Originally from Dispute Resolution Journal

CONSTRUCTION

Manifest Disregard of the Law

The Court of Appeals of Tennessee declined to adopt nonstatutory grounds to review an arbitration award under the Federal Arbitration Act.

The dispute involved a contract to construct a motel for Franklin Landmark LLC. Warbington Construction, the general contractor, had not completed punch list items when it submitted its request to Franklin Landmark for final payment. When Franklin Landmark refused to pay, claiming Warbington did not complete all of its responsibilities under the contract, the contractor commenced an arbitration.

During arbitration Franklin Landmark argued that Warbington was entitled to recover only actual documented expenses because it was not properly licensed under the state licensing law. Warbington’s license only permitted it to enter into contracts for $1 million or less, while this contract was for $1.4 million. Warbington countered that it was engaged in a joint venture with another contractor whose license was unlimited, and that the combined monetary limits on the two licenses allowed Warbington to undertake this project.

There was conflicting proof as to whether a joint venture existed and the arbitrator did not make a specific finding on this issue. The arbitrator awarded Warbington $75,331 on its substantive claims plus prejudgment interest. The arbitrator also awarded $14,915 to Franklin Landmark on its counterclaim. Warbington moved to confirm the award under the Tennessee Uniform Arbitration Act. Franklin Landmark moved to vacate on the ground that the arbitrator manifestly disregarded Tennessee’s licensing law and its public policy. The trial court granted Franklin Landmark’s motion to vacate.

In a case of first impression, the court of appeals reversed. First it held that because interstate commerce was clearly involved, the FAA applied, rather than the state arbitration law. Next it held that in reviewing an arbitration award under the FAA, the trial court is limited to the statutory grounds for vacatur in the statute. The court noted that while federal case law has recognized manifest disregard of the law and public policy as additional nonstatutory grounds for vacatur, Tennessee has not adopted them. The court found support for its conclusion in a decision by the Tennessee Supreme Court, which, after considering federal law, held that only statutory grounds should be used in reviewing an arbitration award under the state arbitration law.

The intermediate appeals court went on to find that there was no evidence that any of the statutory grounds for vacatur in the FAA were violated. Although the award did not explain the resolution of the arguments on the licensing issue, the court found there was substantial evidence in the record to support a finding of a joint venture and thus, that Warbington was not in violation of the licensing law.

Warbington Construction Inc. v. Franklin Landmark, L.L.C., 2001 WL 839029 (Tenn. App. July 25, 2001).