Opinion ID: 2980757
Heading Depth: 2
Heading Rank: 1

Heading: Burden to Escalate under Section 12

Text: Tiburon argues that the district court erred in ruling that the arbitrator had exceeded his powers by concluding that under Section 12 of the SIA, MCD had the responsibility to escalate and complete the DRP. Tiburon points out that the SIA was silent as to which party has the burden to escalate and complete the DRP. In addressing this argument, the district court applied reasoning found in the Michigan Supreme Court’s decision in Detroit Automobile Inter-Insurance Exchange v. Gavin: As Gavin points out, in agreeing to arbitration, the parties’ central focus is the benefit of the bargain they entered-the substantive terms of the agreement-not process. Where parties to a contract provide specifically for the use of arbitration to resolve significant disputes, “it is clear that the primary concern of the parties is the -12- No. 09-2214 enforcement of the terms of the agreement which they have made, securing to each of them the benefits to which they are entitled under the applicable law, including their own agreement.” Of secondary concern are the procedural mechanisms by which disputes will be resolved. “The process of dispute resolution and the procedural advantages of arbitration are the servants of the law governing the issues in dispute, not the reverse.” Muskegon Cent. Dispatch 911, 652 F. Supp. 2d at 867–68 (citations omitted). The district court found that the reasoning in Gavin applies “not only to the ultimate arbitration process, but also to the preliminary dispute resolution steps leading to the eventual arbitration.” Id. at 868. The district court found that under Gavin, “the DRP of Section 12 imposes mutual obligations that are the servant, not the master of the substantive contract obligations.” Id. (emphasis omitted). The district court explained that incorporating mutual obligations to carry out the escalation process makes practical sense: The purpose of an escalation process such as the DRP is to resolve as many disputes as possible on business terms, leaving only the most intractable and substantive problems for arbitration. Business solutions by their nature require both parties to engage and compromise. When one or both parties loses interest in or the ability to reach a business solution, the practical value of the DRP is exhausted-it is no longer a servant of the parties' mutual obligation to work for informal resolution. Id. at 868. The district court noted that it was Tiburon that initiated the arbitration, and thus “[i]t would be especially odd to penalize MCD for failing to exhaust informal means when Tiburon actually initiated the arbitration process.” Id. at 868–69. Tiburon argues that by engaging in this analysis, the district court was engaging in contract interpretation, which is a duty reserved for the arbitrator. Tiburon would be correct if the SIA was indeed silent as to which party has the responsibility to complete the escalation procedures. However, as the district court explained, the plain language of the contract expressly refers to both -13- No. 09-2214 parties: “[i]f the parties are unable to resolve the dispute in accordance with the escalation procedures set forth below, the parties may assert their rights under this Agreement.” Id. at 868. Any fair reading of the contract language makes it clear that the parties intended a mutual obligation to carry out the escalation process. See Morley v. Auto. Club of Mich., 581 N.W.2d 237, 240–41 (Mich. 1998) (quoting Maclean v. Fitzsimons, 45 N.W. 145, 146 (Mich. 1890) (explaining rule that “what is plainly implied from the language used in a written instrument is as much a part thereof as if it was expressed therein”)). By ignoring this language, the arbitrator exceeded his power. See Gavin, 331 N.W.2d at 430. Therefore, it was not error for the district court to vacate the award of the arbitrator. B. Section 13 as Exclusive Remedy for Breach of Contract The district court found that the arbitrator exceeded the scope of his authority by applying Section 13 as the exclusive procedure for a party seeking breach of contract damages. Muskegon Cent. Dispatch 911, 652 F. Supp. 2d at 869. As a result, the arbitrator never reached the merits of MCD’s breach of contract claim. See id. at 868. Tiburon argues that MCD did not argue before the arbitrator that its breach of contact claim should be decided independent of the issue of completion of the DRP. Tiburon argues that this constituted a waiver of the issue. However, in the brief MCD submitted during the damages phase of the arbitration proceedings, MCD stated: Given the lack of any discussion in the Opinion regarding any breach of the SIA by either party, MCD can only assume that the Arbitrator concluded that MCD waived its right to sue for breach of contract by falling short of successfully invoking the SIA’s termination for cause provision. MCD disagrees with this implied conclusion and further disagrees that terminated the SIA “without cause,” but is nevertheless proceeding to the hearing based on the belief that the Arbitrator's ruling has foreclosed MCD’s opportunity to prove its damages. -14- No. 09-2214 (R. 43, Ex. 1.) After reviewing the record, the district court found that the Arbitrator was presented with the issue of MCD’s breach of contract claim, but never reached the issue: In neither his opinion on liability nor his opinion on damages did the Arbitrator address the merits of MCD’s breach of contract claim. Indeed, the arbitrator never made any findings on whether Tiburon breached its own contractual obligations, as MCD claimed, and as Tiburon’s own project manager believed. Instead, the Arbitrator treated what he found as MCD’s failure to comply with the DRP, coupled with the termination provisions, as essentially a forfeiture of MCD’s right to assert breach. The Arbitrator’s decision resulted in MCD losing entirely and Tiburon winning entirely, without any finding on whether Tiburon was in material breach of substantive obligations. Muskegon Cent. Dispatch 911, 652 F. Supp. 2d at 866–67. The district court correctly concluded that the Arbitrator’s decision resulted in a forfeiture of MCD’s breach of contract claim. This result is contrary to Michigan law, which provides that “where one party to a contract commits a material breach, the nonbreaching party is entitled to terminate the contract.” Convergent Grp. Corp. v. Cnty. of Kent, 266 F. Supp. 2d 647, 657–58 (W.D. Mich. 2003) (citing Lynder v. S.S. Kresge Co., 45 N.W.2d 319, 325 (Mich. 1951)). Parties are free to modify this rule by conditioning the right to terminate upon some condition precedent. Id. at 658. However, as the district court noted, the parties in this instance did not do so. There was no language in the SIA stating that Section 13 is the exclusive remedy for a party seeking breach of contract damages. Cf. Short v. Hollingsworth, 289 N.W. 158, 159 (Mich. 1939) (holding that “[i]f it appears to have been the intention that the remedy specified in the contract should be exclusive, the rights of the parties will be controlled thereby”). Therefore, the district court did not err by -15- No. 09-2214 vacating the award of the arbitrator and remanding the case to the arbitrator for decision on the merits of MCD’s breach of contract claim. C. Arbitrator on Remand The district court held that the Arbitrator originally selected by the parties is the appropriate person to handle any further proceedings. We disagree. The Michigan Court Rules permit a court to vacate an arbitration order and remand for rehearing. Mich. Comp. Laws § 3.602(J). However, the functus officio doctrine provides the circumstances in which remand to the original arbitrator, rather than a new arbitrator, is appropriate. Green, 200 F.3d at 976–77. The Latin term “functus officio” means that “having performed his or her office,” an official is “without further authority or legal competence because the duties and functions of the original commission have been fully accomplished.” Black’s Law Dictionary 743 (9th ed. 2009). “The policy behind the doctrine is an unwillingness to permit one who is not a judicial officer and who acts informally and sporadically, to re-examine a final decision which has already been rendered, because of the potential evil of outside communication and unilateral influence which might affect a new conclusion.” Oakwood Labs. v. Howrey Simon Arnold & White, LLP, 2007 WL 1544577, at  (N.D. Ohio May 24, 2007) (internal citations omitted). In general, “‘once an arbitrator has made and published a final award his authority is exhausted and he is functus officio and can do nothing more in regard to the subject matter of the arbitration.’” McClatchy Newspapers v. Cent. Valley Typographical Union, 686 F.2d 731, 734 (9th Cir. 1982) (quoting La Vale Plaza, Inc. v. R.S. Noonan, Inc., 378 F.2d 569, 572 (3d Cir. 1967)); see -16- No. 09-2214 also Beattie v. Autostyle Plastics, Inc., 552 N.W.2d 181, 184 (Mich. Ct. App. 1996) (recognizing the doctrine of functus officio). This means that where a vacated arbitration award is remanded and requires a reopening of the merits of a claim, remand to a new arbitrator is appropriate. Cf. Green, 200 F.3d at 977–78 (noting that if remand was warranted, remand would be to original arbitrator because he would simply be completing his duties by clarifying his reasoning, not reopening the merits of the case); M & C Corp. v. Erwin Behr GmbH & Co., 326 F.3d 772, 783 (6th Cir. 2003) (remanding to original arbitrator is proper where arbitrator is not reopening the merits of a case). However, there are exceptions to the functus officio doctrine that direct when remand to the original arbitrator is appropriate: “(1) an‘arbitrator can correct a mistake which is apparent on the face of his award’; (2) ‘where the award does not adjudicate an issue which has been submitted, then as to such issue the arbitrator has not exhausted his function and it remains open to him for subsequent determination’; and (3) ‘[w]here the award, although seemingly complete, leaves doubt whether the submission has been fully executed, an ambiguity arises which the arbitrator is entitled to clarify.’” Green, 200 F.3d at 977 (quoting La Vale Plaza, 378 F.2d at 573). In the instant case, there are two reasons supporting our decision to vacate the award and remand: (1) the Arbitrator exceeded his powers when he reviewed Tiburon’s contract claim and decided that MCD had the burden to escalate, and (2) the Arbitrator was presented with MCD’s contract claim but failed to review the merits of it. We decide that Tiburon’s contract claim should be remanded to a new arbitrator. Where an arbitration award is vacated because the arbitrator exceeded his or her powers, the Michigan Court Rules grant the court discretion to remand to a new arbitrator or the original arbitrator. Mich. Comp. -17- No. 09-2214 Laws § 3.602(J)(4). Because the original arbitrator here would also be required to reopen the merits of Tiburon’s contract claim, remand to the original arbitrator “implicate[s] . . . the concerns underlying the functus officio doctrine.” Green, 200 F.3d at 978. Thus, a new arbitrator should review Tiburon’s contract claims. We decide that MCD’s contract claim should also be reviewed by the new arbitrator. The original arbitrator, although presented with the MCD’s contract claim, did not review the merits of it. Under the second exception to functus officio, we would normally remand the unreviewed claim to the original arbitrator to give him the opportunity to review it for the first time and complete his duty with respect to that claim. However, submitting Tiburon’s contract claim to a new arbitrator and MCD’s contract claim to the original arbitrator would be inefficient. In the interest of fairness and efficiency, we remand all claims to a new arbitrator.