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 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.