MSP Collaborative Developers v. Fidelity and Deposit Co. of Maryland

• Decision Date: 18 April 1979
• Docket Number: No. 78-1005,78-1005
• Citation: 596 F.2d 247
• Parties: MSP COLLABORATIVE DEVELOPERS, Plaintiff-Appellee, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND and Ray J. Benoit and Son, Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 247

596 F.2d 247

MSP COLLABORATIVE DEVELOPERS, Plaintiff-Appellee, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND and Ray J. Benoit and Son, Inc., Defendant-Appellant.

No. 78-1005.

United States Court of Appeals Seventh Circuit.

Argued Dec. 8, 1978.

Decided April 18, 1979.

Charles W. Linder, Jr., Indianapolis, Ind., for defendant-appellant.

James E. Ayers, Crawfordsville, Ind., for plaintiff-appellee.

Before SWYGERT, LAY ^* and PELL, Circuit Judges.

PELL, Circuit Judge.

The defendant Fidelity and Deposit Insurance Company of Maryland appeals from the district court's judgment confirming an arbitration award of $456,455.96 plus interest in favor of the plaintiff MSP Collaborative Developers. The defendant argues that the arbitrator, John F. Sembower, committed legal error in his decision and that the district court therefore erred in not vacating the award.

In 1973 MSP Collaborative Developers (MSP), an architectural firm, entered a contract with R.J. Benoit and Son for the construction of a housing project for the elderly in Sullivan, Indiana. Fidelity Deposit and Insurance Company of Maryland (F&D) was surety for Benoit on its performance bond. In 1974 Benoit defaulted before completion of the construction. F&D arranged for the completion of the project, and MSP continued to serve as architect. The Sullivan, Indiana Housing Authority accepted the project in April 1975.

MSP brought this action pursuant to the Indiana Uniform Arbitration Act, Indiana Code § 34-4-2-1 Et seq. In state court to compel arbitration pursuant to the construction contract. F&D removed the action to the federal district court on the basis of diversity of citizenship. Thereafter F&D moved to strike the application for arbitration and to dismiss the cause contending that there was no agreement to submit the controversy to arbitration. The district court ruled against F&D and this ruling has not been raised on appeal. The arbitrator, after pre-trial discovery, conducted some twenty days of hearings during which evidence was presented and argument made by counsel. Thereafter the parties submitted briefs to the arbitrator on their respective positions as to the facts and the law. The arbitrator found in favor of MSP and awarded damages of $456,455.96, including $160,000 for "loss of opportunity."

Objecting to this item of damages, F&D filed in the district court a motion under Indiana Code § 34-4-2-13 to vacate the arbitration award and to order a rehearing. The district court denied this motion and entered judgment confirming the arbitration award.

The arbitrator issued a written opinion with the award. The "loss of opportunity" damages were explained by the arbitrator in this way:

With respect to "Loss of Opportunity," the Indiana Supreme Court has held "lost business" is an element of damages when it can reasonably be inferred to have been within the contemplation of the parties when they entered into their contract. City of Terre Haute v. Hudnut (1887) 112 Ind. 542, 13 N.E. 686. Just because it may be a relatively new undertaking does not bar such a recovery. Standard Machinery Co. v. Duncan Shaw Corp. ((1 Cir.) 1953) U.S.C.A., 208 F.2d 61. Nor is it necessary that the parties ever have considered the question of damages for the defaulting party, if they should reasonably have expected them to flow therefrom. 22 Am.Jur.Damages, Sects. 57, 58. The details of the losses may be determined at trial. Against these authorities, Fidelity cites none. . . .

The most difficult of all to evaluate is "Loss of Opportunity." This is the counter-part of the "Lost Profits" allowed, both in Miracle Mile, (Miracle Mile Shopping Center v. National Union Indemnity Co., 299 F.2d 780 (7th Cir. 1962)), and Continental Realty Corporation, (Continental Realty Corp. v. Andrew J. Crevolin Co., 380 F.Supp. 246 (S.D.W.Va.1974)). Citing City of Terre Haute v. Hudnut, and others, 112 Ind. 542 (1887), the Plaintiff refers to the long-recognized doctrine of contracts that in a breach, the injured party may receive those damages which were within the contemplation of the parties when they entered their agreement. This is the doctrine, of course, of the classic old case of Hadley v. Baxendale, 9 Exch. 341, 156 Eng.Reprint 145, 22 Am.Jur.2d § 561, which is almost of the vintage of the Rule in Shelly's (sic) case. Interestingly enough, it does have application to this matter, because Benoit knew of MSP Developers' ambition to use this project as a prototype and obtain others, as Gary Benoit testified.

Fidelity pooh-poohs Plaintiff's claim, saying, in part, that after the debacle of this project, they had no "opportunity" left to lose! However, this only goes to show how damaging Benoit's default was to MSP Developers where it could hurt them most their professional standing. It is like evaluating one's reputation in a libel or slander suit. Fidelity says that none of the three individuals comprising MSP Developers paid an income tax of more than $25,000.00, but the Plaintiff points out that this reflected the serious losses they suffered on this project, and that the incomes normally might be expected to run as high as $135,000.00. While the HUD program ceased, there were other Governmental projects available.

The claim is so speculative, so necessarily conjectural and nebulous, as to defy calculation, but there is the established principle of damage law, that simply because damages are difficult to figure, they should not be denied.

The Arbitrator has attempted to resolve this dilemma by carefully studying the arguments pro and con by the parties. The profits which MSP Developers would have realized on this project, had it gone without a hitch, was somewhat over $40,000.00. While MSP Developers was a new organization, the individuals comprising it are duly licensed architects with good professional backgrounds. Their design for the Sullivan project should reflect credit rather than discredit upon them, regardless of the misfortunes and ineptitudes which beset the contractors charged with carrying them out. Taking everything into account, the Arbitrator finds that they had a reasonable expectancy of $160,000.00, and he will so award. This contemplates additional projects and that seems to be the realistic expectation.

The defendant F&D opposes this item of damages in several respects all of which ultimately bottom on the assertion that the arbitrator misapplied the controlling law. Thus, F&D argues that the item of damages is "unprecedented" under Indiana law, giving in its brief grounds for distinguishing decisions relied on by the arbitrator.

In its brief F&D also suggests that the lost opportunities were not foreseeable and therefore not compensable under the rule of Hadley v. Baxendale, 9 Exch. 341, 156 Eng.Rep. 145, and that even if the loss were foreseeable, the amount was so speculative that it defied calculation within a reasonable degree of certainty, citing Maddox v. Yocum, 114 Ind.App. 390, 52 N.E.2d 636 (1944). Finally, F&D argues that "loss of opportunity" on other contracts was already covered by damages compensating MSP for additional time and expenses attributable to the delay in completing the housing project. According to F&D, the "loss of opportunity" damages constitute double recovery and are therefore contrary to law.

Our role in reviewing the arbitration award, however, is confined to determining whether the defendant has shown one of the grounds for challenge permitted by the Indiana Uniform Arbitration Act. ¹ The Act does not classify legal error as a ground for vacating the award, but the defendant has argued vigorously that, under certain circumstances, legal error comes within Indiana Code § 34-4-2-13(a)(2), which requires the court to vacate the award when "there was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct prejudicing the rights of any party."

The purpose of the Uniform Arbitration Act is to afford the opportunity to reach a final disposition of differences between parties in an easier, more expeditious manner than by litigation. Pillott v. Allstate Insurance Co., 48 Ill.App.3d 1043, 6 Ill.Dec. 778, 363 N.E.2d 460 (3d Dist. 1977) (applying Ill.Rev.Stat. ch. 10, § 112 of the Illinois Uniform Arbitration Act). To accomplish this purpose, the Uniform Act strictly limits judicial review of arbitration awards. F&D seeks, however, to transform an allegedly erroneous view of the law into a statutory ground for vacating the judgment by arguing that the error of law raises an inference of "evident partiality" on the part of the arbitrator. Assuming arguendo that the arbitrator did in fact commit legal error, this argument nevertheless must fail.

Although the Indiana courts have not applied this section of the Uniform Act, the Illinois courts have held that section 112 of the Illinois Uniform Arbitration Act, Ill.Rev.Stat. ch. 10 ² requires a specific allegation...