Manifest Disregard of Contract Termination Clause: Arbitration Award Vacated

Arbitration awards are difficult to overturn, but the Rhode Island Supreme Court has ruled, in a 3-2 split decision, that an arbitrator manifestly disregarded the parties’ contract in his decision, and has vacated that award.

The underlying project appears to have been a mess, with work starting late, continuing slowly, and with improper workmanship. The owner, Flynn, notified the contractor, Nappa, to stop work, citing instances of improper work. The contractor promptly issued a new requisition, which was not paid, and then terminated the contract for nonpayment.

After arbitration hearings, the arbitrator issued a rather curious award, finding, for instance –

it seems obvious that the combative, contentious, dysfunctional relationship between Flynn and Nappa had to be brought to a conclusion. The most practical method to accomplish that end, I have determined, is to consider the Contract to have been terminated according to Para. § 14.4 of the General conditions; TERMINATION BY THE OWNER FOR CONVENIENCE: Under this interpretation, neither Nappa nor Flynn [are] in breach of the Contract; and the contractor is entitled to the best measure of the fair and reasonable value of the work done.

The clue to the court’s outcome came in an early comment about arbitrators construing contracts: “An arbitrator may misconstrue a contract; however, he may not manifestly disregard a contractual term or ignore ‘clear-cut contractual language.’" Here, the Rhode Island high court agreed with the arbitrator that the owner was entitled to stop work and the contractor was not entitled to terminate the contract for cause. However, when the arbitrator adopted the fiction of the owner’s termination for convenience to bring to an end the “combative, contentious, dysfunctional relationship,” per the court, he ignored clear contract language.

The court made two essential and ultimate conclusions. First, “[w]here an arbitrator's decision conflicts with the express terms of the agreement, it fails to draw from the essence of the agreement.” Second, the arbitrator’s final decision (that there should be a termination without cause) conflicted with his subsidiary findings (that the contractor was in breach). The arbitrator’s authority is not without bounds, per the court, but “it is rather circumscribed by the plain language of the parties' contract.” The case was remanded to the trial court with the directive to grant the owners’ motion to vacate the arbitration award.

The dissent argued that the arbitrator had issued an award that “he believed to be fair, within his authority under the contract, and consistent with this Court's prior holdings.” It also argued that the arbitrator’s decision was not “in excess of the terms of the parties' contract, a manifest disregard of the law in its interpretation, or an irrational result.” Thus, the dissent would have upheld the award and the lower court’s confirmation of the same. But three justices concluded the award had manifestly disregarded the parties’ contract, and only two justices thought otherwise. The case is Nappa Constr. Mgmt., LLC v. Flynn, 2017 R.I. LEXIS 13 (Jan. 23, 2017).