Ken Slavens | The Contractor’s Perspective | September 25, 2018
Arbitration is often seen as a way of getting a more predictable result in complex construction disputes. The subject matter expertise available with experienced arbitrators and the finality of the arbitration process itself are certainly important considerations. But resolving disputes in arbitration can sometimes lead to surprising results, even ones that might be inconsistent with the underlying contract or with applicable state law.
The Eighth Circuit’s recent decision in Beumer Corp. v. ProEnergy Services, LLC, No. 17-2862 (8th Cir. Aug. 9, 2018), is an example of such a case. The arbitrator in this case awarded attorney’s fee of nearly a million dollars more than the liability cap in the contract. Despite the possibility that this result was inconsistent with state law, the Eighth Circuit let the award stand.
ProEnergy Service, LLC contracted with Beumer Corporation and Beumer Kansas City, LLC to fabricate and supply steel for Beumer’s pipe conveyor system. As work progressed, Beumer came to the conclusion that ProEnergy’s work was deficient. The resulting dispute led to ProEnergy filing a demand for arbitration. ProEnergy sought $500,000 and Beumer counterclaimed for $2,300,000.
The contract between ProEnergy and Buemer had a limitation of liability clause. The contract also provided for the prevailing party to recover attorney’s fees and the application of Missouri law.
The arbitrator entered an award in Beumer’s favor for damages and prejudgment interest of $699,702.39 (the amount of the liability cap) together with attorney’s fees and expenses of $916,027.90.
In the award, the arbitrator concluded that the attorney’s fee recovery was not limited by the limitation of liability clause, which provided that ProEnergy’s liability for “any loss, indemnity, damage, or delay” will not exceed the contract sum. The arbitrator found that Beumer’s attorney’s fees were not a “loss” and were not “damages.” According to the arbitrator, attorney’s fees are routinely treated in caselaw as “costs” and not damages.
ProEnergy challenged the attorney’s fees award in court, arguing that the award exceeded the arbitrator’s powers. In arbitrations that are subject to the Federal Arbitration Act, this is one of the only grounds upon which a court may vacate an arbitration award. See 9 U.S.C. § 10(a)(4).
In its opinion, the court noted that “an error of law or fact, even a serious one” does not mean that the arbitrator exceeds his or her powers.
ProEnergy argued that the arbitrator did more. ProEnergy argued that the arbitrator exceeded his powers by ignoring the choice of law provision in the contract and by ignoring Missouri law, which provides that attorney’s fees are a “loss” or “damages.” If correct, this would mean the $916,027.90 award of attorney’s fees would be capped by the limitation of liability. ProEnergy’s argument would do away with the award of attorney’s fees because the limitation of liability cap was already exhausted by the damages award.
The court could not find evidence that the arbitrator had intentionally ignored the choice-of-law provision or Missouri law. Although the arbitration award did not cite Missouri law on the attorney’s fee issue, the arbitrator never stated that he was substituting his own preferences for those specified in the contract.
The arbitrator may have mistakenly overlooked Missouri law, but the court concluded that such an error would not justify vacating the award. The court made a point of noting that it did not agree with ProEnergy that Missouri law holds attorney’s fees are part of the “loss” or “damages.” But the court also noted that its assessment of whether the arbitrator was right or wrong on this issue is “beside the point.”
In the court’s words, “[t]he parties bargained for the arbitrator’s decision; if the arbitrator got it wrong, then that was part of bargain.”