Vold v. Broin & Associates, Inc.

Citations: 2005 SD 80; 699 N.W.2d 482; 2005 S.D. LEXIS 81Docket: None

Court: South Dakota Supreme Court; June 22, 2005; South Dakota; State Supreme Court

Original Court Document: View Document

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The South Dakota Supreme Court reviewed an appeal concerning the vacation of an arbitration award involving Greg Vold and Broin Associates, Inc. Broin, a corporation specializing in ethanol production facility construction, had contracted with Vold for site and grading work. Due to Vold's failure to complete the work by December 2002, Broin terminated his contract. In November 2003, Vold initiated arbitration for payment related to various claims, including unapproved change orders.

Under their contract, disputes were to be resolved through binding arbitration as per the American Arbitration Association (AAA) rules. During a preliminary hearing on February 2, 2004, it was agreed that each party would submit a specification of claims, and the arbitration would commence on June 21, 2004. A key point of contention arose over whether a reasoned award was agreed upon; Broin's attorney claimed there was consent for a reasoned award, while Vold's attorney denied this agreement. 

Despite the lack of a verbatim record, the arbitrator later issued a report confirming that a reasoned award would be provided. The AAA subsequently communicated this decision, which led to the appeal. The court affirmed the circuit court's decision to vacate the arbitration award because the arbitrator did not adhere to his own order to issue a reasoned award.

The arbitration hearing took place from June 21 to June 24, 2004, during which twelve witnesses testified. On July 13, 2004, the arbitrator awarded Vold $267,298 in damages and denied Broin's counterclaims. The two-page award outlined the monetary amounts for Vold's claims but lacked reasoning for the decisions and did not reference relevant contract provisions, applicable law, or evidence from the hearing.

Subsequently, Broin attempted to vacate the award in circuit court. After a hearing on September 8, 2004, the court issued findings that contradicted attorney Ron Schmidt's affidavit, asserting that both parties had agreed to a reasoned award during a preliminary hearing on February 2, 2004. The court concluded that the arbitrator had exceeded his authority by failing to provide a reasoned award, leading to the decision to vacate the award under federal law.

Vold raised two points on appeal: first, whether the trial court improperly substituted its judgment for the arbitrator's on a procedural matter, given the contractual Rule 54 that grants the arbitrator sole authority over arbitration rules; second, whether Broin's failure to request a modification under Rule 47(1) within 20 days of the award constituted a condition precedent that barred him from seeking judicial relief, or alternatively, whether it represented a waiver of rights or equitable estoppel.

The review of the circuit court's order vacating the arbitration award involves a clearly erroneous standard for factual findings and de novo review for legal questions. There is a strong deference to the arbitrator's award, which must be upheld even if significant errors occurred, as long as the arbitrator was interpreting or applying the contract and acting within his authority.

Arbitrators have considerable authority, but this authority is not absolute, as established in case law, including Missouri River Servs. Inc. v. Omaha Tribe of Nebraska and Trailmobile Trailer, LLC v. Int'l Union. The Federal Arbitration Act (FAA) outlines specific grounds for vacating arbitration awards, including irrationality or manifest disregard for the law, as noted in Hoffman v. Cargill Inc. 

Vold argues that the arbitrator had discretion in rendering the final decision and that he was not obligated to provide a reasoned award since the parties did not request one in writing before the arbitrator's appointment. Vold contends that even if the agreement were modified to require a reasoned award, it would be a procedural issue and thus not subject to judicial review.

According to the AAA Construction Industry Arbitration Rules, specifically Rule R-1(a), these rules become part of the arbitration agreement when parties opt for AAA arbitration. Amendments to these rules after the arbitrator's appointment require the arbitrator's consent. During a preliminary hearing, a request for a reasoned award was made by Broin's counsel, but Vold's attorney did not consent. The arbitrator subsequently indicated in a scheduling order that the award would be reasoned. 

Despite Vold's claims that the parties did not agree to a reasoned award, the arbitrator's report and the subsequent AAA letter confirmed that a reasoned award was to be issued, and no amendments to this requirement were made. Thus, the arbitrator's decision to issue a reasoned award was documented and accepted, indicating a mutual understanding of this requirement.

The Federal Arbitration Act (FAA) preempts state law and governs written arbitration agreements in interstate commerce contracts. The expansive reach of the FAA aligns with the Commerce Clause, meaning disputes under its scope are governed by federal law. In this case, the dispute involves parties from South Dakota and Minnesota, qualifying it under the FAA.

Section 10 of the FAA outlines four 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 in hearing evidence or postponing hearings; and (4) arbitrators exceeding or imperfectly executing their powers.

The circuit court determined that an arbitration award must be vacated if arbitrators exceed their powers or fail to make a mutual, final, and definite award. It ruled that since the parties required a reasoned award, the arbitrator's failure to provide one constituted exceeding their powers. However, attorney Ron Schmidt disputed any agreement to a reasoned award on behalf of his client.

Without a credibility determination, the circuit court's finding of an agreement to a reasoned award is deemed questionable. Nonetheless, it was concluded that the arbitrator violated the agreed-upon rule. According to the American Arbitration Association's Construction Industry Arbitration Rules, arbitrators are not obligated to provide reasons for awards unless a reasoned award is agreed upon before or after selection. The findings indicate that: (1) no binding agreement existed on the award form prior to the arbitrator's selection; (2) one party requested a reasoned award during the preliminary hearing; (3) the arbitrator indicated the award would be reasoned; (4) the AAA confirmed this requirement; and (5) the arbitrator ultimately failed to issue a reasoned award.

The AAA Construction Industry Arbitration Rules mandate that arbitrators provide a concise, written breakdown of their awards. If requested in writing by all parties before the arbitrator's appointment, or if deemed appropriate by the arbitrator, a written explanation of the award is also required. It is essential that the arbitrator determined it was appropriate to issue a reasoned award, as indicated in their order, especially given the absence of a verbatim record from the preliminary hearing. The central issue is whether the arbitrator exceeded their authority by issuing an award that contradicts their own order for a reasoned award.

An arbitration award can be vacated if the arbitrator exceeded their powers or failed to execute them sufficiently, as stipulated in 9 USC 10(a)(4). In this case, the award is considered to have exceeded the arbitrator's authority by violating the agreed-upon rules. The standard for reviewing these situations involves distinguishing between substantive and procedural errors, with arbitrators generally granted broad discretion. Procedural errors, which are often tangential to the main dispute, do not typically constitute grounds for concluding that an arbitrator exceeded their authority. In contrast, substantive errors involve a more direct disregard for legal principles. The overarching goal in arbitration is to achieve a swift resolution, making it critical to categorize the arbitrator's error accurately.

Substantive law defines the rights, duties, and powers of parties involved. Vold argues that the arbitrator claimed no obligation under the AAA Construction Industry Arbitration Rules to issue a reasoned award. The implication is that the arbitrator could alter his decision post-order without justification. However, the arbitrator's prior directive to issue a reasoned award established a substantive right for Broin and a duty for the arbitrator. Although the arbitrator could have modified his order at any time, he did not, and his failure to adhere to his own order constituted a substantive error under the FAA and AAA rules. This led to the conclusion that the unreasoned award was not a mutual, final, and definite award, prompting the circuit court’s decision to vacate it.

Justice Zinter dissents, stating that there was no verbal or written agreement for a reasoned award, meaning Broin forfeited this right under the AAA rules. The arbitrator possessed the explicit authority to decide on the nature of the award, and therefore, the court's conclusion that the award exceeded the arbitrator's powers was incorrect. The standard of review for arbitration decisions is limited, requiring confirmation of awards as long as the arbitrator operates within their authority. Generally, the law mandates that an arbitrator merely announces their award without needing to provide detailed reasoning, unless specifically required by the arbitration agreement or relevant statute.

The arbitrator's authority to determine the award's form was defined by the AAA Rules, specifically Rule R-43(b), which allows the arbitrator to issue a concise written breakdown of the award and provides for a reasoned explanation only if requested in writing by all parties before the arbitrator's appointment. In this case, there was no such written agreement, granting the arbitrator the discretion to issue a non-reasoned award. Consequently, the arbitrator did not exceed his powers or fail to execute them properly under the relevant provisions of the Federal Arbitration Act.

However, the Court concluded that the arbitrator exceeded his authority by changing his initial decision to issue a reasoned award, which the Court interpreted as a binding substantive right imposed on the arbitrator. The Court's reasoning that the preliminary scheduling order defined the arbitrator's powers was flawed, as it did not recognize that preliminary decisions can be changed before a final award. The Court's findings on the arbitrator's preliminary decision being unclear or merely suggestive highlight the lack of a binding determination regarding the award's form. Furthermore, the preliminary order explicitly stated it was modifiable, thereby allowing the arbitrator to alter the award's form as needed. Thus, the Court's conclusions regarding the binding nature of the preliminary order and the substantive rights it conferred were legally unsound.

The authority to modify preliminary or interlocutory orders is established in both federal and state law, allowing for reconsideration any time before judgment is entered. Courts, such as in *Viehweg v. Mello*, have recognized that these orders do not create fixed rights and can be altered if deemed incorrect. Additionally, it is affirmed in *Lovett v. General Motors Corp.* that a district court may revisit prior rulings until a final judgment is made. Similarly, the inherent power of trial courts to modify orders prior to judgment is acknowledged in *Moore v. Michelin Tire Co. Inc.* Arbitrators also possess the authority to reconsider their prior rulings until a decision becomes final, as stated in *Foreman v. Cargill*.

Furthermore, there is no requirement under Rule R-43(b) or the Federal Arbitration Act (FAA) for an arbitrator to issue a formal amended order to maintain the authority to reassess the award's form. The only condition under which an arbitrator loses this authority is if all parties request a reasoned award in writing before the arbitrator's appointment, which did not occur. Even if a formal amendment might be preferable under Rule R-43(b), Rule R-54 grants the arbitrator the power to issue a non-reasoned final award without such an amendment. The arbitrator's interpretation and application of Rule R-43(b) do not require scrutiny regarding correctness, as their authority to interpret the rule allows for a final award to supersede preliminary orders, as supported by *Koch Oil, S.A. v. Transocean Gulf Oil Co.*

The case outcome is determined by the absence of a written agreement for a reasoned award, granting the arbitrator sole authority to decide the award's format. The arbitrator's initial order could be modified in the final award, allowing him to conclude that only a non-reasoned award was warranted after reviewing the case. The dissent notes that Vold failed to provide legal authority to argue that not requesting a modification under Rule 47(1) barred him from seeking to vacate an award exceeding the arbitrator's power. Both parties had the opportunity to request corrections to the award but did not do so, as required by SDCL 15-26A-60(6) and established case law. The court acknowledges the lack of credibility determination regarding any verbal agreement for a reasoned award at the preliminary hearing. Additionally, Broin's argument citing Rule R-1 for modifications is moot since no written agreement exists. Even if a verbal agreement had taken place, the absence of written consent precludes reliance on the applicable rules for a reasoned award. The court's ambiguity regarding the preliminary order stems from the arbitration record, which shows discussions about a reasoned award that were followed by the arbitrator's unexplained decision not to issue one. Rule R-43(b) allows the arbitrator to decide the award's form, and the Federal Arbitration Act does not negate this authority. The preliminary order concerning the award format is characterized as interlocutory, indicating it was an intermediate procedural decision.