Federated Department Stores, Inc. v. J.V.B. Industries, Inc.

Citations: 894 F.2d 862; 1990 U.S. App. LEXIS 1184Docket: 88-3716, 89-3081

Court: Court of Appeals for the Sixth Circuit; February 1, 1990; Federal Appellate Court

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Federated Department Stores (Federated) appeals three district court orders that modified an arbitration award in favor of J.V.B. Industries, Inc. (JVB), the assignee of TAB Industries, Inc. (TAB). TAB was the contractor for drywall and ceiling work on renovation projects at Federated's stores in Columbus, Ohio, and Indianapolis, Indiana, both owned by Federated and managed by Associated Project Control (APC). The contracts in dispute, executed on February 28, 1986, involved disagreements over the scope of work specified in two sets of drawings provided by different design firms: Walker Group/CNI, Inc. (interior design) and Ames, Elzey, Thomas and Partners (architectural work).

TAB informed APC that its bid was limited to the Walker drawings, excluding work outlined in the Ames, Elzey drawings. Federated contended that TAB's bid covered all drywall and ceiling work required. The disputed tasks included storefronts, escalator well columns, and other elements outlined in the Ames, Elzey drawings. Despite the exclusion, TAB was compelled to complete this additional work under pressure from APC, subsequently demanding $516,000 for it. The contracts stipulated that time was of the essence, and Federated terminated TAB's contract for the Columbus store on September 9, 1986, due to delays.

JVB subsequently sued Federated on November 19, 1986, for compensation and damages, while Federated opted for arbitration to resolve the claims and sought recovery for costs incurred in completing the Columbus project. The District Court for the Eastern District of New York stayed the case pending arbitration, but JVB went out of business before arbitration could begin. The appellate court ultimately affirmed the district court's orders regarding the arbitration award modifications.

JVB sought $1.91 million in arbitration for contract claims, deducting $195,579.04 for payments made by Federated to materialmen's lienholders. During the arbitration's opening day, JVB unexpectedly introduced claims regarding the destruction of TAB's and JVB's businesses, alleging that Federated's refusal to pay TAB led to financial difficulties that incapacitated both companies. Federated contested the arbitrability of these tort claims, which the arbitrators agreed to consider later if deemed arbitrable. On November 1, 1987, the arbitration panel awarded JVB $1,789,957.89 for contract claims, plus attorney fees and costs. JVB subsequently filed a Motion to Confirm the Arbitration Award, which was transferred to the Southern District of Ohio. The district court remanded the award on July 5, 1988, for a correction related to tax liens and ruled on July 7 that the business termination claims were arbitrable. Federated appealed these orders, resulting in a stay of arbitration for the business claims. While JVB's motion to dismiss the appeal was pending, the court issued a third order on December 22, 1988, correcting the arbitrators’ calculations and awarding JVB $1,617,089.51. Federated appealed this order as well. The appeals were consolidated, presenting six issues regarding contract interpretation and the arbitrability of the business claims. Federated argued that the arbitrators exceeded their authority in favoring JVB. Under the Arbitration Act, the grounds for vacating an award focus on misconduct or exceeding powers; here, no misconduct was alleged, making it difficult for Federated to prove the arbitrators exceeded their authority. Courts have a limited role in reviewing arbitration awards, primarily upholding them if they derive from the agreement and do not reflect an arbitrary application of justice.

The case of United Paperworkers International Union v. Misco, Inc. establishes that the standard of review for arbitration cases is narrow, emphasizing that courts do not have the authority to vacate arbitration awards based on mere errors in law or fact. In Anaconda Co. v. District Lodge No. 27, it was clarified that "manifest disregard of the law" entails more than simple misinterpretation; an arbitrator's decision can only be vacated if it demonstrates a blatant disregard for legal principles. This was supported in Board of County Commissioners of Lawrence County v. L. Robert Kimball and Associates, where it was determined that contract interpretation disputes fall within the arbitrator's domain. Federated's assertion that the arbitrators disregarded the contracts' clear language was deemed insufficient, as it reflected mere interpretation errors rather than manifest disregard.

Federated further contended that the arbitrators overstepped their authority by substituting their resolution for that of the architect, contrary to contract stipulations in Section 1.6 of the Ames, Elzey General Conditions, which bind the contractor to the architect's interpretation of discrepancies. However, this argument was countered by referencing the precedent set in General Drivers, Warehouseman and Helpers, where an award was vacated due to the arbitrator's failure to adhere to a clause granting sole authority to the employer for dispute resolution.

General Drivers is not applicable to this case due to its clear employer authority clause, unlike the ambiguous provisions in section 1.6 of the General Conditions noted by Federated. The arbitrators interpreted these provisions as granting the architect authority solely over discrepancies related to artistic effect, not bid disputes. This interpretation falls within the arbitrators' authority as they were arguably construing the contract, supported by the broad arbitration clause in Section 1.42(A), which encompasses all claims except those concerning artistic decisions. Federated failed to demonstrate that the arbitrators exceeded their authority regarding bid disputes.

Federated also contends that the arbitrators disregarded clear contractual language on overtime compensation and productivity loss. A significant portion of damages claimed by JVB was related to overtime and scheduling issues. Section 1.11(J) specifies that a contractor's only remedy for delays is an extension of time, unless caused by intentional interference from the owner. The arbitrators found that Federated's requirement for TAB to work overtime constituted intentional interference, thus allowing for damage awards. Federated's assertion that the arbitrators misinterpreted contract language in their damage assessment is unfounded.

Furthermore, Federated argues that the arbitrators neglected the contractual formula for calculating overtime compensation, which excludes allowances for overhead and profit. However, the arbitrators did not clarify the basis for their award, leaving uncertainty regarding the inclusion of overhead and profit. Federated's assumption that the award accounted for these factors does not provide sufficient evidence of manifest disregard of the law, as arbitrators need not explain their reasoning per established case law.

Under Ohio law, interest on a claim does not accrue before judgment if the claim is unliquidated or disputed. Federated contends that because there was a dispute over TAB's performance, the contract price was uncertain, and thus the arbitrators' award of $136,449.93 for prejudgment interest was improper. Federated argues that this amount should be reduced, as it is not supported by Ohio law regarding unliquidated damages. The arbitrators' decision is characterized as a lump-sum award that does not need to detail its components. Federated incorrectly assumes the entire amount was for prejudgment interest based on JVB's request, while the arbitrators did not specify how much, if any, of the award reflected prejudgment interest. 

Regarding attorney fees, Section 1.40(B) specifies that the prevailing party in litigation is entitled to costs and fees. Federated disputes the district court's designation of JVB as the prevailing party, arguing it successfully reduced the arbitrators' award by 24%. However, the district court found that JVB maintained most of its award and thus reasonably determined JVB was the prevailing party, awarding it $52,457.06 in attorney fees.

Federated also contends the district court erred in deeming JVB's and TAB's business destruction claims arbitrable, asserting it never agreed to arbitrate such claims. However, Section 1.42(A) allows for arbitration of disputes arising from the contract. Federated had previously invoked this provision for its claims against TAB, while TAB and JVB counterclaimed for damages and indicated their intent to pursue business destruction claims at the arbitration hearing, of which Federated was notified at the outset.

Federated contends that JVB's business destruction claim does not fall under the broad arbitration clause in Section 1.42(A) because it introduces elements like malice and intent that were not intended for arbitration. Federated argues its right to demand or reject arbitration was reinstated when TAB and JVB introduced a new claim at the hearing. It cites case law suggesting a litigant can request a jury trial for newly added claims in amended complaints. However, the district court found these cases irrelevant since Federated had already chosen arbitration, knowing arbitrators could handle proper counterclaims. The court concluded that the arbitration clause is sufficiently broad to include tort claims related to alleged contract breaches, and JVB properly filed its claim in accordance with relevant arbitration rules. Federated's references to cases where defendants regained arbitration rights after amending complaints do not support its position, as those cases emphasized a strong federal policy favoring arbitration and did not allow a party to retract its arbitration demand after invoking it. Ultimately, Federated is bound to arbitrate all claims related to the dispute over the Ames and Elzey work without the option to selectively exclude certain claims.

JVB was deemed a proper party to compel arbitration regarding claims of business destruction, despite not being a signatory to the construction contracts between Federated and TAB. The court found that JVB and TAB were closely interconnected, both being controlled by Thomas A. Brusca and operating out of the same office. JVB was responsible for providing equipment, labor, and management for the projects, while TAB functioned as an instrumentality of JVB, lacking independent assets or management. Federated's argument that JVB was merely TAB's assignee was rejected, affirming JVB as the real party in interest.

Additionally, Federated had previously recognized JVB's role in the arbitration process, treating it as the proper respondent. The district court's orders in related cases were affirmed. In a concurring opinion, Circuit Judge Boyce F. Martin, Jr. emphasized the importance of arbitrators providing reasoning for their awards, noting that the lack of such reasoning complicates judicial review. He cautioned that future cases without clear arbitrator explanations may lead the court to reverse awards due to manifest disregard of the law, asserting that the court will not act as a rubber stamp for unsubstantiated arbitrator decisions.

The Walker General Conditions granted authority to the "Designer," while the Ames, Elzey General Conditions replaced this term with "Architect." Both stores were scheduled to open on October 1, 1986. JVB alleges that APC's frequent changes to construction schedules compelled TAB to accelerate its work and incur significant overtime costs. Federated contends that TAB did not notify them of this "discrepancy" as mandated by Section 1.6(C); however, the arbitrators ruled that "discrepancy" does not pertain to bid disputes, rendering this argument invalid. The arbitration award summarized that Federated's claim is denied, and that Federated must pay TAB and JVB a total of $1,789,957.89, along with all hearing-related administrative costs, attorney fees, and arbitrators' expenses. Federated indicated in its brief that it would not pursue arbitration for claims related to business destruction. Under 9 U.S.C. Sec. 4, the opposing party may petition the district court to compel arbitration when one party refuses, granting the court jurisdiction over the arbitrability issue, as supported by the precedent in Moses H. Cone Memorial Hospital v. Mercury Construction Corp. Additionally, Rule 8 permits parties to submit new claims or counterclaims in writing at any point, including after the appointment of arbitrators, provided the arbitrators consent; JVB's tort claim was accepted by the arbitrators after their appointment.