Appalachian Regional Healthcare Inc. Plaintiff-appellant v. Beyt, Rish, Robbins Group, Architects, Defendant-appellee, 963 F.2d 373 (6th Cir. 1992)

This suit involves a dispute between the developer of a hospital and an architectural firm over defects in the hospital. For the reasons set out below, we remand the case to the district court to determine whether the arbitrators' decision should be upheld under the limited standard of review for arbitration awards.

The procedural background of this case is complicated. On August 3, 1983, plaintiff-appellant, Appalachian Regional Healthcare Inc. (ARH), a Kentucky corporation, and defendant-appellee, Beyt, Rish, Robbins Group Architects (Beyt, Rish), a partnership with its principal office in Louisiana, entered into a written contract in which defendant agreed to perform architectural services for construction of an ARH hospital. The parties' contract specifies that all disputes under the contract are to be resolved by arbitration,¹  that the award of the arbitrators is final, and that judgment may be entered on the award in any court with jurisdiction over the matter.²  The contract requires ARH to submit a written demand for arbitration "within a reasonable time after the claim, dispute or other matter in question has arisen," but at least within the statute of limitations for filing a lawsuit on the matter.³  However, the contract also specifies that the statute of limitations for an act or failure to act will begin to run not later than the date the project is substantially completed or the date the Certificate of Payment has been issued.⁴  Perhaps most importantly, the contract states that the agreement shall be governed by Kentucky law.⁵ 

On March 29, 1990, ARH demanded arbitration of Beyt, Rish and the construction manager because of structural defects with the hospital building. ARH then brought suit in Fayette Circuit Court in Kentucky seeking an order requiring joint arbitration of the disputes among ARH, Beyt, Rish and the construction manager. In that state court proceeding and in all subsequent proceedings, Beyt, Rish argued that plaintiff's demand for arbitration was not timely because it was not brought within the one-year statute of limitations.⁶  ARH argued that the seven-year statute of limitations, rather than the one-year statute, applied,⁷  and, in any case, the demand was timely under the one-year statute. The Fayette Circuit Court ruled that the dispute between ARH and Beyt, Rish should proceed to arbitration but refused to order the joint arbitration sought by ARH. The Court held that the statute of limitations issue was for the arbitrators to decide. Defendant Beyt, Rish appealed this decision to the Kentucky Court of Appeals. That appeal is still pending.

On February 16, 1991, the arbitration panel found that ARH's demand was timely under the statute of limitations, but did not specify which statute applied. The arbitration panel rendered an award in favor of ARH for $573,043.

On March 20, 1991, ARH filed a petition in federal district court to confirm the arbitration award rendered in its favor on February 16, 1991. On May 9, 1991, the Kentucky Supreme Court in Perkins v. Northeastern Log Homes, 808 S.W.2d 809 (Ky.1991), struck down the seven-year statute of limitations, Ky.Rev.Stat. § 417.135, which the arbitrators may have relied upon in deciding that the demand for arbitration was timely. On May 20, 1991, Beyt, Rish filed a petition in Fayette Circuit Court and a motion in the federal court action to vacate the arbitrators' award. ARH then filed a motion to dismiss or abate the state court action on the basis of the district court's prior jurisdiction. The Fayette Circuit Court granted the motion, abating Beyt, Rish's action.

Then, on June 28, 1991, defendant Beyt, Rish moved the federal district court to abstain from exercising its jurisdiction because the state courts needed to determine which state statute of limitations should apply. On August 9, 1991, the district court dismissed ARH's petition, holding that the Federal Arbitration Act was the law which governs the case but that abstention was necessary because the statute of limitations question must be decided by the state court.

The issue we must address, then, is whether the district court's abstention and resultant dismissal of the complaint was proper. We find that the district court need not have addressed the abstention issue because under the Federal Arbitration Act, the arbitration award was subject to a limited scope of review and the only question before the district court was whether the arbitrators overstepped their authority in rendering the award. We remand to the district court to review the arbitration award under the standard we set out below.

The threshold question is whether the Federal Arbitration Act (FAA) or Kentucky arbitration law applies to this contract which contains a Kentucky choice-of-law provision. We believe that the district court was correct that the FAA applies to this case, but for the reasons stated below.

The FAA creates a body of federal substantive law "establishing and regulating the duty to honor an agreement to arbitrate." Moses Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S. Ct. 927, 942 n. 32 (1983).⁸  It applies "to any arbitration agreement within the coverage of the Act." Id. at 24, 103 S. Ct. at 941. Because this contract is one "evidencing a transaction involving commerce," 9 U.S.C. § 2, this contract is covered by the FAA.⁹  The question, however, is whether the contract's choice-of-law provision trumps the federal arbitration law in favor of Kentucky arbitration law.

The FAA does not preempt the field of arbitration so long as the state law does not require judicial resolution of claims that the parties agreed to arbitrate. Volt Info. Sciences v. Board of Trustees, 489 U.S. 468, 475-76 109 S. Ct. 1248, 1253-54 (1989). In Volt, the Supreme Court held that it would not disturb a California Court of Appeals decision interpreting a choice-of-law provision in a contract to mean that the state's procedural arbitration rules applied to the contract. Id. at 476-77, 109 S. Ct. at 1254. Several courts, however, have held that Volt did not hold that any time a choice-of-law provision is included in an arbitration agreement, state law rather than federal arbitration law must apply. Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1062 (9th Cir. 1991) (despite Volt, federal law, rather than New York, applies); Painewebber Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir. 1990) (because diversity action involves interstate commerce, FAA applies); Ackerberg v. Johnson, 892 F.2d 1328, 1333-34 (8th Cir. 1989) (Volt merely held that parties could agree to abide by state procedural rules); Barbier v. Shearson Lehman Hutton, Inc., 752 F. Supp. 151, 155-56 (S.D.N.Y. 1990) (choice of law provision does not mean state law must apply). But see Fahnesstock & Co., Inc. v. Waltman, 935 F.2d 512, 518 (2d Cir. 1991) (state law applies in this diversity action). The reasoning of these courts is persuasive in that Volt merely held that carrying out the parties' intent to enforce state procedural rules "is fully consistent with the goals of the FAA." Volt, 489 U.S. at 478-79, 109 S. Ct. at 1255. In addition, Kentucky courts at the time the contract was written believed that the FAA would apply to any transaction involving interstate commerce. See Fite & Warmath Const. Inc. v. MYS Corp., 559 S.W.2d 729 (Ky.1977) ("the Federal Arbitration Act applies in contracts involving interstate commerce.") Therefore, we hold that the FAA's provisions for confirming and vacating awards apply to this contract.

Having determined that the FAA is the law which governs this matter, we must determine what it requires of a court in which a petition to confirm an award has been filed. The FAA provides that if the parties agree, as they have here, that a judgment of the court shall be entered on an arbitration award, then any time within a year of the award a party may apply to the court to confirm that award. The court "must grant such an order unless the award is vacated, modified, or corrected" as prescribed in 9 U.S.C. § 10. 9 U.S.C. § 9. Vacating an award under section 10 is appropriate only in very limited circumstances.¹⁰  In Federated Dept. Stores v. J.V.B. Industries, 894 F.2d 862, 866 (6th Cir. 1990), we held that a court must enforce an award under the FAA "so long as the arbitrator does not 'dispense his own brand of industrial justice.' " Id. We emphasized that "the burden of proving that the arbitrators exceeded their powers is very great." Id. Arbitrators do not exceed their authority unless "they display a manifest disregard of the law," which "means more than mere error in interpretation or application of the law." Id. " [A]s long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision." Id. (quoting United Paperworkers Intern. Union v. Misco Inc., 484 U.S. 29, 38, 108 S. Ct. 364, 371 (1987)).¹¹  Thus, the district court in this case was required to review the award of the arbitrators to determine whether they had exceeded the scope of their authority.

Our holding that this dispute is governed by the FAA and that the FAA requires a confirming court to apply a highly deferential standard of review to the arbitrators' decision compels us to conclude that the district court should not have abstained from ruling on the confirmation petition. Beyt, Rish argues that abstention is appropriate under both the Burford and Colorado River doctrines so that the Kentucky courts may settle the state law statute of limitations issue without federal interference. See Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1442 (1943); Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S. Ct. 1236 (1976). Beyt, Rish misconstrues both of these doctrines of abstention.

Burford abstention is appropriate only if a federal court's decision on a state law issue is likely to "interfere with the proceedings or orders of state administrative agencies." New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350, 361, 109 S. Ct. 2506, 2514 (1989). Since there is no state administrative agency involved in this dispute, Burford abstention is not applicable.

Colorado River abstention permits a federal court to dismiss a case in deference to parallel state court litigation only if extraordinary circumstances overcome a balance "heavily weighted in favor of the exercise of jurisdiction." Moses Cone, 460 U.S. at 16, 103 S. Ct. at 937. Shortly after the Court decided Moses Cone, we distilled five factors from the opinion in that case that should be considered in deciding whether a Colorado River dismissal is appropriate. Crawley v. Hamilton County Comm'rs, 744 F.2d 28, 31 (6th Cir. 1984). The only one of the factors that arguably weighs in favor of dismissal in this case is the avoidance of piecemeal litigation.¹² 

In Moses Cone, the Court concluded that a Colorado River dismissal was inappropriate in an FAA dispute remarkably similar to this case because such a dismissal "frustrated the statutory policy of rapid and unobstructed enforcement of arbitration agreements." Moses Cone, 460 U.S. at 23, 103 S. Ct. at 941. Two years later, the Court explained its reasoning:

[In Moses Cone, ] we affirmed an order requiring enforcement of an arbitration agreement, even though the arbitration would result in bifurcated proceedings. That misfortune, we noted, "occurs because the relevant federal law requires piecemeal resolution when necessary to give effect to an arbitration agreement, ...

The preeminent concern of Congress in passing [the FAA] was to enforce private agreements into which parties had entered, and that concern requires that we rigorously enforce agreements to arbitrate, even if the result is "piecemeal" litigation ...

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221, 105 S. Ct. 1238, 1242-43 (1985) (emphasis in original.) Because the FAA governs this dispute, Moses Cone and Dean Witter compel the conclusion that the prospect of piecemeal litigation cannot justify a Colorado River dismissal.

Therefore, we REMAND this case to the district court to determine whether, under the limited standard of review set out above, the arbitrators exceeded their authority in making the award and in determining that the demand for arbitration was timely.