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Arbitration Agreements: For Better or For Worse

June 18, 2015

Pursuing arbitration over litigation for commercial disputes has many advantages. These advantages typically include more party control of the process, lower cost and shorter time to resolution, specialized decision makers, and confidentiality. However, these benefits do not come without risks.

In a recent decision, the Michigan Court of Appeals reinforced its strong deference to an arbitrator's decision on both questions of fact and procedure. In doing so, the decision illustrates the difficulty of using the court system to overturn an arbitrator's decision.

Daniel Fette ("Fette", Community Development Director for Berrien County) and the Berrien County Board of Public Works contracted with Peters Construction Company to provide various construction services. When unforeseen conditions caused increased costs, Fette declined to pay the additional costs. Pursuant to the contract, Peters Construction pursued arbitration to resolve the dispute.

Prior to the arbitration hearing, Fette and Peters Construction submitted to one another, and the arbitrator, electronic copies of the parties' respective exhibits and witness lists to be used at the hearing. However, at the subsequent hearing, Peters Construction did not formally offer into evidence any of its previously submitted exhibits. Instead, Peters Construction only offered witness testimony. Notwithstanding its failure to formally offer its exhibits into evidence, the arbitrator found for Peters Construction, awarding it more than $45,000.

Fette filed suit in a Michigan Circuit Court seeking to vacate the award under Michigan Court Rule 3.602(J)(2). After the trial court confirmed the award, Fette subsequently appealed to the Michigan Court of Appeals, arguing specifically that the arbitrator exceeded his powers under the Construction Industry Arbitration Rules (the Rules) by considering evidence not formally presented at the hearing. The Court disagreed, deferring to the arbitrator's findings on both factual and procedural issues.

Even in the absence of Peters Construction formally presenting all of its evidence at the hearing, the Court held that the arbitrator could have relied on the testimony of Peters Construction's sole witness, or the documents formally submitted by Fette. The Court noted that it would not engage in a fact-intensive review to determine the reliability of the evidence considered. Furthermore, the Court illustrated the high standard for vacating an award, stating that it would not vacate an arbitrator's award even if the award "was against the great weight of the evidence or not supported by substantial evidence."

The Court then went on to consider and defer to the arbitrator's interpretation of procedural matters within the Rules as well.

Rule 32 of the Rules expressly provides for the presentation of evidence "by alternative means" so long as those means do not inhibit a party's ability to submit evidence. The Court reasoned that an arbitrator possesses considerable discretion in defining the scope of "alternative means," which, according to the Court, may include electronic submission. In this case, both parties submitted their evidence electronically prior to the hearing. Therefore, the Court concluded that Peters Construction's submission of evidence electronically did not affect Fette's ability to present evidence, as Fette had also submitted evidence electronically.

Moreover, under Rule 33, all evidence-including evidence offered by "alternative means" under Rule 32-must "be taken in the presence of all of the arbitrators  and all of the parties." In considering this provision, the Court again deferred to the arbitrator's judgment. Here, the parties exchanged copies of their respective exhibits during the pre-hearing process. The Court found that this exchange of evidence between the parties was sufficient for the arbitrator  to conclude that the submissions were made "in the presence" of the other parties.

By issuing this Opinion, the Court reinforced the strong deference given to arbitrators on both factual and procedural questions. Contracting parties must be mindful of the implications of agreements to arbitrate. If you have any questions related to the Rules or interpreting an arbitration clause within one of your current contracts, consult your attorney or anyone in Clark Hill's Construction Practice Group. 

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