Sanctions for Frivolous Appeals

Dispute Resolution Journal, May-Jul 2006 by Seidman, David

CONSTRUCTION

The 11th Circuit held that sanctions in the form of attorney's fees could be awarded in vacatur or confirmation proceedings where attorneys seek to vacate an arbitration award for manifest disregard of the law but there is no evidence of such conduct.

B.L. Harbert International, a general contractor, entered into a subcontract with Hercules Steel. The subcontract provided that Harbert would issue a "progress schedule" to each subcontractor, pursuant to which all work must be completed. The subcontract stated that Hercules would be liable for failing to timely perform its tasks pursuant to the "project schedule." However, the quoted term was not defined in the subcontract. This became a problem when Harbert developed two schedules for completion of the project and Hercules only met the time frame in the schedule with a later date. Deeming Hercules's work untimely, Harbert withheld payments and demanded delay damages. Hercules responded by filing for arbitration. The parties' briefs and oral arguments in the arbitration provided the only evidence of their positions. After an initial award in favor of Hercules, issued without any explanation, the arbitrator explained himself pursuant to the parties' request for specificity. He also corrected a mathematical error in the award. The award concluded that the schedule with the later date governed so Hercules's performance was timely.

Harbert petitioned the court to vacate the award based on the doctrine of manifest disregard of the law. The court denied the petition because Harbert could not prove manifest disregard on the arbitrator's part. The arbitrator had reviewed evidence of both schedules, the conduct of the parties, and the subcontract.

The 11th Circuit affirmed. It characterized this as "a "typical" contract dispute in which the parties disagree about the meaning of contract terms. Thus, any possible error by the arbitrator could not be more than a misrepresentation, misstatement, or misapplication of the law. This was not enough to come within "shouting distance" of the manifest disregard doctrine.

Of greater importance, the 11th Circuit warned that frivolous appeals based on manifest disregard of the law could lead to sanctions. Frivolous appeals-as the court deemed this case to be-make arbitration last longer than litigation, which is what arbitration seeks to avoid. Making manifest disregard challenges without an "objectively reasonable belief that it will prevail unduly burdens the parties and the courts. The only possible deterrent is sanctions to significantly increase the cost of appealing. Further, the court all but encouraged parties who are forced to defend appeals like this to seek attorney fees as sanctions. All attorneys should heed this as both a warning and an opportunity.

B.L. Harbert International LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006).

-David Seidman