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ConstructionPro Week, Volume: 2 - Issue: 21 - 05/24/2013

Do Rogue Arbitrators Ignore the Law?

By Bruce Jervis

 

Public policy and the courts favor the use of binding arbitration for the resolution of disputes. Once parties have contractually committed to that forum, they should assume the result will be final. There are only limited grounds for judicial intervention. But one basis for vacating an arbitration award is instructive.

 

If an arbitrator displays “manifest disregard for the law,” the arbitrator has exceeded his or her authority and the award may be vacated. A manifest disregard occurs when the arbitrator is aware of a clear, well-defined legal principle and refuses to apply it. This was the case in a recent South Carolina dispute.

 

The contractor in question acknowledged it did not have the proper license required for the project under the South Carolina statutes. The statutes state that an entity without a valid license may not enforce the provisions of a contract. Yet, the contractor pursued a payment claim against the project owner and the arbitrator issued an award in favor of the contractor. The South Carolina Supreme Court vacated the award.

 

Arbitrators are usually not required to be licensed attorneys. The relative informality and flexibility of the process is one of the reasons it is considered more expeditious than a court proceeding. Yet, no party wants to be on the wrong end of an award which ignored the applicable law which was the foundation of the bargain that was struck. Do you believe arbitrators ignore the law on occasion? Do parties, through their counsel, do an effective job of advising arbitrators of the applicable law? If your position is a “legalistic” one, would you prefer to have the dispute heard in court? I welcome your comments.

 

COMMENTS

We normally request MEDLOA clause's in lieu of arbitration which handle's claim's more expeditously.
Posted by: Bob Keller - Friday, May 24, 2013 10:31 AM


So the client got to stiff the contractor because of a legal issue? Isn't there a law against stealing?
Posted by: Steve Bache - Friday, May 24, 2013 10:38 AM


I've rarely found arbitrators completely ignoring the law, although I may disagree with their interpretation of it; however, I would say that I've not had an arbitrator "manifestly disregard the law" any more than I have had a judge disregard legal precedent. One of the key factors in my opinion, as both a litigant and arbitrator, is in the selection process of the arbitrator (or panel of arbitrators). A qualified arbitrator will have a background which enables him/her to grasp the concepts of the case and thus minimize errors of law. If you prefer a strict "legalistic" approach the parties could certainly stipulate to do so in the context of an arbitration, although it would appear to defeat many of the theoretical advantages of ADR and in that instance it may be more economical to have a judge as opposed to pay an arbitrator or panel of arbitrators to act like a court in a strict sense.
Posted by: Brian Pezzillo - Friday, May 24, 2013 10:46 AM


Hey guys. This is South Carolina who brought you Mark Sanford (twice)and his famous south american marching bimbos band. OF COURSE they are gonna pay little heed to the law.
Posted by: Jon F Edelbaum AIA - Friday, May 24, 2013 10:57 AM


In my view, the SC Supreme Court had no other choice, if the facts of the case are properly stated. In a court setting, the letter of the law ordinarily prevails unless questions of equity are brought into the dispute. Although I have not worked in SC for a number of years, it is made patently clear in SC law that an unlicensed contractor may not have the required inspections of his work made to assure conformance with code provisions. If the proper inspections are not made, the building cannot be opened or used in SC. This is especially important when Mechanical, Electrical, Plumbing and Fire protection systems are involved. But regardless of the systems involved, the law is in place to assure that competent contractors, only, will be allowed to participate in construction projects in SC. A second point would be that, the licensing law was, at one time, in a sense necessary, as SC is a "right to work" state. Twenty years ago, lack of union training programs and/or formal educational systems in the trades, made it difficult to find competent workers. SC now has a very fine trade education program in place. All in all, I suspect the contractor which performed the works did not understand the consequences of his actions and left the "Prime Contractor" exposed when inspection time came around. The "intent" of the law is to protect Prime Contractors from just such a development.
Posted by: Bryan Brabham - Friday, May 24, 2013 11:03 AM


THe real issue is the value of the property not being built by a licensed contractor and without a permit. The local building department may have the right to have the work torn down and rebuilt with a licened contractor. Not to mention the tax and resailability of the property.
Posted by: Craig - Friday, May 24, 2013 11:04 AM


Dear Jon Edelbaum AIA,

Please refrain form attacking a state's electorate. I guess your state is scandal free. Keep it professional.
Posted by: Michael C. Connor PE - Friday, May 24, 2013 11:28 AM


Timely discussion - I may have a similar situation. What was the cite or case name in SC??
Posted by: Tarrant H. Lomax - Friday, May 24, 2013 12:45 PM


Although I've written several forensic reports, I've given expert testimony in court only once, and in arbitration hearings only twice. I recall one arbitration where the claimant was clearly, in my view, perpetrating a fraud. My client, an insurance company, was unwilling to pursue the evidentiary difficulties of a legal case, and submitted to arbitration. The arbitrator was very efficient and effective, understood the issues, and reduced the claim from $60,000 to $2000. His decision was based on the inconsistent testimony of the claimant vs. non-legalistic but professionally knowledgeable testimony.
Posted by: Gary R. Collins, AIA - Friday, May 24, 2013 12:51 PM


As a construction claims consultant and expert witness who works nationwide, we have encountered many construction claims obviated early as a result of a party's failure to comply with state statutes. In my view, this is an unusual case to have made it "all the way upstairs." To wit: "The arbitrator was apprised of the applicable law, but nevertheless denied Petitioners' motion to dismiss 'after due consideration of all the evidence and authorities presented by the parties in this Arbitration.'"(1) It is indeed unfortunate for the contractor to do $800,000 of work (which was 800% of the limit under its Group II license) and not get paid. The "moral" of this "story" is: As a contractor, strict compliance with your state's contractor license laws is essential to prevail on your construction claims.

(1)/ THE STATE OF SOUTH CAROLINA In The Supreme Court Opinion No. 27246 - C-Sculptures v. Brown
Posted by: Richard Bull, P.E. - Friday, May 24, 2013 7:22 PM


the article doesn't state why the entity was refusing to pay. Did they find a legal loophole to refuse payment or was the workmanship in question.

it seems if it is a law that they have a particular license to perform the work that should have to be stated specifically in the contract.
Posted by: pete - Saturday, May 25, 2013 11:03 AM


As a construction lawyer for 25+ years I have experienced and heard many horror stories of arbitrators refusing to follow the law and the parties being stuck with the results.

In California the courts are having a difficult time in the extreme in handling their case loads. It may take several months to have a simple motion be heard. The courts here cannot be counted on to achieve an expeditious case result.

These days my office is recommending arbitration, for its speed and confidentiality. To handle the rouge arbitrator risk, we include rights of review for specified reasons, including failure to follow the law, that may be brought before a superior court judge. We believe that an arbitrator aware that his or her ruling could be overturned by a superior court judge will be more careful in rendering an award in the first place.
Posted by: Daniel F. McLennon - Saturday, May 25, 2013 11:34 AM


Several years ago, I was involved in two arbitration cases on projects that were constructed in SC. The GC was licensed in NC but also in SC and the office that was responsible for the projects was located in SC. The GC's attorney was located in NC and when the arbritration was scheduled, it was scheduled in the GC's attorney's office and the other side had to bring all of their information to the table and had no means of instantly obtaining documents that the GC's attorney had. It was agreed that when the arbitration was to be closed with final arguments by both sides, no new evidence or documentation could be presented. In both instances, at the last minute against pre-established agreement, the GC's attorney produced several documents that were highly prejudicial against the other side.

I complained to the arbitrator but the complaint was ignored and the "new" evidence was allowed. In the first case, the other side won a greatly reduced claim that was totally legitimate and supported by all of the evidence and documentation presented. In the second case, the GC prevailed and the other side lost several hundred thousand dollars in labor and material due to last minute documents allowed and a vague ruling that the owner couldn't interfere with a contract between the GC and subcontractor even when the GC received progress payments but did not pay the subcontractors therefore forcing the owner to become involved and in order to keep the project going, make payments direct to the subs.

It was not until a later date did the subcontractors find out that the GC's attorney was also an active member of the arbitration community and he and the two arbitrators knew each other very well and each had been on the other side of the table on several occasions.

The arbitrator knew the rules but still allowed last minute documents and evidence to be introduced while the subcontractor's attorney was left in a no-win situation.

So, anyone out there who agrees to arbitration, be sure to check several things before agreeing to a venue especially if the venue is in the offices of the others side's attorney and be sure to check if the other side's attorney is also an arbitrator. They know the limits of what can be allowed and it does give one side a distinct advantage.

Be sure to choose a neutral site, object to any deviation from the agreed upon rules, and finally, if either attorney is an arbitrator, do not enter into a formal arbitration process unless the arbitrator/attorney is removed and not involved in the process.

The subcontractor who lost several hundred thousand dollars was an honest and respected individual who never failed to complete a contract. He deserved better.


Posted by: W. B. Rogers - Wednesday, May 29, 2013 12:10 PM






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