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A court does not exceed its authority in ordering arbitrators to recalculate damages based on an appropriate legal standard, and arbitrators do not act in manifest disregard of the law by denying interest in accordance with the controlling arbitration rules, according to a New York federal district court.
In Coastal Caisson Corp. v. E.E. Cruz/NAB/Frontier-Kemper, No. 05 Civ. 7462 DLC, 2007 WL 2285936 (S.D.N.Y. Aug. 10, 2007), Coastal's predecessor Bauer entered into a construction contract with Cruz. Coastal first initiated litigation against Cruz, but the parties agreed post-dispute to arbitrate the matter, with New York law governing the arbitration.
The arbitrators issued an award in favor of Coastal, but Coastal moved to vacate part of the award for manifest disregard of the law because the arbitrators did not apply the total cost method of calculating damages. The arbitrators did not apply the total cost method because of the difficulty in apportioning fault between the parties. The district court agreed that failing to apply the total cost method, merely because of the difficulty of apportioning fault, was a manifest disregard of the law. Accordingly, the district court vacated the award and remanded the matter to the arbitrators to recalculate damages.
Under the total cost method, the arbitrators granted Coastal nearly three times the damages initially awarded, but did not award Coastal any interest on the damages. Except for the recalculation of damages, the arbitrators incorporated the rest of the initial award by reference in the revised award.
Coastal then appealed to the district court to modify the revised award, alleging that interest should have been allowed at the legal rate from completion of its work to the date of the award. Cruz appealed as well, asking the district court to vacate the revised award, correct the initial award for material miscalculation, and otherwise confirm the initial award.
Cruz first alleged that the Court exceeded its authority in vacating the initial award by substituting its factual determination of the proper damages calculation for that of the arbitrators. The Court disagreed, noting that the proper method of calculation was a legal determination, well within the authority of a district court. The Court also observed it had clearly reserved authority to the arbitrators to make any changes in the award they felt were warranted, except for the legal method of calculation. Since the Court did not intrude on the fact-finding authority of the arbitrators on remand, Cruz's challenge failed.
Next, Cruz alleged that the total cost method instructions were improperly given because Coastal's claim was not a delay claim, and therefore, did not require this method of calculation. The Court swiftly rejected this challenge, finding that Coastal had clearly brought a delay claim. The Court also noted the arbitrators agreed with this characterization of the claim on remand, refusing to disturb their initial determinations, except in utilizing the total cost method of calculating damages as ordered.
Cruz's challenge to the initial award for material miscalculation was also quickly rejected, with the Court noting both that Cruz had failed to move for vacatur of the revised award for material miscalculation, and that, in any event, the material miscalculation argument was presented to and rejected by the arbitrators on remand.
The Court then addressed Coastal's motion to "correct" the revised award by adding legal interest to the amount of damages, which the Court properly characterized as a motion to vacate the denial of interest for manifest disregard of the law. The arbitrators did note that New York statute normally requires that an award include interest, but declined to do so. The arbitrators maintained that the controlling arbitration rules stated that they "may include interest…" as they "may deem appropriate." The arbitrators stated that they felt interest was highly inappropriate in this particular matter.
The Court refused to disturb the arbitrator's determination that interest was not appropriate, finding that the parties had chosen the rules of the arbitration by contract. Since the parties freely agreed to arbitrate their dispute under this particular rule set, including the rule granting the arbitrators the discretion to award or deny interest, the arbitrators showed no manifest disregard of the law by exercising such discretion.
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