TLC Precision Water Technologies, Inc., Respondent, vs. SVT Associates, Inc., Appellant and SVT Associates, Inc., Appellant, vs. TLC Precision Water Technologies, Inc., Respondent.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2002).

  STATE OF MINNESOTA

IN COURT OF APPEALS

A04-183

 

TLC Precision Water Technologies, Inc.,
Respondent,
 
vs.
 
SVT Associates, Inc.,
Appellant
 
and
 
SVT Associates, Inc.,
Appellant,
 
vs.
 
TLC Precision Water Technologies, Inc.,
Respondent.

 

Filed September 28, 2004 Affirmed

Peterson, Judge

 

Hennepin County District Court

File No. MC03-017937/MC 03-018321

 

 

Jeffrey W. Jones, David L. Lillehaug, Fredrikson & Byron, P.A., 4000 Pillsbury Center, 200 South Sixth Street, Minneapolis, MN  55402 (for respondent)

 

Thomas C. Atmore, Leonard, O'Brien, Spencer, Gale & Sayer, Ltd., 100 South Fifth Street, Suite 2500, Minneapolis, MN  55402 (for appellant)

 

            Considered and decided by Anderson, Presiding Judge; Peterson, Judge; and Shumaker, Judge.

U N P U B L I S H E D   O P I N I O N

PETERSON, Judge

            In this appeal from a district court judgment confirming an arbitrator's award appellant argues that the arbitrator erred by refusing to admit a report prepared by an expert and that the arbitrator exceeded his powers by not basing the award on the essence of the parties' contract and by applying different theories when addressing the parties' contentions that certain claims were time-barred.  We affirm.

FACTS

            Appellant SVT Associates, Inc., (seller) and respondent TLC Precision Wafers Technologies, Inc., (buyer) entered into a contract for the sale and purchase of a molecular beam epitaxial system (MBE system).[1]  The sales contract required the seller to design and build the MBE system in accordance with certain specifications and according to a schedule set forth in the contract.  The contract gave the buyer the right to terminate the contract, cancel undelivered portions of the MBE system, and receive a refund of all sums paid to the seller if the seller failed to (1) successfully demonstrate to the buyer that the MBE system conformed to the specifications or (2) make deliveries or perform services by the dates specified in the schedule.  The contract required the buyer to inspect the MBE system and its components immediately upon delivery to the buyer and, within 21 days after delivery, give written notice to the seller of any claim for a failure of the MBE system to conform to the specifications, and, if the buyer did not give such notice, the MBE system was deemed to be accepted by the buyer.

            Before delivering the MBE system, the seller conducted tests to determine whether the system complied with specifications and reported to the buyer that it complied.   Although the parties disagreed about whether the system complied with the specifications, the parties agreed that the system would be installed and that the specifications would be met after installation.

            After the system was installed, the parties had further disputes about the installation of the system, payment for the system, and alleged defects in the system.   The buyer continued to insist that the system comply with the specifications, and the seller claimed that it had met its obligations and was entitled to payment. 

            The buyer began using the system without the seller's permission and invoiced the University of Oklahoma for wafers that were made on the system, but the wafers were not acceptable.  The buyer represented to other potential customers that it had the capability to produce four-inch wafers, but there is no evidence that it made any wafers other than the ones made for the University of Oklahoma.

            In late 2001, the seller became suspicious that the buyer was using the system to make wafers, and in June 2002, the seller sent the buyer an invoice for final system acceptance indicating that the buyer had not substantiated its claim that the system did not meet specifications and that the buyer had operated the system.  When the parties could not resolve their disagreements, the seller initiated arbitration to collect the final payments due under the sales contract, plus interest, and the buyer counterclaimed seeking to return the system and receive a refund of the amounts it had paid for the system.  The arbitrator denied the seller's claim, awarded the buyer a refund, and required the seller to pick up the system.  The seller filed a motion in the district court, seeking to vacate the arbitrator's award, and the buyer filed a motion seeking confirmation of the award and entry of judgment.  The district court denied the motion to vacate, granted the motion to confirm the arbitrator's award, and ordered entry of judgment for the buyer.  This appeal followed.

D E C I S I O N

            An appeal from an arbitration decision is subject to limited review, and the reviewing court must exercise "[e]very reasonable presumption" in favor of the arbitration award's finality and validity.  State, Office of State Auditor v. Minn. Ass'n of Prof'l Employees, 504 N.W.2d 751, 754 (Minn. 1993).  The party seeking to vacate the award "has the burden of proving the invalidity of the arbitration award."  Nat'l Indem. Co. v. Farm Bureau Mut. Ins. Co., 348 N.W.2d 748, 750 (Minn. 1984).

            The arbitration statute provides:

Upon application of a party, the court shall vacate an award where: . . .

 

                        (3) The arbitrators exceeded their powers; [or]

                        (4) The arbitrators . . . refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of section 572.12, as to prejudice substantially the rights of a party [.]

 

Minn. Stat. § 572.19, subd. 1 (2002).

            The seller argues first that the arbitrator refused to consider relevant and material evidence when the arbitrator refused to admit a report that was prepared by one of the buyer's experts.  The expert's report states that on July 10, 2003, the expert examined the MBE system to evaluate the system's performance, but the expert was unable to make any test runs before significant repairs were made on the machine.  The report then described specific conditions that needed to be addressed before test runs could be done and concluded:

Without the stated problems being fixed, it would be impossible to determine whether or not this MBE is capable of producing high quality gallium arsenide semiconducting material.  The quality of the source materials, and etching, cleaning and sample handling are also critical to growing high quality semiconductors.  These are also areas that should be assessed.  To get this machine in condition to test grow wafers, it would take a minimum of 3-4 weeks to vent, repair, and possibly replace and outgas source materials and crucibles, and bake it. 

 

The buyer produced the report before the arbitration hearing and included the report on the exhibit list that it submitted before the hearing.  Also, the buyer included the expert who prepared the report on the witness list that it submitted before the hearing.  At the hearing, the buyer decided not to call the expert.[2]  During cross-examination of one of the buyer's witnesses, the seller offered the expert's report and sought to elicit testimony regarding some of the factual statements in the report.  The buyer objected, and the arbitrator took the issue under advisement.  On the last day of the hearing, the arbitrator ruled that he would not consider the report.  The parties have not cited, and we have not found in the record, any statement of the arbitrator that explains the basis for his ruling. 

The seller argues that the arbitrator denied the seller a fundamentally fair arbitration proceeding because the arbitrator simultaneously concluded that the seller failed to demonstrate compliance with specifications and excluded evidence that showed that the present condition of the machine prevented such a demonstration.  But it is not apparent how evidence of the condition of the MBE system on July 10, 2003, is material to a determination of whether the seller demonstrated compliance with the contract specifications in June 2002 when the seller sent the buyer an invoice for final system acceptance.  The expert's report describes several problems with the MBE system, but it does not indicate when these problems developed.  The seller has not met its burden of demonstrating that the arbitration award is invalid because the arbitrator refused to consider the expert's report.

            The seller next argues that the arbitrator exceeded his authority by ignoring contract provisions and by rendering a decision that is inconsistent with the arbitrator's theory of the case. 

The scope of the arbitrators' powers is a matter of contract to be determined from a reading of the parties' arbitration agreement, and an arbitrators' award will be set aside by the courts only when the objecting party meets its burden of proof that the arbitrators have clearly exceeded the powers granted to them in the arbitration agreement; courts will not overturn an award merely because they may disagree with the arbitrators' decision on the merits.

 

Children's Hosp., Inc. v. Minn. Nurses Ass'n, 265 N.W.2d 649, 652 (Minn. 1978).

            The arbitration provision in the parties' contract states,

Any dispute, claim or controversy arising out of or relating to this Sales Contract, including any action in tort, contract or otherwise, at equity or at law, and any claim of fraud in the inducement (collectively "Dispute") shall be resolved in a manner set forth in this paragraph 21.[3]  Either party may initiate negotiation proceedings by writing a letter to the other party setting forth the particulars of the Dispute, the terms of this Sales Contract that are involved and the suggested resolution of the Dispute.  If the Dispute is not resolved within 30 days after delivery of the initial written letter setting forth the particulars of the Dispute, either party may deliver written notice to the other party demanding the submission of such Dispute to binding arbitration conducted pursuant to the provisions of this Sales Contract and the commercial arbitration rules of the American Arbitration Association ("AAA"), except to the extent such AAA rules are inconsistent with the provisions of this Sales Contract.  Even though the arbitrator(s) shall apply the AAA rules, the arbitration shall not be conducted by the AAA. 

 

            The seller argues that because the arbitrator's decision fails to draw its "essence" from the contract, the arbitrator exceeded his powers.  When an arbitrator's decision is challenged on the merits, the "award cannot be vacated if it draws its ‘essence' from the contract and can ‘in some rational manner be derived from the agreement.'"  Metro. Airports Comm'n v. Metro. Airports Police Fed'n, 443 N.W.2d 519, 524 (Minn. 1989) (quoting Ramsey County v. AFSCME, Council 91, 309 N.W.2d 785, 792 (Minn. 1981)).  "If an award is rationally derived from an agreement viewed in the light of the agreement's language, content, and indicia of intent, it should be upheld."  Wolfer v. Microboards Mfg., LLC, 654 N.W.2d 360, 366 (Minn. App. 2002).

            Paragraph 12.A. of the sales contract states:

            Buyer reserves the right to terminate this Sales Contract, or any part thereof, and to cancel all or any part of the undelivered portion of the MBE System and receive a refund of all sums paid to Seller if Seller (i) fails to successfully demonstrate to Buyer that the MBE System conforms to the Specifications; (ii) fails to deliver the MBE System and its components or perform the services provided in this Sales Contract by the dates specified in the Schedule and fails to cure such failure as provided in this Sales Contract; (iii) fails to make progress in the work so as to endanger performance; or (iv) breaches this Sales Contract.  These remedies shall be cumulative and in addition to any other or further remedies provided in law or in equity.

 

The arbitrator determined that paragraph 12.A.(i) of the contract required the seller to demonstrate that the MBE system conformed to the specifications and that the seller never demonstrated compliance with two of the specifications.  Based on the arbitrator's finding "that the parties agreed that the system would be installed despite the disagreements as to whether the specifications had been met, and also that the material specifications were to be met by [the seller] after installation," the arbitrator further determined that the requirement that the seller demonstrate compliance with the specifications was not excused by the installation of the system at the buyer's facility before the specifications were met because the buyer and seller agreed both that the system would be installed and that the seller would meet the specifications.   

             We conclude that the arbitrator's decision is rationally derived from the agreement between the parties.  The agreement provides that the buyer can return the system and receive a refund if the seller does not demonstrate that the system conforms to the specifications, and the arbitrator found that the seller never demonstrated compliance with the specifications.  The seller's argument that "[t]he parties intended that the UCC would apply to the Contract and did not waive the ‘use equals acceptance' provision of the UCC" is an argument that the arbitrator incorrectly determined the facts regarding the parties' agreement and that the arbitrator incorrectly applied the law.  But, "an arbitrator, in the absence of any agreement limiting his authority, is the final judge of both law and fact, including the interpretation of the terms of any contract."  Cournoyer v. Am. Television & Radio Co., 249 Minn. 577, 580, 83 N.W.2d 409, 411 (1957) (citation omitted).  The arbitration provision in the parties' contract does not limit the arbitrator's authority.  Therefore, even if the arbitrator incorrectly determined the facts and incorrectly applied the law, the district court did not err when it confirmed the arbitrator's award.

            The seller argues that the arbitrator's decision is inconsistent and that Minnesota courts recognize inconsistency as a basis for overturning an arbitrator's award.  See Johnson v. Am. Family Mut. Ins. Co., 426 N.W.2d 419, 421 (Minn. 1988) (court will not set aside arbitration award because arbitrator erred as to the law or facts, as long as the reasoning and judgment are consistent).  The seller contends that the arbitrator's award is inconsistent because the arbitrator concluded that the buyer's claim that it was entitled to damages caused by the seller's delay in delivering the system was time-barred but that the buyer's claim that it was entitled to relief based on the seller's failure to comply with the specifications was not time-barred.

            Paragraph 18 of the sales contract states, "Any cause of action or claim in arbitration arising from this Sales Contract or the breach hereof shall be initiated within one year after the cause of action accrues or shall be deemed waived."  The arbitrator concluded that this limitations period had run as to the buyer's claim based on late delivery but had not run on the buyer's claims for return and a refund, which was based on the seller's failure to demonstrate compliance with the specifications.  With respect to the claim based on late delivery, the arbitrator concluded that because the sales contract provided that the system was due for delivery in March 2000, the claim for late delivery accrued in March 2000, and the buyer's claim was time-barred because it was brought more than one year after March 2000.  With respect to the claims for return and a refund, the arbitrator concluded that because the parties agreed that the system would be installed at the buyer's facility but that the seller would continue to work to meet the specifications, the claims for return and a refund did not accrue until June 17, 2002, when the seller sent the buyer an invoice indicating that the seller would not act to further demonstrate compliance with the specifications, and, therefore, the buyer's claim was not time-barred because it was brought within one year after June 17, 2002.  The arbitrator's conclusions that two different claims accrued on two different dates when two different events occurred are not inconsistent; they simply reflect the arbitrator's determinations
that accrual of the claims depended on different events and that the events that demonstrated accrual did not occur on the same day.

            Affirmed.

[1] An MBE system is a large, complex machine used to make semiconductor wafers for use in electronic devices.

 

[2] The arbitrator's Report of Preliminary Hearing and Scheduling Order indicates that the parties did "not desire to use a court reporter."  As a result, there is no transcript of the arbitration hearing, and our discussion of events that occurred at the hearing is based on the parties' accounts of the hearing.

 

[3] Although the text of the arbitration provision indicates that the provision is paragraph 21 of the contract, the paragraph is paragraph 22 of the contract.