Arbitration is a matter of contract, and parties are free to structure arbitration provisions in anticipation of disputes. Parties may specifically agree on the qualifications of the arbitrator who will be appointed to resolve disputes. A recent Michigan case of first impression shows that courts will enforce such provisions when the arbitral forum does not act in accordance with the parties’ contract.
Oakland-Macomb Interceptor Drain Drainage District v. Ric-Man Construction, Inc. ___ N.W.2d ___, 2014 WL 4066630 (Mich. Ct. App. January 30, 2014) involved a dispute between a special – purpose public corporation and a contractor hired to build infrastructure needed to perform repairs on the Oakland-Macomb Interceptor, which is part of an extensive sanitary-sewer system in the Detroit area. The Drainage District and Ric-Man asserted multi-million dollar claims against each other during the course of the project, and invoked their right to arbitration. The contract required that two construction-industry professionals and one construction attorney be selected. The Court of Appeals described the arbitration provision as “tailor-made” to arbitrate a large, public-sector sewer construction project.
For the attorney member of the arbitration panel, the contract required the arbitrator to be a member of the American Arbitration Association (AAA) Construction Panel, with selection criteria applied in the following order: (1) that the arbitrator be a member of the Large Complex Construction Dispute (LCCD) panel with at least 20 years of experience in construction law with an emphasis on heavy construction, (2) at least 20 years of experience in construction law with an emphasis on heavy construction, (3) a member of the LCCD panel and at least 10 years of experience in heavy construction, and (4) at least 10 years of experience in heavy construction.
For reasons not made clear in the decision, the AAA appointed an arbitrator who did not meet the qualifications established by the contract. The Drainage District filed suit against Ric-Man and the AAA to enforce the right to have an attorney arbitrator with the required qualifications. Ric-Man argued that a court cannot second-guess an arbitrator selection decision. The trial court agreed, held (erroneously) that the AAA’s selection complied with the contract, and dismissed the complaint. The Court of Appeals reversed, applying the Federal Arbitration Act (as the contract affected interstate commerce) and holding that a court may enter an order requiring that arbitration proceedings conform to the terms of the parties’ contract.
The court observed that Ric-Man continued to argue that the appointed arbitrator was qualified when he clearly was not, stating that the contention that the AAA followed the contract was “at best, disingenuous.” Further, qualified attorneys were evidently available, as evidenced by the AAA’s appointment of an alternate attorney arbitrator, after the litigation began, who met the requirements of the contract. The court held that the contractual mandates will be enforced before entry of an arbitration award when (1) the subject matter of the arbitration involves complex and technical issues, (2) the contract requires the arbitrator to have a highly specialized professional background, and (3) the contract outlines a precise method to select the arbitrator. The Drainage District was awarded costs and attorneys’ fees upon remand, at both the trial and appellate level.
This case shows the importance of assessing arbitrator qualifications at the time of contracting, and that courts will enforce contracts. Note, however, that the court observed that its analysis might be different had the AAA told the parties it could not find any arbitrators meeting the contract requirements. The court also recognized that its decision was in conflict with Gulf Guaranty Life Ins. Co. v. Connecticut Gen. Life Ins. Co., 304 F.3d 476 (5th Cir. 2002), which held that the Federal Arbitration Act does not expressly provide for removal of an arbitrator before entry of an award. That federal decision was not binding on the state court, which found the Gulf Guaranty analysis unpersuasive under the circumstances, stating that the judiciary has the competence to “distinguish between real and serious objections, as here, and frivolous developing tactics.” A dissenting opinion cited Gulf Guaranty in concluding that parties cannot obtain judicial review of decisions about the qualification of arbitrators before issuance of an award.