Construction Law: Court upholds arbitrators’ ability to fashion equitable remedy

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By Anthony Bradley (Brad) Eben, III
Special to North Carolina Construction News

The North Carolina Court of Appeals on Aug. 16, 2022 issued an opinion recognizing arbitrators’ ability to fashion an equitable remedy to award monetary damages to a subcontractor.

R.E.M. Construction, Inc. v. Cleveland Construction, Inc., 2022 NCCOA-557, involved a dispute arising out of subcontracts entered into for the renovation and construction of a high-rise condo and hotel building in downtown Asheville.

Work stoppages led to delays in the project. The general contractor terminated the subcontractor for default. The subcontracts provided that in the event a default termination was later determined to be a wrongful termination the termination would convert to a termination for convenience.

Under the “termination for convenience” provision, the subcontractor would be entitled to recover the “actual direct cost” of the work properly performed but would not be entitled to any overhead or profit or compensation for work not performed, or exemplary, special, or consequential damages. After the subcontractor filed suit, the parties submitted the claims to arbitration.

The arbitrators found that the general contractor had wrongfully terminated the subcontractor but could not find sufficient evidence on which to base a calculation of the subcontractor’s “actual direct costs.” The arbitration award stated that it would be unfair to deny compensation to the subcontractor as a result of the general contractor’s wrongful termination.

The arbitrators then fashioned an equitable remedy in favor of the subcontractor based on a project cost report prepared by the general contractor showing the subcontractor’s earnings for completed work as of the date of the termination. The arbitrators awarded the subcontractor $237,077 and also ordered the general contractor to pay for all the costs of the arbitration and all the arbitrators’ fees (approximately $150,000).

The general contractor filed a motion to modify or vacate the award on the grounds that the arbitrators had exceeded their authority, as provided for under N.C. Gen. Stat. § 1-569.23(a)(4). The general contractor did not challenge the arbitrators’ conclusions of law that the general contractor wrongfully terminated the subcontractor or that the subcontractor was entitled to compensation under the terms of the subcontracts. The general contractor’s sole argument was that the subcontracts clearly stated how damages for a wrongful default termination should be calculated, and that the arbitrators exceeded their authority by basing the award on an equitable determination of damages instead of on the express subcontract language.

The Court of Appeals rejected the general contractor’s arguments. The subcontracts stated that all disputes under the agreements would be arbitrated under the American Arbitration Association Construction Industry Arbitration Rules and Mediation Procedures and there was no language in the subcontracts expressly precluding the equitable remedy fashioned by the arbitration panel. Under AAA Rule R-48(a), arbitrators have the authority 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….”

The arbitration award was within the arbitrators’ authority under the AAA rules which were incorporated into the arbitration provisions in the subcontracts. The Court of Appeals noted that the arbitrators did not award any damages for the categories specifically excluded by the subcontracts (lost profits, exemplary damages, etc.). Instead, the arbitration award was narrowly tailored to provide the general type of compensation to the subcontractor as contemplated by the subcontracts.

The Court of Appeals notably left open the possibility that the case could have turned out differently if the subcontracts had expressly prohibited arbitrators from fashioning an equitable remedy. This opinion may influence how parties structure potential damages in their contracts in the future; and gives the parties opportunity to limit or expand the scope of damages that may be awarded in arbitration.

brad eben connerBrad Eben is an associate with Conner Gwyn Schenck PLLC in its Raleigh, NC office. Brad’s practice focusses on litigation and arbitration of construction claims and disputes, drafting and negotiating construction contracts, and regulatory issues affecting the construction industry. Brad is fluent in Spanish.

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