Industrial Steel Construction, Inc. v. Lunda Construction Company, 33 F.4th 1038, 1041 (8th Cir. 2022)

This federal case relates to the construction of a bridge over the Mississippi River between Iowa and Illinois. The state of Iowa hired Lunda Construction Company (Lunda) as the general contractor for the project, which contracted Industrial Steel Construction, Inc. (ISC) to fabricate the structural steel for the bridge. A breach of contract dispute arose between Lunda and ISC that resulted in an arbitration pursuant to the contractual dispute resolution provisions. The arbitrator ruled entirely in favor of Lunda, including awarding Lunda its attorneys’ fees and expert costs, and requiring ISC to reimburse Lunda for its half of the cost of the arbitration.

Lunda moved the U.S. District Court for the Southern District of Iowa to confirm the final award. ISC in turn moved to vacate in part or modify the award, specifically challenging the arbitrator’s authority to award Lunda attorneys’ fees and expert costs. The district court ruled that the arbitrator exceeded its authority. Lunda appealed to the U.S. Court of Appeals, Eighth Circuit.

While the contract provided that disputes could be resolved in arbitration and that ISC, if it prevailed, was entitled to its costs, the parallel provisions for Lunda’s costs contained handwritten strikeouts and red text. The paragraph addressing Lunda’s right to damages provided that ISC “shall be liable for incidental and consequential damages (including attorneys fees and liquidated damages) resulting from delays caused solely by Seller in delivery, from the breach of any warranties, from defective goods and from any other breach of the term and conditions.” The stricken and underlined portions appeared in a different font color, and the bottom of the page bore two sets of initials. ISC argued that Lunda was thus not entitled to its arbitration costs.

The court of appeals noted that the Supreme Court has long held a “liberal federal policy favoring arbitration agreements.” It requires courts to enforce the results of arbitration liberally and may only vacate such results “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” This is a “heavy burden,” and the “sole question” for the court is whether the arbitrator read and interpreted the parties’ contract, “not whether he got its meaning right or wrong.” An “arbitrator does not ‘exceed his powers’ by making an error of law or fact, even a serious one.”

The court ruled that the arbitrator construed the contract as it related to attorneys’ fees and expert costs. The court gave significant deference to the portion of the award that stated that “the Arbitrator has reviewed R-48 of the Construction Industry Rules of the American Arbitration Association (AAA) and finds that an award of attorneys’ fees and costs is appropriate in this matter” because a contract provision indicated that the AAA’s Construction Industry Rules would govern procedural matters that were not otherwise addressed. Since ISC’s liability for Lunda’s costs was stricken from the contract, the contract arguably did not address the matter, obliging the arbitrator to apply Rule R-48 to fill in the gap. The fact that ISC disagreed with the arbitrator’s interpretation was immaterial due to the “liberal federal policy favoring arbitration agreements.”

The court made clear that it could not examine the accuracy of the arbitrator’s decision, but only whether the arbitrator attempted to interpret the arbitration provision and set forth its logic in its award. Since the arbitrator did so, the court held that the award must be confirmed in full as “convincing a court of an arbitrator’s error — even his grave error — is not enough. … The potential for those mistakes is the price of agreeing to arbitration.”

Parties must be cognizant of this issue when negotiating arbitration provisions and litigating in arbitral forums. As the court noted here, parties “cannot impose a heightened standard of judicial review even by mutual agreement.”

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