Arbitration awards can be challenged in court, but overturning an award is rare because judicial review of arbitration awards is extremely limited. The theory being that having agreed to arbitration, the parties should be held to the result, even if the arbitrator misunderstood or misapplied the law. Courts will vacate or refuse to confirm an award, however, if there is actual evidence of serious misconduct, corruption or fraud by the arbitrator.
In the recent case of Structure Tek Construction, Inc. v Waterville Holdings, LLC, the appellate court addressed the standards of review for vacating an arbitrator’s award.
In June of 2012, Structure Tek, a contractor, commenced a lawsuit against Waterville seeking to foreclose an $89,000 mechanic’s lien, and seeking contract and delay damages. Because the parties had agreed to arbitration in their construction contract, the lawsuit was stayed to allow the arbitration to proceed. The parties agreed that the arbitrator should be a construction lawyer. The arbitrator at issue was the first choice of Waterville and the third choice of Structure Tek. On the assurance of Waterville’s counsel that this arbitrator “has practical architecture background and I think he is a good choice”, Structure Tek’s counsel agreed to utilize the arbitrators and the parties proceeded to a five day arbitration, after which the arbitrator entered an award in favor of the contractor in the total amount of $254,735.29, which included $95,970.10 in contract balance, and additional sums for delay damages.
After the issuance of the award, Waterville’s counsel learned that the arbitrator was personally in default of his own home mortgage and was a defendant in a current mortgage foreclosure action. When Structure Tek returned to court and petitioned to confirm the award as a judgment, Waterville opposed, arguing that the arbitrator’s failure to disclose his personal default of his own real estate mortgage and his status as a mortgage foreclosure defendant tainted the award. Waterville added that threats and intimidating behavior made by an agent of Structure Tek before and during the arbitration—which included threats to contact the Liquor Authority and Internal Revenue Service, false accusations that Waterville solicited organized crime to intimidate Structure Tek, and false accusations that Waterville representatives had threatened him and Structure Tek’s attorney with physical harm—provided further grounds for overturning the award. Finally, Waterville argued that the award was irrational, in part because the arbitrator awarded in excess of $95,000 on the claim when the contractor’s own mechanic’s lien was only in the sum of $89,000.
The trial court confirmed the arbitrator’s award, finding that Waterville failed to establish that the arbitrator’s financial difficulties affected his impartiality. The court also found that the amount of the award was not totally irrational, and that Waterville failed to establish any other basis to overturn the award.
The appellate court affirmed. In doing so, the appellate court acknowledged that judicial review of an arbitrator’s award is extremely limited. It relied upon well settled case law that such award should not be disturbed unless there is clear and convincing evidence that vacatur is appropriate. The court held that there were no grounds to overturn the award. As to the irrationality standard, the appellate court pointed out that mere mistakes of law or fact were insufficient because the arbitrator “may do justice as he [or she] sees it, applying his [or her] own sense of law and equity to the facts as he [or she] finds them to be and making an award reflecting the spirit rather than the letter of the agreement”.
Courts favor arbitration because it expedites claims and reduces litigation in an overburdened court system. Because of the limited right of appeal, the arbitration award is final and binding, even if the arbitrator makes a mistake of fact or law, or the award is contrary to the weight of the evidence presented at the hearing. Although it has been said that arbitration is an effective way to resolve disputes privately, promptly and economically, the arbitrating parties should be aware that they are giving up the important safeguard of full appellate review of the arbitration award.