Opinion
No. 5-843 / 04-1701
Filed January 19, 2006
Appeal from the Iowa District Court for Polk County, Douglas F. Staskal, Judge.
Plaintiff appeals from a district court ruling that vacated an arbitration award for damages. REVERSED.
John R. Hearn, Des Moines, for appellant.
Dennis W. Johnson of Dorsey Whitney LLP, Des Moines, for appellees.
Considered by Sackett, C.J., and Vogel and Eisenhauer, JJ.
Plaintiff-appellant, Des Moines Area Association of Realtors Inc. (Realtors), a trade association of realtors, appeals from a district court ruling that vacated an arbitration award for damages for an admitted breach of a contract for sale of software to plaintiffs by defendants-appellees U.S. Recognition, Inc. (US), a computer development subsidiary of defendant-appellee Norwest Mortgage, Inc. (NW). Realtors contends the court erred by (1) applying the wrong standard of review, (2) addressing issues not raised by defendants, (3) vacating the award on grounds it had not been damaged, and (4) failing to award contractual attorney fees and interest. We reverse the district court and affirm the arbitrator on all issues.
Realtors contracted with US to develop software for Realtors's members. The software, called WIN2, was designed to operate the association's Multiple Listing Service. US defaulted on the WIN2 contract on April 1, 1996, and Realtors contracted with Iowa Realty to lease Iowa Realty's T-III software instead. Realtors then sued US and NW for damages based on the breach of the WIN2 contract and fraud. Realtors also sought attorney fees and interest. US and NW moved to compel arbitration pursuant to an arbitration clause in the contract. The parties agreed to arbitration and the district court ordered all issues proceed to arbitration under Iowa Code chapter 679A (2001).
The case proceeded to arbitration and the arbitrator, after hearing evidence and considering a number of exhibits, issued a ruling holding (1) there was no fraud, (2) a damage limitation/disclaimer clause in the contract was not enforceable, and (3) Realtors was entitled to $675,500 in damages. In a supplemental ruling the arbitrator refused Realtors's request for attorney fees and did not address Realtors's claim for prejudgment interest.
Both sides filed motions in the initial action in district court challenging the decision. The district court vacated the award. The district court found, while defendants conceded there was a breach of the contract for sale of WIN2, Realtors had not been damaged because Realtors profited by using T-III because the charges it assessed its members exceeded the amount it paid to Iowa Realty.
Scope of Review on Appeal
This is an appeal from a court order in a civil lawsuit; our scope of review of the district court's decision is for correction of error. Iowa R. App. P. 6.4; Humphreys v. Joe Johnston Law Firm, P.C., 491 N.W.2d 513, 514 (Iowa 1992).
Scope of Review in the District Court
We first address Realtors's contention the district court exceeded its scope of review beyond the statutory grounds of Iowa Code section 679A.12(1)(f).
Judicial review of arbitration awards is limited in Iowa. Humphreys, 491 N.W. 2d at 515; Reicks v. Farmers Commodities Corp., 474 N.W.2d 809, 810-11 (Iowa 1991); Iowa City Cmty. Sch. Dist. v. Iowa City Educ. Ass'n, 343 N.W.2d 139, 142-43 (Iowa 1983); Sergeant Bluff-Luton Educ. Ass'n v. Sergeant Bluff-Luton Cmty. Sch. Dist., 282 N.W.2d 144, 147-48 (Iowa 1978).
The function of the courts is strictly limited to a determination of the arbitrator's authority and the existence of an arbitrable dispute. Ordinarily courts may not inquire into the merits of the decision itself. Teamsters Local 394 v. Associated Grocers of Iowa Coop., Inc., 263 N.W.2d 755, 757 (Iowa 1978) (citing United Steelworkers v. Enterprise Wheel Car Corp., 363 U.S. 593, 596, 80 S. Ct. 1358, 1360, 4 L. Ed. 2d 1424, 1427 (1960)). The Iowa Supreme Court has recognized the arbitrator's broad authority and correspondingly restricted judicial involvement in the arbitration process. Id.; see also Humphreys, 491 N.W.2d at 515. "Most important, limited judicial review gives the parties what they bargained for — binding arbitration, not merely arbitration binding if a court agrees with the arbitrator's conclusion." Sergeant Bluff-Luton, 282 N.W.2d at 147. Arbitration decisions "are not . . . closely scrutinized." Reicks, 474 N.W.2d at 811. "A refined quality of justice is not the goal in arbitration matters." Id. Arbitration is looked on favorably as an alternative to civil litigation. Humphreys, 491 N.W.2d at 514. Accordingly, every reasonable presumption will be indulged in favor of the legality of an arbitration award. Id.; First Nat'l Bank v. Clay, 231 Iowa 703, 713, 2 N.W.2d 85, 91 (1942).
We look at the district court's decision to determine whether it followed the directives of Iowa Code section 679A.17(2) in vacating the award. That section provides in relevant part:
Vacating an award
1. Upon application of a party, the district court shall vacate an award if any of the following apply:
. . . .
c. The arbitrators exceeded their powers.
. . . .
f. Substantial evidence on the record as a whole does not support the award.
. . . .
2. The fact that the relief awarded could not or would not be granted by a court of law or equity is not ground for vacating or refusing to confirm the award.
The award must be vacated if not supported by substantial evidence. Id.; id. § 679A.12(1)(f).
An arbitration conducted under the auspices of the American Arbitration Association, which this award was not, has a different standard of review. See Iowa Code § 679A.12(1)(f).
Realtors contend the district court closely scrutinized the arbitration award and this was not the proper standard of review. There is some confusion as to what standard the district court actually applied. We agree with Realtors that the district court is not authorized by chapter 679A to scrutinize the award and we note the defendants only contended it was not supported by substantial evidence. We therefore review to determine whether the district court correctly determined it was not supported by substantial evidence.
Damages
It is agreed US did not deliver the WIN2 software as promised and that Realtors entered into an agreement with Iowa Realty for its T-III software. The focal issue is whether there was substantial evidence Realtors was damaged.
The arbitrator found that after US failed to deliver the promised WIN2 software, Realtors sought and obtained replacement software. Thus Realtors elected to receive damages under Iowa Code section 554.2711(1)(a). The arbitrator determined the cost for the five-year contract period with US for WIN2 was $804,820 for the average number of non-Iowa/First Realty Agents using a replacement software system and the cost for reasonable cover for WIN2 would be a program called Realink, which would cost $1,481,320 for the same contract period. The arbitrator determined this was about one half of the cost of T-III. The arbitrator also found no evidence of any expenses saved by Realtors as a result of the US breach. The arbitrator then found that Realtors sustained direct damages of $676,500 based on the difference between the cost of WIN2 and Realink and awarded that amount against US and NW as guarantor.
Iowa Code section 554.2711 provides:
Buyer's remedies in general — buyer's security interest in rejected goods
1. Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (section 554.2612), the buyer may cancel and whether or not the buyer has done so may in addition to recovering so much of the price as has been paid
a. "cover" and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or
b. recover damages for nondelivery as provided in this Article (section 554.2713).
The WIN2 contract provided that Realtors should pay (1) a $54,950 upfront fee, (2) $5,000 per month licensing fee for up to 1,300 members and non-member participants, and a $30 per month charge for each non-member above 1,300 member and non-member participants. Realtors's CPA testified Realtors would charge fees to members and while generally a break even, they might want to increase cost to build up equity reserves and they did intend to have gross profits to cover overhead and indirect operating expenses.
The district court made a determination that the cover did not cost Realtors $676,500 more than it would have paid for WIN2 software. It found the agreement between Iowa Realty had no cost to Realtors and that Realtors had what it would have had if the contract for WIN2 had been completed, except it saved the cost of the WIN2 software. The court then went on to say that perhaps the members of Realtors have claims on a third-party beneficiary basis, but there was no evidence Realtors suffered any liabilities to its members for these additional costs. The court said there was a lack of substantial evidence Realtors was damaged by US's breach and vacated the award.
Realtors contends there was substantial evidence supporting the damage award. It also contends among other things that it did not seek consequential damages such as lost profits, that its damage is not affected by consequential damages such as profits or losses and that it contemplated profits as it would have imposed a similar WIN2 user fee. Realtors also argues there is substantial evidence supporting the arbitrator's determination of its cost for T-lll.
As to the issue of cover, Realtors argues the evidence supports the arbitrator's damage award, either using the cost of T-III as cover, or using the cost of Realink as the market price for substitute software. Realtors asserts that the alleged "profits" are not properly characterized as such (they were administrative fees and surcharges, and Realtors is a nonprofit corporation), and in any event Realtors would have received similar "profits" with WIN2. Realtors argues it cannot affect the measure of its damages based on a cover analysis.
Realtors entered into two separate contracts for the use of T-lll. The first contract commenced March 13, 1997, and ran until December 31, 1999. Under this contract Realtors billed members for T-III charges. Then in July of 1999 a second contract was signed to extend the agreement to December 31, 2002. This agreement provided that Realtors would pay $65,000 a month commencing on January 1, 2000, for the T-lll system, which over the remaining two-year period was $1,560,000. Therefore, even without considering the cost of the first contract, the cost the arbitrator used to determine cover is supported by substantial evidence.
Applying the extremely limited scope of review by Iowa courts of arbitration decisions, the district court should be reversed in vacating the damage award for several reasons. First, the district court based its decision on issues not specifically addressed by the arbitrator. The arbitrator's ruling indicated the fighting issues were around (1) a limitation of liability clause in the agreement, (2) the effect of such on the guarantee given by NW, and (3) plaintiff's claims of breach of contract, fraud, and breach of the covenant of good faith and fair dealing.
Second, in reaching its award of damages the arbitrator did not consider alleged profits made by Realtors but considered only cover and held, "The costs of cover are direct or actual damages and not consequential damages as are differentiated in the statute itself where it recognized the cost of cover as separate from consequential damage." The arbitrator went on to find "the statute [apparently referring to Iowa Code Section 554.2712] permits the Buyer to recover from the Seller the difference between the cost of cover and the contract price." Nor did the arbitrator consider, as did the district court, that if there were losses as a result of the WIN2 contract not being performed, they were not losses to Realtors but to its members. The issue of whether the arbitrator applied the correct law here is not subject to review by this court or the district court. See Humphreys, 491 N.W. 2d at 515 (finding that courts reviewing arbitration decisions may not correct errors of law as long as the decision does not violate any provisions of chapter 679A).
The buyer may choose to cover by making "in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller." Iowa Code § 554.2712(1); Kanzmeier v. McCoppin, 398 N.W.2d 826, 831 (Iowa 1987). Furthermore, the goods must be a like kind substitute. Id. (citing Martella v. Woods, 715 F.2d 410, 413 (8th Cir. 1983)).
We reverse the district court and affirm the damage award made by the arbitrator.
Claims for prejudgment interest and attorney fees.
Realtors next contends the court erred in rejecting its challenge to the arbitration award, which was based on the arbitrator's failure to award attorney fees and failure to address the issue of prefiling and post filing interest. On the later issue, Realtors argues its damages were liquidated, and interest should run from the date the contract was breached. As to attorney fees, Realtors expresses concern that there is no statutory authority for review of legal error committed by the arbitrator, but urges that such review must be available and that a proper interpretation of Iowa Code section 679A.10 and the parties' contract allows for, and merited, arbitration attorney fees.
A provision in the agreement provided that "[the arbitrator shall have power to award recovery of all costs and fees (including reasonable attorney fees)." The arbitrator determined section 679A.10 appeared to except an award of attorney fees from the province of an arbitrator and also reasoned that in State v. State Police Officers Council, 525 N.W.2d 834, 837 (Iowa 1994), the court said no award is given for attorney fees unless there is bad faith. The arbitrator here did not find bad faith. It is not our province to determine whether or not the arbitrator correctly applied the law and we do not do so. See Humphreys, 491 N.W.2d at 514.
Plaintiff contends there is support for an interest award in AFSCME/Iowa Council 61 v. State, 484 N.W.2d 390, 396 (Iowa 1992). In AFSCME, the supreme court affirmed the district court in finding interest should be computed on wage increases determined by an arbitrator from the date due. Id. The wage increases were awarded state employees after negotiations for a collective bargaining agreement failed and the issues proceeded to arbitration. Id. When the State did not pay as ordered by the arbitrators, the unions filed an action in district court to enforce the arbitration awards under Iowa Code section 20.17(5), which provides collective bargaining agreements may be enforced by civil action in district court. Id. at 392. The arbitrator had been asked to award interest and failed to address the issue. AFSCME does not support plaintiff's position here. We have considered all of plaintiff's arguments on this issue and find them to be without merit.
We reverse the district court and affirm the arbitration award.