New York District Court confirms arbitration award; reference to American Arbitration Assoc. Rules renders award binding notwithstanding redaction of subcontract provision for binding award.

St. Lawrence Explosives v. Worthy Bros. Pipeline,
916 F.Supp. 187 (N.D.N.Y. 1996)

The Petitioner, St Lawrence, requested confirmation and judgment to be entered upon an arbitration award in favor of St Lawrence and against the Respondent, Worthy Brothers.

St Lawrence Explosives and Worthy Brothers Pipeline entered into a subcontract for construction of a gas pipeline within New York which would connect into an international pipeline. The subcontract was a Standard Form of Agreement Between Contractor and Subcontractor: AIA Document A401. Article 6.1 of the subcontract provided that if the Prime Contract did not provide for arbitration, then disputes would be resolved in accordance with the Construction Industry Arbitration Rules (“AAA Rules”). Article 6.4 provided that the award shall be final and judgment may be entered upon it. But, Article 6.4 in the above subcontract agreement was crossed out.

The Petitioner argued that the subcontract, by referring to the AAA Rules revealed an intent by the parties to have any arbitration governed by them, and the Rules provide for binding arbitration. But the Respondent countered, that by striking out Article 6.4, the parties intended the arbitration to be non-binding.

The Petitioner contended that any matter stricken from a form contract was extrinsic evidence which would only be referred to if ambiguity arose in the contract. Article 6.4 was essentially “redacted” and should only be referred to when the intent of the parties is not clear from the language used in the contract. Therefore, Article 6.1 stands alone.

The Court agreed that this argument made sense, and a Tenth Circuit decision [Hughes v. Samedan Oil Corp., 166 F.2d 871 (10th Cir. 1948)] held that language that was merely crossed out could in fact constitute extrinsic evidence. The Respondent argued that even if Article 6.4 is not considered, Article 6.1 was in fact ambiguous and placed limits on the applicability of the AAA Rules, by referring to the Rules in a different manner than other contract provisions in relevant caselaw.

The Court explained that federal policy favors arbitration and the lower courts do not draw fine distinctions between types of references to the AAA Rules. Under these standards, Article 6.1 which contemplates arbitration that would be binding, should stand.

The Respondent finally argued that the arbitration award should be vacated on the grounds that the arbitrator’s decision was “biased, arbitrary and capricious, and affected by manifest disregard of the law.” This motion was founded on 9 U.S.C. [[section]] 10 which lays out criteria to be fulfilled if an arbitration award is to be vacated.

The Court held that authority to vacate an award under Section 10 is read very narrowly and not all the grounds under Section 10 were fulfilled. Although the Court was not given a transcript of the arbitration proceedings, after it weighed the allegations of both parties against each other, it held that the Respondent did not demonstrate to the Court that the arbitrator made improper comments or was biased in any way. For an award to be vacated based on “manifest disregard for the law” the error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator. This intimates that the arbitrator recognized the clearly governing legal principle but decided to disregard it. The Court decided that even if the arbitrator made an error, it would not be an obvious one, and the Respondent also failed to point out “the governing law” that had been disregarded.

For the foregoing reasons the District Court confirmed and entered judgment upon the arbitration award and held that there was no ground for vacatur of award.

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