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Scherrer Constr. Co. v. Burlington Mem. Hosp

Supreme Court of Wisconsin
Oct 1, 1974
221 N.W.2d 855 (Wis. 1974)

Summary

reviewing record to determine if any evidence supports arbitrator's award under either possible legal theory

Summary of this case from Arbitration, Madison Teachers v. Metro. Sch. Dist

Opinion

No. 271.

Argued September 9, 1974. —

Decided October 1, 1974.

APPEAL from a judgment of the circuit court for Racine county: THOMAS P. CORBETT, Circuit Judge. Affirmed.

For the appellant there was a brief by Donald A. Butchart and Benson, Butchart Haley, all of Racine, and oral argument by Donald A. Butchart.

For the respondent there was a brief by Stroud, Stroud, Willink, Thompson Howard and C. Vernon Howard, all of Madison, and oral argument by C. Vernon Howard.


This is an appeal from a judgment entered pursuant to an order confirming an arbitration award in a construction contract dispute. The award (1) granted respondent, Scherrer Construction Company, an extension of the deadline for completion of a building being constructed for appellant, Burlington Memorial Hospital, and (2) compelled the hospital to pay Scherrer $56,830 above and beyond the contract price.

The hospital had invited bids for construction of an addition to its existing hospital building, and Scherrer submitted the low bid. The contract specifications prepared by the hospital's architect and engineer required underpinning of a wall of the existing hospital by intrusion of chemical grout to firm up the underlying soil. Scherrer's bid included $7,500 for this underpinning procedure but shortly after notification that its bid was lowest, Scherrer orally informed the architect that no subcontractor had actually given a firm commitment to do the job. Although there is some disagreement about what else was said, in any case Scherrer signed the contract on February 5, 1970.

Apparently the chemical grout acts like glue — filling cavities between particles of sand, rock, and dirt, and binding the whole mixture so no settling will occur.

In the ensuing months Scherrer was unable to secure a firm bid from any subcontractor for the underpinning using the chemical grout method, but did receive a firm bid for the underpinning using the more standard pit method, entailing construction of a subterranean concrete wall. In a July 13, 1970, letter Scherrer formally requested a change order to allow utilization of the pit method, and in addition, requested additional compensation. Both requests were denied. In an August 14, 1970, letter Scherrer announced that unless it received a change order in three days, a subcontractor would commence underpinning with chemical grout, but without guaranteeing the price or quality of its work. Again no change order was forthcoming, and the chemical underpinning process was begun, using the materials and methods specified in the contract. After nine days, a small area was excavated and examined. All concerned agreed the results were unsatisfactory, although the architect's, engineer apparently felt the inadequacies could be cleared up after further work. Scherrer disagreed, abandoned the chemical grout method, and began underpinning, using the pit method. The job was completed in December, 1970. On January 14, 1971, a change order was issued, permitting the use of the pit method. Additional compensation, and a deadline extension, were denied. Scherrer, as permitted by the contract, issued a demand for arbitration on January 23, 1971. Apparently the parties agreed (the agreement itself is not in the record) that the arbitration would be conducted by the American Arbitration Association under its Construction Industry Arbitration Rules.

The change order did, in fact, extend the deadline by forty-two days, but this extension solely resulted from strikes that had stopped construction. An extension due to delays arising from the underpinning problem was expressly refused.

The arbitration panel included two architects, Carter E. Hewitt and Fritz Von Grossman, and an attorney, George K. Blakely. The proceeding lasted three days and produced a 510-page transcript. The parties interrogated 15 witnesses, and the arbitrators actively participated in the questioning.

Scherrer asked for damages of $65,652.01 due to the increased cost of underpinning; special damages of $76,140 due to delay; and an extension of the completion deadline of 115 days. Apparently Scherrer's theory supporting its claim was that the architect hired by the hospital specified the chemical grout method of underpinning which could not possibly be successful, that Scherrer followed this method called for in the contract to its detriment, and that therefore the hospital, not Scherrer, should be responsible for the resulting delay and increased costs. To support its position, Scherrer presented the testimony of three expert witnesses that the chemical grout method could not possibly work in this situation. The hospital argued that under the contract, Scherrer assumed all risks of unexpected subsoil conditions. The hospital also presented the testimony of two experts that the chemical grout method would produce the desired results if properly utilized. The three arbitrators unanimously agreed to award damages plus a deadline extension to Scherrer. The award stated:

"1) Burlington Memorial Hospital . . . shall pay to Scherrer Construction Company, Incorporated . . . the sum of Fifty-Six Thousand Eight Hundred Thirty Dollars ($56,830.00).

"2) Scherrer shall have an extension of One Hundred Fifteen (115) days for completion of said contract.

"3) The counterclaim of Burlington shall be denied in its entirety.

"4) The administrative fees, expenses and Arbitrators' compensation in the total amount of Three Thousand Three Dollars and Eighty-Five Cents ($3,003.85) shall be borne by Burlington.

"5) This award is in full settlement of all claims and counterclaims submitted to this arbitration."

No opinion was written.

The hospital asked the circuit court for Racine county to vacate the award on four grounds: (1) the arbitrators were partial to Scherrer; (2) the arbitrators refused to hear pertinent evidence; (3) the arbitrators exceeded their powers; and (4) the arbitrators exercised their powers so imperfectly that a mutual, final and definite award was not rendered. The trial court rejected all of these contentions. The court issued an order confirming the award, and rendered judgment on the award in favor of Scherrer. The hospital appeals.


Three issues are raised on this appeal:

1. What is the scope of judicial review of arbitration awards?

2. Did the arbitrators exceed their powers in making the award?

3. Is the award mutual, final and definite?

Scope of review.

1. The grounds upon which an arbitration award may be vacated are specified in sec. 298.10, Stats. The main thrust of the hospital's argument is that the arbitrators "exceeded their powers" (sec. 298.10 (1) (d)) by misconstruing the construction contract, and making an award based on a legal theory unsupported by the evidence. These matters fall within the domain of the arbitrator's exercise of judgment. As this court has consistently held, the scope of review of such matters is extremely limited.

In Koepke v. E. Liethen Grain Co. the court was asked to vacate an arbitration award in a construction-contract dispute on the ground that the arbitrators exhibited a lack of due deliberation and judgment in reducing the contract price due to incomplete and defective performance by the contractor. In refusing to upset the award on this ground, the court did not even discuss the evidence before the arbitrators. The court stated:

(1931), 205 Wis. 75, 236 N.W. 544.

"No useful purpose will be served by a detailed discussion of the evidence. Due consideration and appreciation of the well established principles applicable to valid arbitration proceedings virtually disposes of all of the Grain Company's contentions on this appeal. . . . Every presumption is in favor of an award which is responsive to the submission and which is duly executed by the arbitrators. Invalidity must be shown, by any one asserting it, by clear and satisfactory evidence. All questions of judgment within the submission are concluded by the decision of the arbitrators, and are not subject to appeal or review by the court. On an attack on an award it is not within the province of the court to determine whether conflicting evidence before the board, on issues which it decided, constituted a preponderance for or against its decisions. Upon a submission without restrictions, the board has plenary power to decide questions of admissibility, competency, and weight of evidence. . . .

"Appellants contend that the award utterly disregards the evidence as to the nature and extent of alleged defects and resulting damages, and that, consequently, there was partiality on the part of the arbitrators toward the respondent. The contention is supported by an argument that would be in point if the question were whether there was sufficient evidence to support a jury's verdict or court's finding. However, the technical rules of law as to the competency and sufficiency of evidence, and the necessity of confining the tribunal's consideration to matters which appear of record, are not applicable in arbitration proceedings as they are in court litigation. Contentions such as that the arbitrators misconceived the real issue as to responsibility for an item of damage, or that they failed to duly regard the technical legal requirements as to satisfying the burden of proof, or otherwise decided an issue contrary to law or the technically relevant or competent evidence, do not warrant vacating their award. Bearing in mind that the arbitrators could rightly be selected because of their special knowledge as experts on the matters in controversy, and that they could rightly rely upon their expert knowledge and the information which they acquired on their own inspections of the buildings, without incorporating any of their individual statements or testimony as to their observations or opinions in the transcript of their proceedings, we are unable to conclude in this case that the award improperly disregards the testimony taken, or that it evidences partiality or dishonesty on the part of the arbitrators. They may have erred in their opinions and conclusions as to matters which they ascertained upon their inspection, or otherwise, or in passing upon the competency or weight of the testimony which was submitted to them, but their award cannot be vacated solely because of any such error. As the learned circuit judge rightly said: `Arbitrators are judges chosen by the parties for themselves, and when so chosen they must be taken as they are, with their weaknesses and frailties, of which all have some, and while they act honestly and fairly, according to such abilities as they have, with reference to what is submitted to them, their proceedings are valid and binding.'"

Id. at pages 77-79.

In Putterman v. Schmidt the court was asked to vacate an arbitration award settling a dispute arising out of a partnership agreement. The court affirmed the award, stating in part:

(1932), 209 Wis. 442, 245 N.W. 78.

". . . Mistakes of judgment, mistakes of either fact or law, are not ground for review of or setting aside an award. 2 Ruling Case Law, p. 392. `Such errors are among the contingencies which parties assume when they select such tribunals.' 5 Corp. Jur. p. 179. The mistakes that will void an award are those appearing on its face or gross mistakes of the arbitrators extraneously appearing as to their powers or duties, which result in real injustice or constructive fraud. 2 Ruling Case Law, p. 392. The mistake must so mislead the arbitrators that they did not apply the rules which they intended to apply, `so that upon their own theory a mistake was made which has caused the result to be something different from that which they had reached by their reason and judgment.' 5 Corp. Jur. p. 180. The record here does not disclose any such mistake."

Id. at page 451.

More recently, in Reith v. Wynhoff this court refused to upset an arbitration award where the losing party argued the arbitrator used an "erroneous" formula to compute damages in a construction contract dispute. The court said:

"It was an ancient rule at common law that mere errors of judgment were not enough to upset an award whether upon questions of fact or of law if within the submission. Decker v. Ladish-Stoppenback Co., supra; Donaldson v. Buhlman (1908), 134 Wis. 117, 113 N.W. 638, 114 N.W. 431; McCord v. Flynn (1901), 111 Wis. 78, 86 N.W. 668. There is no question the real-estate appraiser acted honestly. The parties contracted for his judgment and opinion as a real-estate appraiser on value in lieu of a trial and that is what they received. His errors of judgment within the scope of the submission honestly committed were contingencies assumed by the process of arbitration. If the parties intended to limit the expert in his opinion to certain theories of establishing value, the stipulation should have so provided."

Id. at pages 343, 344.

These statements are consistent with the views expressed in Domke, Commercial Arbitration, the leading treatise in the field. The author states that to vacate an arbitration award, the court must find not merely an error in judgment, but "`perverse misconstruction or positive misconduct . . . plainly established,'" "`manifest disregard of the law,'" or that the award itself "violates public policy," "is illegal," or that "the penal laws of the state will be violated." Did the arbitrators exceed their powers in making the award?

(1968), ch. 34, pp. 312-315.

Id. at pages 312-314.

2. The parties seem to agree that the arbitrators could have relied on two theories to support the arbitration award: The first based on a construction of the contract and the second based on the impossibility doctrine of contract law. The hospital argues, however, that the arbitrators disregarded the law and the evidence in relying on these theories and that, therefore, the arbitrators exceeded their powers. These arguments attack the arbitrators' exercise of judgment and thus may be quickly disposed of. It is obvious that the award was not based on a perverse or manifest disregard of the law or the facts. An extensive review of the evidence before the arbitrators, as in the lower court's lengthy and excellent opinion, would not only be unnecessary, but harmful, since an impression might be conveyed that despite the expressed standard of limited judicial review, the arbitration hearing record in every case would be carefully scrutinized by this court to determine whether the weight of the evidence supported the award.

We find much here to support reliance on either of the two theories on which the award could be based.

Construction of the Contract

A. . The 527-page contract contains two conflicting provisions concerning Scherrer's right to additional compensation resulting from unexpected subsoil conditions. Sec. 12.1.6 (the AIA provision) of the American Institute of Architects General Conditions of the Contract for Construction provides:

"12.1.6 Should concealed conditions encountered in the performance of the Work below the surface of the ground be at variance with the conditions indicated by the Contract Documents or should unknown physical conditions below the surface of the ground of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in this Contract, be encountered, the Contract Sum shall be equitably adjusted by Change Order upon claim by either party made within a reasonable time after the first observance of the conditions."

On the other hand, sec. 32 of the project requirements (the project provision) provides:

" SOIL BORING DATA

"a. The Contractor may acquire a copy of the logs of borings from Soils and Engineering Services, Inc., 4306 Tokay Blvd., Madison, Wis., or may examine them at the Architect's' office. Such data is offered in good faith solely for the purpose of placing the Contractor in receipt of all information available, and in the event is to be considered a part of the Contract Documents. The Contractor must interpret such data according to his own judgment and acknowledges that he is not relying upon the same as accurately describing the sub-surface conditions which may be found to exist. The Contractor further acknowledges that he assumes all risks contingent upon the nature of the sub-surface conditions to be actually encountered by him in performing the work covered by the Contract, even though such actual conditions may result in the Contractor performing more or less work than he originally anticipated." Applying the AIA provision, the arbitrators could, without perversity, have found Scherrer entitled to additional compensation: the contract prepared by the hospital's architects and engineers specified that the chemical grout intrusion method of underpinning should be utilized, but according to three experts, the soil conditions actually encountered rendered successful use of this method impossible. The hospital, however, makes two arguments against the application of the AIA provision:

First, the hospital argues the arbitrators erred in relying on the AIA provision rather than the project provision. The hospital contends that Article 15 c of the supplementary conditions provides:

"Where conflicting conditions occur between . . . the AIA General Conditions . . . and other Contract Documents, the more stringent requirement shall apply."

And the hospital then argues that since the project provision is "more stringent" than the AIA provision, the project provision must apply. Not so. (1) Article 15 c does not specify "more stringent" as to whom — the architect, the owner, the contractor — and therefore arguably is a poor guide to construction; (2) Article 16 b of the supplementary conditions expressly gives AIA General Provisions precedence over the project requirements in the event of conflict "except as may be otherwise specifically stated." Nothing in the contract specifically states that the project provision governs the AIA provision; therefore, the AIA provision should control.

Article 16 b of the supplementary conditions provides, in part:
"Contract Documents consist of . . . (2) Conditions of Contract, (3) General Requirements . . . . In event any of above component parts of Contract Documents conflicts with provisions in any other of the component parts, then provisions in document first stated above shall govern over other component parts, except as may be otherwise specifically stated."
"Conditions of Contract" is then defined to include "General Conditions" (which would include the AIA General Conditions of Contract). "General Requirements" is defined to include "Project Requirements."

Second, the hospital argues that the arbitrators flatly ignored the project provision and therefore exceeded their powers. To support this contention, the hospital relies on a portion of the record of the arbitration hearing. When the project provision was called to the attention of the arbitrators, Arbitrator Von Grossman noted that the project provision and the AIA provision were contradictory and indicated that he would be guided by the AIA provision which he helped draft. He said in part:

". . . it is my off-the-cuff opinion that your clause is rather restrictive. And I could say unenforceable. I personally, knowing the rules, wouldn't try to impose on someone. It is all right to put — you attorneys can put all kinds of clauses in, but to make them stick, I personally am going to be guided by this particular clause, which is national in scope and accept it."

The hospital argues that this statement amounts to more than an error in judgment; rather, the hospital argues, it evidences a "deliberate refusal to make the award within the terms of the contract of submission." Indeed, sec. 42 of the American Arbitration Association Construction Industry Arbitration Rules provides, in part:

"SCOPE OF AWARD — The arbitrator may grant any remedy or relief which he deems just and equitable and within the terms of the agreement of the parties." (Emphasis supplied.)

Certainly the arbitrator is not free to ignore the contract in making his award.

However, there is no showing here that the contract was ignored by this arbitrator. Faced with two conflicting provisions he indicated a preference for the one he felt would produce a more equitable result. Furthermore, in a portion of the record not cited by the hospital, the attorneys representing both sides extensively explained the different theories of interpretation discussed above, and Arbitrator Von Grossman indicated that he preferred the position urged by Scherrer's attorney, but that he would do additional research on the point. Finally, regardless of any individual arbitrator's personal subjective reasons for giving effect to the AIA provision rather than the project provision, such construction has ample support on the face of the contract as we have already explained. Thus, the argument advanced by the hospital comes nowhere close to establishing the clear and convincing evidence of perverse misconstruction or manifest disregard of the law that would justify vacating the arbitrator's award. Impossibility Doctrine.

B. If the project provision were held to apply here, Scherrer would be liable for "all risks contingent upon the nature of the sub-surface conditions." However, under the impossibility doctrine of contract law, the arbitrators might have found Scherrer did not assume the risk that subsoil conditions would render the method of underpinning specified in the contract completely impossible of successful performance. Sec. 456 of the Restatement, 2 Contracts, provides:

"Except as stated in sec. 455, or where a contrary intention is manifested, a promise imposes, no duty if performance of the promise is impossible because of facts existing when the promise is made of which the promisor neither knows nor has reason to know."

Restatement, 2 Contracts, p. 847, sec. 456. This section of the Restatement was quoted and relied on in Estate of Zellmer (1957), 1 Wis.2d 46, 49, 82 N.W.2d 891.

Sec. 455 pertains to subjective impossibility (party unable to perform) and is thus irrelevant here. The arbitrators could have found the other elements present here. The arbitrators could have found that the project provision did not manifest an intention that the risk of impossibility would be assumed. The provision could be read only to include the risk of doing more work than anticipated, using the methods specified in the contract, rather than having to do more work because a different method was required. In any case, such an interpretation would not be perverse, because the provision does not mention impossibility at all.

The fact of impossibility here itself is supported by the testimony of three expert witnesses. The record also reveals Scherrer's lack of knowledge or reason to know of the impossibility of successfully underpinning using the chemical grout intrusion method. The technical characteristics and problems of this method are quite complicated, and the arbitrators could have found that Scherrer reasonably relied on the information and specifications contained in engineering data and the contract written by architects and engineers employed by the hospital. Furthermore, experts testified that whether the chemical grout method would actually work in any given instance could only be determined through testing the soil after the process had already been commenced. Thus, Scherrer could not have known of the impossibility at the time the contract was signed.

In sum, the arbitrators could have found that the doctrine of impossibility relieved Scherrer of extra costs incident to changing the method of underpinning. This whole situation closely resembles an example of the operation of this doctrine contained in the Restatement. Illustration 4 of sec. 456 is as follows:

"A, a general contractor, contracts with B to build a bridge according to plans that have been prepared by C, a bridge engineer, employed by B. The determination of the sufficiency of the plans demands expert knowledge. They are so defective that a structure built according to them must inevitably fall before it is half finished. It does so when A has partially completed it. A is under no duty, since performance was from the outset impossible. He had no reason to know this and did not, on a fair interpretation, agree to bear the risk of the expert's incompetence."

Restatement, 2 Contracts, p. 849, sec. 456, Illustration 4.

We conclude that the award is supported on either theory and should not be vacated. Is the award mutual, final and definite?

3. The hospital's final argument is that the award must be vacated because it is incomplete and indefinite in that it fails to allocate the damage award between special and general damages. Scherrer made two damage claims: $65,652.01 for the cost of underpinning, and $76,140, arising out of delay. The award commanded the hospital to pay $56,830 without any further explanation. The hospital argues that since damages due to delay are prohibited under the contract, and since it is impossible to determine whether any portion of the award was based on damages due to delay, the award must be overturned.

Plaintiffs' argument misconceives this court's function in reviewing arbitration awards. Such awards are presumptively valid, and invalidity may only be shown by, clear and convincing evidence.

The hospital's "evidence" consists of speculation about the reasons behind the award. If any state of facts could support the award, it must be upheld. Here, the $56,830 award could be entirely attributable to the claim of $65,652.01 for damages from the increased cost of underpinning. Therefore, the damage award may not be attacked on the grounds that a portion of it could conceivably be allocable to an allegedly improper item.

The hospital relies on the case of Garstka v. Russo to support its contention that the award was improper. In Garstka, the arbitrators were asked to decide two separate questions arising out of a construction contract dispute: (1) the value of the materials furnished by the contractor; and (2) the value of the labor furnished by the contractor. The arbitrators award specifically determined that the labor was worth $1,500, but failed to make any finding as to the materials. The court vacated the award on the grounds it was incomplete on its very face. The situation in the instant case is quite different. Here, the award was for a lump sum, not expressly attributable to either damage claim, and the award itself stated: "This Award is in full settlement of all claims and counterclaims submitted to this arbitration." On its face the award left no issue unresolved and must be considered final and definite. Arbitration awards need not separately treat each claim and counterclaim where a specific sum is awarded expressly to satisfy all such claims and counterclaims. The hospital's argument that the award is incomplete must be rejected.

See Annot. (1971), 36 A.L.R. 3d 649, 663.

By the Court. — Judgment affirmed.


Summaries of

Scherrer Constr. Co. v. Burlington Mem. Hosp

Supreme Court of Wisconsin
Oct 1, 1974
221 N.W.2d 855 (Wis. 1974)

reviewing record to determine if any evidence supports arbitrator's award under either possible legal theory

Summary of this case from Arbitration, Madison Teachers v. Metro. Sch. Dist
Case details for

Scherrer Constr. Co. v. Burlington Mem. Hosp

Case Details

Full title:IN RE ARBITRATION: SCHERRER CONSTRUCTION COMPANY, Respondent, v…

Court:Supreme Court of Wisconsin

Date published: Oct 1, 1974

Citations

221 N.W.2d 855 (Wis. 1974)
221 N.W.2d 855

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