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June 20, 2023 Article

Confirming and Contesting the Outcome of Arbitration Issued in a Series of Awards

Stan Martin

Concerning arbitration awards, this case had everything: arbitration in London but a post-award legal battle in the United States; bifurcation of liability and damages by agreement, but then disagreement over whether the liability determination was “final”; a series of damages awards stretching out over four years, leading to argument over whether a motion to confirm was timely; and a 1st Circuit Court of Appeals decision authored by retired Supreme Court Justice David Souter, sitting by designation.

The primary take-away? Don’t sit back and wait! The court will confirm a bifurcated liability award if it appears that the parties agreed to the process and arbitrator intended it to be final, but confirmation of an interim award as “final” will remain the exception and not the rule.

Project. The University of Notre Dame (USA) in England has a campus in London. Notre Dame contracted with TJAC Waterloo, LLC, to buy a building in London after the building had been renovated by TJAC’s affiliated contractor, ZVI Construction Co., LLC. The purchase and sale agreement was signed by both TJAC and ZVI.

Arbitration Round One. After completing the acquisition, Notre Dame identified a series of deficiencies with the cost of remedial work claimed to be $8.5 million. These issues were referred to an “expert” (meaning an arbitrator) for adjudication. The arbitrator circulated a preliminary decision to the parties for review and comment. The arbitrator titled the draft award “A Document of Preliminary Indications on Liability for Comment in Reply by the Parties.”  The draft also included:

“None of the answers are the final answers. All and any may not be commented upon in any way seen fit.”

The arbitrator then issued his report, now entitled “An Expert Determination on Liability,” which found TJAC and ZVI to be jointly and severally liable to Notre Dame for failing to comply with the contract. In response to an objection by ZVI, that it was not subject to the arbitrator’s jurisdiction, the arbitrator responded that “The binding decision . . . cannot be changed.”

Initial Court Proceedings. The damages phase was initially postponed due to the ill health of a principal, at which point Notre Dame asked the other two parties for assurances that they would be able to satisfy any award that might issue. Apparently considering the response less than satisfactory, Notre Dame filed a lawsuit in Massachusetts state court seeking security for payment. The defendants removed the case to federal court on the basis of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958 (“Convention”). Notre Dame then supplemented its request for security with a request for confirmation of the arbitrator’s determination on liability. The District Court confirmed the arbitrator’s liability determination under the Convention and authorized attachment of property for approximately $7 million.

Appellate Round One. TJAC and ZVI appealed to the 1st  Circuit. The decision on the first round was written by Justice Souter.

Justice Souter noted the standard for confirmation under the Federal Arbitration Act (FAA) that the award be “final,” and under the Convention that it be “binding.” The parties, and the Court, considered these standards to be “conceptually indistinguishable,” and so the Court looked to precedent under the FAA. It cited precedent for treating a liability decision as final when the parties have agreed to bifurcation, even when such an agreement is informal. Thus, the court looked to whether there was any factual dispute as to the finality of the liability decision.

The two sentences quoted above had remained in the final decision. Reviewing the record de novo, Justice Souter noted that neither TJAC or ZVI had objected to the arbitrator’s response that the decision was “binding.” The court reiterated the District Court statement, that “the two sentences TJAC and ZVI rely on are nothing more than mistaken leftovers from the earlier document . . .”

Thus, the District Court’s confirmation of the arbitrator’s liability determination was upheld, as a binding decision on liability.

Notably absent from the decision is any discussion of grounds for contesting or vacating the arbitrator’s award. It appears that neither TJAC or ZVI took any action within the timeframe stated in the FAA. Nothing in the Court of Appeals decision suggests or indicates that any such argument would have gained traction, even if timely advanced. But the decision serves as a reminder that the time limits of the FAA must be observed any time a party may seek to avoid the consequences of a final decision.

Arbitration Round Two. The parties arbitrated the issue of quantum, and the arbitrator then issued a series of awards, starting in September 2016 and ending in March 2020. In May 2020, Notre Dame moved to confirm the series of damages awards. (Award Nos. 1 and 2 concerned liability, and Award Nos. 3 – 7 addressed damages. Award No. 3 did not include a numerical amount. Award No. 4 was for £1,781,048.44, Award No. 5 for £957,450.00, and Award No. 6 was for interest on Nos. 4 and 5, for £328,001.37 plus a per diem amount.)

Subsequent Court Proceedings. The defendants opposed confirmation on the grounds that the three-year statute of limitations for confirmation of an award had passed, as to Award No. 4 and thus the applicable interest amount included in Award No. 6. The District Court confirmed the damages award. TJAC and ZVI again appealed to the 1st Circuit.

Appellate Round Two. The Court of Appeal noted that an award under the FAA may be confirmed “[w]ithin three years after an arbitral award falling under the [New York] Convention is made.” (emphasis in original) Going back to a similar point raised in the first appellate round, the Court of Appeal noted that an award is not “made” until it is binding.

The defendants’ argument was again scrutinized from a factual perspective. TJAC and ZVI argued that each damages award was final, based on language in the award indicating that it comprised the arbitrator’s “final views” and that “[d]eterminations herein served are final Quantum sums.”

But the Court noted that each award had to be placed in context. Award No. 4 had addressed only certain “Cost of Works,” and the arbitrator had “explicitly disclaim[ed] a comprehensive resolution” noting other items were “yet to be decided.” Thus, by its very terms, Award No. 4 had not addressed all items of damages.

The arbitrator had followed a piecemeal approach to his awards on damages, but the Court held that this did not “suggest that each time the [arbitrator] decided a particular component, that decision was a final arbitral award.” The Court noted, for example, that the per diem interest rate included in Award No. 5 was updated and revised in Award No. 6. And the Court looked to the conduct of the parties throughout the process, in concluding that there was no understanding that the series of damages awards would be final upon issuance.

Thus, the Court of Appeal held that none of the series of damages awards were final, until Award No. 7, which covered the last of the categories of damages identified by the arbitrator. So Notre Dame’s motion to confirm the damages award, filed two months after Award No. 7, was timely.

Further Discussion. The Court of Appeal acknowledged that its first decision upheld the mid-arbitration liability determination as final, and yet its second decision did not treat any of the damages awards in the same manner, save for the last award. But it noted that “judicial confirmation of interim awards constitutes an exception to the ordinary rule governing arbitral finality . . .” Thus, it was necessary for the Court to consider other factors such as an agreement among the parties.  There had been an agreement between the parties to bifurcate the case into liability and damages, but there was no similar or analogous agreement to further sub-divide the damages phase. Thus, the liability determination could be “final” for purposes of confirmation, and yet the individual damages awards would not be “final” in the same manner, as the parties had not agreed to such a process.

The set of appellate decisions may read to some as setting up a series of traps for the unwary.  On balance, however, the Court of Appeal applied the same standard. An interim decision can be final if the parties have agreed on that process, even though finality of an interim award is the exception and not the rule. The record demonstrated that Notre Dame, TJAC and ZVI had all agreed to bifurcate liability and damages, and so the exception could be applied to confirm what was in effect an interim award. But there was no similar agreement relative to damages, and so it was incumbent upon the parties – and the Court – to consider only the last of a series of awards as the “final” award that was binding upon the parties.

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Stan Martin

Commonsense Construction Law LLC, Boston, MA