June 14, 2006

Arbitration has a long history in the construction industry. As the cost and time associated with resolving construction disputes through litigation steadily rose during the twentieth century, contractors and owners turned en masse to “alternative dispute resolution” procedures as a way to minimize the parties’ burden of resolving disputes. Essentially, the key players believed that all they needed to resolve their disputes was an impartial referee, preferably one with expertise in their field – with that in place, there would be no need for the perceived inefficiencies of the judicial system. Congress agreed with this streamlined process and enacted the Federal Arbitration Act (the “FAA”), 9 U.S.C. §§ 1-16, which provided a federal mandate encouraging and upholding arbitration agreements in contracts and evidencing a transaction involving interstate commerce.

However, as time went on, and despite the FAA’s presumptions favoring arbitration, parties who lost in arbitration increasingly turned to the courts to appeal, overturn, or delay the enforcement of the award. Concurrently, more courts began to adopt grounds for “vacatur” (judicial nullification of an award) that went beyond the few, limited grounds spelled out in the FAA. One of these new grounds for vacatur was “manifest disregard of the law,” which basically means that the arbitrator totally ignored or failed to apply clear, governing legal principles in deciding the dispute. As can be imagined, opening up the arbitrator’s decision to this type of review can allow for a flurry of post-arbitration litigation and a re-trying of the case before the court or the appeals court.

It is this rise in “arbitration related litigation,” especially in the post-arbitration stage, among other things, that appears to be driving more contractors and owners back to the court system as the preferred dispute resolution process. Indeed, in the newest version of the American Institute of Architects (“AIA”) design/build form construction contract, arbitration is no longer the “default” dispute resolution procedure. Rather, the parties can select from a menu of dispute resolution options, of which arbitration is one choice. This move back to litigation appears to be understandable: why pay and wait for a long round of litigation after the matter has been arbitrated when the dispute can be decided sooner through litigation alone?

Arbitration Appeal Criticized

It is precisely this trend, accompanied by a clogging of the federal courts’ dockets with arbitration related matters, that appears to be the basis for a recent decision by the United States Court of Appeals for the Eleventh Circuit (Florida, Alabama and Georgia), B.L. Harbert Intern., LLC v. Hercules Steel Co., — F.3d ——, 2006 WL 462368 (11th Cir. Feb. 28, 2006), which attempts to swing the pendulum back in favor of arbitration as an efficient dispute resolution procedure by drastically limiting the allowable arguments against confirmation of an award.

The underlying issues in Harbert involved a payment dispute between a general contractor and a subcontractor on an U.S. Army Corps of Engineers project at Fort Bragg, North Carolina. As the arguments were made to the arbitrator, it was apparent that the main issue to be decided was which of two project schedules should govern the subcontractor’s performance. Hercules “won” this argument as the arbitrator applied the project schedule favorable to it. The trial court confirmed the arbitrator’s award. On appeal of this confirmation, Harbert argued for vacatur on the premise that by choosing to apply Hercules’ schedule, the arbitrator acted in “manifest disregard of the law.”

The Eleventh Circuit completely rejected Harbert’s argument. “Manifest disregard of the law,” the court said, was never meant to be read so broadly as to dissect and reargue the choice between two schedules where valid arguments existed as to the application of both. As such, the court issued a stern warning concerning the allowed scope of appealable issues concerning the confirmation of arbitration awards.

Specifically, the Eleventh Circuit noted that “[c]ourts cannot prevent parties from trying to convert arbitration losses into court victories, but it may be that we can and should insist that if a party on the short end of an arbitration award attacks that award in court without any real legal basis for doing so, that party should pay sanctions.” The court went on to state that it is “exasperated by those who attempt to salvage arbitration losses through litigation that has no sound basis in the law applicable to arbitration awards.” To prevent similar activity in the future, the court firmly stated that it would levy “sanctions” (or monetary penalties) against parties who made overreaching or baseless objections to the enforcement of arbitration awards in litigation.

Comment

The Harbert opinion represents a strong and clear stance against the practice of attempting to re-argue issues in litigation that have been fairly decided in arbitration. Not only would the court’s imposition of sanctions publicly chastise litigants and their attorneys, it would represent a tangible “cost” to using litigation as a way to “get around” the decision of the arbitrator. This is evident in the court’s statement that “[i]f we permit parties who lose in arbitration to freely relitigate their cases in court, arbitration will do nothing to reduce congestion in the judicial system; dispute resolution will be slower instead of faster; and reaching a final decision will cost more instead of less.” While it may appear that Harbert may represent a shift in the governing federal policy away from the expansive judicial review of arbitration awards in favor of a more limited one, it is actually consistent with the long established federal policy favoring arbitration as a means to resolve disputes. While this shift will not please those who seek to overturn undesirable awards, it should assist in returning arbitration to its intended role as a more efficient and less expensive dispute resolution method by effectively limiting the scope of judicial review.

James B. Taylor 404/582-8048 [email protected] Member of the State Bar of Georgia