By: Richard E. Guttentag, Esq., Stearns, Roberts & Guttentag, LLC
The Federal Arbitration Act provides that an arbitration award may be vacated where: (i) the award was procured by corruption, fraud, or undue means; (ii) there was evident partiality or corruption in the arbitrators; (iii) the arbitrators were guilty of misbehavior which prejudiced the rights of a party to the arbitration; or (iv) the arbitrators exceeded their powers. While a party has the right to challenge an arbitration award on these grounds, if a party attacks the award without any real legal basis for doing so, that party may be subject to sanctions. The case of U.S. ex rel. Subcontractor Industries, Inc. v. Travelers Cas. and Sur. Co. of America, 2014 WL 3594306 (M.D. Fla. 2014) addressed a subcontractor’s motion to vacate an arbitration award on the ground that there was evident partiality in one of the arbitrators, and the general contractor’s motion for sanctions against the subcontractor for making a frivolous challenge to the award.
In this case, a general contractor (“GC”) contracted with the U.S. Department of Veterans Affairs to construct a hospital. The GC entered into a subcontract with a subcontractor (“Subcontractor”) to fabricate and install the hospital’s interstitial steel. Before the hospital’s completion, a dispute arose between the GC and the Subcontractor regarding construction site conditions and the quality and pace of the Subcontractor’s work. The GC stopped payment and the Subcontractor discontinued performance.
The dispute between the GC and the Subcontractor was resolved in an arbitration action. The arbitration panel ruled in favor of the GC, granting an award of over four million dollars in damages. The Subcontractor filed a motion to vacate the arbitration award, arguing that the award should not be enforced because an arbitrator on the panel was biased.
Under the Federal Arbitration Act, arbitration awards are presumed to be correct, and can only be vacated under certain narrow circumstances. As provided above, a party in a legal action may challenge an arbitration award “where there was evident partiality or corruption in the arbitrators.” Evident partiality exists only when either (1) an actual conflict exists, or (2) the arbitrator knows of, but fails to disclose, information which would lead a reasonable person to believe that a potential conflict exists. The evident partiality exception is strictly construed, and the alleged partiality must be direct, definite and capable of demonstration rather than remote, uncertain and speculative.
The Subcontractor argued that a member of the arbitration panel was “evidently partial” in favor of the GC because: (1) the arbitrator knew two of GC’s attorneys from prior social gatherings and had previously mediated cases in which those attorneys were involved; (2) at the time of the arbitration, the arbitrator knew but did not disclose that his former secretary was employed by the law firm representing GC; and (3) the arbitrator also knew but did not disclose that GC’s general counsel had met the arbitrator’s former law partner at a social gathering during the arbitration.
The court rejected the Subcontractor’s arguments. The court reasoned that a member of an arbitration panel’s familiarity with an individual does not constitute bias unless the member and the individual are engaged in an ongoing business relationship. Conversely, an arbitrator’s experience in and familiarity with an industry is a factor that can make arbitration a superior means of resolving disputes. Thus, the court denied the Subcontractor’s motion to vacate the award, ruling that no reasonable person could believe that these trivial relationships could suggest bias.
The Court then addressed the GC’s motion for sanctions. A party is subject to sanctions for challenging an arbitration award without legal justification merely because it is dissatisfied with the award. The court explained that when a party who loses an arbitration award assumes a never-say-die attitude and drags the dispute through the court system without an objectively reasonable belief it will prevail, the promise of arbitration is broken. The court concluded that although the Subcontractor attacked the arbitration award under a valid statutory provision, its motion completely lacked factual support of evident partiality, and reflected the “never-say-die” attitude that robs arbitration proceedings of their ability to provide speedy, less costly, and final resolution. Therefore, the Court ordered sanctions against the Subcontractor because the challenged lacked any legal merit.
This case demonstrates that while a party has the right to challenge an arbitration award, such challenge must be supported with a real legal and factual basis for doing so. Otherwise, that party may be subject to sanctions.
About the Authors: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, LLC, and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at [email protected].