Greg VOLD d/b/a States Border Turf, Plaintiff and Appellant, v. BROIN & ASSOCIATES, INC., a South Dakota Corporation, Defendant and Appellee.
No. 23464
Supreme Court of South Dakota
Decided June 22, 2006.
Rehearing Denied July 21, 2006.
2006 SD 80
Tim R. Shattuck, Daniel J. Harmelink of Woods, Fuller, Shultz & Smith, Sioux Falls, South Dakota, Attorneys for defendant and appellee.
[¶ 1.] In this appeal, we review a circuit court‘s decision to vacate an arbitration award. Because the arbitrator failed to follow his own order to issue a “reasoned award,” we affirm.
Background
[¶ 2.] Broin & Associates is a South Dakota corporation engaged in the business of designing and constructing ethanol production facilities. On November 2, 2000, Broin contracted to design and build a production plant known as Northern Lights Ethanol, L.L.C. Broin served as the general contractor for the project.
[¶ 3.] In April 2001, Broin signed a contract with Gregory Vold, a Minnesota resident, who would perform the site and grading work. From the beginning, there were difficulties. By December 2002, Vold had not completed much of the required work. As a result, on December 19, 2002, Broin terminated Vold‘s contract for cause.
[¶ 4.] In November 2003, Vold filed a demand for arbitration, seeking payment for unapproved change orders, alleged work stoppages, and other claims. Under their contract, “[a]ll claims, disputes, and other matters in question between Design/Builder and Contractor arising out of or relating to the Construction Agreement Documents or the breach thereof . . . will be decided by binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association [AAA].” Broin filed an answering statement with the AAA, denying liability on Vold‘s claims and seeking reimbursement for the costs and expenses sustained in connection with the remaining grading work on the construction project. Vold had thirteen claims, totaling more than $800,000. Broin had eleven claims, totaling approximately $500,000.
[¶ 5.] Norman Fast was selected to be the arbitrator. He conducted a telephonic preliminary hearing with the parties and their attorneys on February 2, 2004. The purpose of the hearing was to provide the arbitrator with guidance on the parameters of the arbitration proceeding. During the hearing, it was agreed that each side would submit a specification of claims to the AAA outlining their respective demands. It was also agreed that the arbitration would be held in Watertown, South Dakota, starting on June 21, 2004. As the hearing progressed, Tim R. Shattuck, one of the attorneys for Broin, requested that the arbitrator issue a “reasoned award.” According to another of Broin‘s attorneys, Daniel J. Harmelink, the attorney for Vold, Ron Schmidt, consented to the award being in the form of a “reasoned award.” Attorney Ron Schmidt, however, denies that he agreed to a reasoned award. There was no verbatim record kept of the hearing.
[¶ 6.] After the preliminary hearing, the arbitrator prepared and signed a report and scheduling order indicating that the form of the award was to be a “reasoned award.” This order was then submitted to the AAA by the arbitrator. On February 10, 2004, the case manager from the AAA sent a letter to all parties setting out the terms of the arbitrator‘s preliminary hearing report and scheduling order. The letter stated that “[t]he form of Award to be issued in the above matter will be a reasoned award” and that “[t]his order shall continue in effect unless and until
[¶ 7.] The arbitration hearing began on June 21 and ended on June 24, 2004. Twelve witnesses testified. On July 13, 2004, the arbitrator issued his decision awarding $267,298 in damages to Vold and denying Broin‘s counterclaims. The arbitrator‘s award consisted of two pages. It itemized the various dollar amounts allowed for each of Vold‘s claims, but gave no reason for each award and no reason for rejecting Broin‘s claims. The award did not mention any of the relevant contract provisions at issue, cite any law, or discuss any of the evidence admitted during the four day hearing.
[¶ 8.] Following the arbitrator‘s decision, Broin sought to vacate the award in circuit court. The court heard the matter on September 8, 2004, and thereafter issued its Findings of Fact and Conclusions of Law and Order Granting Motion to Vacate Arbitration Award and Denying Motion to Confirm Award. Several times in its “findings” the court noted, contrary to attorney Ron Schmidt‘s assertion in his affidavit, that both Broin and Vold had agreed to a reasoned award during the telephonic preliminary hearing with the arbitrator on February 2, 2004. It is unclear how the court reached this factual, and perhaps, credibility, determination, since it appears that it heard no testimony during the hearing. Nonetheless, the court went on to conclude that “the parties had agreed to the issuance of a reasoned award” and “the arbitrator had exceeded the authority granted him by Broin and Vold by failing to issue a reasoned award.” Accordingly, the court ruled that federal law required the award to be vacated.
[¶ 9.] Vold raises the following appeal issues: First: “Whether the trial court erred by substituting its judgment for that of the arbitrator on a strictly procedural issue, especially in light of the parties’ contractual Rule 54 granting the arbitrator sole authority to interpret and apply the arbitration rules insofar as they govern his powers and duties?” Second: “Whether Broin‘s failure to pursue [his] remedy under contractual Rule 47(1) authorizing an aggrieved party, within 20 days of the award, (while the information is still fresh in the arbitrator‘s mind) to request the arbitrator to modify any alleged procedural, technical error (such as lack of reasoning) in the award: (1) was a condition precedent, and barred Broin‘s seeking judicial relief to cure such alleged defect, or, alternatively, (2) a waiver of a known right and/or an equitable estoppel barring him from seeking judicial relief?”1
Analysis and Decision
[¶ 10.] In examining a circuit court‘s order vacating an arbitration award, we review the court‘s findings of fact under the clearly erroneous standard, but decide questions of law de novo. Boise Cascade Corp. v. Paper Allied-Indus., Chem. & Energy Workers (PACE), Local 7-0159, 309 F.3d 1075, 1080 (8th Cir.2002)
[¶ 11.] Arbitrators possess broad, but not unlimited, authority. Missouri River Servs., Inc. v. Omaha Tribe of Nebraska, 267 F.3d 848, 855 (8th Cir.2001) (following Trailmobile Trailer, LLC v. Int‘l Union of Electronic, Electrical, Salaried, Mach. & Furniture Workers, AFL-CIO, 223 F.3d 744, 747 (8th Cir.2000)). Grounds for vacating an arbitration award are provided in the Federal Arbitration Act (FAA),
[¶ 12.] The arbitrator, Vold contends, was vested with discretion in how he handed down the final decision and award: the “arbitrator determined that he had no duty under the AAA Construction Industry Arbitration Rules to render a ‘reasoned’ award.” Because the “parties did not request any reasoned award, in writing, prior to the appointment of the arbitrator,” Vold argues that the arbitrator‘s decision to declare an award without a reasoned explanation was within his right. And, even if the agreement was changed to require a “reasoned award,” Vold contends that the matter was one of procedure, rather than substance, precluding the circuit court from substituting its judgment for that of the arbitrator. As such, Vold argues that the circuit court‘s sole basis for vacating the arbitration award was procedural in nature, therefore constituting reversible error.
[¶ 13.] In addressing Vold‘s arguments, we first turn to the Construction Industry Arbitration Rules provided by the AAA. Rule R-1(a) states:
The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the [AAA] under its Construction Industry Arbitration Rules. These rules and any amendment of them shall apply in the form in effect at the time the administrative requirements are met for a demand for arbitration or submission agreement received by the AAA. The parties, by written agreement, may vary the procedures set forth in these rules. After appointment of the arbitrator, such modifications may be made only with the consent of the arbitrator.
(Emphasis added.) In accord with R-21(b), “the parties and the arbitrator,” during the preliminary hearing, “should discuss the future conduct of the case, including clarification of the issues and claims, a schedule for the hearings and any other preliminary matters.”
[¶ 14.] It is undisputed that no request for a reasoned award was made in writing
[¶ 15.] The preliminary hearing order, however, was then submitted to the AAA by the arbitrator. On February 10, 2004, the AAA case manager sent a letter to all parties, which reflected the terms of the arbitrator‘s preliminary hearing report and scheduling order. The letter indicated that “[t]he form of Award to be issued in the above matter will be a reasoned award,” and that “[t]his order shall continue in effect unless and until amended by subsequent order by the arbitrator.” No amendment was ever made or requested. Accordingly, the requirement of a reasoned award was apparently consented to by the arbitrator and confirmed and memorialized in writing under the terms of the preliminary hearing report and scheduling order and the letter issued by the AAA.
[¶ 16.] We now turn our analysis to the Federal Arbitration Act. “The Federal Arbitration Act (FAA) preempts state law and governs all written arbitration agreements in contracts involving interstate commerce.” Dinsmore v. Piper Jaffray, Inc., 1999 SD 56, ¶ 10, 593 N.W.2d 41, 43; Dakota Wesleyan Univ. v. HPG Int‘l, Inc., 1997 SD 30, ¶ 6, 560 N.W.2d 921, 922 (citing Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 271-72, 115 S.Ct. 834, 838, 130 L.Ed.2d 753 (1995)); see
[¶ 17.] Section 10 of the FAA sets forth the following four grounds for vacating an arbitration award. First, “the award was procured by corruption, fraud, or undue means. . . .”
[¶ 18.] The circuit court ruled that the “FAA requires a court to vacate an arbitration award in which ‘the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter
[¶ 19.] In the absence of any credibility determination, we must label as spurious the circuit court‘s finding that the parties “agreed” to a reasoned award. Nonetheless, we conclude that the arbitrator violated the rule he consented to follow. Under the American Arbitration Association‘s Construction Industry Arbitration Rules, arbitrators are under no obligation to set out the reasons for their awards. The general rule is inapplicable, however, when a reasoned award is agreed to between the parties before selection of an arbitrator, or, after selection, when the arbitrator consents to give a reasoned award. AAA Rule R-43. We can deduce the following from the record: (1) before an arbitrator was selected, no binding agreement was made concerning the form of the award; (2) after the arbitrator was selected, at least one of the parties requested that the award be a “reasoned award” at the preliminary hearing; (3) after the preliminary hearing, the arbitrator indicated by order that the award would be reasoned; (4) the AAA issued a letter confirming that the award would be reasoned; (5) the requirement of issuing a reasoned award was therefore consented to by the arbitrator; and (6) the arbitrator failed to issue a reasoned award.
[¶ 20.] AAA Construction Industry Arbitration Rules provide:
R-43. Form of Award
* * *
(b) The arbitrator shall provide a concise, written breakdown of the award. If requested in writing by all parties prior to the appointment of the arbitrator, or if the arbitrator believes it is appropriate to do so, the arbitrator shall provide a written explanation of the award.
To emphasize the pertinent language, “[i]f requested in writing by all the parties prior to the appointment of the arbitrator, or if the arbitrator believes it is appropriate to do so, the arbitrator shall provide a written explanation of the award.” R-43(b) (emphasis added). The arbitrator must have determined that it was appropriate to give a reasoned award. This conclusion is unavoidable because his order states that the award will be “reasoned.” And all we have to rely on is the arbitrator‘s order, there being no verbatim record of what actually was agreed upon at the preliminary hearing. Therefore, the question becomes whether the arbitrator exceeded his power by issuing an award inconsistent with his own order that he would render a reasoned award.
[¶ 21.] An arbitration award can be set aside when the arbitrator “exceeded [his] powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”
[¶ 22.] Procedural questions involve matters that are “tangential to the main body of the arbitrable dispute. . . . A mere procedural irregularity provides no basis upon which to conclude that the [arbitrator] acted beyond its authority.” Sheet Metal Workers Int‘l Ass‘n Local Union No. 420 v. Kinney Air Conditioning Co., 756 F.2d 742, 745 (9th Cir.1985) (citations omitted). “Procedural law” is defined as: “[t]he rules that prescribe the steps for having a right or duty judicially enforced, as opposed to the law that defines the specific rights or duties themselves.”
[¶ 23.] “Substantive law” “creates, defines, and regulates the rights, duties, and powers of the parties.”
[¶ 24.] Affirmed.
[¶ 25.] GILBERTSON, Chief Justice, and MEIERHENRY, Justice, and MILLER, Retired Justice, concur.
[¶ 26.] ZINTER, Justice, dissents.
[¶ 27.] MILLER, Retired Justice, sitting for SABERS, Justice, disqualified.
ZINTER, Justice (dissenting).
[¶ 28.] I agree that the parties did not verbally “agree” to a “reasoned award.”
[¶ 29.] Our standard of review of an arbitrator‘s decision concerning the form of the award is, like most arbitration matters, limited. Even if this Court is convinced that the arbitrator committed serious error, as “long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,” arbitration awards must be confirmed. Schoch v. InfoUSA, Inc., 341 F.3d 785, 788 (8th Cir.2003) (citation omitted). See also United Paperworkers Int‘l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 371, 98 L.Ed.2d 286, 299 (1987); Gas Aggregation Servs., Inc. v. Howard Avista Energy, LLC, 319 F.3d 1060, 1064 (8th Cir.2003); Bureau of Engraving, Inc. v. Graphic Communication Int‘l Union, Local 1B, 284 F.3d 821, 824 (8th Cir.2002).
[¶ 30.] With respect to the form of the award, “[i]t is usually held that the law requires only that an arbitrator announce his award, not that he state detailed reasons therefor.” Meharry v. Midwestern Gas Transmission Co., 103 Ill.App.3d 144, 58 Ill.Dec. 887, 430 N.W.2d 1138, 1140 (1981) (citation omitted). As the Iowa Supreme Court explained:
Arbitrators need not disclose the facts or reasons behind their award unless the arbitration agreement or submission, or an applicable statute, requires them to do so. Otherwise, they are no more bound to go into particulars, or to give reasons for their award, than a jury is for its verdict. When acting within the scope of their authority, being the chosen judges of the parties and the law unto themselves, they may award according to their notions of justice and without assigning any reason.
Reicks v. Farmers Commodities Corp., 474 N.W.2d 809, 811 (Iowa 1991) (citation omitted).
[¶ 31.] In this case, the scope of the arbitrator‘s authority to determine the form of the award was governed by the AAA Rules because the parties’ agreement incorporated these rules. Rule R-43(b) expressly defined the scope of the arbitrator‘s authority over the form of the award. It provided:
Form of Award
. . .
(b) The arbitrator shall provide a concise, written breakdown of the award. If requested in writing by all parties prior to the appointment of the arbitrator, or if the arbitrator believes it is appropriate to do so, the arbitrator shall provide a written explanation of the award.
(Emphasis added). Thus, under this unambiguous rule, the parties either had to
[¶ 32.] In this case, there was no written agreement, and therefore, the arbitrator was within the clear scope of his authority to issue a non-reasoned award. Simply stated, absent a written agreement, Rule R-43(b) gave the arbitrator absolute discretion to determine the form of the award he deemed “appropriate.” Because the arbitrator possessed that authority, the arbitrator did not exceed his powers or so imperfectly execute them that a mutual, final, and definite award was not made under the vacation provisions of
[¶ 33.] The Court concludes otherwise, reasoning that the arbitrator exceeded his powers because he “violated the rules he agreed to follow” and did not enter a final and definite award. Supra ¶¶ 21-23 (emphasis added). The Court points out that the arbitrator entered a preliminary hearing scheduling order that indicated a reasoned award would be entered. The Court then concludes that the arbitrator had no authority, after issuing a preliminary hearing scheduling order, to change his decision and issue a non-reasoned award. The Court reasons that “[o]nce the arbitrator ordered that the award he would issue would be reasoned, his powers were defined. The arbitrator‘s decision to issue a reasoned award bestowed a substantive right on Broin and, at the same time, imposed a substantive duty upon the arbitrator.” Supra ¶ 23. From this premise, the Court ultimately concludes that the arbitrator‘s change of decision and failure to amend the preliminary order “constituted a substantive error under the [Federal Arbitration Act] and the AAA rules he operated under.” Id. However, the Court misinterprets Rule R-43(b) and the express language of the preliminary order. The Court fails to consider that an arbitrator, like any other comparable judicial officer, is authorized to change preliminary decisions that have not become final.
[¶ 34.] The weakness of the Court‘s conclusions is first demonstrated by its own description of the uncertain nature of the arbitrator‘s preliminary decision regarding a reasoned award. The Court can only state that “a reasoned award was apparently consented to by the arbitrator,” supra ¶ 15 (emphasis added), or that “the arbitrator must have determined that it was appropriate to give a reasoned award.” See supra ¶ 20 (emphasis added). These slender findings hardly demonstrate a binding preliminary determination, let alone a binding final decision, as to the form of the award.4
[¶ 36.] Second, it must be remembered that the authority to change a preliminary or interlocutory order is well recognized in the federal and state law governing dispute resolutions. It is specifically recognized that preliminary and interlocutory orders6 do not bestow unalterable rights and duties. That is because the federal courts have recognized there is “inherent power to reconsider and modify an interlocutory order any time prior to entry of judgment.” Vickroy v. Mello, 5 F.Supp.2d 752, 757 (E.D.Mo.1998). A departure from an earlier holding is allowed when the Court is “convinced that the holding is incorrect.” Id. See also Lovett v. General Motors Corp., 975 F.2d 518, 522 (8th Cir. 1992) (stating that until the district court entered judgment on all claims, it could consider earlier rulings on an issue). Similarly, we have consistently held that “[a] trial court has the inherent power to reconsider and modify an order any time prior to entry of judgment.” Moore v. Michelin Tire Co., Inc., 1999 SD 152, ¶ 46, 603 N.W.2d 513, 525 (citations omitted). Therefore, it is no surprise that arbitrators also have this authority to reconsider their earlier rulings until the time they become final. Foreman v. Cargill, 1986 WL 9910 (Del.Super.Ct.).
[¶ 37.] Third, contrary to the majority opinion, there is no requirement under Rule R-43(b) or the FAA that an arbitrator must issue a formal “amended order” to retain authority to determine the form of the award that the arbitrator will ultimately utilize. On the contrary, there is only one way an arbitrator can lose his authority and become bound to a particular form of award under the rules of arbitration; i.e. if a reasoned award is “requested in writing by all parties prior to the appointment of the arbitrator.” Id. That did not occur.
[¶ 39.] In the final analysis, the outcome of this case is controlled by the fact that there was no written agreement for a reasoned award. Therefore, this arbitrator had the sole authority to determine the form of the award. Moreover, his preliminary order was subject to change in the final award. Thus, after hearing the facts and law at the hearing, the arbitrator had authority to determine that the case only merited a non-reasoned award. I therefore dissent.