Nappa Constr. Mgmt., LLC v. Flynn, 2017 R.I. LEXIS 13 (R.I. Jan. 23, 2017)

Caroline and Vincent Flynn (the “Flynns”) contracted with Nappa Construction Management, LLC (“Nappa”) to construct an automobile repair facility. The parties executed the American Institute of Architects’ A101-2007 Standard Form of Agreement Between Owner and Contractor.  The contract provided that the owner could terminate the contract for cause; could order the contractor to suspend the work without cause “for such period of time as the Owner may determine”; and could terminate the contract for convenience.

Six months after Nappa commenced work, the Flynns directed Nappa to “immediately cease any further work on the project,” contending that Nappa was not constructing the flooring according to the project plans or industry standards. Thereafter, Nappa submitted a payment application that included expenses for the disputed flooring, which the Flynns declined to pay.  Nappa notified the Flynns that they were in breach of the contract and filed for mediation.  Nappa ultimately terminated the contract for nonpayment.

The matter proceeded to arbitration, after which the arbitrator issued an award finding that while there were problems with the flooring, the Flynns’ stop-work order “was not a satisfactory way to address these problems.” He did not find, however, that the stop-work order was a breach of contract.  The arbitrator also found that Nappa “failed to act in the best interest of the project” by submitting a payment application which included expenses for the disputed flooring, “while at the same time acknowledging that floor to be deficient.”  Accordingly, Nappa was not justified in declaring the Flynns in breach of contract or in terminating the contract.

Declaring that the “dysfunctional relationship between the Flynns and Nappa had to be brought to a conclusion” somehow, the arbitrator determined that the “most practical way to accomplish that end” was to consider the contract to have been terminated under the termination-for–convenience clause. This interpretation allowed the arbitrator to conclude that neither party was in breach, that Nappa was entitled to the reasonable value of its work, and that the Flynns were entitled to the cost to remediate the deficient flooring.

The Flynns filed a motion to vacate, arguing that the arbitrator exceeded the scope of his authority by holding that the contract was terminated for convenience. The trial court denied the motion, citing the strong public policy in favor of the finality of an arbitral award, and holding that the arbitrator did not exceed his authority because he grounded his analysis in various provisions of the contract.
The Supreme Court of Rhode Island acknowledged its limited authority to review arbitral awards, and that reversal “solely on the ground of a reviewing court’s disagreement with the arbitrator’s construction of the contract is prohibited.” However, the court noted that reversal was mandated where an arbitrator exceeds his authority, including where his award “fails to draw its essence from the parties’ agreement,” “manifestly disregards a provision of the agreement” or “reaches an irrational result.”

The court found that the award failed to draw its essence from the parties’ agreement and manifestly disregarded a provision thereof because under the contract, a termination for convenience could be exercised only by the Flynns and completely in their discretion, and there was no evidence that the Flynns had exercised this right. The award also reached an irrational result in that the arbitrator’s finding that Nappa was unjustified in terminating the contract directly contradicted his award, which was predicated on an interpretation of the contract under which Nappa was not considered in breach.  The court remanded the case with directions to grant the Flynns’ motion to vacate.

To view the full text of the court’s decision, courtesy of Lexis®, click here.