By Michael C. Loulakis and Lauren P. McLaughlin
As many readers know, the construction industry has robustly adopted arbitration as the means of resolving disputes. Selecting a neutral third party to settle a claim is an alternative to litigation. Because arbitration is contractually based, the opposing parties have substantial flexibility in determining the process, such as how to select an arbitrator and how much (if any) prehearing discovery will be allowed.
While there are some exceptions, the overwhelming majority of arbitrations involving U.S. construction projects result in the arbitrator issuing a “final and binding” award at the end of the process.
But what does final and binding really mean? Can a losing party fight the award? The answer is yes, through a process called vacatur, i.e., having the award vacated or canceled. The vacatur process is set forth in two statutes: the Federal Arbitration Act and the applicable state arbitration act governing the dispute. Depending on the case, one or both statutes may be applicable. The important thing to note, however, is that the grounds for vacating a duly entered arbitration award are narrow and limited.
This is explained in this month’s column, which discusses a recent decision from a Maryland appellate court, 9103 Basil Court Partners LLC v. Monarc Construction Inc., in which a disappointed owner unsuccessfully tried to have an award vacated.
The case
The project involved a $14 million construction contract for a Homewood Suites Hotel in Largo, Maryland. Monarc was the general contractor and Basil was the owner. The project reached substantial completion seven months later than planned, and the parties disagreed on who was responsible for the delays. This resulted in Monarc initiating a demand for arbitration in accordance with the contract’s arbitration agreement.
The arbitration hearings occurred over multiple days before a three-person arbitration panel in accordance with the American Arbitration Association’s Construction Industry Arbitration Rules and Mediation Procedures. While the parties submitted nearly 100 claims to be resolved by the panel, it concluded that “in the main, this is a delay case,” according to the court decision. “The panel explicitly noted ‘the parties’ inexperience with hotel construction’ as a main contributor to the delays and ensuing claims.” After considering all the evidence, the panel awarded Monarc the net amount of about $1.43 million and approximately $314,000 in attorneys’ fees.
Basil filed a petition for an order vacating, modifying, and/or correcting the arbitration award in a Maryland circuit court. The circuit court judge found in favor of Monarc and confirmed the panel’s arbitration award. This prompted Basil to appeal the circuit court’s decision to the Maryland appellate court.
The ruling
In short, Basil argued that the award should be vacated or modified because, among other things, the panel: (a) was completely irrational; and (b) manifestly disregarded the law. Monarc countered this by arguing that a court must “give a substantial level of deference to an arbitration award, and Basil did not meet the strict standards necessary to vacate or modify the award.” Monarc argued that even if there was an error, the award still needed to be affirmed. The appellate court agreed with Monarc and affirmed the circuit court ruling upholding the arbitration award.
The appellate court began its analysis by looking to prior Maryland precedent that holds that a circuit court’s review of arbitration awards is “very narrowly limited” and “among the narrowest known to the law.” It stated that a circuit court should give great deference to an arbitration panel’s factual findings and legal applications, and: “Mere errors of law or fact would not ordinarily furnish grounds for a court to vacate or to refuse enforcement of an arbitration award,” according to the decision.
The appellate court’s decision thoroughly examined the standards for vacating an award under the FAA and Maryland arbitration acts. Two of the standards are that an award can be vacated if it is completely irrational or manifestly disregarded the law. While Basil raised several arguments in support of its position, the one that will be discussed here is whether the panel was completely irrational in finding that certain concurrent delays could result in a time extension.
The concurrency question revolved around the interpretation of a contract provision stating:
There shall be no increase in the Guaranteed Maximum Price or extension of the Contract Time for any (Owner-caused) delays that are concurrent with delays caused by Contractor which independently affect the critical path of the Project. Contractor shall manage and utilize the float in Owner’s best interests.
Basil argued that this meant there could be no time extension for any concurrent delay. Consequently, by awarding Monarc a 16-day non-compensable time extension for a concurrent delay, “the panel acted completely irrationally in their contract interpretation and application,” per the decision.
Monarc argued that the provision did not allow time extensions (or compensation) for concurrent delays that “independently affect the critical path.” Monarc stated that Basil did not submit any evidence of independence and Basil’s “own delay expert admitted on cross-examination that concurrent delays do not necessarily independently affect the critical path,” according to the decision.
The appellate court framed the issue as “whether concurrent delays always ‘independently affect the critical path,’” per the decision, “or if something more must be shown to satisfy independence, and whether the panel’s interpretation of the parties’ contract is permissible.” It noted that while the panel classified the delay as concurrent, the award did not define whether this particular case was an independent concurrent delay or whether a concurrent delay is inherently independent.
Rejecting Basil’s argument, the court stated: “We defer to the panel’s expertise and understanding of concurrent and independent delays. ... Because the panel’s award ‘is a plausible interpretation of the arbitration contract,’ we find that the award is not completely irrational, and the panel did ‘not exceed its authority.’”
The analysis
As is typically the case when a losing party wants to overturn an arbitration award, Basil focused on areas in which it believed that the panel had improperly interpreted the contract, such as lien releases and contractual notice provisions, where Basil argued that Monarc had waived its claim rights. The appellate court reviewed each of these and concluded, as it had with the concurrency issue, that the panel had discretion to interpret the application of the lien releases and notice provisions, and that errors are not enough to overturn an award.
The takeaway from the Monarc case should not be that it is impossible to overturn an arbitration award. Awards have been overturned in cases when there was arbitrator bias, or the court found that an arbitrator had manifestly disregarded the law. However, the decision by the court looks like most others considering vacatur: It is difficult for a court to substitute its judgment for that of the arbitrator, and reviews by courts are incredibly narrow.
What else does this mean in practical terms? If you decide to use arbitration in your contract, you will very likely have to live and die with the result.
Michael C. Loulakis ([email protected]) is the president and CEO of Capital Project Strategies LLC in Reston, Virginia. Lauren P. McLaughlin ([email protected]) is a partner of Smith, Currie & Hancock LLP in Tysons, Virginia.
This article first appeared in the November/December 2024 issue of Civil Engineering as “Thinking About Overturning an Arbitration Award? Think Again.”
