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University of Notre Dame (USA) In England v. TJAC Waterloo, LLC, No. 16-1397 (1st Cir. June 28, 2017)

Plaintiff-Appellee the University of Notre Dame (USA) in England (“Notre Dame”) executed a purchase and sale agreement to buy a building in England from Defendants-Appellants TJAC Waterloo, LLC (“TJAC”) and ZVI Construction Co., LLC (“ZVI”). Per the agreement, Notre Dame purchased the building from TJAC for $58,833,700, contingent upon completion of its renovation and conversion into a student dormitory by ZVI, a contractor associated with TJAC. The same agent executed the agreement for both TJAC and ZVI. Following the conversion, Notre Dame claimed that construction inadequacies had caused $8,500,000 in necessary remedial work.

The parties submitted the dispute to arbitration per the purchase and sale agreement, which provided that either the buyer or seller could refer the dispute for adjudication by an “expert,” or arbitrator. During the arbitration, all three parties agreed to bifurcate the proceedings — i.e., to resolve the liability phase of the breach of contract claims before reaching damages. The parties then tried the liability issues, and, after providing an opportunity for the parties to comment on a draft decision, the arbitrator adjudged TJAC and ZVI jointly liable to Notre Dame for substantial construction deficiencies.

TJAC and ZVI asked to postpone the impending damages phase of the arbitration, and Notre Dame requested a showing of their financial ability to satisfy a potential damages award. TJAC and ZVI did not comply with Notre Dame’s solvency request, so Notre Dame filed a suit in Massachusetts state court to enjoin TJAC and ZVI from dissipating, encumbering or transferring their assets. TJAC and ZVI removed the case to Massachusetts district court under 9 U.S.C. § 205, which creates subject matter jurisdiction for actions related to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In proceedings before the district court, Notre Dame requested confirmation of the arbitrator’s liability findings. The court granted confirmation and authorized an attachment of over $7 million as security for the judgment. TJAC and ZVI appealed, raising two issues: (1) TJAC and ZVI claimed that the bifurcated arbitration liability decision lacked the requisite finality required for judicial confirmation of an arbitration award under 9 U.S.C. § 207; and (2) ZVI argued that it was not bound by the judgment because only TJAC and Notre Dame had submitted to the arbitration clause.

In response to TJAC and ZVI’s first argument, the First Circuit explained that, while the Federal Arbitration Act (the “FAA“) requires an arbitration decision to be “final” before judicial recognition, a bifurcated liability judgment will be considered final where the parties have formally agreed to the bifurcation. This comports with the U.S. Supreme Court’s stance that the FAA allows parties to tailor the features of arbitration by contract.

Here, TJAC and ZVI argued that the arbitration decision was not final based on language in the draft decision: “None of the answers are final answers. All and any may now be commented upon in any way seen fit.” The First Circuit rejected this argument because the cited language only appeared in the first, clearly tentative, draft of proposed findings, and the subsequent award emphasized the finality of the liability determination. The arbitrator described the final decision as “[a]n expert determination on liability” and stated that “[l]iability was decided,” and the decision was “binding.” Recognizing legitimate reasons for the bifurcation, the First Circuit affirmed the district court’s decision that the arbitration liability decision was final and should be confirmed.

The First Circuit then rejected ZVI’s argument that it had not agreed to the arbitration clause of the purchase and sale agreement. The purchase and sale agreement referred to ZVI as one of the three parties; a ZVI corporate officer executed the agreement in a representative capacity; and the arbitration clause addressed “any dispute arising between the parties” regarding “their respective rights, duties and obligations” “as to any matter arising out of or in connection with the subject matter of this agreement.” The construction dispute clearly fell within the scope of the arbitration clause, and ZVI had submitted to the arbitration by actively participating without lodging any formal objection.

The First Circuit also rejected ZVI’s ancillary contentions. First, ZVI argued that it was a “nominal” party to the agreement because its only substantive obligation was to employ someone to oversee the construction. The court held that, irrespective of ZVI’s allegedly small role in the subject transaction, the instant dispute clearly implicated the broad language of the arbitration clause, which covered disputes “between the parties.” Second, ZVI argued that only the buyer (Notre Dame) and seller (TJAC), not the contractor (ZVI), could initiate arbitration under the agreement. Furthermore, it had a separate Duty of Care Agreement with Notre Dame that gave English courts exclusive jurisdiction over Notre Dame–ZVI disputes. The court noted that, while only the buyer or seller could initiate arbitration, the contract clearly contemplated that TJAC and ZVI, as closely related entities, would have a shared identity of interest. Finally, any rights conferred by the Notre Dame–ZVI Duty of Care Agreement merely provided a supplemental litigation forum and did not conflict with or detract from Notre Dame’s right to arbitrate against ZVI under the subject purchase and sale agreement.

In sum, the First Circuit rejected TJAC and ZVI’s arguments and affirmed the judgment of the district court.