Scherbenske Excavating, Inc. v. North Dakota State Highway Dept.

• Decision Date: 20 March 1985
• Docket Number: No. 10818,10818
• Citation: 365 N.W.2d 485
• Parties: SCHERBENSKE EXCAVATING, INC., Petitioner and Appellee, v NORTH DAKOTA STATE HIGHWAY DEPARTMENT, Respondent and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 485

365 N.W.2d 485

SCHERBENSKE EXCAVATING, INC., Petitioner and Appellee, v NORTH DAKOTA STATE HIGHWAY DEPARTMENT, Respondent and Appellant.

Civ. No. 10818.

Supreme Court of North Dakota.

March 20, 1985.

As Corrected April 9, 1985.

Zuger & Bucklin, Bismarck, and Moore, Costello & Hart, St. Paul, Minn., for petitioner and appellee; argued by Lyle W. Kirmis, Bismarck.

Robert E. Lane, Asst. Atty. Gen., Bismarck, for respondent and appellant.

LEVINE, Justice.

This is an appeal by the State Highway Department from a district court judgment affirming an arbitration award of $781,604.00 in favor of Scherbenske Excavating, Inc. (Scherbenske) and denying the Highway Department's motion to vacate the award.

In the summer of 1980 Scherbenske contracted with the Highway Department to pave 21.5 miles of roadway near Beulah. The contract provided that Scherbenske would commence work by mid-August 1980 and complete the project by the fall of 1980. It was further agreed that Scherbenske would work on a mile-by-mile basis as the subcontractors completed their preparatory work on the road. Subsequently the State Highway Department decided that Scherbenske could not begin work until all subcontractors had completed preparation of the entire stretch of 21.5 miles. As a result, Scherbenske was delayed in beginning its work for approximately two months until mid-October 1980, and was unable to complete the job until September 1981. Factors contributing to the delay in completion were inclement weather in the summer of 1981, inferior preparation by the subcontractors, and a greater than anticipated increase of traffic.

Because of these delays the State imposed liquidated damages of $11,600.00. However, the State later conceded responsibility for Scherbenske's delay in commencement and agreed that the assessment of liquidated damages was not warranted.

Scherbenske made a claim against the Highway Department for the increased cost due to the delay and subsequently demanded arbitration pursuant to North Dakota Century Code Sec. 24-02-26. A hearing was held before three arbitrators. They awarded Scherbenske $781,604.00 ¹ and Scherbenske subsequently moved the district court to affirm the award while the State moved to vacate it. Following a hearing the court denied the State's motion to vacate and granted Scherbenske's motion to affirm the award. Judgment was entered and the State filed this appeal.

The Highway Department's initial contention is that the "completely irrational" standard of review of arbitration awards announced in Nelson Paving Co., Inc. v. Hjelle, 207 N.W.2d 225 (N.D.1973), should be abandoned in favor of a more liberal scope of review.

In Nelson Paving, decided a little over a decade ago, the North Dakota State Highway Department argued, as it does in the instant case, for vacation of the arbitration award under NDCC Sec. 32-29-08(4) ² because the arbitrators "exceeded their powers" in making their award. This Court, after surveying case law of other jurisdictions, adopted the New York rule and concluded that an arbitration award would not be vacated pursuant to Sec. 32-29-08(4) unless the award were completely irrational. Nelson Paving, supra at 234.

In Nelson Paving the court set out the perimeter of complete irrationality from which it reasoned that an award not devoid of rationality would be affirmed:

"The mistakes that will void an award are those appearing on its face or gross mistakes of the arbitrators extraneously appearing as to their powers or duties, which result in real injustice or constructive fraud." Nelson Paving, supra at 230.

This court has not had occasion since Nelson Paving to apply or discuss the completely irrational standard of review. Other courts have done so and their analyses are helpful in filling in the interstices of an abstract principle with particular instances.

In O-S Corporation v. Samuel A. Kroll, Inc., 29 Md.App. 406, 348 A.2d 870, 872 (1975), an arbitration award was vacated as completely irrational because the contract provided no rationale for the award without resort to a wholly spurious, illogical interpretation of essential contractual language.

The Maryland Court of Appeals offered a rather poetic if not elucidating definition of a "completely irrational" award as one which is "inferentially opprobrious, i.e., '[e]xpressing or carrying a sense of disgrace or contemptuous scorn' causing it to be suspect in its conception." O-S Corporation, supra 348 A.2d at 872. However, some light was shed by its explanation that there need be only some evidence to meet the test of rationality, i.e., it may be so little as to make the result "arbitrary," so long as it is not completely irrational. O-S Corporation, supra 348 A.2d at 874.

Representative of another line of cases holding that an arbitration award is not completely irrational so long as the arbitrators considered the "proper sources" in fashioning the award is the Rhode Island Supreme Court's prescription:

"As 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." Rhode Island Council 94 v. State, 456 A.2d 771, 773 (R.I.1983).

In Rhode Island Council 94, the contention was that an arbitration award was completely irrational in retroactively suspending two employees because there was no contract provision for retroactive suspension. The court affirmed the award on the basis of the arbitrator's inherent power to fashion an appropriate remedy, noting that the employment contract did not specifically prohibit retroactive suspension and thus the award "drew its essence" from the contract. Rhode Island Council 94, supra at 774-775.

Yet another explanation of the completely irrational standard of review is that an arbitrator exceeds his powers when he gives a completely irrational construction to the agreement in dispute, thereby effectively creating a new contract between the parties. Sweeney v. Herman Management, Inc., 85 A.D.2d 34, 447 N.Y.S.2d 164, 168 (1982). In the Sweeney case the court concluded the arbitrator took a contract with arguable terms, and, by ignoring and misrepresenting some facts and adding new ones, created nonexistent legal duties and an entirely new contract with different obligations, rendering the resulting award completely irrational. Sweeney, supra at 168.

As the foregoing discussion illustrates the definitive constituents of a completely irrational award cannot be formulated in the abstract but, like all legal principles, can best be developed on a case-by-case basis. The Highway Department urges revision of the present scope of review to require vacation of an arbitration award under NDCC Sec. 32-29-08(4) if it is not "supported by evidence or other basis of reason," a standard adopted by the New York Court of Appeals in Mount St. Mary's Hospital of Niagara Falls v. Catherwood, 26 N.Y.2d 493, 311 N.Y.S.2d 863, 260 N.E.2d 508 (1970).

In Catherwood four members of the seven-member New York Court of Appeals drew a distinction between voluntary and compulsory arbitration holding that due process, in the context of compulsory arbitration, requires a more extensive judicial scope of review than that encompassed in the completely irrational standard. The Catherwood court reasoned that while parties engaged in voluntary arbitration consent to restrictions upon or deprivations of their rights to due process, similar restrictions or deprivations, if compelled by government through compulsory arbitration, must accord with procedural and substantive due process. Catherwood, supra 311 N.Y.S.2d at 867, 260 N.E.2d at 511. In complying with due process a broader scope of review of compulsory arbitration than completely irrational was required.

Catherwood is clearly distinguishable. It addressed the compulsory arbitration of disputes involving private parties. In the instant case, as in Nelson Paving, NDCC Sec. 24-02-26 requires arbitration of all controversies arising out of any contract for the construction or repair of highways entered into by the Highway Department. This distinction is significant, as recognized in Hjelle v. Sornsin Construction Company, 173 N.W.2d 431 (N.D.1969), because here disputing private parties are not compelled to arbitrate so as to substantially interfere with their protected property rights. See Catherwood, supra 311 N.Y.S.2d at 869, 260 N.E.2d at 513. Rather, by virtue of NDCC Sec. 24-02-26 the Legislature has consented on behalf on the Highway Department to arbitrate its disputes over highway construction and repair contracts it has with private contractors. See Hjelle v. Sornsin Construction Company, supra at 436. ³

The policy reasons for compulsory arbitration provided by NDCC Sec. 24-02-26 were thoroughly examined in Nelson Paving. Arbitration is favored as a speedy and inexpensive mode of adjusting differences, ⁴ and in the highly technical field of highway construction the view of the technicians named to the arbitration board is to be preferred over the view of judges who have no specific training in the field. Nelson Paving, supra at 230 and 237. That was true in 1973 and remains so today. ⁵ Indeed, the ongoing debate over alternative methods of resolving disputes in other categories of litigation underscores the continuing need for and efficacy of arbitration.

Obviously, the effect of applying the clearly irrational standard of review is to give to the arbitrators every benefit of every doubt. It affords them the widest latitude to exercise their authority and arrive at their decision without the customary restraints of traditional judicial review. It is but a reflection of the strong public policy favoring the arbitration process. We find no reasons compelling or persuasive enough to warrant revising the completely irrational standard of review and therefore we decline to overrule or modify Nelson...