Court: District Court, D. Massachusetts; May 5, 2017; Federal District Court
Sanwan Trust petitions to vacate a November 4, 2016, arbitration award, while Lindsay, Inc. seeks to confirm it. The court denies Sanwan's petition and grants Lindsay's motion. The district court's review of arbitral awards is characterized as "extremely narrow and exceedingly deferential," as established in prior case law. The Federal Arbitration Act (FAA) specifies four exclusive grounds for vacating an arbitration award: (1) corruption or fraud in procuring the award; (2) evident partiality or corruption among arbitrators; (3) misconduct by arbitrators affecting the rights of the parties; or (4) exceeding or imperfectly executing their powers. The Supreme Court has affirmed that these grounds are exclusive and cannot be supplemented by contract. A party challenging an award must demonstrate more than mere error; they bear the burden to show substantial justification for vacatur. Sanwan cites "manifest disregard of the law" and "public policy" as grounds for vacatur but fails to identify specific provisions under section 10 of the FAA. Lindsay argues, correctly, that neither ground is valid for vacatur under the FAA following the Hall Street decision.
Manifest disregard of the law is identified as a non-statutory standard of review by the First Circuit, which held that an arbitral award could be vacated for legal error only under this standard, as established in McCarthy v. Citigroup Global Markets Inc. This implies that the Federal Arbitration Act (FAA) does not completely preclude judicial review of arbitration awards outside of statutory grounds. Following the Supreme Court's decision in Hall Street, the First Circuit has not definitively resolved whether its prior case law on manifest disregard is compatible with Hall Street but has acknowledged that manifest disregard is not a valid basis for vacating or modifying arbitral awards under the FAA. Should the standard persist, it is viewed as a judicial interpretation of § 10 of the FAA.
Sanwan has shifted its argument, asserting that the arbitrator failed to apply the correct law, potentially aligning its argument with § 10(a)(4), which requires demonstrating that the arbitrator recognized a governing legal rule but chose not to apply it. Meeting this burden is challenging, as courts will not overturn an arbitrator's decision if they were at least arguably interpreting or applying the contract. Sanwan's claims are based on two provisions in their Agreement: Article 11, which waives claims after the final payment except for those related to faulty work, and Article 9, which provides a one-year period for remedying defects. Sanwan cites Creative Playthings Franchising, Corp. v. Reiser to argue that the one-year limitation is an unreasonable limitation of repose, asserting that limitations must be reasonable and in line with legislative authority, and that any limitations period must allow for claims arising from latent defects upon discovery.
The arbitrator referred to Creative Playthings, indicating an understanding of the governing rule but allegedly disregarded it by affirming a contractual limitation of repose deemed unreasonable by Sanwan. This limitation is said to contradict Massachusetts General Laws chapter 260, section 2B, which mandates a six-year repose period for construction defect claims, and fails to accommodate the discovery rule. The arbitrator interpreted the one-year limitation as a shortened statute of limitations, which is generally enforceable under Massachusetts law if reasonable. He found it reasonable, considering that the Contract Agreement was negotiated between The Sanwan Trust and Lindsay, Inc. Sanwan's assertion that the arbitrator misapplied this legal framework does not provide grounds for vacating the arbitration award, as serious error by the arbitrator is insufficient for overturning a decision. Regarding the discovery rule, the arbitrator concluded that the circumstances to invoke it—misrepresentation, breach of disclosure duty, or concealment of a cause of action—were absent, and this factual finding is not subject to judicial review. Sanwan cannot demonstrate the award is "unfounded in reason and fact" or based on obviously faulty reasoning. Prior to Hall Street, courts recognized a public policy exception to vacate arbitration awards if they contravened explicit, well-defined, and dominant public policy. However, following Hall Street, there has been no definitive ruling by the First Circuit on whether public policy violations remain a valid basis for vacatur under the FAA; if they do, it would likely only serve as a judicial interpretation of section 10.
An arbitration decision may be vacated under § 10(a)(4) of the Federal Arbitration Act (FAA) if the arbitrator exceeds their powers, which includes only interpreting and enforcing contracts—not making public policy. Although Sanwan mentioned a manifest disregard of the law argument under § 10(a)(4), it did not substantiate its public policy violation claim. Furthermore, the cases cited by Sanwan predate Hall Street, which eliminated non-statutory review grounds for arbitration awards. Consequently, Sanwan's motion to vacate is not valid, and Lindsay's request to confirm the award is granted.
Lindsay's motion to dismiss Sanwan's petition for lack of subject matter jurisdiction is denied as moot due to an agreement that Sanwan’s First Amended Petition establishes diversity jurisdiction. Both Sanwan's Motion to Vacate the Arbitration Award and Lindsay’s Petition to Confirm the Arbitration Award are addressed, with the court allowing the latter.
Sanwan's arguments regarding statutes of limitations and repose, including claims of unreasonable time periods and alleged concealment of defects by Lindsay, were rejected by the arbitrator and are not subject to judicial review. The court finds that Sanwan has not demonstrated a clear public policy violation by the Award, noting that while certain limitations can be deemed unenforceable, no such restrictions apply in this case. Therefore, there are no grounds to vacate the arbitration award.
