E-Alert Case Updates

Court Affirms Arbitration Panel Award over Contractor’s Objection

MCI Constructors, LLC v. City of Greensboro
No. 09-1600 (United States Court of Appeals for the Fourth Circuit, July 1, 2010)
By Colleen K. O’Brien, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

In 1996, the City of Greensboro (“City”) entered into a $29 million contract with MCI Constructors, LLC (“MCI”) to expand and upgrade a wastewater treatment plant. When the construction of the plant became substantially delayed, the City terminated the contract with MCI. MCI sued the City and other third parties, and the City counterclaimed.

Before trial, the City and MCI advised the trial court that they had entered into a binding arbitration agreement to settle their dispute. Consequently, the court severed the third party lawsuits and stayed the case pending arbitration. The City and MCI stipulated that the arbitration proceedings would address both liability and damages. They also stipulated that either Judicial Arbitration Mediation Services (“JAMS”) or AAA Complex Commercial Arbitration (“AAA”) rules would control the arbitration proceedings. The parties agreed that at the conclusion of the arbitration, the court would confirm the award, and enter judgment.

At arbitration, the City was victorious. On the issue of liability, the arbitration panel found that the City had cause to terminate MCI’s performance of the wastewater treatment plant contract. On the issue of damages, the arbitration panel found that the City was entitled to recover $14,939,004 from MCI. Pursuant to the parties’ stipulations prior to arbitration, the district court entered an order confirming the arbitration awards. The Court also entered Final Judgment under FED. R. CIV. P. 54(b).

MCI appealed to the Fourth Circuit Court of Appeals, and asserted three main arguments. The appellate court began by noting that its authority to review arbitration awards was “among the narrowest known at law” because “to allow full scrutiny of such awards would frustrate the purpose of having arbitration at all—the quick resolution of disputes and the avoidance of the expense and delay associated with litigation.” MCI at *13.

MCI first argued that the district court erred by entering Final Judgment under FED. R. CIV. P. 54(b). MCI argued that Final Judgment was not proper where third party claims still existed in the original lawsuit. However, the Court pointed out that the claims involving the third parties had been severed prior to arbitration. Those claims could still be litigated, without any preclusive or prejudicial effect from the City and MCI’s arbitration. FED. R. CIV. P. 54(b) permits a court to direct entry of Final Judgment as to one or more parties in a multi-party claim. Therefore, the Court concluded that there was no just reason for delaying the entry of judgment as far as the City and MCI’s claims against each other were concerned.

Next, MCI argued that the district court should have vacated the liability award because it was obtained through “undue means.” Under the Federal Arbitration Act (“FAA”), a court may vacate an arbitration award if the award was procured by corruption, fraud, or undue means. 9 U.S.C.A. § 10(a). MCI accused the City of using undue means. MCI alleged that the City: 1) misrepresented facts to the arbitration panel; 2) used facts that were outside the record; and, 3) argued its principal argument in rebuttal so that MCI could not respond. The Court observed that even if MCI’s allegations were true, no court had ever construed “undue means” to apply to “legally objectionable” actions by counsel. MCI at *14. Additionally, the Court noticed that the undue means must have been used by a party to “procure” the award. This meant that a causal relationship must have existed between the undue means and the award. The Court concluded that MCI failed to prove such a causal connection between the City’s alleged actions and the liability award.

Finally, MCI argued that the arbitration panel’s award was unreasoned. In the case of a reasoned award, the arbitration panel provides a concise written statement of the reasons for the award. In the case of an unreasoned award, the arbitration panel makes an award, but does not disclose its reasoning. In this case, before arbitration, the parties consented to the arbitration panel using either JAMS or AAA rules. The panel opted to use AAA rules. Under AAA, the panel was not required to render a reasoned award unless one of the parties requested a reasoned award, in writing, prior to the appointment of the arbitrators. Because neither party requested a reasoned award, the panel was not required to give one.

Ultimately, the Court of Appeals affirmed all decisions made by the district court in certifying the arbitration award in favor of the City.