Introduction
Choice-of-Law Provision 1
A choice-of-law provision is as much a part of a parties’ contract as any other, and an arbitrator might manifiestly disregard the parties’ contractual choice-of-law, which might provide grounds for vacating the award under Section 10(a)(4) of the Federal Arbitration Act (“FAA”). But, as well-illustrated by the U.S. Court of Appeals for the Eigth Circuit’s decision in Beumer Corp. v. ProEnergy Servs., LLC, ___ F.3d ____, slip op. (8th Cir. August 8, 2018), the circumstances that might justify such a decision would be very unusual, to say the least.
Beumer Corp. v. ProEnergy Servs., LLC
Choice-of-Law Provision 2
Owner and Contractor had a construction contract that contained an arbitration agreement, limitation-of-liability, provision, and a Missouri choice-of-law clause. The Owner complained that the Contractor’s work was deficient and, accordingly, no payment was due. The Contractor commenced arbitration for the amount due under the contract and the Owner counterclaimed for damages.
The parties disputed the scope and enforceability of their contract’s limitation of liability provision, which stated:
Notwithstanding any of the foregoing or any other term in this Contract, the total liability of Contractor for any loss, indemnity, damage or delay of any kind will not under any circumstances exceed 100% of the Contract Sum.
The contract contained a broad Missouri choice-of-law clause, and provided that a prevailing party could collect its attorney’s fees.
The Award
Choice-of-Law Provision 3
The Arbitrator ruled that the clause was enforceable, that the Contract Sum (i.e., the liability cap) was $699,702.39., and that the terms “loss, indemnity, damage or delay of any kind” did not include the prevailing party’s contractual right to attorney fees. The Arbitrator thus awarded Beumer: (a) $699,702.39 in damages; (b) $191,680.14 in pre-judgment interest; (c) post-judgment interest at 9%; and (d) $916,027.90 in attorney’s fees and expenses.
On its motion to vacate the Award the Contractor did not dispute that the Arbitrator “arguably construed” the limitation of liability clause, but contended that the Arbitrator exceeded its powers by “disregarding” the Missouri choice-of-law clause, because: (a) the Arbitrator relied on caselaw from four jurisdictions outside of Missouri to support his construction of the limitation of liability provision as exclusive of costs and attorney fees, and did not cite any Missouri decisions on this construction question; and (b) the Contractor claimed that the Missouri cases required a cost-inclusive interpretation of the clause, not a cost-plus one.
The Arbitrator did not Disregard the Choice-of-Law Provision
Choice-of-Law Provision 4
Did the Arbitrator exceed his powers by ruling that the limitation of liability clause did not limit liability for contractual attorney fees? The Eighth Circuit, in a well-reasoned decision, said the answer was “no.”
The Court rejected the contention that the Arbitrator “disregarded” the Missouri choice-of-law provision. The arbitrator “cited Missouri law throughout his order[,]” said the Court, “[h]e relied on Missouri law when assesing whether one version of the parties’ contract constituted a novation of a prior version[,] [a]nd he applied Missouri law to determine” pre- and post-judgment interest rates. Beumer Corp. v. ProEnergy Servs., LLC, ___ F.3d ____, ____, slip op. at 4 (8th Cir. August 8, 2018).
The Court also rejected Contractor’s argument that the Arbitrator exceeded his powers by not citing any Missouri decisions on the limitation-of-liability clause issue. The “arbitrator…never said that he substituted his own choice-of-law preference for the contractual provision….” Slip op. at 4. The Arbitrator not citing any Missouri law cases on this point “more likely suggests that the arbitrator found no Missouri authority on point[,]” observed the Court, which explained that, in diversity cases, the Court “looks to other jurisdictions for guidance[]” when it determines that a state whose law applies “has not addressed a particular issue.” Slip op. at 4.
Choice-of-Law Provision 5
The Court further explained that, if the Arbitrator “mistakenly overlooked Missouri decisions that favored a contrary result, then he might have made an error of law in applying the contract, but such an error of law does not justify vacating the award.” Slip op. at 4. “The parties[,]” said the Court, “bargained for the arbitrator’s decision; if the arbitrator got it wrong, then that was part of the bargain.” Slip op. at 4. “Our own view[,] the Court observed, “is that the Missouri decisions cited by ProEnergy do not establish that attorney’s fees are part of “loss” or “damage” under Missouri law, but whether the arbitrator was right or wrong by our lights is really beside the point.” Slip op. at 4.
What about Manifest Disregard of the Law?
Choice-of-Law Provision 6
The Eighth Circuit’s decision was right on the mark, and fully consistent with Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) (discussed here, here, here, and here). While the Eighth Circuit does not recognize “manifest disregard of the law” as a ground for vacatur under the Federal Arbitration Act (“FAA”), see Medicine Shoppe Int’l,Inc. v. Turner Invs., Inc., 614 F.3d 485, 488-89 (8th Cir. 2010), the result would likely be the same under that standard, which is applied in certain Circuits, including the Second Circuit. (See discussion of “manifest disregard of the law,” here.)
The very strict requirements of “manifest disregard of the law” include, among other things, a showing that the arbitrator wilfully disregarded controlling law. As discussed above, the Eighth Circuit: (a) found that the Arbitrator did not not substitute his own choice-of-law judgment for the choice-of-law provision; and (b) was not persuaded that the Contractor’s Missouri decisions established that attorney’s fees were “loss” or “damages” within the meaning of the limitation-of-liability clause.
Photo Acknowledgements:
The photos featured in this post (captioned Choice-of-Law Provision 1 – Choice-of-Law Provision 6) are licensed from Yay Images and are subject to copyright protection under applicable law. L&L added text to Choice-of-Law Provision 4 and Choice-of-Law Provision 6.
Tags: Attorney's Fees, Choice-of-Law Clause, Choice-of-Law Provision, choice-of-law provisions, Construction Contract, Construction Industry Arbitration, Cost-Inclusive, Cost-Plus, FAA Section 10(a)(4), Limitation of Liability Clause, Manifest Disregard of Agreement, Manifest Disregard of the Contract, Manifest Disregard of the Law, Missouri Law
