David Co. v. Jim W. Miller Construction, Inc.
1989 Minn. LEXIS 221, 444 N.W.2d 836 (1989)
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Rule of Law:
When an arbitration agreement grants arbitrators broad authority to resolve 'all claims, disputes and other matters' relating to a contract, that authority implicitly includes the power to fashion novel, equitable remedies commensurate with the harm caused, unless such remedies are expressly forbidden by the contract.
Facts:
- Jim W. Miller Construction, Inc. (Miller) contracted with David Company to construct seven townhouses on property owned by David Company.
- Throughout the first phase of construction, numerous and significant problems arose, which David Company attributed to Miller's poor supervision and workmanship.
- The project's completion was delayed by several months, causing David Company to lose sales and incur additional expenses.
- Despite being aware of existing deficiencies, David Company made the final payment for Phase I after Miller reaffirmed its contractual obligation to remedy all defects.
- Following the final payment, David Company discovered additional, extensive, and serious construction defects, including widespread water infiltration, structural damage from collapsed walls, and numerous building code violations.
- The defects were so severe that they rendered the unsold units unmarketable and led to demands for rescission from parties who had already purchased units.
- Miller subsequently refused David Company's request to correct the newly discovered, severe deficiencies.
Procedural Posture:
- David Company filed a Demand for Arbitration with the American Arbitration Association against Jim W. Miller Construction, Inc., alleging breach of contract, negligence, and misrepresentation.
- A panel of three arbitrators heard the dispute.
- The arbitrators issued an award ordering Miller to purchase the property from David Company (the 'sell back' option) or, alternatively, to pay monetary damages.
- David Company exercised the 'sell back' option, but Miller refused to comply with the award.
- David Company initiated an action in Minnesota district court (the trial court) to confirm the arbitration award.
- The district court entered an order confirming the award.
- Miller, as appellant, appealed to the Minnesota Court of Appeals (the intermediate appellate court).
- A majority of the court of appeals panel affirmed the district court's order.
- Miller, as appellant, appealed to the Supreme Court of Minnesota (the state's highest court).
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Issue:
Does an arbitrator exceed their powers under a broad arbitration clause by ordering a contractor to purchase the defectively constructed property from the owner as a remedy for breach of contract?
Opinions:
Majority - Kelley, Justice
No. An arbitrator does not exceed their powers when, under a broad arbitration clause, they fashion an innovative, equitable remedy like a forced property purchase, particularly when the remedy is commensurate with the pervasive and severe nature of the breach. The court's reasoning is that the arbitration clause was extremely broad, authorizing arbitrators to decide 'all claims, disputes and other matters in question' without any contractual limitations on the types of remedies they could award. Minnesota public policy strongly favors arbitration and accords flexibility to arbitrators to fashion awards that fit the circumstances of the dispute. The 'sell back' remedy was justified by the magnitude of the defects, which left David Company with a nearly worthless building and exposed it to significant future liability. This remedy appropriately shifted the burden of correcting the gross deficiencies and the risk of future warranty claims to Miller, the party responsible for the faulty construction. The court also held that the award did not violate the Statute of Frauds, as the public policy favoring arbitration outweighed the statute's purpose in this context, and the transfer was compelled by the award itself, not a fraudulent oral contract.
Analysis:
This decision significantly reinforces the principle of judicial deference to arbitration awards and expands the recognized remedial powers of arbitrators in Minnesota. It establishes that unless a contract explicitly restricts an arbitrator's authority, their power to craft a remedy is vast and can include equitable relief traditionally reserved for courts, such as specific performance or a rescission-like 'sell back' order. The ruling serves as a strong signal to contracting parties that if they wish to limit an arbitrator's power, they must do so with clear and express language in their arbitration clause. Future litigants challenging an arbitrator's novel remedy will face a high burden, as courts will likely uphold any award that is rationally derived from the contract and tailored to the unique facts of the breach.
