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B.L. Harbert Int’l, L.L.C. v. Hercules Steel Co.

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by Michele L. Jacobson, Esq., Andrew S. Lewner, Esq.

Date Promulgated: February 28, 2006

Issue Addressed: Whether an Award Should be Vacated for Manifest Disregard of the Law

In B.L. Harbert Int’l, L.L.C. v. Hercules Steel Co., the 11th Circuit Court of Appeals refused to vacate an arbitration award because the Court found that the arbitrator did not act in manifest disregard of the law. The Court, moreover, issued an admonition warning future potential litigants seeking to challenge arbitration awards of the possibility of sanctions in the event that the challenge is found to be frivolous. B.L. Harbert International, L.L.C. (“Harbert”) is a general contractor based in Birmingham Alabama that specialized in large construction projects, including governmental projects. Harbert was awarded a contract to construct an office complex, and it awarded a subcontract to Hercules Steel Co. (“Hercules”). The dispute between the parties centered over the fact that Harbert created two work schedules, which it referred to as the 2000 Schedule and the 3000 Schedule. The timeframe within which the work had to be completed was earlier in the 2000 Schedule than in the 3000 Schedule. While Hercules completed its work within the more lenient timeframe of the 3000 Schedule, its completion fell outside of the date contained in the 2000 Schedule.

Dissatisfied with Hercules’ failure to meet the earlier deadlines, Harbert refused to pay Hercules the amounts outstanding under the subcontract, and, instead, demanded delay damages from Hercules. Hercules initiated arbitration before the American Arbitration Association pursuant to the arbitration provision contained in the subcontract to recover the amounts owing, as well as interest, other damages and attorney’s fees. Harbert counter-claimed that it was entitled to delay damages, accelerated costs, miscellaneous back charges, interest and attorney’s fees. After seven hearing sessions before a single arbitrator which, consistent with construction industry custom, were not transcribed by a court reporter, the arbitrator issued an award in Hercules’ favor.

Harbert moved for modification and clarification of the award from the arbitrator, contending that the award did not contain the requisite level of specificity agreed to between the parties. In that regard, Harbert requested that the arbitrator provide “enough discussion” of each of the six issues of decision contained in the award. The arbitrator issued his Disposition for Application of Modification/Clarification of the Award (the “Disposition”) which, aside from correcting a computational error contained in the award, provided the arbitrator’s findings. Specifically, the Disposition noted that Hercules was bound by the 3000 Schedule, and not the 2000 Schedule, which had been “unilaterally set by Harbert.”

Harbert sought to vacate the arbitration award in the United States District Court for the Northern District of Alabama, contending that the award reflected a manifest disregard of the law. Hercules opposed Harbert’s request, and moved for confirmation of the award. The district court entered an order denying Harbert’s motion to vacate and granting Hercules’ motion to confirm. The district court interpreted the arbitrator’s award, as well as his subsequent disposition of the motions to clarify / modify the award as evidencing that the arbitrator concluded that Hercules was bound by the date contained in the 3000 Schedule, as opposed to the 2000 Schedule.

Harbert subsequently appealed the order of the district court to the United States Court of Appeals for the 11th Circuit. In reviewing the case, the 11th Circuit began its analysis by noting the strong federal policy in favor of arbitration as a method of dispute resolution. In that regard, the Court reviewed governing 11th Circuit law which holds that the grounds for appealing an arbitration aware are limited to those grounds enumerated in the Federal Arbitration Act (“F.A.A.”), 9 U.S.C. § 10, as well as three non-statutory grounds recognized in the 11th Circuit: (1) if the award is arbitrary and capricious; (2) if enforcement of the award is contrary to public policy; and (3) if the award was made in manifest disregard of the law. Since Harbert only sought vacatur on the ground of manifest disregard of the law, the Court limited its discussion to that ground for vacatur.

The Court recited established 11th Circuit case law holding that vacatur for manifest disregard “requires clear evidence that the arbitrator was conscious of the law and deliberately ignored it. A showing that the arbitrator merely misinterpreted, misstated, or misapplied the law in insufficient.” The Court noted that the 11th Circuit had only vacated an arbitration award for manifest disregard of the law in one instance, in Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1461 (11th Cir. 1997), and that all cases subsequent to Montes had distinguished Montes on the facts of the case. The Court specifically noted that in Montes, the facts justifying vacatur were: “(1) the party who obtained the favorable award had conceded to the arbitration panel that its position was not supported by the law, which required a different result, and had urged the panel not to follow the law; (2) that blatant appeal to disregard the law was explicitly noted in the arbitration panel’s award; (3) neither the award itself nor anywhere else in the record is there any indication that the panel disapproved or rejected the suggestion that it rule contrary to law; and (4) the evidence to support the award is at best marginal.” The Court found that the facts of the case at bar did “not come within a shouting distance” of satisfying the burden of proving manifest disregard of the law, since the arbitrator had apparently simply determined that the 3000 Schedule, and not the 2000 Schedule, was controlling.

Similarly, the Court rejected Harbert’s contention – based entirely upon dicta contained in a prior 11th Circuit case (Univ. Commons-Urbana, Ltd. v. Universal Constructors, Inc., 304 F.3d 1331 (11th Cir, 2002)) – that “theoretically, the arbitrator’s approach to the award of damages could be in manifest disregard of the law altogether, if it differed from the provisions of the contract.” The Court held that misinterpretation of a contract cannot amount to manifest disregard of the law, and noted that the single sentence of dicta relied upon by Harbert was entirely contradictory with the remainder of the Universal opinion, as well as the actual holding in that case.

The Harbert decision concludes with an admonition to future potential litigants. Specifically, the Court noted that, when a party who loses an arbitration “drags the dispute through the court system,” the goals of arbitration are broken; thus “it may be that we can and should insist that if a party on the short end of an arbitration award attacks that award in court without any real legal basis for doing so, that party should pay sanctions.”

The Court did not, however, impose sanctions upon Harbert for three reasons: (1) the dicta contained in Universal provided Harbert with “a little cover for its actions”; (2) Hercules did not move for sanctions; and (3) at the time that Harbert brought the instant dispute to court, it did not have the benefit of the warning contained in this opinion. Regarding that warning, the Court ended its opinion by stating, “we are ready, willing and able to consider imposing sanctions in appropriate cases. While Harbert and its counsel did not have the benefit of this notice and warning, those who pursue similar litigation positions in the future will.”

* Michele L. Jacobson is a partner in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating her practice on insurance and reinsurance litigation and arbitration. Ms. Jacobson has represented ceding companies, reinsurers, retrocessionaires, liquidators and intermediaries in a vast array of matters in state and federal courts, as well as before arbitration Panels throughout the country.

Andrew S. Lewner is an associate in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating on insurance and reinsurance litigation and arbitration. Mr. Lewner has represented ceding companies, reinsurers and retrocessionaires in a wide range of matters.