Construction and Procurement Law News, Q3 2015

The Supreme Court of Rhode Island recently handed down a decision in Atwood Health Properties, LLC v. Calson Construction Co., which reaffirmed courts’ reluctance to overturn arbitration awards. In Atwood, the owner filed suit against the general contractor and HVAC subcontractor on an office building project. The suit alleged that defective compressors required replacement of the building’s entire HVAC system. After a lengthy arbitration, the arbitrator entered an award in favor of the owner.

After the owner sought and received confirmation of the award from a Rhode Island Superior Court, however, the general contractor and subcontractor appealed the confirmation of the award on a number of grounds including that (1) the arbitrator manifestly disregarded the contract and applicable law when he failed to make a finding of negligence before determining there was a breach of contract and (2) the arbitrator inappropriately relied on an indemnification provision in the contract in violation of state law.

Before addressing the contractor’s and subcontractor’s arguments, the court described the very narrow or limited set of circumstances by which a court could overturn an arbitrator’s decision. The court noted that arbitration awards would not be overturned for mere errors of law but might be overturned if the award was shown to be irrational or if the arbitrator demonstrated a manifest disregard for applicable law.

The court then turned to the arguments of the contractor and subcontractor, and, while acknowledging that the arbitrator made errors in interpreting the contract, reasoned that none of the errors rose to a level of demonstrating a manifest disregard for the law or resulted in an irrationally derived award. Specifically, the court opined that the arbitrator’s improper reliance on an indemnification provision that required a demonstration of negligence was not sufficient to warrant overturning the award. The court noted that other provisions in the contract could be used to support the rationality and lawfulness of the arbitrator’s award, and the court further concluded that the arbitrator’s erroneous analysis did not invite a judicial re-examination of the contract language. In the court’s view, the arbitrator’s award continued to “draw its essence” from the agreement between the parties.

The Supreme Court of Rhode Island’s decision in Atwood drives home the point that arbitration awards are final and binding on parties. Arbitration is often praised for its efficiency and economy in resolving disputes. Contractors sought arbitration as a preferred remedy beginning in the 1960’s in order to obtain swift and final determinations, without lingering court appeals to undermine or delay resolution. If that is not what your company seeks as a business matter, then it must be keenly aware of the consequences of entering into arbitration. Unlike a court ruling which may be overturned on any number of legal grounds, an arbitrator’s decision will rarely be set aside. Companies should be aware of this potential when agreeing to arbitration provisions in contracts, and, if the decision to arbitrate a dispute has been made, companies should be prepared to live with the finality.