Court of Appeals Partially Vacates Arbitration Award in Complex Construction Payment Dispute

The Nebraska Court of Appeals recently considered whether to sever and vacate part of an arbitration award in a dispute brought to arbitration by a property owner against a general contractor and plumbing subcontractor.

In February 2017, Lund-Ross Constructors and the Duke of Omaha agreed Lund-Ross would be the general contractor to build an apartment complex in Omaha. In turn, Lund-Ross subcontracted Raymond Plumbing to construct the plumbing at the apartments. Upon finishing construction of the apartments, the Duke withheld payment of $952,599 from Lund-Ross.

Consequently, Lund-Ross filed a demand for arbitration against the Duke. Lund-Ross also included Raymond as a respondent since Raymond was demanding payment from Lund-Ross for its plumbing work. After the arbitration hearing in January of 2023, Raymond requested to file a counterclaim against Lund-Ross for breach of contract, breach of implied covenant of good faith and fair dealing, and quantum meruit/unjust enrichment. The arbitrator permitted the counterclaim to be filed in the arbitration proceedings and ruled on it based upon the evidence at the hearing. Lund-Ross objected since it had not had the opportunity to respond the counterclaim, but the arbitrator maintained the award notwithstanding Lund-Ross’s objection.

The award: The Duke owed Lund-Ross $307,103 and Lund-Ross owed Raymond $215,508.31.

Thereafter, Lund-Ross moved to vacate or modify the arbitration award in a Nebraska district court. In its final order, the district court denied Lund-Ross's requested relief. Lund-Ross then appealed.

In its appeal, Lund-Ross claimed several errors, but the primary issue considered by the Court of Appeals was whether the arbitration was a fair proceeding or whether improper procedures prejudiced Lund-Ross during it, which are grounds for a court to vacate arbitration awards under the Federal Arbitration Act, 9 U.S.C §10(a)(3).

When Raymond filed a counterclaim against Lund-Ross, the arbitrator entered the award without giving Lund-Ross the chance to answer the counterclaim and develop its rebuttal evidence. Based upon federal precedent, the appellate court concluded that the arbitrator

had indeed not given Lund-Ross a chance to respond with its own evidence and rebut the allegations made by Raymond. This would constitute improper conduct in the arbitration that prejudiced Lund-Ross and supported vacating the award entered by the arbitrator for Raymond.

Thus, the $215,508.31 that the arbitrator ordered Lund-Ross owed to Raymond was invalidated.

That led to the next legal question in the appeal: Is partial vacatur of an award allowed under the FAA and Nebraska law? This presented a novel issue for the Nebraska appellate court; it therefore relied upon opinions of the Connecticut Supreme Court to determine if an arbitration award against multiple parties could be severed. The court further looked to law developed by the Second Circuit, which has similar case law interpreting 9 U.S.C §10 of the FAA. See Scandinavian Reinsurance v. Saint Paul, 668 F.3d 60, 71 (2d Cir. 2012).

In the end, the Nebraska Court of Appeals severed and vacated the portion of the award on the subcontractor’s counterclaim. This case addressed the novel question in Nebraska of whether an arbitration award may be partially modified, with the court concluding that one may be. This case will inform those practicing in arbitrations reviewable by Nebraska courts in the future.

Arbitration - Preparing for the Important Preliminary Hearing

A guiding principle for an Arbitrator is to hear all the evidence that may be relevant and material in order to understand and determine the dispute. A well-organized preliminary hearing is critical to fulfill that principle.

Because an arbitration demand is not usually a very detailed account, often only a limited amount of information is exchanged in the early stages of arbitration. The parties and their attorneys may have had little or no contact with each other since the dispute arose, except to choose the arbitrator.

It surprises me that many attorneys do not realize that they are to participate in a preliminary hearing. As noted, the preliminary hearing is a critical step in the arbitration process. I've also found that the large number of attorneys are not prepared for the preliminary hearing.

These are my suggestions to improve the quality of their arbitration advocacy and put them on the right path to obtain the benefits of arbitration.

1. Often the Claimant files a general demand, i.e. Respondent breached the contract and owes $50,000. That does not tell the Arbitrator much about the case. If possible, the attorneys should indicate all theories of recovery and relief sought and the calculation of damages. This allows the Arbitrator to determine whether the case is complex or simple. Also a more detailed Complaint, Answer or Crossclaim narrows the issues for the Arbitrator.

2. Attorneys should realize that they have an important part in the proceedings. They should discuss scheduling dates on which the clients and witnesses (both fact and expert) will be available. Before the preliminary hearing, the attorneys should confer to discuss:

• Available dates for the evidentiary hearing.

• The scope of document discovery.

• The dates for exchanging documents.

• Deadlines for Exhibit Lists.

• Deadlines for Witness Lists.

• Dates for exchanging their expert's reports.

• Whether either party plans to file any prehearing motions, and if so, the dates for filing and replying to them.

• How much time each side will need for direct and cross-examination at the evidentiary hearing.

• Whether the parties want a court reporter?

3. The Attorneys should at the preliminary hearing inform the Arbitrator what type of award they want. Failure to tell the Arbitrator the form of the award could result in an award that fails to address every claim or counterclaim. Attorneys should be aware that the more detailed an award, the more cost to the client. Obviously, the Arbitrator charges for the time taken to draft the award.