R.E.M. Constr., Inc. v. Cleveland Constr. ( 2022 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
2022-NCCOA-557
No. COA21-781
Filed 16 August 2022
Buncombe County, No. 19 CVS 1433
R.E.M. CONSTRUCTION, INC., Plaintiff,
v.
CLEVELAND CONSTRUCTION, INC.; MHG ASHEVILLE TR, LLC; ASHEVILLE
ARRAS RESIDENCES, LLC; AND FEDERAL INSURANCE COMPANY;
Defendants,
and
UNITED STATES SURETY COMPANY, Intervenor.
Appeal by defendant Cleveland Construction, Inc., from judgment and order
entered 10 September 2021 by Judge Alan Z. Thornburg in Buncombe County
Superior Court. Heard in the Court of Appeals 24 May 2022.
Erwin, Capitano & Moss, P.A., by Fenton T. Erwin, Jr., and Erin C. Huegel,
for plaintiff-appellee R.E.M. Construction, Inc.
Chamberlain Hrdlicka White Williams & Aughtry, by Seth R. Price, pro hac
vice, and Hamilton Stephens Steele + Martin, PLLC, by Tracy T. James and
Carmela E. Mastrianni, for defendant-appellant Cleveland Construction, Inc.
Everett Gaskins Hancock LLP, by James M. Hash, and Thompson Law Group,
LLC, by Kelley Herrin, pro hac vice, for intervenor-appellee.
ZACHARY, Judge.
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Opinion of the Court
¶1 Defendant Cleveland Construction, Inc., (“CCI”) appeals from the trial court’s
judgment and order (1) granting the motion of Plaintiff R.E.M. Construction, Inc.,
(“REM”) to confirm the arbitration panel’s award, and (2) denying CCI’s motion to
modify or, in the alternative, to partially vacate the panel’s award. After careful
consideration, we affirm.
Background
¶2 This appeal arises out of an arbitration proceeding following CCI’s termination
of REM from a construction project in Asheville. CCI’s appeal presents a narrow
question of law concerning the arbitration panel’s award of damages to REM. On
appeal, CCI does not challenge the panel’s conclusions that (1) CCI did not properly
terminate REM for default under the terms of the parties’ subcontracts, and (2) REM
was “entitled to monetary compensation from CCI[.]” Instead, CCI argues that the
panel exceeded its authority by awarding damages that were not permissible under
the express terms of the parties’ subcontracts, and that the trial court thus erred by
confirming the panel’s award. As CCI does not contest the panel’s conclusions
regarding the merits of REM’s claims, we recite only those facts pertinent to the
present dispute concerning the award of damages.
¶3 On 29 August 2017, CCI entered into a pair of substantially identical
subcontracts (“the Subcontracts”) with REM for work on the “exterior envelope” of a
nineteen-story building in Asheville. Intervenor United States Surety Company
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Opinion of the Court
(“USSC”) issued performance bonds dated 25 January 2018 for both of the
Subcontracts. REM began work in November 2017, but between May and September
2018 the project suffered several problems and resultant delays. On 5 October 2018,
CCI terminated REM for default and notified USSC of the termination.
¶4 On 3 April 2019, REM filed suit against Defendants CCI, MHG Asheville TR,
LLC, and Asheville Arras Residences, LLC in Buncombe County Superior Court.1
CCI elected to arbitrate REM’s claims pursuant to the terms of the Subcontracts,
each of which provides in pertinent part that “[a]ny controversy or claim of . . . [REM]
against [CCI] shall, at the option of [CCI], be resolved by arbitration pursuant to the
Construction Industry Arbitration Rules of the American Arbitration Association in
effect on the date on which the demand for arbitration is made.” Accordingly, on 3
May 2019, CCI filed a motion to stay pending arbitration alongside its motion to
dismiss. On 26 June 2019, the trial court entered an order staying proceedings
pending the arbitration.
¶5 A panel of arbitrators confirmed by the American Arbitration Association
(“AAA”) and approved by the parties heard this matter. On 15 March 2021, the panel
issued its award, determining in pertinent part “that CCI did not properly terminate
1 On 26 June 2019, the trial court entered an order allowing Plaintiff to amend its
complaint to bring claims against additional Defendant Federal Insurance Company.
Defendants MHG Asheville TR, LLC, Asheville Arras Residences, LLC, and Federal
Insurance Company are not involved in the present appeal.
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REM for default; . . . and REM shall be entitled to monetary compensation from CCI
in accordance with the terms of” the Subcontracts. To calculate the amount of the
damage award, the panel first looked to the terms of the Subcontracts:
73. As stated above, the termination for default by [CCI]
against REM was improper. In a case of an improper
termination, the contract provides in Article 31.8 as
follows:
“If after termination it is determined that, for
any reason, [REM] was not in default or that
[REM] is not properly terminated for default,
then such termination shall have been
deemed to be for the convenience of [CCI] and
[REM] shall be entitled to the actual direct
cost of all Subcontract Work satisfactorily
performed and materials furnished prior to
notification of termination. [REM] shall not
be entitled to compensation for profit and
overhead. [REM] shall not be entitled to
compensation for work not performed or
materials not furnished. [REM] shall not be
entitled to recover exemplary, special or
consequential damages, or anticipated profit
on account of such termination or on account
of [CCI’s] breach of the subcontract
agreement.”
(Emphases added.)
¶6 The panel then reviewed the record, but found insufficient evidence on which
to base a calculation of the “actual direct cost” to which REM was entitled under the
Subcontracts. As such, the panel determined that it would fashion an equitable
remedy pursuant to the AAA rules:
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74. The contractual starting point for determining the
damages or compensation for REM is the actual direct cost
of all Subcontract Work prior to October 5, 2018. The
problem is that there is no evidence of “actual direct cost”
of all work. There was little evidence of the job costs of REM
presented to the Panel.
75. It is unfair to deny any compensation to REM as a
result of the improper termination of its subcontracts with
[CCI]. Therefore, the Panel develops an equitable remedy
pursuant to the AAA Rules. Specifically, Rule R-48 (a) of
the Construction Industry Rules of the AAA states, “The
arbitrator may 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,
equitable relief and specific performance of a contract.”
¶7 Therefore, the panel set out to estimate REM’s “actual direct cost” under
Article 31.8 of the Subcontracts. The panel examined the evidence in the record to
determine “the amount of the contract funds earned by REM at the time of
termination.” The panel identified a document provided by CCI as “the best source
for contract funds earned by REM through September 30, 2018” and calculated a total
of $211,151.00 in earnings for that period. Then, recognizing that this amount “d[id]
not include the work of REM performed from October 1-5, 2018[,]” the panel
determined that “the labor and equipment, including demobilization for October 1-5,
2018, is $25,000.00.” Ultimately, the panel concluded that “REM is entitled to a total
of $236,151.00 for contract work performed on this project.” The panel added $926.00
for technical violations of the North Carolina Prompt Pay Act to its total award, and
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ordered that CCI pay the administrative costs and fees of arbitration as well as
prejudgment interest; the panel rejected REM’s other claims for additional payment
and compensation.
¶8 Upon request from CCI, the panel entered a modified award on 30 April 2021,
correcting a computation in the amount of prejudgment interest. Although CCI also
“complain[ed] about the [p]anel’s reliance” on the document that the panel used to
calculate REM’s actual direct cost when determining the damage award, the panel
declined to otherwise modify its award.
¶9 The parties then returned to the trial court, where they filed a series of
motions. On 10 May 2021, REM filed a motion to confirm the award. On 24 May 2021,
USSC filed a motion to intervene and to modify the award. On 1 June 2021, CCI filed
motions to lift the stay and to modify or, alternatively, to partially vacate the award.
The matter came on for hearing on 12 July 2021 in Buncombe County Superior Court.
On 10 September 2021, the trial court entered its judgment and order, in which it: (1)
lifted the stay; (2) allowed USSC to intervene; (3) denied CCI’s motion to modify or,
alternatively, partially vacate the award; (4) granted REM’s motion to confirm the
award; and (5) entered judgment confirming the award. CCI timely filed notice of
appeal.
Discussion
¶ 10 As stated above, CCI does not challenge the merits of the panel’s conclusions
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that (1) CCI did not properly terminate REM for default under the terms of the
Subcontracts, and (2) REM was “entitled to monetary compensation[.]” Further, CCI
notes that it does not contest the award of costs and fees of arbitration and has
already reimbursed REM for that amount.
¶ 11 Instead, CCI argues that the trial court erred by denying its motion to modify
or, alternatively, to partially vacate the award because the panel “improperly applied
Rule 48 of the AAA Construction Industry Rules . . . to award [REM] money to which
it was not entitled.” Alternatively, CCI argues that the trial court should have
vacated the panel’s award “because the panel manifestly disregarded the law.” We
disagree.
I. Standard of Review
¶ 12 “Since this appeal arises from a decision on a motion to confirm an arbitration
award, we first note that a strong policy supports upholding arbitration awards.”
WMS, Inc. v. Weaver, 166 N.C. App. 352, 357, 602 S.E.2d 706, 709 (citation and
internal quotation marks omitted), disc. review denied, 359 N.C. 197, 608 S.E.2d 330(2004). “Judicial review of an arbitration award is confined to a determination of
whether there exists one of the specific grounds for vacation of an award” under the
Revised Uniform Arbitration Act, N.C. Gen. Stat. § 1-569.1 et seq. (2021). Dalenko v.
Peden Gen. Contr’rs, Inc., 197 N.C. App. 115, 125, 676 S.E.2d 625, 632 (2009) (citation
omitted), notice of appeal dismissed, 363 N.C. 801, 690 S.E.2d 534, cert. denied, 363
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N.C. 854, 694 S.E.2d 202 (2010).
¶ 13 “[E]rrors of law or fact or erroneous decisions of matters submitted to
arbitration are not sufficient to invalidate an arbitration award fairly and honestly
made.” Carteret Cty. v. United Contr’rs of Kinston, Inc., 120 N.C. App. 336, 346, 462
S.E.2d 816, 823 (1995), petition for disc. review withdrawn, 343 N.C. 121, 471 S.E.2d
65 (1996).
An award is intended to settle the matter in controversy,
and thus save the expense of litigation. If a mistake be a
sufficient ground for setting aside an award, it opens the
door for coming into court in almost every case; for in nine
cases out of ten some mistake either of law or fact may be
suggested by the dissatisfied party. Thus[,] arbitration
instead of ending would tend to increase litigation.
Cyclone Roofing Co. v. David M. LaFave Co., 312 N.C. 224, 236, 321 S.E.2d 872, 880
(1984) (citation omitted). Accordingly, “[i]f the dispute is within the scope of the
arbitration agreement, then the court must confirm the award unless one of the
statutory grounds for vacating or modifying the award exists.” United Contr’rs, 120
N.C. App. at 346, 462 S.E.2d at 823.
II. Analysis
¶ 14 CCI argues that the trial court should have vacated the panel’s award of
damages under N.C. Gen. Stat. § 1-569.23(a)(4), which provides that a trial court may
vacate an arbitration award where “[a]n arbitrator exceeded the arbitrator’s
powers[.]” N.C. Gen. Stat. § 1-569.23(a)(4). CCI contends that the panel “exceeded its
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authority by electing to fashion an award outside of what was contemplated in the
negotiated contract” when it applied AAA Rule 48 to “develop[ ] an equitable remedy”
where there was “no evidence of ‘actual direct cost’ of all work” in the record before
the panel.
¶ 15 In light of the strong public policy that “supports upholding arbitration
awards[,]” Weaver, 166 N.C. App. at 357, 602 S.E.2d at 709 (citation omitted), this
Court has recognized with regard to the award of remedies that “an arbitrator does
not exceed his powers if (1) state law allows the remedy for the specified cause of
action, and (2) the arbitration contract does not unequivocally preclude it[,]” id. at
359, 602 S.E.2d at 711.2 In the present case, state law unquestionably allows for the
equitable remedy fashioned by the panel. See N.C. Gen. Stat. § 1-569.21(c) (“[A]n
arbitrator may order any remedies the arbitrator considers just and appropriate
under the circumstances of the arbitration proceeding. The fact that a remedy could
not or would not be granted by the court is not a ground for . . . vacating an award
under G.S. 1-569.23.”). Thus, the issue presented here is whether the Subcontracts
“unequivocally preclude[d]” the panel’s award. Weaver, 166 N.C. App. at 359, 602
S.E.2d at 711.
2 Although Weaver concerned arguments under the Federal Arbitration Act, the
applicable federal and state provisions both allow a trial court to vacate an award where,
inter alia, the arbitrators exceeded their powers. Compare 9 U.S.C. § 10(a)(4) (2018), with
N.C. Gen. Stat. § 1-569.23(a)(4).
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¶ 16 Each of the Subcontracts provides, in pertinent part, that “[a]ny controversy
or claim of . . . [REM] against [CCI] shall, at the option of [CCI], be resolved by
arbitration pursuant to the Construction Industry Arbitration Rules of the American
Arbitration Association in effect on the date on which the demand for arbitration is
made.” AAA Rule 48(a), as quoted by the panel in its award, provides that “[t]he
arbitrator may 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, equitable relief and specific performance of a contract.” The Subcontracts
do not explicitly preclude the equitable remedy that the panel fashioned; rather, they
expressly vest the arbitration panel with broad discretion to craft equitable remedies
through the specific adoption of the AAA Rules, including Rule 48(a). Hence, in
estimating the “actual direct cost” incurred by REM pursuant to Article 31.8 of the
Subcontracts, the panel did not exceed the vast equitable powers with which it was
endowed by the parties.
¶ 17 Notably, CCI does not directly argue on appeal that the Subcontracts explicitly
precluded the equitable remedy fashioned by the panel. Instead, CCI offers a series
of arguments otherwise attacking the panel’s equitable authority, including: (1) that
“Rule 48(a) is an equitable remedy that is not applicable in this context”; (2) that even
if Rule 48(a) were applicable, the relief designed by the panel was not “within the
scope of the agreement of the parties” as required by Rule 48(a); and (3) that “Rule
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48(a) does not allow an arbitration panel to award monetary damages in direct
contradiction of the governing contract’s terms” and that “[t]o hold otherwise would
be to eviscerate the central concept underlying all arbitrations: that the arbitrators
derive their powers from the parties’ contract and are thus limited to awarding relief
within the scope of that contract.” These arguments are unpersuasive.
¶ 18 Although CCI asserts that the panel’s award of monetary damages was in
“direct contradiction of the [Subcontracts’] terms[,]” we again note that the
Subcontracts themselves do not contain any express limitation that would preclude
the panel’s award. The Subcontracts provide that, in the event that CCI improperly
terminated REM for default, REM would not be entitled to “compensation for profit
and overhead”; “compensation for work not performed or materials not furnished”; or
“exemplary, special or consequential damages, or anticipated profit[.]” But the
Subcontracts explicitly state that REM “shall be entitled to the actual direct cost of
all Subcontract Work satisfactorily performed and materials furnished prior to
notification of termination.” And AAA Rule 48(a), which the Subcontracts specifically
adopt, authorizes the arbitration panel 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, equitable relief[.]” (Emphases added).
¶ 19 In its equitable award, the arbitration panel did not provide REM with any of
the forms of compensation prohibited by the Subcontracts. In fact, it expressly
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constrained its calculation of equitable relief—authorized by Rule 48(a)—to an
approximation of “the amount of the contract funds earned by REM at the time of
termination” and rejected REM’s claims for “additional payment or compensation.”
Therefore, the arbitration panel’s estimation of REM’s “actual direct cost” was
properly calculated to be consistent with the Subcontracts’ terms.
¶ 20 At its essence, the sole source of CCI’s complaints on appeal is that the panel
estimated an approximate “amount of the contract funds earned by REM at the time
of termination” when REM had not submitted any evidence to that effect, based on
the panel’s statement that it would be “unfair to deny any compensation to REM”
under the circumstances presented. However, CCI cannot point to any provision in
the Subcontracts that forbids the panel from (1) awarding this equitable relief—
which, again, was explicitly authorized by Rule 48(a) and not specifically precluded
by the terms of the Subcontracts—and thus (2) estimating the “actual direct cost” to
which REM was entitled based on evidence in the record before it, regardless of which
party provided that evidence. “[T]he parties could have—but did not—write into the
contract a limiting provision” forbidding the arbitration panel from fashioning this
specific remedy. Faison & Gillespie v. Lorant, 187 N.C. App. 567, 577, 654 S.E.2d 47,
54 (2007) (citation omitted).
¶ 21 We conclude that in the case at bar the arbitration panel did not “act[ ] contrary
to the express authority conferred on them by statute and by the language of the
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parties’ private arbitration agreement.” Id. at 575, 654 S.E.2d at 52. “In making [its]
award the arbitrat[ion panel] construed the contract, as it was [its] right and duty to
do. [It] added nothing to the agreement. Instead, [it] based [its] conclusions on a
permissible construction of the written instrument.” Id. at 577, 654 S.E.2d at 54(citation omitted). Because the arbitration panel did not exceed the authority afforded
it by the parties in the Subcontracts, the trial court did not err by confirming the
award.
¶ 22 Lastly, CCI contends that “the panel’s award should be vacated because the
panel manifestly disregarded the law.” CCI maintains that the panel acted in
manifest disregard of the law by declining to apply the parties’ subcontracts as
written in calculating its damages award.
¶ 23 “To establish manifest disregard, a party must demonstrate: (1) the disputed
legal principle is clearly defined and is not subject to reasonable debate; and (2) the
arbitrator refused to apply that legal principle.” Warfield v. Icon Advisers, Inc, 26
F.4th 666, 669–70 (4th Cir.) (citation and internal quotation marks omitted), reh’g
and reh’g en banc denied, 2022 U.S. App. LEXIS 7583 (2022).
¶ 24 The “manifest disregard” analysis has been adopted by other jurisdictions, but
has not been employed by the North Carolina courts; indeed, the federal circuit courts
of appeal are split as to whether the “manifest disregard” ground is viable as a matter
of federal law. See id. at 669–70 n.3. However, CCI asks this Court to adopt an
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arbitrator’s “manifest disregard of the law” as an additional, non-statutory ground
for vacating an arbitrator’s award.
¶ 25 In that we have already determined that the arbitration panel here did not
“act[ ] contrary to the express authority conferred on them by statute and by the
language of the parties’ private arbitration agreement[,]” Faison, 187 N.C. App. at
575, 654 S.E.2d at 52, we need not accept CCI’s invitation to adopt this alternative
analysis, see In re Fifth Third Bank, Nat. Ass’n, 216 N.C. App. 482, 488, 716 S.E.2d
850, 855 (2011) (concluding that, because the appellant “fail[ed] to demonstrate that
the Arbitrator either ‘manifestly disregarded the law’ or ‘dispensed his own brand of
industrial justice,’ . . . we need not determine the extent, if any, to which ‘manifest
disregard of the law’ remains a valid non-statutory basis for vacating an arbitration
award” under the Federal Arbitration Act).
Conclusion
¶ 26 For the foregoing reasons, we conclude that the trial court did not err in
denying CCI’s motion to modify or, alternatively, to partially vacate the award. The
trial court’s judgment and order confirming the arbitration award is affirmed.
AFFIRMED.
Judges INMAN and JACKSON concur.