                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-16-2007

HSM Constr Ser v. MDC Sys Inc
Precedential or Non-Precedential: Non-Precedential

Docket No. 06-2584




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                                                NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT




                         No. 06-2584




          HSM CONSTRUCTION SERVICES, INC.;
          HSM MANAGEMENT SERVICES, INC.,
                                  Appellants
                        v.

                    MDC SYSTEMS, INC.




        On Appeal from the United States District Court
            for the Eastern District of Pennsylvania
                     (D.C. No. 05-cv-05983)
        District Judge: Honorable Ronald L. Buckwalter




          Submitted Under Third Circuit LAR 34.1(a)
                        July 9, 2007

   Before: SLOVITER, HARDIMAN, and ROTH, Circuit Judges

                    (Filed July 16, 2007 )




                          OPINION
SLOVITER, Circuit Judge.

       Appellants HSM Construction Services, Inc. (“Construction”) and HSM

Management Services, Inc. (“Management”) (jointly referred to as “HSM” unless

otherwise noted) appeal from the District Court’s order confirming an arbitration award in

favor of the appellee, MDC Systems, Inc. HSM argues that the Arbitration Panel

manifestly disregarded the law and was evidently partial to MDC Systems, Inc.1

                                               I.

       Because the parties are familiar with the facts, we adopt the factual scenario as

stated by the District Court in its opinion:

                     The present case stems from a lawsuit regarding the construction of
              the Rosewood Care Center of St. Charles, Illinois, in which Construction
              was a named defendant. To aid in its defense of that lawsuit, Construction
              hired MDC Systems, Inc. (“MDC”) to prepare expert engineering reports.

                     By a letter dated July 18, 2002, MDC drafted a Proposal of Expert
              Consulting Services. Throughout the Proposal, MDC refers to the other
              party to the contract as “HSM” and does not specify whether it is referring
              to “HSM Management” or “HSM Construction.” By a letter dated July 19,
              2002, printed on “HSM Management Services, Inc.” letter head, “HSM”
              provided supplementary terms and conditions. The fax also included the
              signature page of the Proposal, which was signed by General Counsel for
              “HSM.” Afterwards, HSM Management Services, Inc. paid the initial
              retainer and made two subsequent partial payments to MDC.

                    Construction and Management argue[d] that MDC prepared an
              unusable expert disclosure report. As a result, MDC was not paid for the


                    1
                    The District Court had diversity jurisdiction over this action
             pursuant to 28 U.S.C. § 1332. This court has jurisdiction over the
             appeal pursuant to 9 U.S.C. § 16(a)(1)(D) and 28 U.S.C. § 1291.

                                               2
               balance due under the contract. MDC then submitted a Demand for
               Arbitration to the American Arbitration Association (“AAA”) seeking relief
               of $80,662.53 in unpaid fees from only “HSM Management Services, Inc.”
               Construction was not named as a party on MDC’s initial Demand.

                      On March 16, 2004, the arbitration Panel conducted a preliminary
               hearing conference call. Management argued that it was not a party to the
               contract in question. The Panel later amended the caption from “HSM
               Management, Inc.” to “HSM, Inc., HSM Management, Inc., and HSM
               Construction Services, Inc.”

HSM Constr. Serv., Inc. v. MDC Sys., Inc., 2006 WL 1030229, at *1 (E.D.Pa. Apr. 13,

2006).

         At the conclusion of the arbitration, the panel issued a decision in favor of MDC

and held Construction and Management jointly and severally liable for $86,969. HSM

raises two issues in its appeal. It argues first, that “the District Court err[ed] in

determining that the arbitration panel did not manifestly disregard the law by finding

Management liable to MDC where Management was not a party to the agreement

between Construction and MDC[.]” Appellants’ Br. at 3. Second, it argues that the

District Court erred in determining that the arbitration panel was not evidently partial to

MDC.

                                               II.

                                               A.

         We consider first which law applies. HSM argued in the District Court that the




                                                3
Federal Arbitration Act (“FAA”) applies, whereas MDC argued that the Delaware

Uniform Arbitration Act (“DUAA”) applies. The District Court decided that “the

provisions of the FAA and the DUAA that are applicable in this case, the ‘evidently

partial’ standard and the ‘manifest disregard of the law’ standard, are identical” and

therefore it declined to decide which law applies because the result would be the same.

2006 WL 1030229, at *2. We agree with the District Court in this respect.

       This court reviews a district court’s denial of a motion to vacate a commercial

arbitration award de novo. Dluhos v. Strasberg, 321 F.3d 365, 369 (3d Cir. 2003). In

reviewing a district court’s order confirming an arbitration award, this court reviews the

district court’s factual findings for clear error and exercises plenary review over the

district court’s determination on questions of law. See China Minmetals Materials Imp.

& Exp. Co., Ltd. v. Chi Mei Corp., 334 F.3d 274, 278-79 (3d Cir. 2003) (citing First

Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-48 (1995)); Kaplan v. First

Options of Chicago, Inc., 19 F.3d 1503, 1509 (3d Cir. 1994), aff’d, 514 U.S. 938 (1995).

                                             B.

       HSM contends that Management was never a party to the agreement with MDC

(the “Agreement”) because it neither signed the Agreement nor was a party to the

underlying lawsuit concerning the construction of the Rosewood Care Center. Because

the issue as to whether Management was a party to the arbitration agreement is an issue of



                                              4
arbitrability, the court must make an independent determination. See First Options, 514

U.S. at 943-45.

       The parties’ objective manifestations control in deciding whether they formed a

contract by mutual assent. Management’s outward words and acts indicate that it is a

party to the Agreement. First, the signature page of MDC’s Proposal and the July 19,

2002 letter from “HSM” to MDC (the “Letter”) were both signed by Dennis McCubbin,

the General Counsel of Management and Construction, on behalf of “HSM.” Although

neither MDC nor McCubbin explicitly specified whether “HSM” referred to Management

or Construction, both the Letter and its fax cover sheet were on Management’s letter

head. “HSM Management Services, Inc.,” as it appears on both the letter head and fax

cover page, is the only full name on those documents that is consistent with the

abbreviation of “HSM.” This leads to the conclusion that the “HSM” referred to in the

Letter as a party must be “HSM Management Services, Inc.”

       Second, Management is the entity that paid MDC’s fees for its service. The

checks payable to MDC for its service were all under Management’s name. Indeed, it

paid the initial retainer and the two subsequent partial payments. Although Management

contends that it paid the check on behalf of Construction, there was no outward indication

of such subjective and undisclosed intention. From the objective acts of Management, it

was Management who signed the Agreement and performed the obligation to pay under



                                             5
the Agreement. Thus, Management is a party to the Agreement.

       Management argues that it never was a party to the underlying Rosewood Care

Center lawsuit, and therefore it could not be a party to the Agreement, which retained

MDC to provide expert services for the underlying proceeding. However, Management

had an interest in the proceeding, because it possessed one of the claims for which

Construction sought indemnification in the Rosewood Care Center lawsuit. Moreover,

whether Management is a party to the underlying lawsuit is not directly related to the

question as to which entity is the party to the Agreement. The objective manifestation by

Management was sufficient to indicate its assent to be a party to the Agreement.

       Management also argues that MDC’s president “knew MDC was dealing with

Construction, not Management.” Appellants’ Br. at 16. It notes that MDC’s president, in

response to questioning at the arbitration hearing, appears to have agreed that references

to “HSM” in the expert report were specifically meant to indicate “HSM Construction

Services, Inc.” because “they were the party to the contract, so it would only be proper to

do that.” App. at 41.

       MDC does not fully respond to the foregoing argument. Although these

statements show that MDC knew that it was providing services to Construction, they do

not lead to the conclusion that MDC knew it was not also signing the Agreement with

Management.

       The contract between the parties was the subject of a broad arbitration clause

                                             6
covering “all” disputes arising from the transaction. App. at 50. We conclude that

Management’s outward manifestations were clear enough to find its objective intention to

be a party and accordingly hold that it is bound by the arbitration award.

                                             C.

       We turn then to the second issue, HSM’s argument that “the District Court erred in

determining that the arbitration panel was not evidently partial to MDC where MDC

informed the arbitration panel in writing that Construction and Management ‘ha[ve] not

paid the AAA-required fees or deposits,’” Appellants’ Br. at 3, and the panel was made

aware that HSM “were not paying [their] share of the arbitration fees” in the conference

after the first day of the hearing. App. at 82. This issue arose from a letter sent by MDC

to the Arbitration Panel on July 12, 2004, stating, in part, “HSM has not paid the AAA-

required fees or deposits, nor has it requested in forma pauperis relief[.]” App. at 78.

Originally, the arbitration was to be for a single day, but the panel believed a second day

would be required. HSM argues that because the salary of the arbitrators “originate[s]”

from the arbitration fees, the Panel has a financial interest “in the outcome of the

arbitration,” and thus created, at the very least “an appearance of impropriety.”

Appellants’ Br. at 21.

       MDC responds that during the conference after the first day of the arbitration

hearing, no party (MDC, AAA or the Arbitration Panel) other than HSM itself could have

known that HSM planned to refuse to pay its share of fees. Therefore, even if the Panel


                                              7
did know of HSM’s intention, HSM has not proven that it was MDC who told the

arbitrators so. MDC also argues that if evident partiality may be found based on the fact

that an arbitration panel knows a party refused to pay arbitration fees, it would be easy for

parties to get rid of an arbitration award simply by voluntarily telling the panel that it did

not pay arbitration fees. The District Court refused to find evident partiality of the

Arbitration Panel, because HSM failed to prove that the July 12, 2004 letter of MDC

actually reached the Panel, and failed to submit any additional evidence of bias.

       The courts have not clearly articulated the standard to be applied in interpreting

section 10 of the Federal Arbitration Act which provides that courts may vacate an

arbitration award if an arbitrator shows “evident partiality.” 9 U.S.C. §10(a)(2). On one

hand, the Supreme Court has stated that evident partiality is shown when arbitrators fail to

disclose “any dealings that might create an impression of possible bias.” Commonwealth

Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 149 (1968). The arbitrators “not only

must be unbiased but also must avoid even the appearance of bias.” Id. at 150. On the

other hand, this court has appeared to adopt what we refer to as a “reasonably construed”

bias standard, which finds evident partiality only when “a reasonable person would have

to conclude that the arbitrator was partial to [one] party to the arbitration.” Kaplan, 19

F.3d at 1523 n.30 (quoting Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 (6th Cir.

1989)). The reasonably construed bias standard requires proof of circumstances

“powerfully suggestive of bias.” Id. (quoting Merit Ins. Co. v. Leatherby Ins. Co., 714


                                               8
F.2d 673, 681-82 (7th Cir. 1983)).

       The First, Second, Fourth, Sixth, Seventh, Ninth and Eleventh Circuits have

adopted the reasonably construed bias standard, albeit not under that name. See Morelite

Const. Corp. v. N.Y. City Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2d

Cir. 1984) (evident partiality will be found where “a reasonable person would have to

conclude that an arbitrator was partial to one party to the arbitration”); JCI Commc’ns,

Inc. v. Int’l Bhd. of Elec. Workers, Local 103, 324 F.3d 42, 51 (1st Cir. 2003) (same);

ANR Coal Co., Inc. v. Cogentrix of N.C., Inc., 173 F.3d 493, 500-01 (4th Cir. 1999)

(same); Apperson, 879 F.2d at 1358 (same); see also Gianelli Money Purchase Plan and

Trust v. ADM Investor Servs., Inc., 146 F.3d 1309, 1312 (11th Cir. 1998); Toyota of

Berkeley v. Auto. Salesman’s Union, Local 1095, 834 F.2d 751, 756 (9th Cir. 1987) (“the

party alleging bias must establish facts that create a reasonable impression of partiality”)

(internal citation and quotation marks omitted); Merit Ins. Co., 714 F.2d at 681.

       We need not decide the standard of bias in this case because HSM has failed to

show evident partiality of the arbitrators even under the more generous standard of

“appearance of bias.” The District Court found that it was unclear whether MDC’s letter

actually reached the Panel members. Without clear error, we will not reverse a factual

finding of the District Court. The District Court also held that there is “no additional

evidence of bias.” 2006 WL 1030299, at *3. We agree. Although HSM has stated that



                                              9
the Arbitration Panel learned that HSM was planning not to pay arbitration fees in the

conference after the hearing, it is no more than a conclusory assertion. The only evidence

in the record regarding this allegation is the affidavit of HSM’s General Counsel,

McCubbin, who stated, “[o]n February 2, 2005, the arbitrators were aware that

[Construction and Management] were not paying a share of the arbitration fees.” App. at

82. No other evidence is cited to support McCubbin’s allegation or to prove that it was

MDC who informed the Panel of HSM’s intention to avoid arbitration fees.

       Even if HSM had proven that the Arbitration Panel was aware of HSM’s intention

not to pay the arbitration fee, such awareness itself is not sufficient to show that the

arbitrators had a financial interest in the outcome of the arbitration. Rule 54 of the

AAA’s Commercial Rules of Arbitration provides that the AAA may suspend or

terminate the hearing or proceeding if arbitration fees are not paid on time. The fact that

the arbitration proceeded suggests that the fees were paid, no matter which party actually

paid them. HSM conceded that if it did not pay the arbitration fees, MDC “would have to

pay the fees for both parties in order for the arbitration to proceed.” App. at 82.

Therefore, the Panel did not have any financial interest in the outcome of the arbitration,

because the fees would have been paid as long as the proceeding continued.

       In conclusion, HSM has failed to prove that MDC’s July 12, 2004 letter actually

reached the Arbitration Panel, and it has not provided any additional evidence showing

bias of the arbitrators. Even under the generous standard of “appearance of bias,” we

                                              10
conclude that HSM has failed to raise any genuine issue of bias.

                                            III.

       For the reasons set forth, we will affirm the District Court’s order confirming the

arbitration award.




                                            11
