Case Name: Greg VOLD d/b/a States Border Turf, Plaintiff and Appellant, v. BROIN & ASSOCIATES, INC., a South Dakota Corporation, Defendant and Appellee
Court: South Dakota Supreme Court
Jurisdiction: South Dakota
Decision Date: 2005-06-22
Citations: 699 N.W.2d 482
Docket Number: No. 23464
Parties: Greg VOLD d/b/a States Border Turf, Plaintiff and Appellant, v. BROIN & ASSOCIATES, INC., a South Dakota Corporation, Defendant and Appellee.
Judges: [V 25.] GILBERTSON, Chief Justice, and MEIERHENRY, Justice, and MILLER, Retired Justice, concur.
Reporter: North Western Reporter 2d
Volume: 699
Pages: 482–493

Head Matter:
2005 SD 80
Greg VOLD d/b/a States Border Turf, Plaintiff and Appellant, v. BROIN & ASSOCIATES, INC., a South Dakota Corporation, Defendant and Appellee.
No. 23464.
Supreme Court of South Dakota.
Considered on Briefs April 25, 2005.
Decided June 22, 2005.
Rehearing Denied July 21, 2005.
Ronald G. Schmidt of Schmidt, Schroyer, Moreno & Lee, Rapid City, South Dakota, Attorneys for plaintiff and appellant.
Tim R. Shattuck, Daniel J. Harmelink of Woods, Fuller, Shultz & Smith, Sioux Falls, South Dakota, Attorneys for defendant and appellee.

Opinion:
KONENKAMP, Justice.
[¶ 1.] In this appeal, we review a circuit court's decision to vacate an arbitration award. Because the arbitrator failed to follow his own order to issue a "reasoned award," we affirm.
Background
[¶ 2.] Broin & Associates is a South Dakota corporation engaged in the business of designing and constructing ethanol production facilities. On November 2, 2000, Broin contracted to design and build a production plant known as Northern Lights Ethanol, L.L.C. Broin served as the general contractor for the project.
[IT 3.1 In April 2001, Broin signed a contract with Gregory Void, a Minnesota resident, who would perform the site and grading work. From the beginning, there were difficulties. By December 2002, Void had not completed much of the required work. ' As a result, on December 19, 2002, Broin' terminated Void's contract for cause.
[¶4.] In November 2003, Void filed a demand for arbitration, seeking payment for unapproved change orders, alleged work stoppages, and other claims. Under their contract, "[a]ll claims, disputes, and other matters in question between Design/Builder and Contractor arising out of or relating to the Construction Agreement Documents or the breach thereof . will be decided by binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association [AAA]." Broin filed an answering statement with the AAA, denying liability on Void's claims and seeking reimbursement for the costs and expenses sustained in connection with the remaining grading work on the construction project. Void had thirteen claims, totaling more than $800,000. Broin had eleven claims, totaling approximately $500,000.
[¶ 5.] Norman Fast was selected to be the arbitrator. He conducted a telephonic preliminary hearing with the parties and their attorneys on February 2, 2004. The purpose of the hearing was to provide the arbitrator with guidance on the parameters of the arbitration proceeding. During the hearing, it was agreed that each side would submit a specification of claims to the AAA outlining their respective demands. It was also agreed that the arbitration would be held in Watertown, South Dakota, starting on June 21, 2004. As the hearing progressed, Tim R. Shattuck, one of the attorneys for Broin, requested that the arbitrator issue a "reasoned award." According to another of Broin's attorneys, Daniel R. Harmelink, the attorney for Void, Ron Schmidt, consented to the award being in the form of a "reasoned award." Attorney Ron Schmidt, however, denies that he agreed to a reasoned award. There was no verbatim record kept of the hearing.
[¶ 6.] After the preliminary hearing, the arbitrator prepared and signed a report and scheduling order indicating that the form of the award was to be a "reasoned award." This order was then submitted to the AAA by the arbitrator. On February 10, 2004, the case manager from the AAA sent a letter to all parties setting out the terms of the arbitrator's preliminary hearing report and scheduling order. The letter stated that "[t]he form of Award to be issued in the above matter will be a reasoned award" and that "[t]his order shall continue in effect unless and until amended by subsequent order by the arbitrator."
[¶ 7.] The arbitration hearing began on June 21 and ended on June 24, 2004. Twelve witnesses testified. On July 13, 2004, the arbitrator issued his decision awarding $267,298 in damages to Void and denying Broin's counterclaims. The arbitrator's award consisted of two pages. It itemized the various dollar amounts allowed for each of Void's claims, but gave no reason for each award and no reason for rejecting Broin's claims. The award did not mention any of the relevant contract provisions at issue, cite any law, or discuss any of the evidence admitted during the four day hearing.
[¶ 8.] Following the arbitrator's decision, Broin sought to vacate the award in circuit court. The court heard the matter on September 8, 2004, and thereafter issued its Findings of Fact and Conclusions of Law and Order Granting Motion to Vacate Arbitration Award and Denying Motion to Confirm Award. Several times in its "findings" the court noted, contrary to attorney Ron Schmidt's assertion in his affidavit, that both Broin and Void had agreed to a reasoned award during the telephonic preliminary hearing with the arbitrator on February 2, 2004. It is unclear how the court reached this factual, and perhaps, credibility, determination, since it appears that it heard no testimony during the hearing. Nonetheless, the court went on to conclude that "the parties had agreed to the issuance of a reasoned award" and "the arbitrator had exceeded the authority granted him by Broin and Void by failing to issue a reasoned award." Accordingly, the court ruled that federal law required the award to be vacated.
[¶ 9.] Void raises the following appeal issues: First: "Whether the trial court erred by substituting its judgment for that of the arbitrator on a strictly procedural issue, especially in light of the parties' contractual Rule 54 granting the arbitrator sole authority to interpret and apply the arbitration rules insofar as they govern his powers and duties?" Second: "Whether Broin's failure to pursue [his] remedy under contractual Rule 47(1) authorizing an aggrieved party, within 20 days of the award, (while the information is still fresh in the arbitrator's mind) to request the arbitrator to modify any alleged procedural, technical error (such as lack of reasoning) in the award: (1) was a condition precedent, and barred Broin's seeking judicial relief to cure such alleged defect, or, alternatively, (2) a waiver of a known right and/or an equitable estoppel barring him from seeking judicial relief?"
Analysis and Decision
[¶ 10.] In examining a circuit court's order vacating an arbitration award, we review the court's findings of fact under the clearly erroneous standard, but decide questions of law de novo. Boise Cascade Corp. v. Paper Allied-Indus., Chem. & Energy Workers (PACE), Local 7-0159, 309 F.3d 1075, 1080 (8th Cir.2002) (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-48, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985 (1995)). "However, we must accord 'an extraordinary level of deference' to the underlying award itself." Id. (quoting Keebler Co. v. Milk Drivers & Dairy Employees Union, Local No. 471, 80 F.3d 284, 287 (8th Cir. 1996)). "Indeed, we must confirm the award even if we are convinced that the arbitrator committed serious error, so 'long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.' " Id. (extracting from Bureau of Engraving, Inc. v. Graphic Communication Int'l Union, Local 1B, 284 F.3d 821, 824 (8th Cir. 2002)). See also Stroh Container Co. v. Delphi Indus., Inc., 783 F.2d 743, 748-49 (8thCir.1986).
[¶ 11.] Arbitrators possess broad, but not unlimited, authority. Missouri River Servs., Inc. v. Omaha Tribe of Nebraska, 267 F.3d 848, 855 (8th Cir.2001) (following Trailmobile Trailer, LLC v. Int'l Union of Electronic, Electrical, Salaried, Mach. & Furniture Workers, AFL-CIO, 223 F.3d 744, 747 (8th Cir.2000)). Grounds for vacating an arbitration award are provided in the Federal Arbitration Act (FAA). 9 U.S.C. § 10 (2002). Section 10 of the FAA lists several bases for vacating an arbitration award. In addition, circuit courts may also vacate arbitration awards that are "completely irrational" or that "evidence a manifest disregard for the law." Hoffman v. Cargill Inc., 236 F.3d 458, 461 (8th Cir.2001) (alteration and citation omitted).
[¶ 12.] The arbitrator, Void contends, was vested with discretion in how he handed down the final decision and award: the "arbitrator determined that he had no duty under the AAA Construction Industry Arbitration Rules to render a 'reasoned' award." Because the "parties did not request any reasoned award, in writing, prior to the appointment of the arbitrator," Void argues that the arbitrator's decision to declare an award without a reasoned explanation was within his right. And, even if the agreement was changed to require a "reasoned award," Void contends that the matter was one of procedure, rather than substance, precluding the circuit court from substituting its judgment for that of the arbitrator. As such, Void argues that the circuit court's sole basis for vacating the arbitration award was procedural in nature, therefore constituting reversible error. .
[¶ 13.] In addressing Void's arguments, we first turn to the Construction Industry Arbitration Rules provided by the AAA. Rule R-l(a) states:
The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the [AAA] under its Construction Industry Arbitration Rules. These rules and any amendment of them shall apply in the form in effect at the time the administrative requirements are met for a demand for arbitration or submission agreement received by the AAA. The parties, by written agreement, may vary the procedures set forth in these rules. After appointment of the arbitrator, such modifications may be made only with the consent of the arbitrator.
(Emphasis added.) In accord with R-21(b), "the parties and the arbitrator," during the preliminary hearing, "should discuss the future conduct of the case, including clarification of the issues and claims, a schedule for the hearings and any other preliminary matters."
[¶ 14.] It is undisputed that no request for a reasoned award was made in writing prior to the arbitrator's appointment. At the preliminary hearing held on February 2, 2004, a request was made for a reasoned award by Broin's counsel. Void's attorney denies that he consented to a reasoned award. After the preliminary hearing, nonetheless, the arbitrator prepared and signed a report and scheduling order, indicating that the form of the award was to be a "reasoned award." Void contends that the parties did not agree to amend the form of the award. He also argues that the arbitrator's notation on the preliminary hearing report and scheduling order was merely suggestive, and thus the arbitrator was under no duty to issue a "reasoned award."
[¶ 15.] The preliminary hearing order, however, was then submitted to the AAA by the arbitrator. On February 10, 2004, the AAA case manager sent a letter to all parties, which reflected the terms of the arbitrator's preliminary hearing report and scheduling order. The letter indicated that "[t]he form of Award to be issued in the above matter will be a reasoned award," and that "[t]his order shall continue in effect unless and until amended by subsequent order by the arbitrator." No amendment was ever made or requested. Accordingly, the requirement of a reasoned award was apparently consented to by the arbitrator and confirmed and memorialized -in writing under the terms of the preliminary hearing report and scheduling order and the letter issued by the AAA.
[¶ 16.] We now turn our analysis to the Federal Arbitration Act. "The Federal Arbitration Act (FAA) preempts state law and governs all written arbitration agreements in contracts involving interstate commerce." Dinsmore v. Piper Jaffray, Inc., 1999 SD 56, ¶ 10, 593 N.W.2d 41, 43; Dakota Wesleyan Univ. v. HPG Int'l, Inc., 1997 SD 30, ¶ 6, 560 N.W.2d 921, 922 (citing Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 271-72, 115 S.Ct. 834, 838, 130 L.Ed.2d 753 (1995)); see 9 U.S.C. § 2 (1947). The FAA's expansive reach coincides with that of the Commerce Clause. Allied-Bruce Terminix, 513 U.S. at 274, 115 S.Ct. at 840. See, e.g., Perry v. Thomas, 482 U.S. 483, 490, 107 S.Ct. 2520, 2526, 96 L.Ed.2d 426 (1987). Therefore, when a dispute falls within the scope of the FAA, a contract that includes an arbitration clause is governed by federal law. Allied-Bruce Terminix, 513 U.S. at 281, 115 S.Ct. at 843; see 9 U.S.C. § 3 (1947). Here, because the contract and construction dispute involves residents from South Dakota and Minnesota, thereby implicating interstate commerce, we review the matter under controlling federal law.
[¶ 17.] Section 10 of the FAA sets forth the following four grounds for vacating an arbitration award. First, "the award was procured by corruption, fraud, or undue means.... " 9 U.S.C. § 10(a)(1). Second, "there was evident partiality or corruption in the arbitrators, or either of them.... " Id. at (a)(2). Third, "the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced. ." Id. at (a)(3). Fourth, "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." Id. at (a)(4).
[¶ 18.] The circuit court ruled that the "FAA requires a court to vacate an arbitration award in which 'the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.' " See 9 U.S.C. § 10(a)(4). The court concluded that "[w]here parties to an arbitration have agreed and directed the arbitrator to issue a reasoned award, the arbitrator is obligated to conform to the parties' directive and issue a reasoned award." Thus, the "arbitrator's failure to issue a reasoned award when directed by the parties to do so [was] an act in excess of the arbitrator's power.... " The circuit court must have deduced that the parties agreed to a reasoned award because the arbitrator provided for one in his order. But attorney Ron Schmidt denied that he agreed to such an award on behalf of his client.
[¶ 19.] In the absence of any credibility determination, we must label as spurious the circuit court's finding that the parties "agreed" to a reasoned award. Nonetheless, we conclude that the arbitrator violated the rule he consented to follow. Under the American Arbitration Association's Construction Industry Arbitration Rules, arbitrators are under no obligation to set out the reasons for their awards. The general rule is inapplicable, however, when a reasoned award is agreed to between the parties before selection of an arbitrator, or, after selection, when the arbitrator consents to give a reasoned award. AAA Rule R-43. We can deduce the following from the record: (1) before an arbitrator was selected, no binding agreement was made concerning the form of the award; (2) after the arbitrator was selected, at least one of the parties requested that the award be a "reasoned award" at the preliminary hearing; (3) after the preliminary hearing, the arbitrator indicated by order that the award would be reasoned; (4) the AAA issued a letter confirming that the award would be reasoned; (5) the requirement of issuing a reasoned award was therefore consented to by the arbitrator; and (6) the arbitrator failed to issue a reasoned award.
[¶ 20.] AAA Construction Industry Arbitration Rules provide:
R-43. Form of Award
(b) The arbitrator shall provide a concise, written breakdown of the award. If requested in writing by all parties prior to the appointment of the arbitrator, or if the arbitrator believes it is appropriate to do so, the arbitrator shall provide a written explanation of the award.
To emphasize the pertinent language, "[i]f requested in writing by all the parties prior to the appointment of the arbitrator, or if the arbitrator believes it is appropriate to do so, the arbitrator shall provide a written explanation of the award." R-43(b) (emphasis added.) The arbitrator must have determined that it was appropriate to give a reasoned award. This conclusion is unavoidable because his order states that the award will be "reasoned." And all we have to rely on is the arbitrator's order, there being no verbatim record of what actually was agreed upon at the preliminary hearing. Therefore, the question becomes whether the arbitrator exceeded his power by issuing an award inconsistent with his own order that he would render a reasoned award.
[¶ 21.] An arbitration award can be set aside when the arbitrator "exceeded [his] powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(a)(4). This award exceeded the arbitrator's powers because the arbitrator violated the rules he agreed to follow. See generally Gas Aggregation Serv., Inc. v. Howard Avista Energy, LLC, 319 F.3d 1060, 1068-69 (8th Cir.2003) (stating that an arbitration decision evinces a manifest disregard for the law when it identifies a substantive rule and then proceeds to ignore it). Our query does not end here, however. We must next determine whether his error was substantive or procedural. As stated above, the standard of review grants broad discretion to arbitrators. "This rule of deference is founded on the recognition that (1) procedural questions are often intertwined with the merits of the dispute and (2) the reservation of procedural issues for the courts provides an opportunity for serious delay and duplication of effort." Stroh Container Co., 783 F.2d at 748-49 (citing John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557, 84 S.Ct. 909, 918, 11 L.Ed.2d 898 (1964)). We must give greater deference to the arbitrator's decisions on procedural matters than those dealing with substantive questions. Id. at 749 (following United Steelworkers of Am., AFL-CIO-CLC v. Ideal Cement Co., Div. of Ideal Basic Indus., Inc., 762 F.2d 837, 841 (10th Cir.1985)). Accordingly, because the overarching policy in arbitration is to attain a quick resolution to a dispute, it is crucial to determine whether the arbitrator's error was procedural or substantive.
[¶ 22.] Procedural questions involve matters that are "tangential to the main body of the arbitrable dispute.... A mere procedural irregularity provides no basis upon which to conclude that the [arbitrator] acted beyond its authority." Sheet Metal Workers Intl. Assn. Local Union No. 420 v. Kinney Air Conditioning Co., 756 F.2d 742, 745 (9th Cir.1985) (citations omitted). "Procedural law" is defined as: "[t]he rules that prescribe the steps for having a right or duty judicially enforced, as opposed to the law that defines the specific rights or duties themselves." Black's Law Dictionaey 1221 (7th ed 1999).
[¶ 23.] "Substantive law" "creates, defines, and regulates the rights, duties, and powers of the parties." Id. at 1443. Void contends that the "arbitrator determined that he had no duty under the AAA Construction Industry Arbitration Rules to render a 'reasoned' award." Are we to conclude, then, that the arbitrator, after issuing his written order, simply had the power to change his mind without notice or explanation? Once the arbitrator ordered that the award he would issue would be reasoned, his powers were defined. The arbitrator's decision to issue a reasoned award bestowed a substantive right on Broin and, at the same time, imposed a substantive duty upon the arbitrator. True, the arbitrator could have amended his written order with a subsequent order at any time. But he never did. The day he handed down his unreasoned award, his order requiring a reasoned award still stood. The arbitrator's disregard of his own order constituted a substantive error under the FAA and the AAA rules he operated under. Thus the unreasoned decision constituted a lack of a mutual, final, and definite award. For the foregoing reasons, we affirm the circuit court's decision vacating the arbitration award.
[¶ 24.] Affirmed.
[V 25.] GILBERTSON, Chief Justice, and MEIERHENRY, Justice, and MILLER, Retired Justice, concur.
[¶ 26.] ZINTER, Justice, dissents.
[¶ 27.] MILLER, Retired Justice, sitting for SABERS, Justice, disqualified.
. We do not address this second issue because Void did not cite any authority to support his argument that the failure to request such a modification under Rule 47(1) deprives a party of the right to seek vacation of an award given in excess of the arbitrator's power. Both sides had the right and opportunity to request that the arbitrator correct technical errors in the award, though neither side did. SDCL 15-26A-60(6) and a long line of precedent requires that a party cite authority for positions argued on appeal. See Priebe v. Priebe, 1996 SD 136, 11 14, 556 N.W.2d 78, 81; Petersen v. Sioux Valley Hosp. Ass'n, 486 N.W.2d 516, 520 n. 2 (S.D. 1992); Fox v. Fox, 467 N.W.2d 762, 768 (S.D.1991); Nielsen v. McCabe, 442 N.W.2d 477, 480 (S.D.1989); Kanaly v. State ex rel. Janklow, 403 N.W.2d 33, 34 (S.D.1987); Kostel Funeral Home, Inc. v. Duke Tufty Co., 393 N.W.2d 449, 452 (S.D. 1986).