Doug Shevelow

    Arbitration definition

    Supreme Court of Rhode Island overturns arbitrator’s award in construction case

    The Supreme Court of Rhode Island, in a 3-2 decision, recently took the unusual step of overturning an arbitrator’s award in a case involving a construction project gone bad. The case, styled Nappa Constr. Mgmt., LLC v. Flynn 2017 R.I. LEXIS 13 (R.I. Jan. 23, 2017), arose out of a $360,000 contract to construct a car repair shop. The parties used an AIA A101-2007 contract form, which included both termination for cause and termination for convenience provisions in favor of the owner.

    Work began in December 2012 and continued amid rancor between the owner and contractor until the end of June 2013 when the owner directed the contractor to stop work until alleged defects in the concrete floor were corrected.  The contractor then asked to be paid for work that included the concrete floor and the owner refused, causing the contractor to declare the owner in breach and to terminate the contract in September.

    The case went to arbitration with claims and counterclaims.  The arbitrator held that there were indeed defects in the concrete floor and that the owner was not in breach of the contract. But then, instead of assessing money damages against the contractor for the defective work and walking off the job without justification, the arbitrator held that the best solution to the controversy was to deem the owner to have invoked the termination for convenience clause. Then the arbitrator calculated that there was approximately $38,000 owing to the contractor after netting out overhead and profit for non-performed work, the cost of unpaid completed work, and the cost to fix the floor. The trial court upheld the award and the owner appealed.

    The Supreme Court explained its decision to overturn the award by first citing numerous Rhode Island cases that all said the same thing but in different ways—that it is somewhat of a fool’s errand to attempt to overturn an arbitrator’s decision. But then the court did just that—holding that the arbitrator erred so badly by finding the contractor had breached but then declaring that there was a fictitious termination for convenience. The power to terminate for convenience belonged only to the owner, and there was no evidence that the owner wished to do so. And why would it when it had the justification to terminate for cause, which would have given it much more powerful rights?

    In essence, the court held that the arbitrator reached “an irrational result” that “contradicts [his] factual findings” and which failed to draw its essence from the contract. That was enough for the court to narrowly conclude that the arbitrator reached beyond the terms of the contract to impermissibly achieve what he believed to be a more desirable result, justifying a reversal, despite a strong dissent.

    This is for informational purposes only. It is not intended to be legal advice and does not create or imply an attorney-client relationship.

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