Opinion ID: 1060160
Heading Depth: 1
Heading Rank: 2

Heading: the second arbitration demand

Text: In their second demand for arbitration, the 49ers described the nature of the dispute as follows: Cost of repair necessary to bring the bulkhead to the condition demanded by the arbitrators in its Award dated February 12, 1991. Respondent performed none of the work, nor supplied the Bond required by the Arbitrators ... On November 11, 1991, sections of the bulkhead collapsed. Failure to perform is breach of the contract containing an arbitration clause, breach of contractual warranty and breach of the guarantee in the Award. The 49ers sought to recover the cost of repair to bring the structure in compliance with the previous arbitration award, the cost of emergency repair, property damage, and attorneys' fees. Elaborating on their demand, the 49ers claim that WMC breached Paragraph 3.5.1 of the construction contract which contains the contractor's warranties against defective construction and design of the bulkhead. The 49ers also claim that WMC's failure to comply with the first arbitration award breached the guarantee contained in the award and was in and of itself, a breach of the Contract, which required the parties to submit their disputes to arbitration. We begin with the consideration of the 49ers' claims regarding the breach of the first arbitration award based on WMC's failure to comply with its terms.
Although the parties could have agreed that disputes over the compliance with a final arbitration award would be subject to arbitration, the contract does not expressly address the arbitrability of such controversies. See Menorah Ins. Co. v. INX Reinsurance Corp., 72 F.3d 218, 222 (1st Cir.1995). Nevertheless, the contract does describe certain attributes of the award itself. According to the terms of the contract, the parties agreed that the award was to be final, and that judgment may be entered on the award by a court. By allowing a judgment to be entered on the award, it is reasonable to assume that the parties were aware of the statutory provisions regarding court confirmation of the award, Code § 8.01-581.09, and providing that the court's order confirming the award can be enforced as any other judgment or decree, Code § 8.01-581.012. [3] Additionally, the parties presumably knew that an arbitrator has no power to enforce the award rendered. The statute provides a limited time within which the parties may ask the arbitrator to reconsider or modify the award. Code § 8.01-581.08. After that time, the arbitrator has no further authority over the award and, in absence of agreement of the parties, the arbitrator becomes functus officio. Home Oil Co. of Hot Springs, Virginia v. Home Oil Co., 240 Va. 5, 8-9, 393 S.E.2d 188, 189-90 (1990). We do not dispute the 49ers' assertion that ambiguity in the scope of an arbitrability clause should be resolved in favor of arbitrating the claim. Considering the above factors, however, we conclude that the contract reflects the parties' understanding that the arbitration process would end with the arbitration award. Any further consideration of the award or action regarding compliance with it would be undertaken in a different forum. The 49ers also argue that the failure to comply with the first arbitration award is a breach of the construction contract because the parties agreed that an arbitration award would be binding. We reject this argument. We agree that the purpose of compulsory arbitration is that, in lieu of taking the matter to court, the parties will accept the arbitrators' award as a final resolution of the controversy. That understanding, however, does not anticipate that the only action a party may take is to comply with the award. The Act clearly contemplates that a party who disagrees with an award can file a pleading with a court to have it vacated or modified, albeit that the grounds for doing so are limited. Under the 49ers' reasoning, such a pleading would be a breach of the contract because by it the parties would be seeking to escape a binding award. We also reject the 49ers' assertion that we should interpret the clause, claim or controversy arising out of or related to broadly as we did in McMullin, and hold that the non-compliance with the award qualifies as a claim or controversy under the contract in this case. We do not retreat from our prior statements that an arbitration clause like the one in issue here is very broad; however, such clauses are not unlimited. In McMullin, we determined that the controversy proposed for arbitration was related to the agreement, and therefore arbitrable, because the litigants had to refer to a provision of the contract to resolve the controversy. 242 Va. at 342, 410 S.E.2d at 639. McMullin, however, is distinguishable from the instant case. Here, the controversy regarding WMC's noncompliance relates solely to the terms of the first arbitration award; no provision of the construction contract need be construed or applied to resolve the controversy over noncompliance. Thus, we decline to adopt the construction of the phrase arising out of or related to urged by the 49ers because such a construction is far broader than any we have previously applied to the clause. The 49ers' claim in their second demand for arbitration, based on WMC's failure to comply with the terms of the first arbitration award, is nothing more than an action seeking compliance with the first arbitration award and damages for the failure to comply with that award. We conclude that such an action was not contemplated as an arbitrable controversy in the agreement between the parties.
In their second demand for arbitration, the 49ers also claim that WMC breached the warranties contained in Paragraph 3.5.1 of the contract. In that provision, the contractor warrants that the material and equipment furnished will be of good quality, that the work will be free from defects, and that the work will conform to the requirements of the contract documents. WMC does not dispute the arbitrability of this claim; however, WMC asserts that further arbitration of this claim is barred by the principle of res judicata because the 49ers made the same claim in their first demand for arbitration which was denied by the arbitrators. Res judicata is a judicially developed doctrine designed to end litigation and to protect the litigants from harassment. A plea of res judicata will be sustained if the prior adjudication was between the same parties or their privies and a valid final judgment was entered which resolved the claim on its merits. Bates v. Devers, 214 Va. 667, 670-71, 202 S.E.2d 917, 920-21 (1974). When parties choose to resolve their disputes by arbitration rather than litigation, even though the resolution reached in that process does not require the application of legal principles, courts have applied the doctrine of res judicata to preclude subsequent litigation on issues resolved by validly issued arbitration awards. 1 Gabriel M. Wilner, Domke on Commercial Arbitration § 31:02, at 452-53 (1984 & Supp.1995); Restatement (Second) of Judgments § 84 cmt. b (1982). While we have not specifically addressed the applicability of the doctrine of res judicata to an arbitration award, this Court reviewed a trial court's dismissal of a garnishment action based on the res judicata bar of a confirmed arbitration award in Virginia Builders' Supply v. Brooks & Co., 250 Va. 209, 212, 462 S.E.2d 85, 87 (1995). On appeal, this Court reversed, not because res judicata did not attach to such awards, but because the parties to the arbitration agreement and award were not the same parties in the garnishment proceeding and, therefore, the elements of res judicata were not satisfied. Id. at 213-14, 462 S.E.2d at 88. The lack of any challenge to the trial court's ability to bar subsequent litigation by applying the doctrine of res judicata based on a prior confirmed arbitration award is readily understandable. Code § 8.01-581.012 provides that a judgment confirming an arbitration award is to be treated like any other judgment. Such treatment would include the application of res judicata. While res judicata may operate to bar subsequent judicial proceedings based on a prior confirmed arbitration award, here WMC seeks to bar a subsequent arbitration proceeding based on the res judicata effect of an unconfirmed arbitration award. These factual differences do not preclude application of the res judicata plea in this case, however. The parties have made no distinction between a confirmed and unconfirmed award. Therefore, we will assume, without deciding, that an unconfirmed arbitration award is treated in the same manner as a confirmed award for purposes of res judicata analysis. [4] The parties also do not contest the power of res judicata to bar a subsequent arbitration proceeding. The 49ers, however, maintain that, in the absence of a specific agreement to the contrary, whether a prior award is given res judicata effect on a subsequent request for arbitration is itself arbitrable, and therefore, the trial court was correct in referring this issue to the arbitration panel.
The 49ers rely heavily on a labor arbitration case, Little Six Corp. v. United Mine Workers of America, 701 F.2d 26, 29 (4th Cir.1983), for their contention that the applicability of res judicata to a particular award is an arbitrable issue. [5] Our review indicates, however, that other jurisdictions have concluded that a plea of res judicata is not subject to arbitration and the court, not the arbitration panel, determines whether a previous arbitration award operates as res judicata or collateral estoppel on a subsequent action or demand for arbitration. See, e.g., Clark v. Bear Stearns & Co., 966 F.2d 1318, 1321 (9th Cir.1992); Greenblatt v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1360-61 (11th Cir.1985); Monmouth Pub. Sch. v. Pullen, 141 Ill.App.3d 60, 95 Ill.Dec. 372, 377, 489 N.E.2d 1100, 1105 (1985); Chattin v. Cape May Greene, Inc., 216 N.J.Super. 618, 524 A.2d 841, 848, cert. denied, 107 N.J. 148, 526 A.2d 209 (1987); Rembrandt Indus., Inc. v. Hodges Int'l, Inc., 38 N.Y.2d 502, 381 N.Y.S.2d 451, 452, 344 N.E.2d 383, 384 (1976); C & O Dev. Co. v. American Arbitration Ass'n, 48 N.C.App. 548, 269 S.E.2d 685, 687 (1980), review denied, 301 N.C. 719, 274 S.E.2d 227 (1981). We believe these jurisdictions reached the correct conclusion. First we note that arbitration is proper in this case only for controversies arising from or relating to the contract between the parties. The dispute over WMC's plea of res judicata arises from, or is related to, satisfying the elements of this common law doctrine; it does not arise from the terms of the contract. Thus, it is not arbitrable. More importantly, an arbitration panel is not generally bound by legal principles, does not have to explain or justify its decision, and the decision is not reviewed for legal errors. Rather, the arbitrators are entitled to make their decision based on what they deem to be just and equitable within the scope of the parties' agreement. AAA Construction Industry Arbitration Rule 43 (1993); G. Richard Shell, Res Judicata and Collateral Estoppel Effects of Commercial Arbitration, 35 UCLA L.Rev. 623, 633-37 (1988). Consequently, when considering a plea of res judicata, an arbitration panel could determine that the issues resolved in a prior arbitration should be revisited, regardless of whether the legal elements required for sustaining the plea were met. Allowing a plea of res judicata to be resolved by arbitration defeats the purpose of the judicially created doctrine  to bring an end to the substantive controversy and to protect the parties from re-litigating previously decided matters. Accordingly, we conclude that, in the absence of a clear agreement to the contrary, a plea of res judicata is not arbitrable. Therefore, the trial court erred in directing the arbitration panel to determine whether res judicata barred WMC's claim for breach of contractual warranty. However, we will not remand this issue for determination by the trial court because, like the issue of arbitrability discussed above, the record before us is sufficient to resolve the issue here.
The original arbitration demand filed by the 49ers described the dispute as a breach of contract. The alleged breach, as explained by the 49ers' arbitration counsel, consisted of specific design and construction defects. The 49ers assert that the second demand claiming breach of warranty as a result of the damaged bulkhead was not identical to the first, and could not have been, because the bulkhead had not failed at the time of the first demand. Relying on Allstar Towing, Inc. v. City of Alexandria, 231 Va. 421, 344 S.E.2d 903 (1986), the 49ers argue that, for res judicata purposes, a cause of action is an assertion of particular legal rights which have arisen out of a definable factual transaction. Id. at 425, 344 S.E.2d at 906. Thus, they assert, since the event giving rise to the cause of action, i.e., the partial collapse of the bulkhead, had not occurred at the time of the first arbitration, the claims could not have been the same. The 49ers misapply Allstar Towing. In that case the city of Alexandria rejected the towing company's initial bid to provide services because the company was not a registered corporation and, therefore, was ineligible for award of the contract. The company unsuccessfully challenged that decision. Id. at 422-23, 344 S.E.2d at 904-05. Thereafter, the company submitted a bid in response to the city's second invitation to bid. The city awarded the contract to another towing enterprise. The company filed a second protest asserting that it met the bid requirements, but the company receiving the contract did not. The Court in Allstar Towing held that the company's second action was not subject to a res judicata bar because the legal rights asserted by the company arose from the second transaction. The second action was not related to the first transaction in which the company's bid was rejected because it was an unresponsive bidder. Id. In this case, the legal rights asserted by the 49ers in the first arbitration action were based on its contractual right to construction of a bulkhead free of design or construction defects. The storm damage to the bulkhead after the first arbitration did not increase or alter the contractual rights the 49ers acquired at the time the contract was executed. Furthermore, no plans were altered and no work was performed on the bulkhead between the filing of the first and second demands for arbitration. The damages suffered as a result of the alleged defects may have increased when the bulkhead collapsed, but any defects in construction and design which existed at the time of the first arbitration had not changed at the time of the second demand for arbitration. Furthermore, even though the first demand described only specific defects, the doctrine of res judicata applies to all claims which could have been brought, thereby preventing a party from splitting his cause of action. Flora, Flora & Montague, Inc. v. Saunders, 235 Va. 306, 310-11, 367 S.E.2d 493, 495 (1988); Bates, 214 Va. at 670-71, 202 S.E.2d at 920-21. Here, the 49ers had engaged an engineer to evaluate the bulkhead prior to filing its first demand for arbitration. Their engineer reported that the design and construction of the bulkhead was deficient. In the first arbitration, the 49ers chose to limit the items of alleged deficient construction and design. Having made that choice, they are not entitled to bring forward additional items at a later date, particularly when, as set out above, there had been no further construction or design activity on the bulkhead between the two arbitration demands. The claim for breach of warranty asserted by the 49ers in their second arbitration demand was no different than the claim for breach of contract asserted in the first arbitration demand. Labeling the claim a breach of warranty rather than a breach of contract does not alter the nature of the claim. That label is a distinction without a difference. As pointed out by WMC, a breach of the warranty is a breach of the construction contract. Werner Sabo, Legal Guide to AIA Documents § 418, at 199 (3rd ed. 1989). The record demonstrates that the first arbitration was between the 49ers and WMC, and, as a result of that proceeding, a valid final arbitration award was entered rejecting the 49ers' claim for breach of contract due to defective design and construction of the bulkhead. Thus, we conclude that WMC met its burden of proof to sustain its plea of res judicata. The 49ers' demand for arbitration of their breach of warranty claim is barred by the first arbitration award under principles of res judicata.