A: When the issue is decided in arbitration. An arbitrator’s decision that a periodic subcontractor release had not waived claims made in arbitration was upheld by the Rhode Island Supreme Court, although one could read between the lines to conclude that the court would have ruled otherwise on the merits. This case highlights – with an issue that is controversial of its own accord – the distinction between arbitration and litigation.
The sub signed a monthly lien waiver and release, which arguably released the claims ultimately submitted in arbitration. The arbitrator considered the terms of the monthly release, concluded that it could be distinguished from prior case law that barred claims based on similar release language, and awarded damages to the sub. The prime contractor argued that this represented “manifest disregard for the law” and thus grounds to overturn the arbitrator’s award. The lower court agreed with the contractor that the arbitrator had manifestly disregarded the law, and vacated the award. The RI high court disagreed. “Only when the arbitrator’s decision rises above the high-water marks of implausibility, irrationality, manifest disregard, or failure to draw its essence from the agreement may a court intervene and strike it down.” So the court refused to substitute its judgment for that of the arbitrator. This refusal is, after all, consistent with case law in most jurisdictions. But it is not hard to believe that some courts would have held the arbitrator’s actions to be such a “manifest disregard.”
Monthly releases of this type continue to be on the front lines of many battles. On the one hand, demand for a monthly release represents a legitimate interest in avoiding stale or after-the-fact claims. On the other hand, the monthly release is often either flatly incorrect when signed (such as when the release does not even carve out retainage or pending changes), or is coupled with a course of conduct between the parties that tends to negate the terms of the release (such as when there are pending changes and discussions clearly contrary to the written words about there being no other claims). Thus, a sub signing the release each month in an environment where it is led to believe that known and unresolved claims will not be later barred does not want to have the release thrown in its face at a later date. Let’s face it: these cases often involve sloppy contract administration, where the conversation conflicts with the written document but no one tries to resolve that conflict.
There are two messages here: (a) arbitration awards must be considered final except in truly exceptional or out-of-the-ordinary situations, and (b) monthly releases will continue, in practice, to lack the finality that the party upstream would expect, in theory.