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refusing to vacate an arbitration award finding an individual respondent jointly and severally liable "after a full factual hearing at which [that individual respondent] was represented and had the opportunity to present evidence"
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Civil Action No. 17592.
Date Submitted: April 28, 2000.
Date Decided: August 30, 2000.
Robert A. Penza and Peter M. Sweeney, Esquires, of GORDON, FOURNARIS MAMMARELLA, P.A., Wilmington, Delaware; Attorneys for Claimant
William J. Wade, Esquire, of RICHARDS, LAYTON FINGER, Wilmington, Delaware; and Andrew J. Ostrowski, Esquire, of SERRATELLI, SCHIFFMAN, BROWN CALHOON, P.C.; Attorneys for Respondents Innovative Plastics Technologies, Inc., Edge Building Products, Inc., and Jeffrey E. Nesbitt
MEMORANDUM OPINION
Pending is a motion for summary judgment by the claimant, Custom Decorative Moldings, Inc., ("CDM" or "Claimant") in this action brought to confirm an arbitration award under 10 Del. (IL § 5713 of the Delaware Uniform Arbitration Act. That award was entered on October 19, 1999 in CDM's favor against the Respondents, Innovative Plastics Technology ("IPT"), Edge Building Products, Inc. ("Edge"), and Jeffrey E. Nesbitt ("Nesbitt"). The Respondents oppose the motion on several grounds. This is the Opinion of the Court on CDM's summary judgment motion which, for the following reasons, will be granted.
I. BACKGROUND
What follows are the undisputed facts that are material to the controversy presented.
CDM is a Delaware corporation that manufactures decorative molding and trim for use in houses and other buildings. CDM manufactures this molding and trim by pouring molten plastic type material into molds that can be re-used once the material has cooled. CDM was interested in increasing its production volume by acquiring a different technology — the so-called "extrusion technology" — that would allow continuous production of the plastic molding without having to wait for the molds to cool.
IPT, a Pennsylvania corporation, marketed to CDM its ability to supply the extrusion technology CDM was seeking. After discussions in April and May, 1997, CDM, IPT and related persons entered into two contracts. The first contract (the "Tooling Agreement") was submitted as a proposal on April 16, 1997, that was accepted on May 14, 1997. The Tooling Agreement contemplated a process for fabricating an extrusion used to produce inward foamed brick molding (the "Tooling"). The foamed brick molding ("the Product") is a type of decorative molding having a profile and dimensions (as defined in the Tooling Agreement) that can be used to trim doors and windows. The Tooling was a critical piece of the equipment needed to manufacture the Product, and under the Tooling Agreement CDM would purchase the Tooling from IPT.
On or about the same date, Respondents IPT, Edge, Nesbitt, Terry Heller and Robert King also entered into a License and Independent Contractor Agreement with CDM (the "Technology Agreement"), that was made effective on or about May 15, 1997. Under the Technology Agreement, the Respondents agreed to provide CDM with all necessary proprietary technical information to enable CDM to produce the Product for sale as part of its business operations; to identify, locate, and assist CDM in purchasing the equipment needed to produce the Product using the technology; to oversee the installation of the extrusion equipment in CDM's facility; and to instruct and train CDM's personnel to operate that equipment.
Terry L. Heller and Robert L. King were parties to the Technology Agreement, as well as respondents in the arbitration. The Arbitrator ultimately denied CDM's claims against Heller and King on the merits. Accordingly, except where otherwise indicated, all references in this Opinion to the "Respondents" will be only to IPT, Edge, and Nesbitt.
Importantly, Paragraph 25 of the Technology Agreement (the "arbitration clause") was an arbitration clause which broadly provided that ". . .[A]ny and all disagreements or controversies arising with respect to this Agreement, whether before or after termination of this Agreement, shall be settled by binding arbitration to be held in Wilmington, Delaware, pursuant to the Commercial Arbitration Rules of the American Arbitration Association." In their Brief, the Respondents emphasize that the Technology Agreement contained an arbitration clause, but that the Tooling Agreement did not. Why Respondents make this point is unclear, since they do not contend that the claimed breaches of the Tooling Agreement (as distinguished from the Technology Agreement) were not arbitrable. Thus, the Respondents implicitly concede that the claimed breaches of the Tooling Agreement were sufficiently related to the claimed breaches of the Technology Agreement so as to render all of CDM's claims arbitrable under the arbitration clause.
Over the next year, disputes arose among the parties. The matter came to a head on June 26, 1998, when CDM submitted a Demand for Arbitration, copies of which were delivered to IPT, Edge, Nesbitt, Heller, and King. On or about November 17, 1998, Thomas R. Trowbridge, III, Esquire, of the New York City office of Baker Botts, L.L.P., filed an Answering Statement before the Arbitrator on behalf of all the Respondents.
Mr. Trowbridge had actually appeared in the arbitration proceeding several months earlier. In a September 21, 1998 letter from the American Arbitration Association ("AAA") Case Administrator to Mr. Trowbridge and Claimant's counsel, the Case Administrator confirmed that in an administrative conference call, the parties had agreed to waive the contractual requirement of three arbitrators and instead proceed to select one arbitrator under the AAA's Commercial Arbitration Procedures.
The arbitration hearing originally scheduled to take place on February 2-4, 1999 never occurred, because the parties agreed to submit the matter to AAA mediation, which resulted in an agreement in principle to settle the case. A definitive settlement agreement was drafted and the Claimant's counsel was told that it was acceptable to Respondents, but the Claimant never succeeded in obtaining an executed settlement agreement. Accordingly, the Claimant requested that the arbitration hearing be rescheduled. The rescheduled hearing did not take place, however, because the Respondents obtained new counsel, Andrew J. Ostrowski, Esquire, who was granted a continuance. As a result, the rescheduled arbitration hearing was held on August 19-20, 1999.
A full stenographic record was made of the arbitration hearing. As a preliminary matter, the Respondents submitted the issue of whether Edge and King were proper parties to the arbitration. The Arbitrator heard full argument on that question, and ruled that Edge and King were proper parties. The hearing then proceeded. In connection with that hearing, each side submitted Pre-Hearing Arbitration Statements and Post-Hearing Memoranda. Ultimately the Arbitrator found (i) in favor of King and Heller on all claims asserted against them, and (ii) against Edge and the other Respondents, and in favor of CDM, on all claims asserted against those Respondents.
Another issue submitted and argued by the Respondents was whether Mr. Trowbridge, the Respondents' previous counsel, had represented Edge and Mr. King before Mr. Ostrowski's entry into the case. The record shows that Mr. Trowbridge had informed the AAA, and the AAA confirmed, that Mr. Trowbridge was representing all Respondents. Neither Edge nor Mr. King ever protested Mr. King's representation of them during the arbitration process, and the Arbitrator declined to dismiss Edge or King on that ground.
On October 19, 1999, the Arbitrator issued the Finding and Award of Arbitrator (the "Award"), ruling in favor of CDM and against IPT, Edge, and Nesbitt, and determining that those Respondents were liable to CDM in the amount of $601,905.20, which included administrative fees, the Arbitrator's expenses, and all of CDM's out-of-pocket expenses except attorneys' fees.
On November 17, 1999, CDM filed this action to confirm the Arbitrator's Award and to have it entered as an Order of Judgment.
II. APPLICABLE LEGAL PRINCIPLES AND THE PARTIES' CONTENTIONS
This Court has held that summary judgment is an "appropriate judicial mechanism for reviewing an arbitration award, because the complete record is before the court and no de novo hearing is permitted to determine whether one of the five statutory exceptions [to vacate an award] is applicable." Under Court of Chancery Rule 56, the Court may award summary judgment if, based upon the undisputed material facts, the moving party is entitled to judgment as a matter of law. Because neither side contends that this motion presents any disputed material facts, a summary judgment disposition is appropriate.
E.I. duPont de Nemours and Co. v. Custom Blending International. Inc., Del. Ch., C.A. No. 16295-NC, Strine, V.C. (Nov. 24, 1998).
Our statutory scheme for confirming an arbitration award is straightforward. Section 5713 of the Delaware Uniform Arbitration Act requires the Court to confirm an award unless, within specified time limits, grounds are urged for vacating or modifying or correcting the award. The grounds for vacating, and for modifying or correcting, an arbitration award are narrowly circumscribed. Section 5714 (a) recognizes only five grounds for vacating an arbitration award, specifically where:
10 Del. C. § 5713.
(1) The award was procured by corruption, fraud, or other undue means;
(2) There was evident partiality by an arbitrator appointed as a neutral except where the award was by confession, or corruption in any of the arbitrators or misconduct prejudicing the rights of any party;
(3) The arbitrators exceeded their powers, or so imperfectly executed them that a final and definite award upon the subject matter submitted was not made;
(4) The arbitrators refused to postpone the hearing upon sufficient cause being shown therefor, or refused to hear evidence material to the controversy, or otherwise so conducted the hearing, contrary to the provisions of § 5706, or failed to follow the procedures set forth in this chapter, so as to prejudice substantially the rights of a party, unless the party applying to to vacate the award continued with the arbitration with notice of the defect and without objection; or
(5) There was no valid arbitration agreement, or the agreement to arbitrate had not been
been complied with, or the arbitrated claim was barred by limitation under § 5702(c), and the issue was not adversely determined in proceedings under § 5703 and the party applying to vacate the award did not participate in the arbitration hearing without raising the objection;
But the fact that the relief was such that it could not or would not be granted by a court of law or equity is not ground for vacating or refusing to confirm the award.
Moreover, Section 57l5 recognizes only three circumstances that empower this Court to modify or correct an arbitration award, namely, where:
(1) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award;
(2) The arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted; or
(3) The award is imperfect in a matter of form, not affecting the merits of the controversy.
Thus, "the scope of review of an arbitration award is . . . very limited and a reviewing court is prohibited from considering the merits of the dispute submitted to the arbitrator."
Falcon Steel Co., Inc. v. HCR Contractors, Inc., Del. Ch., C.A. No. 11557, Hartnett, V.C. (Apr. 4, 1991) (citing 10 Del. C. § 5701).
In this case the Respondents do not ask that the Award be modified or corrected. Rather, they advance five reasons why the Award should be vacated. The first is that Edge should have never been made a party to the arbitration proceeding, and that therefore no arbitration award could validly be entered against it, because no one having the authority to bind Edge executed the Technology Agreement.
The Respondents also argue that CDM had notice of the limitations of the agent's authority to act on behalf of Edge, and that Edge was not represented during the proceedings.
Respondents' second and third grounds for vacating the Award are that the Arbitrator "clearly disregarded governing law" in two separate respects, namely: (1) by finding that the Claimant established a breach of the Tooling Agreement even though the Claimant's own expert had found the Tooling to be sufficient to perform the expected tasks; and (2) by permitting the Claimant to recover, despite material breaches of contract by CDM that (the Respondents say) relieved them from any further obligation to perform.
The Respondents' fourth and fifth grounds for vacating the Award are that the Arbitrator "exceeded his authority" by (i) awarding damages in an amount greater than the recovery permitted by law and by the contract; and also by (ii) finding one individual Respondent (Mr. Nesbitt) jointly and/or severally liable.
The Claimant responds that none of these grounds is sufficient, legally or factually to vacate the Award. For the reasons next discussed, I agree.
III. ANALYSIS
A. Whether Edge Validly Agreed to Arbitrate
The essence of the Respondents' first ground for vacating the Award is that Edge was not a proper respondent in the arbitration, because (i) Edge was neither a party to, nor otherwise bound by, either of the Agreements; (ii) no agent had authority to bind Edge contractually; and (iii) Edge was not represented throughout the proceeding. Although the Respondents do not explicitly relate this argument to any of the five statutory grounds for vacating the Award, it would appear that the ground upon which they rely is that there was "no valid arbitration agreement" to which Edge was properly subject under Section 5714(a)(5).
The argument that Edge was not represented throughout the proceeding is without factual basis and is flatly belied by the record. Mr. Trowbridge sent a letter to the AAA Case Administrator on August 6, 1998, advising that his firm had been retained to represent all the Respondents in the arbitration. The Case Administrator confirmed Mr. Trowbridge's representation of all the named Respondents by letter dated September 14, 1998. On November 17, 1998, Mr. Trowbridge filed an Answering Statement which advised that "Respondents will be represented in these proceedings by its attorneys, Baker Botts, L.L.P."
The Respondents' other argument — that no person with authority signed the Technology Agreement on behalf of Edge — was an issue that was litigated before the Arbitrator, who ruled against the Respondents. On this motion, the Respondents contend that there was no evidence to support the Arbitrator's implicit finding that the signature executed on behalf of Edge was authorized.
In an award-confirmation proceeding in this Court, an arbitrator's factual determination must be upheld if it can in some rational manner be derived from the evidence submitted to him. The Arbitrator's determination that Edge was a party (and thus properly subject) to the Technology Agreement, and therefore was also a proper party to the arbitration, clearly satisfies that standard. Edge was a named party — and a signatory — to that Agreement. The persons who signed on behalf of Edge were Robert L. King, as President, and Terry L. Heller as Secretary. Messrs. Heller and Nesbitt witnessed the signatures. Not until the eve of the arbitration hearing was the Claimant ever told that Mr. King was taking the position that he had never executed the Technology Agreement on behalf of himself or Edge.
Audio Jam. Inc. v. Fazelli, Del. Ch., C.A. No. 14368, Chandler, V.C.. Ltr. Op. at 2 (Mar. 20, 1997 ("An arbitrator's decision will be upheld if it can in some rational manner be derived from the evidence submitted to him.").
The only evidence adduced at the arbitration hearing supportive of Mr. King's contention, was his own self-serving testimony. The Arbitrator was free to reject that testimony on credibility grounds, and had ample basis in the record to do so. At the hearing, Mr. King testified that he saw a draft of the Technology Agreement before it was executed, and that that draft Agreement listed Edge and King as parties to the Agreement and subject to its obligations. Mr. King also testified that after he received the executed Technology Agreement, he sent it to his counsel, and for almost one year thereafter he never told anyone that neither he nor Edge had validly executed that Agreement. The Arbitrator was free to find totally implausible the scenario that Mr. King knew his signature had been forged on a legally binding document, yet for almost one year never made any protest to anyone.
The Arbitrator's determination that Edge was a party to the Agreement, and, thus, a proper party to the arbitration proceeding, was clearly derived ". . . in [a] . . . rational manner from the evidence submitted to him."
Id.
B. Whether The Arbitrator Clearly Disregarded The Governing Law
The Respondents next contend that the Award should not be confirmed because the Arbitrator "clearly disregarded governing law." The Respondents make no effort to link their "disregarded governing law" standard to any of the five grounds for vacation authorized by the statute. That linkage became clear only after the Claimant brought to the Court's attention Wier v. Manerchia, where former Chancellor Allen held that if arbitrators act in "manifest disregard of the law," that is tantamount to exceeding their authority under Section 5714(a)
Del. Ch., C.A. No. 14836. Allen C., Mem. Op. at 2 (Jan. 28, 1997).
(3):
. . . An award may be vacated under Section 5714(a) (3) only upon a showing by strong and convincing evidence that the arbitrators clearly exceeded their authority. . . . If any grounds for the award can be inferred from the facts on the record, the Court must presume that the arbitrators did not exceed their authority and the award must be upheld. . . .
* * * . . . In an extreme case, where the record reveals no support whatsoever for the determination made by the arbitration panel, the award must be vacated. . . . An award must be vacated as well if the arbitrators, in "manifest disregard" of the law, were clearly aware of the controlling law but clearly chose to ignore it in reaching their decision. . . . Only such serious violations of authority by an arbitration panel permit this Court to vacate an award under Section 5714(a)(3)'s narrow exception. . . .
Id. at 2, 4.
Be that as it may, the Respondents have failed to demonstrate that the Arbitrator manifestly either disregarded the controlling law or otherwise exceeded his authority in any respect.
1. The Objected-To Ruling That Respondents Breached The Tooling Agreement
The Respondents first contend that in finding that CDM had established a breach of the Tooling Agreement, the Arbitrator chose to ignore principles of controlling law. According to Respondents, those principles, found in the Delaware Uniform Commercial Code ("UCC"), are that (i) the burden is on the buyer of goods to establish any breach with respect to the goods accepted, (ii) an acceptance of the goods occurs when the buyer's acts are inconsistent with the ownership of the seller, and (iii) that when a buyer claims a breach for accepted goods, it must give notice of the breach. Here, Respondents urge, proof of a breach of the Tooling Agreement would have required evidence of an identifiable defect in the Tooling that rendered it nonconforming to the terms of that Agreement. But (the Respondents contend) the only two witnesses that the Claimant called to testify on the issues of breach were CDM's President and a CDM employee, both of whom disclaimed any knowledge of the extrusion process, and neither of whom testified inconsistently with the Claimant's expert's opinion that the Product was conforming. Hence (Respondents conclude) the Arbitrator's finding of a contractual breach must have been in manifest disregard of the controlling law.
6 Del. C. § 2-606, 2-607.
These arguments, though couched as legal, are in reality a hodge-podge of factual contentions that were presented to — and considered and rejected by — the Arbitrator. The record before the Arbitrator contained evidence from which the Arbitrator could rationally conclude that the Respondents had breached the Tooling Agreement, and (to the extent applicable) the express and implied warranty provisions of the UCC.
Although Mr. Nesbitt had promised delivery of the Tooling by June 23. 1997, only a part of the Tooling was delivered on that date. That part of the Tooling was then returned to the Respondent's facility. The Tooling Agreement required a delivery date eight weeks from the date of its acceptance, which would have been July 9, 1997, but the Tooling was not delivered until late August 1997, and even then, according to the testimony, it still did not work. The Tooling Agreement also provided that the Tooling was to be attached to the equipment and was to be capable of making salable Product at the rate and specific gravity specified by that Agreement. The arbitration record, however, contains evidence that the Tooling never created a salable product that conformed to the specifications in the Tooling Agreement.
On page 14 of their Answering Brief, the Respondents argue that an employee of CDM testified that the Tooling did produce Product in conformity with the contract specifications and used the Product in the field without one reported failure. That argument ignores other testimony from the same witness, that CDM was never able to run product at .53 specific gravity, that holes in the Product caused problems in the field, and that the field personnel would have to cut a triangle off the Product in order to make the mitered ends fit together properly.
The Respondents next argue that the arbitration record established, as incontrovertible fact, that the Claimant had accepted the nonconforming Tooling. The record shows otherwise. The Claimant and the Respondents orally agreed to permit the Claimant to take the Tooling to its facility where the Respondents would complete their work. The second installment payment due under the Tooling Agreement was conditioned upon the Claimant's approval of the rate, quality, and fitness for use of the Tooling before shipment. It was the Respondents' obligation to make the Tooling conform to the contract specifications at the Claimant's facility, but that never occurred, for which reason the second installment payment was never made.
Finally, the arbitration record refutes the Respondents' claim that the Claimant failed to prove contractual breaches under the express and implied warranty provisions of the UCC. The Tooling Agreement contained an express warranty that "[s]ystem rate is guaranteed at 10 feet/min using our compound. Finished density is to be 0.55 or below with an integral and weatherable skin." Evidence was presented that the Tooling was not capable of producing the Product at those specifications. The Arbitrator could also have concluded from that evidence that IPT had breached the implied warranty of merchantability under 6 Del. § 2-314(2)(d), which provides that "Goods to be merchantable must be at least such as. . . . run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved. . . ." The variations allowed under the Tooling Agreement were for a rate equal to or greater than 10 feet per minute and with a specific gravity equal to or lower than 0.55. The Product produced by the Tooling did not meet those requirements.
See 6 Del. C. § 2-313 through 2-315.
In sum, the Respondents have failed to establish that the Arbitrator disregarded the controlling law in finding that the Claimant had established breaches of the Tooling Agreement.
2. The Objection To Claimant's Recovery Despite Alleged Material Breaches That Relieved Respondents of Any Further Contractual Duty to Perform
The Respondents next contend that the Arbitrator disregarded governing law by permitting CDM to recover, even though CDM had committed a material contractual breach that relieved the Respondents of any further duty to perform. The "material breach" referred to in this argument (which occupies two paragraphs in the Respondents' Answering Brief), is the assertion that CDM did not tender payment as the UCC required.
To this argument there are two short answers. The first is that nowhere do Respondents identify what "governing principle of law" the Arbitrator supposedly disregarded. The second is that this argument is factual, not legal. The record before the Arbitrator contained evidence from which he could (and presumably did) rationally conclude that CDM's obligation to make further payments was conditioned upon the respondents delivering Tooling capable of producing conforming Product. Based upon these presumed findings, the Arbitrator did not "clearly disregard" governing law at all. On the contrary, he would have applied the governing law, but to facts different from those advocated by the Respondents. That the Arbitrator reached a result by this process that was adverse to the Respondents, hardly establishes that he "clearly disregarded" the governing law.
C. Whether The Arbitrator Exceeded His Authority
Finally, the Respondents objects to confirmation of the Award on the ground that the Arbitrator "clearly exceeded his authority" by (i) awarding damages that were greater than the recovery permitted by law or by the Tooling Agreement, and (ii) finding one individual Respondent (Mr. Nesbitt) jointly and severally liable. Neither objection has merit.
The objection that the Award exceeded the amount recoverable at law runs as follows: no damages could be awarded for breaches of the Tooling Agreement because there were no facts from which the Arbitrator could have found a breach of that contract. Therefore, any damages award could only have been based upon a breach of the Technology Agreement, which contains self-executing payment provisions that limit the amount of any damages award. Because the Award exceeded those limitations, the Arbitrator clearly exceeded his authority.
The fallacy in this argument lies in its incorrect premise. I have previously determined that the arbitration record contains evidence from which the Arbitrator properly could have found one or more breaches of the Tooling Agreement. That record also contains evidence from which the Arbitrator could have found breaches of the Technology Agreement. At bottom this contention, like the others being advanced here, are attempts by the Respondents to reargue factual findings made by the Arbitrator under the guise of statutory objections to confirmation of the Award.
For example, the respondents argue that the Arbitrator in essence gave the Claimant a free income-producing asset (the equipment) by not requiring the Claimant to mitigate its damages. The Claimant did mitigate its damages, however, by subtracting from its damages claim the residual value of the purchased equipment, as well as the value of the raw and finished materials. Those elements of mitigation were factored into the claimant's expert's report.
Lastly, the Respondents object, in a one paragraph argument, that the Arbitrator exceeded his authority by holding Mr. Nesbitt jointly and severally liable with the other Respondents. The Arbitrator found against Mr. Nesbitt after a full factual hearing at which Nesbitt was represented and had the opportunity to present evidence. The Respondents do not demonstrate, with citations to the arbitration record or to legal authority or by reasoned argument, how precisely the Arbitrator exceeded his authority in that regard. In apparent recognition of theipse dixit nature of this argument, the Respondents conclude their Brief by conceding that ". . . this issue, standing alone, may not rise to the level of error to vacate the award," but should be considered in combination with the other "numerous egregious errors" made by the Arbitrator.
But the respondents have not demonstrated "numerous egregious errors." Indeed, they have not demonstrated any "errors" that would justify this Court refusing to confirm the Award.
IV. CONCLUSION
For the foregoing reasons, the claimant's motion for summary judgment is granted. IT IS SO ORDERED. Counsel shall confer and submit such further order as may be required to implement the rulings in this Opinion. ________________ Vice Chancellor