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Archive for the ‘Construction Industry Arbitration’ Category

Res Judicata and Consolidated Arbitration: the Sixth Circuit puts the Kibosh on the “Contagion Theory of Arbitration”

September 17th, 2014 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Confirmation of Awards, Consolidation of Arbitration Proceedings, Construction Industry Arbitration, Contract Interpretation, Drafting Arbitration Agreements, Existence of Arbitration Agreement, Final Awards, Judicial Review of Arbitration Awards, Michigan State Courts, Practice and Procedure, Preclusive Effect of Awards, Res Judicata or Claim Preclusion, State Courts, United States Court of Appeals for the Sixth Circuit, United States Supreme Court Comments Off on Res Judicata and Consolidated Arbitration: the Sixth Circuit puts the Kibosh on the “Contagion Theory of Arbitration”

Res judicata—Latin for a “matter” or “thing” “decided”—is the legal principle under which a final judgment in one action bars the same parties from relitigating in another, successive action matters that were or could have been asserted in that  first action. Also known as “claim preclusion”, it is designed to promote finality and judicial economy, and to protect persons from vexatious litigation. See, generally, Taylor v. Sturgell, 553 U.S. 880, 891 (2008).

But can an unconfirmed arbitration  award preclude a party from maintaining a court action to resolve a matter that it did not submit or agree to submit to arbitration? Suppose:

  1. A has an arbitration agreement with B (the “AB Agreement”);
  2. B has an arbitration agreement with C (the “BC Agreement”);
  3. A and C did not agree to arbitrate any disputes between them;
  4. The AB Agreement contemplates the parties arbitrating their claims against each other in a consolidated arbitration that may involve factually-related disputes that B has agreed to arbitrate with C or other third parties, provided those third parties consent to consolidated arbitration;
  5. The AB Agreement does not purport to require A or B to arbitrate any disputes between (a) A or B or both; and (b) C or any other non-party;
  6. The BC Agreement does not purport to require B or C to arbitrate any disputes between (a) B or C or both; and (b) A or any other third party;
  7. A dispute arises between A and B, and A demands arbitration against B;
  8. B, in turn, demands arbitration against C, seeking indemnity from C for any liability B may have to A;
  9. The AB and BC arbitrations are consolidated over A’s objection;
  10. A knows it has a legal and factual basis for asserting a tort claim against C arising out of the same transactions and occurrences at issue in the consolidated arbitration, but does not submit (or attempt to submit) that claim to arbitration;
  11. The arbitration proceeds, and the arbitrator issues a final award finding that B is liable to A for $X in damages and that C is not obligated to indemnify B;
  12. Nobody seeks to confirm, vacate, modify or correct the award; and
  13. A subsequently brings an action in court against C, which seeks damages from C allegedly caused by C’s negligent conduct with respect to the same transactions and occurrences that were the subject of the consolidated arbitration.

Is A’s lawsuit barred by res judicata?

On August 28, 2014, in O’Neil v. Shepley, No. 13-2320, slip op. (6th Cir. Aug. 28, 2014),  the U.S. Court of Appeals for the Sixth Circuit, in a 2-1 decision, said the answer was “no,” and that the answer would have been the same had the AB/BC award been confirmed. See slip op. at 10-11.

The two-judge majority opinion—authored by Chief Circuit Court Judge R. Guy Cole, and joined by Circuit (and former Chief) Judge Danny Julian Boggs—minced no words when it said that to bar A’s lawsuit based on res judicata would be to endorse a “contagion theory of arbitration” that “has no basis in law or the relevant contracts[:]”

Simply put: the premise of arbitration is consent and [A] did not consent to arbitrate the present claims [against C]. Our judicial doctrines do not force it to do so now.

Slip op. at 10-11.

Circuit Court Judge David William McKeague dissented, arguing that the “court does not need to infect [A] with a ‘contagion theory of arbitration’ to bar his claims with res judicata. It merely needs to hold him to the basic terms of his contract. Any infection that [A] O’Neil has acquired is its own doing.” That was so, claimed the dissent, because:

[The AB arbitration was] eventually expanded to include [C]. Moreover, in [subcontractor A’s] contract with [construction manager B], [A] agreed to arbitrate his grievances with [B] and further agreed in a standard ‘flowthrough’ provision to be ‘bound by the procedures, decision and determinations resulting from any dispute resolution process’ in the contract between [B] and [the owner].  The contract between [B] and the [owner] required all disputes, among all contractors, to be submitted to binding arbitration.

Slip op. at 13 (emphasis in original) (McKeague, J., dissenting).

All three judges appeared to agree that res judicata does not turn on whether the first proceeding would have barred the second had the first been a plenary court proceeding. The difference of opinion between the majority and dissent was that the dissent was prepared to find A’s agreement to consolidated arbitration was the functional equivalent of an agreement arbitrate its claims against any person who might consent to join such a consolidated arbitration, even if A had no contractual relationship with that person, let alone a written agreement to arbitrate.

We think the majority’s read of the relevant contractual provisions gave effect to the parties expressed intent, whereas the dissent’s view of what the parties agreed did not. But to appreciate why, you’ll need to take a closer look at the Sheply facts, which in substance are much like (but not identical to) those in our hypothetical. Continue Reading »

Re Colorado Energy Management, LLC v. Lea Power Partners, LLC: Another Appellate Division holds Construction Arbitration Award should be Vacated, but this time for Good Reason

May 10th, 2014 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Practice and Procedure, Arbitrator Vacancy, Authority of Arbitrators, Awards, Construction Industry Arbitration, Functus Officio, Grounds for Vacatur, Judicial Review of Arbitration Awards, New York State Courts, Practice and Procedure, State Arbitration Law, State Arbitration Statutes, State Courts Comments Off on Re Colorado Energy Management, LLC v. Lea Power Partners, LLC: Another Appellate Division holds Construction Arbitration Award should be Vacated, but this time for Good Reason

Introduction

In our recent post on the Merion Construction case (here), we were pretty critical of New Jersey’s Superior Court, Appellate Division, for reversing a trial court decision confirming a modified arbitration award, finding it should have been vacated and the original award confirmed. Today’s post takes a brief look at a decision by another state’s Appellate Division—New York’s Supreme Court, Appellate Division, First Department—which held that another construction-industry award should be vacated.

In Merion Construction the New Jersey Appellate Division thought the arbitrator had no authority to correct his award to reflect the rulings he intended to make on two issues the parties had submitted to him. Re Colorado Management, LLC v. Lea Power Partners, LLC , ___ A.D.3d ___, ___, 2014 N.Y. Slip Op. 01253 at 1-3 (1st Dep’t Feb. 20, 2014), held that a final arbitration award had to be vacated because the arbitrator had no authority to rule upon an issue that was not presented to him in light of the parties’ submissions and a ruling made in the same proceeding by a predecessor arbitrator.

While Merion Construction got an “F,” Colorado Management gets at least an “A-,” and perhaps even an “A.” Continue Reading »

No Good Deed Should Go Unpunished: Functus Officio and Merion Constr. Mgt., LLC v. Kemron Environmental Serv., Inc.—Part I

May 3rd, 2014 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Awards, Construction Industry Arbitration, Final Awards, Functus Officio, Grounds for Vacatur, Judicial Review of Arbitration Awards, New Jersey State Courts, Practice and Procedure, State Arbitration Statutes, State Courts, Uncategorized Comments Off on No Good Deed Should Go Unpunished: Functus Officio and Merion Constr. Mgt., LLC v. Kemron Environmental Serv., Inc.—Part I

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.” Continue Reading »