A general contractor and subcontractor entered into an Engineering, Procurement and Construction Agreement containing an arbitration clause that provided for arbitration in the event of a dispute. The agreement also contained a clause that provided that the contractor and subcontractor would share responsibility for cost overruns except in the event of gross negligence. Further, the agreement capped liability at $22,043,302, subject to a gross negligence exception.
The contractor sued the subcontractor and alleged gross negligence, claiming that as a result of the gross negligence, the project cost rose from $272 million to $415 million. Additionally, the contractor sought consequential damages and damages for various cost overruns. After the parties entered arbitration, the subcontractor moved to dismiss the contractor’s claim. The subcontractor argued that the claims were not arbitrable because the contractor’s claims could not form the basis of a gross negligence claim and, therefore, the general contractor had no actual claim to arbitrate. The arbitrator denied the motion and determined that the allegations made by the contractor were sufficient to show that, if proven, they could form the basis for a gross negligence action.
Following the arbitration hearing, the arbitrator stated that the contractor lost its gross negligence claim but still awarded it $22,043,032 in cost overruns. The subcontractor appealed, arguing that the arbitration award should have been vacated because the arbitrator exceeded his power, successfully arguing that the arbitrator ruled on an issue that was not presented before him. The gross negligence was the only claim that the contractor presented at the hearing. The arbitrator denied the gross negligence claim, but still ended up awarding the contractor cost overrun damages. The court held that, under the Federal Arbitration Act, the arbitration award was vacated because the arbitrator exceeded his powers, stating the contractor should not have been awarded cost overrun damages because the arbitrator rejected its only claim.
Arbitration provisions sometimes exclude the ability to file an arbitration demand for various claims. For example, fraud based causes of action are routinely excluded from the arbitration provision and must be brought in court rather than in the arbitration proceeding. As a result, when drafting pleadings and argument for arbitrations, it is crucial to review the arbitration provision to make sure the claims being sought are allowed to be adjudicated through the arbitration hearing. As this case demonstrates, not only is it important to make sure the arbitration allows for the claim to be made, but that the theory of liability in which damages are being sought is properly pleaded and argued at the hearing.
Matter of Colorado Energy Mgt., LLC v. Lea Power Partners, LLC, 114 A.D.3d 561, 981 N.Y.S.2d 44, 2014 N.Y. App. Div. LEXIS 1224, 2014 NY Slip Op 1253 (1st Dep’t Feb. 20, 2014).