Courts usually err in favor of not vacating awards in close cases. As a result, Courts usually vacate awards only where there is a very clear, fundamental disconnect between the award and the parties’ arbitration agreement. Vacating an award in those circumstances enforces the parties’ agreement to arbitrate, which is exactly what the Federal Arbitration Act (“FAA”) and state arbitration codes are supposed to do. (See, e.g., L. Reins. & Arb. L. Forum post here.)
Today’s case, Merion Constr. Mgt., LLC v. Kemron Environmental Serv., Inc., No. A-2428-12T4, slip op. (N.J. App. Div. March 13, 2014), involved two disputed awards: the original arbitration award (the “Original Award”) and a subsequent, modified award (the “Modified Award”). The arbitrator (the “Arbitrator”) issued the Modified Award to correct a mistake in the Original Award, which had inadvertently omitted items of claimed damage that one of the parties had requested the Arbitrator to award. The Arbitrator said he intended to include those damage items in the Original Award. The Modified Award thus accurately reflected the parties’ agreement and submission and the Original Award did not.
Which Award should have been confirmed? Relying on the functus officio doctrine, and an American Arbitration Association (“AAA”) Rule concerning arbitral modification and correction of awards, the intermediate state appellate court reversed a trial court judgment confirming the Modified Award, and held that the Original Award should have been confirmed.
A few years back the Chief Justice of the United States Supreme Court prefaced one his opinions with the following truism: “People make mistakes. Even administrators of ERISA plans.” Conkright v. Frommert, 559 U.S. 506, 509 (2010) (Roberts, C.J.). Had Merion Construction been decided correctly, then the New Jersey appellate court might have prefaced its opinion with a similar truism: “People make mistakes. Even arbitrators.” But based on how the case was decided a more fitting preface would have been: “No good deed should go unpunished. Even those perpetrated by arbitrators.”
The Arbitrator’s principal good deed in this case was his inclusion in the Original Award of a clear expression of his intent that the award was to resolve all claims and issues the parties submitted to him: “Any other claims in this matter not specifically mentioned above are denied.” Having dealt with and read enough cases where such a catch-all finality clause might have obviated problems that occurred later, it is the sort of thing we generally like to see in awards.
But the Court misapplied applicable law by interpreting the catch-all finality clause as prohibiting the arbitrator from correcting the Original Award to reflect fully and accurately the award he intended to make on the merits based on the parties’ submissions, thereby fully executing—in the way he intended to execute it— the authority the parties delegated to him. The AAA Rules, the doctrine of functus officio and New Jersey’s arbitration statute not only provided no support for the Court’s interpretation of the catch-all finality provision, they foreclosed it.
Before we discuss and critique Merion Construction some brief background is in order on the functus officio doctrine, Rule 48 of the AAA Construction Industry Arbitration Rules (the “AAA Construction Industry Rules”) and a provision of the New Jersey’s Revised Uniform Arbitration Act concerning arbitral modification and correction of awards. After that, we’ll discuss what transpired in Merion Construction, and, in the next segment of this post, we’ll analyze and critique the case.
The Functus Officio Doctrine and AAA Construction Industry Rule 48
Functus officio is Latin for “office performed” and in arbitration-law parlance “means that once an arbitrator has issued his final award he may not revise it.” Glass, Molders, Pottery, Plastics and Allied Workers Int’l Union v. Excelsior Foundry Co., 56 F.3d 844, 845 (7th Cir. 1995). It is a vestige of the “bad old days when judges were hostile to arbitration and ingenious in hamstringing it.” 56 F.3d at 846 (citations omitted). The common-law policy justifications for functus officio included: (a) “an unwillingness to permit one who is not a judicial officer and who acts informally and sporadically, to re-examine a final decision which he has already rendered, because of the potential evil of outside communication and unilateral influence which might affect a new conclusion[;]” and (b) the “policy of finality, founded on practical considerations, [which was] nourished by the primitive view of the solemnity of all judgments.” See La Vale Plaza, Inc. v. R.S. Noonan, Inc., 378 F.2d 569, 572 (3rd Cir. 1967).
While the doctrine’s underpinnings may be questionable, it continues to serve at least a few useful purposes, and it remains valid today—albeit subject to a number of exceptions. As respects the exceptions, arbitrators are generally deemed to have the authority to: (a) correct mistakes that are apparent on the face of the award; (b) to complete an award by ruling on an issue that was submitted to the arbitrator but not adjudicated by the award; and (c) to clarify an ambiguity “where the award, although seemingly complete, leaves doubt whether the submission has been fully executed. . . .” Colonial Penn Ins. Co. v. Omaha Indem. Co., 943 F.2d 327, 332 (3rd Cir. 1991)(quotation and citations omitted); La Vale, 378 F.2d at 573; see, e.g., Green v. Ameritech Corp., 200 F.3d 967, 977 (6th Cir. 2000); Hartford Steam Boiler Inspection and Ins. Co. v. Underwriters, 271 Conn. 474, 484-85 (2004).
Unlike the first exception, which concerns mistakes that appear from the face of the award, the third exception can be established not only from the award itself, “but from an extraneous but objectively ascertainable fact.” Colonial Penn, 943 F.2d at 334; see Ameritech, 200 F.3d at 977-78; Eastern Seaboard Const. Co. v. Gray Const., Inc., 553 F.3d 1, 5-6 (1st Cir. 2008); Hartford Steam Boiler, 271 Conn. at 485-94. The second exception also may require, albeit to a lesser extent, consideration of matters not necessarily apparent from the award because the exception’s applicability turns on the parties’ submission, which may (in the absence of a formal submission agreement) need to be ascertained from the arbitration demand and the positions the parties took during the proceedings. (For a discussion of the legal effect of the parties’ submission and what constitutes the submission, see L. Reins. & Arb. L. Forum posts here and here.)
Functus officio is a default rule. Parties are entitled to opt out of it by agreement. See T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F. 3d 329, 342-43 (2d Cir. 2010) (“[Appellant] and the district court ignore an important caveat to the functus officio doctrine: that it only applies absent an agreement by the parties to the contrary.”) (quotation and citations omitted); Excelsior, 56 F.3d at 848 (“Functus officio is merely a default rule, operative if the parties fail to provide otherwise.”).
The FAA does not contain a statutory provision that addresses directly functus officio or the closely-related topic of party applications for arbitral modification, correction or clarification of awards. But Merion Construction was governed by New Jersey’s arbitration statute, and New Jersey has adopted the Uniform Arbitration Act of 2000, also known as the Revised Uniform Arbitration Act or “RUAA.” One feature of New Jersey’s RUAA is that it expressly authorizes arbitrators to “clarify” awards, and to modify or correct them where:
- “there was an evident mathematical miscalculation or an evident mistake in the description of a person, thing, or property referred to in the award[;]”
- “the award is imperfect in a matter of form not affecting the merits of the decision on the claims submitted[;]” or
- “the arbitrator has not made a final and definite award upon a claim submitted by the parties to the arbitration proceeding.”
N.J.S.A. §§ 2A:23B-20(a)(1)-(3), 2A:23B-24(a)(1) & (3).
Rule 48 of the AAA Construction Industry Rules provides a procedure by which the parties can request the arbitrator to correct errors that appear on the face of the award, but withholds from the arbitrator the authority to revisit the merits of already-decided claims. Rule 48 provides that “[w]ithin 20 calendar days after the transmittal of an award, the arbitrator on his or her initiative, or any party, upon notice to the other parties, may request that the arbitrator correct any clerical, typographical, technical or computational errors in the award.” AAA Construction Industry Rule 48(a). While Rule 48 provides that “[t]he arbitrator is not empowered to re-determine the merits of any claim already decided[,]” it is silent on clarification, modification or correction of the award for purposes of adjudicating issues that were submitted but, for whatever reason, not determined by the Award. Accord AAA Commercial Arbitration Rule 50.
Merion Construction: The Arbitration, the Original Award and the Modified Award
Merion Construction involved a subcontract between a contractor and an environmental-remediation service-provider subcontractor, which provided for AAA-administered arbitration. The subcontractor substantially performed its end of the bargain but the contractor didn’t pay, so the subcontractor demanded arbitration, alleging the contractor was liable for $4,442,804.65 in damages, which included $950,953.65 in approved claims and direct billings. The contractor asserted counterclaims for various items of damages.
After a hearing and briefing, the arbitrator issued the Original Award, which consisted of 15 paragraphs. The first paragraph said “[u]nder the terms of the contract documents, [contractor] is not liable to [subcontractor] for delay damages.” The next four paragraphs were each prefaced with “[contractor] is not liable to [subcontractor] for its claim for. . . ,” and each denied one of the following four of subcontractor’s claims: “Fee on Total Cost”; “Savings within GMP (Profit)”; “Interest on Outstanding”; and “Spector Lease for Field Trailer Area.”
Paragraphs 6 through 11 declared the extent and quantum of the contractor’s liability to the subcontractor:
- Paragraph 6: “[Contractor] is liable to [subcontractor] on [subcontractor]’s claim for ‘Costs Associated with Union Labor Delay in Signing PLA”’ in the amount of $28,377.56[;]”
- Paragraph 7: “[Contractor] is liable to [subcontractor] on approved Change Order Requests 7, 8, 12, and 15 for excess stump removal, spraying, stump tie downs and wetland piping in the amount of $141,040.00[;]”
- Paragraph 8: “[Contractor] is liable to [subcontractor] for removal of storm debris in the amount of $162,020.00[;]”
- Paragraph 9: “[Contractor] is liable to [subcontractor] for contaminated PDM soil removal in the amount of $31,181.00[;]”
- Paragraph 10: “[Contractor] is liable to [subcontractor] on [subcontractor]’s claim for payment on its invoices/application for payment 9, 10, and 11 in part of the amount of $462,480.00[;]” and
- Paragraph 11: “[Contractor] is liable to [subcontractor] for winter seeding in the amount of $48,660.00.”
Paragraphs 12 through 14 of the Award declared:
- Paragraph 12: “[Subcontractor] is not liable to [contractor] for its claim for repayment of ‘Backfill Delay[;]’”
- Paragraph 13: “[Subcontractor] is not liable to [contractor] for its claim of $500,000.00 for [subcontractor]’s alleged failure to remedy defective work and honor its maintenance bond and warranty obligation. . . [;]” and
- Paragraph 14: “[Subcontractor] is not liable to [contractor] for “Audit Costs.”
Finally, Paragraph 15 of the Award provided: “Any other claims in this matter not specifically mentioned above are denied.” The last two sentences of the Award underscored that point: “This Award is in full settlement of all claims and counterclaims submitted to this Arbitration. All claims not expressly granted herein are hereby, denied.”
The subcontractor requested that the arbitrator “reconsider[]” and “rule on a circumscribed portion of the Claim [“Claim” was apparently a reference to the aggregate of all of the subcontractor’s individual claims submitted to arbitration] which he did not specifically determine, most likely as an oversight,” and “amend[]” the Award to increase its net amount from $873,758.56 to $1,118,261.99.” The subcontractor asserted that two submitted items were not addressed: (a) “the retainage amount, which totals $198,006.43[;]” and (b) “the amount awarded for [subcontractor’s] Invoice [Number Eight]” which, according to the subcontractor, was “inexplicably short by $46,497.00.”
The subcontractor argued that “[b]ecause the award purports to approve [subcontractor’s] receivables . . . there is no logical or factual reason to deny the retainage,” and, “once again, since the award, by its terms, was intended to compensate [subcontractor] fully for Invoice [Number Eight], this amount of $46,497.00 should be added to the award.”
The contractor responded that the Arbitrator did not have the authority to reconsider or amend the Award, apparently invoking the functus officio doctrine, and that precipitated further correspondence. The subcontractor contended that it was seeking modification or correction based on “matters that . . . fall squarely within the reasonable definition of a `technical or computation error,” and the contractor claimed “that the amount by which [the subcontractor] seeks to have the Award amended was disputed during the evidentiary hearings. . . .” The contractor further stated that it “did not, and will not here, address the ‘merits’ of the dispute because [the subcontractor] did not show that there is any ‘clerical, typographical, technical or computational errors in the award’ such as would permit the Arbitrator to consider modifying the Award pursuant to Rule R-48 [of the applicable AAA Rules].”
The Arbitrator directed the subcontractor to provide “[s]pecific transcript and exhibit references [] to support [its] position[,]” and the subcontractor did so. The Arbitrator subsequently issued the Modified Award, which stated:
The Arbitrator made two computational errors and the Award must be modified. First, undisputed invoices 1 through 8 were not paid in full—[thus] a 5% retainage in the amount of $198,006.43 should have been included in the computation of the Award. Second, invoice 8 was only partially paid and the corrected amount for item 10 of the Award should be increased by $46,497.00 for a total of $508,977.
The net sum of the Award to Kemron from Merion is corrected for those computational errors and modified from $873,758.56 to $1,118,261.99.
In all other respects my Award dated July 2, 2012 is reaffirmed and remains in full force and effect.
The Trial Court Proceedings
The parties commenced separate New Jersey state court actions, one to confirm the Modified Award, and one to confirm the Original Award, which the court in the first-filed action consolidated. The court granted the motion to confirm the Modified Award, finding:
what [the arbitrator] did here with respect to the five percent issue of retainage in Invoice Number 8 was in my mind a computational change, and he was authorized to do that. It wasn’t in any way a substantive change or a reexamination, or to look at the [AAA] rule, a redetermination of the merits of what he decided, so respectfully, I’m going to deny the application by [the contractor] and grant it for [the subcontractor].
Pursuant to N.J.S.A. 2A:23B-25, the trial court awarded the subcontractor $18,315.00 in attorneys fees and $1,667.75 in costs.
The Appellate Court Proceedings and Decision
The contractor appealed to New Jersey Superior Court, Appellate Division, New Jersey’s intermediate appeals court. The Appellate Division reversed, holding that the trial court should have vacated the Modified Award on the ground that the arbitrator exceeded his powers. See N.J.S.A. 2A:23B-23(a)(4) (authorizing vacatur “if. . . the arbitrator exceeded the arbitrator’s powers. . . .”).
Citing Wein v. Morris, 194 N.J. 364, 38 (2008), the Court explained that, although Rule 48 of the AAA Construction Industry Rules permits arbitrators to amend awards to correct clerical, computational, technical and mathematical errors, arbitrators are not “permitted to amend the Award to add claims not previously included in the award and recast those claims as computational errors.” Slip op. at 10.
“Notably absent from the award,” said the Court, “is any reference to ‘retainage amount’ or ‘Invoice Number Eight.’” Slip op. at 10. And since Paragraph 15 expressly provided that “[a]ny other claims in this matter not specifically mentioned above are denied,” the Court concluded that the “trial court erred” when it found that “the change in the Award represented a computation change.” Slip op. at 10. Accordingly, the Court reversed the judgment confirming the award, and vacated the fee and cost award, which was premised on the subcontractor having prevailed. See Slip op. at 10.
We’ll explain in Part II why we think the Court got it wrong.
Tags: AAA Commercial Rule 50, AAA Construction Industry Rule 48, Ambiguity in Award, American Arbitration Association, Arbitral Power, Arbitrators, Clarification of Award, Colonial Indemnity, Computational Errors, Conkright v. Frommert, Construction Industry Arbitration, Correction of Awards, Correction of Errors Appearing on Face of Award, Correction of Errors not Appearing on Face of Award, Delegation of Authority, Delegation of Authority to Arbitrators, Execution of Submission, Final Award, Functus Officio, Grounds for Vacating Awards, Mathematical Errors, Mistakes by Arbitrators, Modification of Awards, New Jersey Revised Uniform Arbitration Act, New Jersey Superior Court Appellate Division, Reconsideration, Remand of Award, Revised Uniform Arbitration Act, Revision of Awards, RUAA, submission, Submission not Fully Executed, Uniform Arbitration Act 2000
