Purvis Systems v. American Systems Corp.

• Decision Date: 24 January 2002
• Docket Number: No. 99-290-Appeal.,99-290-Appeal.
• Citation: 788 A.2d 1112
• Parties: PURVIS SYSTEMS, INC. v. AMERICAN SYSTEMS CORPORATION.
• Court: Rhode Island Supreme Court

788 A.2d 1112

PURVIS SYSTEMS, INC. v. AMERICAN SYSTEMS CORPORATION.

No. 99-290-Appeal.

Supreme Court of Rhode Island.

January 24, 2002.

Present WILLIAMS, C.J., LEDERBERG, BOURCIER, FLANDERS, and GOLDBERG, JJ.

Robert M. Duffy, Christine K. Ahern, Providence, for plaintiff.

Charles S. Kirwan, Pawtucket, for defendant.

OPINION

LEDERBERG, Justice.

Is an arbitrator in a commercial dispute barred from awarding attorney's fees if the parties' contract provided that "all expenses of the arbitration" be assessed against the losing party? In this case, a justice of the Superior Court vacated a supplemental award of attorney's fees and costs after the arbitrator amended an award that did not include attorney's fees in the expenses awarded. In accordance with the strong public policy in favor of the finality of arbitration awards, we reverse the judgment of the Superior Court and reinstate the arbitrator's awards.

Facts and Procedural History

In 1997, in response to a request for proposals by the Naval Undersea Warfare Center, Purvis Systems, Inc. (Purvis), American Systems Corporation (ASC), and two other companies submitted a joint proposal that designated Purvis as the general contractor and the other companies, including ASC, as the subcontractors. After Purvis was awarded the contract, it entered into a subcontract with ASC delineating the services that ASC was to provide under the Navy contract. A dispute developed between Purvis and ASC with respect to whether the subcontract guaranteed a "fixed level of effort" toASC. In accordance with the terms of the subcontract, Purvis filed a demand for arbitration, a demand that was worded, in pertinent part, as follows:

"THE NATURE OF THE DISPUTE[:] Declaratory judgment action to determine the parties' respective rights under the [sub]contract.

"THE CLAIM OR RELIEF SOUGHT (the Amount, if any): Determination of each party's rights under the [sub]contract."

A counterdemand for arbitration was filed by ASC, seeking specific performance of the subcontract and damages.

In December 1998, two days of unrecorded hearings were held before a single arbitrator, who issued an award (the award) in favor of ASC after finding that "[p]er the subcontract, the fees and expenses of the American Arbitration Association ('AAA') and the fees and expenses of the arbitrator, totaling $8,608.50, shall be borne by Purvis." The award did not mention attorney's fees.

Upon receipt of the award, counsel for ASC, Joseph Billings (Billings), sent a letter to the American Arbitration Association (AAA) and Purvis's counsel via facsimile, pointing out that "it appears that the arbitrator inadvertently failed to address payment of attorneys [sic] fees." Christine Ahern, an attorney for Purvis, responded to Billings's letter the same day, denying that the subcontract's term "expenses of the arbitration" was intended to include attorney's fees. She wrote that "[i]f the parties had intended that attorney's fees could be awarded in addition to arbitration expenses, such a provision would have been expressly included."

In response, Billings telefaxed a second letter to the AAA, claiming that "[t]he parties both understood the subcontract to require payment of attorney's fees. At the close of the arbitration hearing, Robert Duffy [an attorney for Purvis] pointed out to the arbitrator that the subcontract called for the losing party to pay attorney's fees. I told the arbitrator that I agreed with Mr. Duffy." RobertDuffy responded by disputing ASC's version of events in a letter to the AAA: "At the close of the arbitration proceeding, I pointed out to the arbitrator that the `costs of arbitration' are recoverable by the prevailing party. Costs of arbitration do not include attorneys' fees, and the parties neither intended nor understood that to be the case."

In January 1999, the arbitrator modified the award to provide that "[e]xpenses of the arbitration include both reasonable attorney's fees and the costs of the [AAA]," (the modified award). One month later, the arbitrator issued a supplemental award, instructing Purvis to pay to ASC attorney's fees and costs in the amount of $24,288.10, (the supplemental award). Both Purvis and ASC submitted evidence on the issue of attorney's fees, and Purvis reserved its right to challenge any award of fees. The amount awarded by the arbitrator was approximately $3500 less than the amount Purvis estimated would constitute reasonable attorney's fees.

Purvis then filed a Superior Court miscellaneous petition to vacate the modified and supplemental awards, and after a hearing, ASC filed an objection to Purvis's motion to vacate and filed a cross-motion to confirm the awards. The hearing justice affirmed the arbitrator's initial award, but granted Purvis's motion to vacate the modified and supplemental awards, stating, "I find based on the insurmountable factual dispute here that there is no basis in the law and that the arbitrator by awarding legal fees has so imperfectly carried forward his responsibilities that that portion of the order should not, in fact, be sustained or confirmed." After an order was entered, ASC filed a motion for reconsideration and objection, along with an appeal, pursuant to G.L. 1956 § 10-3-19, challenging the vacating of the modified and supplemental awards. The Superior Court judgment provided in pertinent part:

"[The modified and supplemental awards] are hereby vacated because (a) the Arbitrator manifestly disregarded applicable law and the terms of the Subcontract in awarding attorney's fees to [ASC] and (b) soimperfectly stated the basis for the award of attorney's fees that this Court cannot rule that the Arbitrator did anything but manifestly disregard the law and the terms of the Subcontract."

On appeal, ASC argued that in his review of the arbitration award, the hearing justice exceeded the court's limited authority under § 10-3-12 and our numerous holdings addressing the review of arbitration decisions.

Standard of Review

This Court has consistently recognized that the role of the judiciary in the arbitration process is "extremely limited." Romano v. Allstate Insurance Co., 458 A.2d 339, 341 (R.I.1983); see also Prudential Property & Casualty Insurance Co. v. Flynn, 687 A.2d 440, 441 (R.I.1996)

. Section 10-3-12 sets forth the narrow grounds on which an arbitration award must be vacated:

"(1) Where the award was procured by corruption, fraud or undue means. "(2) Where there was evident partiality or corruption on the part of the arbitrators, or either of them.

"(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in hearing legally immaterial evidence, or refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been substantially prejudiced.

"(4) 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."

Moreover, under our caselaw, an arbitration award may be overturned if the award was irrational or if the arbitrator manifestly disregarded the law. Flynn, 687 A.2d at 442. We have emphasized, however, that the latter standard requires "something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand or apply the law." Westminster Construction Corp. v. PPG Industries, Inc., 119 R.I. 205, 211, 376 A.2d 708, 711 (1977) (quoting San Martine Compania De Navegacion, S.A. v. Saguenay Terminals Ltd., 293 F.2d 796, 801 (9th Cir. 1961)). For example, "`[a] manifest disregard of the law * * * might be present when arbitrators understand and correctly state the law, but proceed to disregard the same.'" Id. In sum, "[a]s long as the award `draws its essence' from the contract and is based upon a `passably plausible' interpretation of the contract, it is within the arbitrator's authority and our review must end." Jacinto v. Egan, 120 R.I. 907, 912, 391 A.2d 1173, 1176 (1978).

Issue Subject to Arbitration

Purvis argued on appeal that the issue of attorney's fees was never submitted to the arbitrator, and therefore, the arbitrator exceeded his powers in rendering a decision on that issue. We reject this argument. The subcontract provided that

"[a]ny controversy or claim arising out of or related to this contract or breach thereof, shall be settled by binding arbitration in accordance with the rules of the [AAA]. The parties further agree that all expenses of the arbitration shall be assessed against the losing party, and that said expense may be added to any judgment that may be entered." (Emphases added.)

Not only did the subcontract call for the arbitration of "[a]ny controversy or claim" arising out of the subcontract, but in addition, Purvis's initial demand for arbitration sought a declaratory judgment "to determine the parties' respective rights under the contract." Nothing in the language of the subcontract or in Purvis's demand suggests that the arbitrator was precluded from addressing attorney's fees.

Moreover, although the AAA's Commercial Arbitration Rules (AAA rules) do not explicitly mention attorney's fees, rule 43, entitled "Scope of Award," authorizes an arbitrator "[to] grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract." Therefore, the AAA rules, thearbitration clause in the subcontract, and Purvis's own demand for arbitration vested the arbitrator with broad authority to interpret the terms of the subcontract that provided in part: "The parties further agree that all expenses of the arbitration shall be assessed against the losing party, and that said expense may be added to any judgment that may be entered." Furthermore, we have held that "[t]he framing of the...