Filed: Sep. 27, 1995
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals, Fifth Circuit. Nos. 93-1101, 94-10787. GATEWAY TECHNOLOGIES, INC., Plaintiff-Appellee, v. MCI TELECOMMUNICATIONS CORP., Defendant-Appellant. MCI TELECOMMUNICATIONS CORP., Plaintiff, v. GATEWAY TECHNOLOGIES, INC., Defendant. Sept. 27, 1995. Appeals from the United States District Court for the Northern District of Texas. Before JOLLY, JONES and DeMOSS, Circuit Judges: EDITH H. JONES, Circuit Judge. MCI Telecommunications Corp. ("MCI") appeals a district court order
Summary: United States Court of Appeals, Fifth Circuit. Nos. 93-1101, 94-10787. GATEWAY TECHNOLOGIES, INC., Plaintiff-Appellee, v. MCI TELECOMMUNICATIONS CORP., Defendant-Appellant. MCI TELECOMMUNICATIONS CORP., Plaintiff, v. GATEWAY TECHNOLOGIES, INC., Defendant. Sept. 27, 1995. Appeals from the United States District Court for the Northern District of Texas. Before JOLLY, JONES and DeMOSS, Circuit Judges: EDITH H. JONES, Circuit Judge. MCI Telecommunications Corp. ("MCI") appeals a district court order ..
More
United States Court of Appeals,
Fifth Circuit.
Nos. 93-1101, 94-10787.
GATEWAY TECHNOLOGIES, INC., Plaintiff-Appellee,
v.
MCI TELECOMMUNICATIONS CORP., Defendant-Appellant.
MCI TELECOMMUNICATIONS CORP., Plaintiff,
v.
GATEWAY TECHNOLOGIES, INC., Defendant.
Sept. 27, 1995.
Appeals from the United States District Court for the Northern
District of Texas.
Before JOLLY, JONES and DeMOSS, Circuit Judges:
EDITH H. JONES, Circuit Judge.
MCI Telecommunications Corp. ("MCI") appeals a district court
order affirming the judgment of an arbitrator who found that MCI
breached its contract with Gateway Technologies, Inc., ("Gateway")
and awarded attorneys' fees as actual damages as well as $2,000,000
in punitive damages. MCI contends that its contract with Gateway
provides for de novo review by this court of the errors of law in
the arbitration award and urges vacation of the entire award,
claiming that the arbitrator improperly assessed both attorneys'
fees and punitive damages as well as excluded critical evidence.
While we agree that the contract provides for de novo judicial
review of "errors of law" in the arbitration award, this court
vacates only the punitive damages and otherwise affirms the
arbitration award.
1
I. FACTUAL BACKGROUND
During 1990, the Virginia Department of Corrections ("VADOC")
solicited bids to design and implement a telephone system that
would enable inmates to place collect calls to authorized
individuals without operator assistance. After successfully
bidding for the project, MCI subcontracted with Gateway. Under
their contract, MCI, as a telephone service carrier, agreed to
secure the local access lines over which inmate calls would be
made, while Gateway promised to furnish, install, and maintain all
the equipment and technology necessary to provide the automated
collect calls.1 The contract expressly provided that the parties
were independent contractors and neither partners, joint venturers,
nor agents. Contract ("Agreement"), Apr. 29, 1991, at Article 2.
Further, it imposed on the parties a duty to negotiate in good
faith any disputes arising from the contract. Id. at Article 9.
In the event that such good faith negotiations proved fruitless,
the parties agreed to binding arbitration, "except that errors of
law shall be subject to appeal."
Id.
After installment of the VADOC phone system, MCI complained to
Gateway that the automated system it had designed was improperly
completing many collect calls. Ostensibly, because of the problems
with Gateway's system, MCI integrated its own automated system to
bypass the defective one. During the arbitration, however, the
1
An inmate, for example, would dial an authorized number
and, when the recipient answered, a recorded message would
announce the inmate's name and inform the recipient that he could
accept charges for the call by pressing or dialing "3."
2
arbitrator found that MCI's decision to migrate from the Gateway
system was motivated primarily by the significant profits promised
by integration.2 Once MCI had integrated its own system, it sent
a default notice to Gateway. Although Gateway proposed to cure the
defects with updated software, MCI refused to sign a
confidentiality agreement for this software, thus leaving the
problems with the original system unsolved. In January 1993, MCI
formally terminated its contract with Gateway.
On July 30, 1993, the arbitrator found that MCI had breached
its contractual duty to negotiate in good faith and awarded actual
as well as punitive damages to Gateway. MCI filed a motion in the
United States District Court for the Northern District of Texas to
vacate the award; Gateway simultaneously moved to confirm it.
Although the district court purported to review the award according
to the standard agreed upon in the contract, it did not interpret
"errors of law" as requiring "a scrutiny as strict as would be
applied by an appellate court reviewing the actions of a trial
court." Rather, it chose to "review the [a]ward under the harmless
error standard, but with due regard for the federal policy favoring
arbitration." Applying this standard, the district court confirmed
the award in its entirety.
II. DISCUSSION
A. Standard of Review
2
During the arbitration, Gateway presented internal MCI
memoranda that supported this conclusion. One estimate suggested
that MCI would earn a net revenue from savings of nearly $84,000
per month if it migrated from the Gateway system.
3
This court reviews the district court's confirmation of an
arbitration award under a de novo standard. Executone Info. Sys.,
Inc. v. Davis, 26 F.3d 1314, 1320 (5th Cir.1994); McIlroy v.
PaineWebber, Inc.,
989 F.2d 817, 819-20 (5th Cir.1993); Forsythe
Int'l, S.A. v. Gibbs Oil Co.,
915 F.2d 1017, 1020-21 (5th
Cir.1990). As the Supreme Court recently explained, this is not a
special standard, but reflects the application of typical appellate
principles. First Options of Chicago, Inc. v. Kaplan, --- U.S. ---
-, ---- - ----,
115 S. Ct. 1920, 1925-26,
131 L. Ed. 2d 985 (1995).
Usually, however, the district court's "review of an
arbitration award is extraordinarily narrow." Antwine v.
Prudential Bache Securities, Inc., 899 F.2d 410, 413 (5th
Cir.1990). In a proceeding to confirm or vacate an arbitration
award, the Federal Arbitration Act ("FAA") circumscribes the review
of the court, providing that an award shall not be vacated unless:
(1) the award was procured by corruption, fraud, or undue means;
(2) there is evidence of partiality or corruption among the
arbitrators; (3) the arbitrators were guilty of misconduct which
prejudiced the rights of one of the parties; or (4) the
arbitrators exceeded their powers. 9 U.S.C. § 10(a)(1)-(4)
(Supp.1995). Forsythe Int'l, S.A., 915 F.2d at 1020.
In this case, however, the parties contractually agreed to
permit expanded review of the arbitration award by the federal
courts. Specifically, their contract details that "[t]he
arbitration decision shall be final and binding on both parties,
except that errors of law shall be subject to appeal." (emphasis
4
added). Such a contractual modification is acceptable because, as
the Supreme Court has emphasized, arbitration is a creature of
contract and
the FAA's pro-arbitration policy does not operate without
regard to the wishes of the contracting parties.... "[I]t
does not follow that the FAA prevents the enforcement of
agreements to arbitrate under different rules than those set
forth in the Act itself. Indeed, such a result would be quite
inimical to the FAA's purpose of ensuring that private
agreements to arbitrate are enforced according to their terms.
Arbitration under the Act is a matter of consent, not
coercion, and parties are generally free to structure their
arbitration agreements as they see fit. Just as they may
limit by contract the issues which they will arbitrate, so too
may they specify by contract the rules under which that
arbitration will be conducted.' Mastrobuono v. Shearson
Lehman Hutton, Inc., --- U.S. ----, ----, 115 S. Ct. 1212,
1216, 131 L. Ed. 2d 76 (1995) (quoting Volt Information
Sciences, Inc. v. Board of Trustees of Leland Stanford Junior
Univ., 489 U.S. 468, 479,
109 S. Ct. 1248, 1256,
103 L. Ed. 2d
488 (1989)) (emphasis added).
See also Vimar Seguros y Reaseguros, S.A., v. M/V Sky Reefer, ---
U.S. ----,
115 S. Ct. 2322,
132 L. Ed. 2d 462 (1995) (enforcing a
contractual provision mandating arbitration in Tokyo, Japan);
First Options of Chicago v. Kaplan, --- U.S. ----, ----,
115 S. Ct.
1920, 1925,
131 L. Ed. 2d 985 (1995) (observing that "the basic
objective in this area is not to resolve disputes in the quickest
manner possible, no matter what the parties' wishes, but to ensure
that commercial arbitration agreements, like other contracts are
enforced according to their terms.") (citations omitted); Allied-
Bruce Terminix Companies, Inc., v. Dobson, --- U.S. ----,
115 S. Ct.
834,
130 L. Ed. 2d 753 (1995) (the FAA "intended courts to enforce
arbitration agreements into which parties had entered and to place
such agreements upon the same footing as other contracts.")
(citations omitted); Shearson/American Express, Inc. v. McMahon,
5
482 U.S. 220, 226,
107 S. Ct. 2332, 2337,
96 L. Ed. 2d 185 (1987)
(stressing that courts should "rigorously enforce agreements to
arbitrate."). Because these parties contractually agreed to expand
judicial review, their contractual provision supplements the FAA's
default standard of review and allows for de novo review of issues
of law embodied in the arbitration award.3
The district court accordingly erred when it refused to
review the "errors of law" de novo, opting instead to apply its
specially crafted "harmless error standard." This choice
apparently reflected the district court's unwillingness to enforce
the parties' contract because "the parties have sacrificed the
simplicity, informality, and expedition of arbitration on the altar
of appellate review." Prudent or not, the contract expressly and
unambiguously provides for review of "errors of law"; to interpret
this phrase short of de novo review would render the language
meaningless and would frustrate the mutual intent of the parties.
When, as here, the parties agree contractually to subject an
arbitration award to expanded judicial review, federal arbitration
policy demands that the court conduct its review according to the
terms of the arbitration contract. See, e.g., Volt Info. Sciences,
Inc., 489 U.S. at 469, 109 S.Ct. at 1250.
3
Of course, the FAA would govern review of the arbitration
had the contract been silent. However, the FAA does not prohibit
parties who voluntarily agree to arbitration from providing
contractually for more expansive judicial review of the award.
"There is no federal policy favoring arbitration under a certain
set of procedural rules; the federal policy is simply to ensure
the enforceability, according to their terms, of private
agreements to arbitrate." Volt Info. Sciences, Inc., 489 U.S. at
469, 109 S.Ct. at 1250.
6
Because the district court erroneously employed "harmless
error" review of the award, both the actual and punitive damages
awarded to Gateway were scrutinized and confirmed less rigorously
than the parties had intended. As a result, this court will review
the award de novo for "errors of law."4
B. Actual Damages
Upon finding that MCI had breached its contractual obligation
to negotiate in good faith with Gateway, the arbitrator awarded
actual damages to Gateway in the form of attorneys' fees.5 The
award is premised on the notion that had MCI satisfied its
contractual obligation, Gateway would not have incurred significant
litigation expenses; in different terms, it was reasonably
foreseeable that Gateway would incur attorneys' fees if MCI
breached its duty to negotiate in good faith. MCI objects to this
award of actual damages as an "error of law" and urges that under
the American Rule, a "litigant cannot collect attorneys' fees from
the losing party unless a statute or contract provides for the
4
MCI also contends that it was an "error of law" for the
arbitrator to exclude from evidence an audio tape and a video
tape purporting to demonstrate the failures of the Gateway
system. We disagree. MCI makes no headway on this point because
arbitrators' evidentiary decisions should be reviewed with
unusual deference. "Judicial review of arbitration awards is
[so] tightly limited; perhaps it ought not be called "review' at
all." Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704,
706 (7th Cir.1994) (Posner, J.). Because the arbitrator could
have easily found that the tapes were merely cumulative of
testimony already before him, it was not an abuse of his
discretion to exclude them from evidence. Stokes v. Georgia-
Pacific Corp.,
894 F.2d 764, 767 (5th Cir.1990).
5
Specifically, the arbitrator ordered MCI to pay $664,800 to
Gateway for its attorneys' fees. Award of Arbitrator, July 30,
1993.
7
award, or the losing party willfully disobeyed a court order or
brought suit in bad faith." See Alyeska Pipeline Serv. Co. v.
Wilderness Society, 421 U.S. 240, 259-60,
95 S. Ct. 1612, 1622-23,
44 L. Ed. 2d 141 (1975). MCI contends further that since the
exceptions to the American Rule do not apply in this case, the
award of attorneys' fees should be vacated.
Unfortunately for MCI, its objections to the award of actual
damages are not properly before this court because they were waived
when MCI failed to object to the imposition of attorneys' fees at
any time during the arbitration. Although Gateway argued to the
arbitrator both in testimony and in written briefs that it was
entitled to recover attorneys' fees as actual damages, MCI neither
objected nor responded during the arbitration or in its
post-hearing brief. Indeed, counsel for MCI admitted to this court
in oral argument that MCI did not object to the award of attorneys'
fees prior to the close of arbitration.
MCI's first objection was raised after arbitration when it
sought to have the award vacated in district court. However, MCI
"cannot stand by during arbitration, withholding certain arguments,
then, upon losing the arbitration, raise such arguments in federal
court." Nat'l Wrecking Co. v. Int'l Brotherhood of Teamsters,
Local 731, 990 F.2d 957, 960 (7th Cir.1993). If a party were
allowed to withhold objections until its appearance in federal
court, this would extinguish any benefit of an arbitration contract
as arbitrators would rarely, if ever, be fully apprised of the
8
issues before them.6 Accordingly, MCI has waived its objections to
the imposition of attorneys' fees and the arbitrator's award of
actual damages must be confirmed.
C. Punitive Damages
But the award of actual damages was coupled with a $2,000,000
award of punitive damages. In an extremely confusing passage, the
arbitrator found that the punitive damages were justified
"in part for an additional reason perhaps not assigned by
Claimant, but found by the Arbitrator: that Respondent's
attempt to terminate Claimant for default was part of a
deceptive scheme in wanton disregard of Respondent's
obligations to Claimant."7
Beyond this lone, opaque statement, the arbitration award is silent
about its rationale for imposing punitive damages against MCI.
Notwithstanding the district court's reference to "federal
law" as the rule of decision, any punitive damage award must be
consistent with the substantive state law governing the
arbitration. The arbitrator, hearing the dispute in Richmond,
Virginia, avowedly applied the substantive law of Virginia to this
dispute.8 For instance, during the arbitration proceeding the
6
See also, United Food & Commercial Workers, Local 100A v.
John Hofmeister & Son, Inc., 950 F.2d 1340, 1345 (7th Cir.1991)
(recognizing that allowing parties to withhold their objections
would "undermine the purpose of arbitration.").
7
Award of Arbitrator, July 30, 1993 (emphasis added). The
suggestion that an arbitrator has the authority to decide a
dispute that is not before him is meritless and is dispelled by
the unambiguous language of the FAA. See, e.g., 9 U.S.C. §
10(a)(4) (Supp.1995) (arbitrator cannot exceed his contractual
powers).
8
Gateway admits that the arbitrator announced that he would
apply Virginia law. Although Gateway suggests that Virginia law
did not govern every issue before the arbitrator, it finds no
9
arbitrator "announced, of course, earlier that I was going to apply
Virginia law, if there was no choice of law in the [arbitration]
clause...."9 Additionally, the arbitrator speculated that Virginia
courts might have jurisdiction to review the award, suggesting
strongly that Virginia law governed the arbitrator's resolution of
the dispute.10
If Virginia law allowed the arbitrator to impose punitive
damages and if the arbitration contract did not expressly prevent
the arbitrator from doing so, then such an award would have fallen
under the arbitrator's broad discretion to decide damages and
fashion remedial relief. Executone Info. Sys., Inc. v. Davis, 26
F.3d 1314, 1324-25 (5th Cir.1994) (an arbitration award is
legitimate so long as it draws its essence from the contract).
Other federal courts addressing the issue generally concur. See,
e.g., Baravati v. Josephthal, Lyon & Ross, Inc.,
28 F.3d 704 (7th
Cir.1994) (award of punitive damages for defamation did not exceed
arbitrator's authority); Lee v. Chica,
983 F.2d 883 (8th Cir.1993)
(arbitrator could award punitive damages for fraud and breach of
fiduciary duty), cert. denied, --- U.S. ----,
114 S. Ct. 287,
126
L. Ed. 2d 237 (1993); Todd Shipyards Corp. v. Cunard Line, Ltd., 943
support in the record for this suggestion.
9
The arbitration clause did not contain a choice of law
provision.
10
When considering an evidentiary matter, the arbitrator
said, "To protect [the attorney] from the wrath of the Virginia
Supreme Court, if this goes up on appeal or what have you, that
[sic] let's try to find some other way to get this letter in."
(emphasis added).
10
F.2d 1056 (9th Cir.1991) (upholding an award of punitive damages
and attorneys' fees for bad faith); Raytheon Co. v. Automated
Business Sys., Inc.,
882 F.2d 6 (1st Cir.1989) (tort claims allowed
for punitive damages); Bonar v. Dean Witter Reynolds, Inc.,
835
F.2d 1378, 1386-87 (11th Cir.1988) (language of arbitration
contract did not prevent arbitrator from awarding punitive
damages). Moreover, the Supreme Court has just confirmed that
arbitrators presumptively enjoy the power to award punitive damages
unless, unlike this case, the arbitration contract unequivocally
excludes punitive damages claims. Mastrobuono, --- U.S. at
----,
115 S. Ct. at 1216-17.
Although the arbitrator in this case wielded the power to
impose punitive damages, his rationale for doing so must be
consistent with Virginia law. Under Virginia law, punitive damages
cannot be imposed merely for breach of contract.11 In different
terms, punitive damages must be predicated on tort liability.
Gasque v. Mooers Motor Car Co., Inc., 227 Va. 154, 159,
313 S.E.2d
384, 388 (1984) (holding that "[p]unitive damages are unavailable
in suits purely ex contractu, and can be awarded only where an
independent, willful tort is alleged and proved."); Kamlar Corp.
v. Haley,
224 Va. 699, 707,
299 S.E.2d 514, 518 (1983) (mere breach
of contract, unaccompanied by willful tort, cannot sustain punitive
damage award). Virginia law also requires that an award of
punitive damages be supported by an award of compensatory tort
11
Gateway does not dispute that, under either Virginia or
Texas law, punitive damages cannot be awarded merely for breach
of contract.
11
damages. See, e.g., Murray v. Hadid, 238 Va. 722, 732,
385 S.E.2d
898, 905 (1989); A & E Supply Co., Inc., v. Nationwide Mutual Fire
Ins. Co.,
798 F.2d 669, 673 (4th Cir.1986). Quite simply, if MCI
is not liable to Gateway for tort damages, then the arbitrator
cannot impose punitive damages.
Whether the arbitrator found MCI liable to Gateway for tort
damages is vigorously contested. In fact, MCI contends that
Gateway never timely alleged tortious conduct or requested punitive
damages during the arbitration. Both MCI and Gateway agree that
five days before arbitration, Gateway sent to the American
Arbitration Association ("AAA") a letter enclosing two additional
briefs in which Gateway alleged a breach of fiduciary duty by MCI
and discussed the "Law Relating to Punitive Damages."12 On the same
day, MCI filed a written objection to the briefs as untimely. MCI
requested that the AAA not forward these briefs to the arbitrator,
while Gateway suggested that they be forwarded with or without
response by MCI. The AAA sustained MCI's objection to the briefs
12
Rule 8 of the AAA's Commercial Arbitration Rules provides
that,
After filing of a claim, if either party desires to
make any new or different claim or counterclaim, it
shall be made in writing and filed with the AAA, and a
copy shall be mailed to the other party, who shall have
a period of ten days from the date of such mailing
within which to file and answer with the AAA. After
the Arbitrator is appointed, however, no new or
different claim may be submitted except with the
Arbitrator's consent. (emphasis added).
Although the briefs were submitted after the cutoff date in
Rule 8, the arbitrator retains discretion under the Rule to
admit untimely claims.
12
as untimely, but instructed Gateway that it could seek leave from
the arbitrator to file the briefs. Pursuant to this instruction,
Gateway presented the briefs to the arbitrator on the first day of
hearings. The arbitrator accepted the additional briefs, and MCI
renewed its objection to them as untimely.
While the record demonstrates that the arbitrator allowed
Gateway to submit its claim, albeit untimely, for breach of
fiduciary duty, there is heated debate over whether Gateway
subsequently disclaimed its tort theories, choosing to rely
exclusively on contractual bases for recovery. MCI insists that
Gateway repeatedly disclaimed any tort claim against MCI. This
argument enjoys support in the record. For example, in a
prehearing submission to the arbitrator, Gateway suggested that
"the only issues before the Arbitrator are, first, whether Gateway
properly cured ... defaults in Gateway's performance, and second,
whether MCI breached the Agreement by unlawfully terminating it and
failing to negotiate in good faith." These issues were reiterated
during Gateway's opening statement as the "two fundamental
questions" confronting the arbitrator. Additionally, Gateway's
President, Richard Cree, testified during the arbitration that the
company alleged neither conspiracy nor fraud. In closing
arguments, Gateway urged that
In determining whether MCI breached their contractual duty to
negotiate in good faith, it is not necessary that you find
that they proceeded in bad faith. This is not a tort, we are
alleging. All that is necessary is that you find that they
failed to carry their affirmative contractual obligation to
negotiate in good faith.
While the record demonstrates that throughout the arbitration,
13
Gateway relied primarily on its claims for breach of contract, this
court is unable to find that Gateway conclusively waived its claim
for breach of fiduciary duty. Given Gateway's representations to
the arbitrator, this decision is a close one. However, since
Gateway never expressly waived the claims for breach of fiduciary
duty made in the brief presented to the arbitrator and accepted by
him, this court is unwilling to hold that these claims were waived
by Gateway's more general denials of fraud and conspiracy.
But even if Gateway did not actually waive its claim for
breach of fiduciary duty, the punitive damage award issued by the
arbitrator must be vacated because, as a matter of law, the facts
do not sustain a claim for breach of fiduciary duty.13 Initially,
there is no formal relationship between MCI and Gateway that would
impose fiduciary duties on MCI since their contract expressly
provides that "[e]ach party shall act as an independent contractor
and not as agent for, partner of, or joint venturer with the other
party. The parties create no other relationship outside of that
contemplated by the terms of this Subcontract." Agreement, Apr.
29, 1991, at Article 2. Also, Gateway did not share in either
profits or losses under the contract, but received instead a fixed
percentage of gross collected revenues. Id. at Article 6. The
Agreement did not create a partnership capital account and provided
13
While this court applies the substantive law of Virginia
to the claims before the arbitrator, Gateway concedes that there
are no material differences between Texas and Virginia law on
fiduciary duty. Brief of Appellee, at 27 n. 85. See also, Crim
Truck & Tractor v. Navistar Int'l Trans. Corp., 823 S.W.2d 591,
594 (Tex.1992) (whether a relationship gives rise to fiduciary
duties is a question of fact).
14
for no joint ownership of property or for the filing of partnership
tax returns. Id. at Article 15. The language of the contract is
unambiguous and establishes that the parties intended no formal
relationship which would impose fiduciary duties on MCI.
Because there is no formal fiduciary relationship between the
parties, Gateway attempts to establish an "informal" fiduciary
relationship.14 Under Virginia law, the existence of such a
fiduciary relationship is a question of fact. Allen Realty Corp.
v. Holbert, 227 Va. 441, 446-47,
318 S.E.2d 592, 595 (1984). A
fiduciary relationship may arise " "when special confidence has
been reposed in one who in equity and good conscience is bound to
act in good faith and with due regard for the interests of the one
reposing the confidence.' " Allen Realty Corp.,
227 Va. 441, at
446,
318 S.E.2d 592 (quoting H-B Partnership v. Wimmer,
220 Va.
176, 179,
257 S.E.2d 770, 773 (1979)); Myers v. Finkle,
950 F.2d
165, 168 (4th Cir.1991).
But no genuine issue of material fact demonstrates that the
relationship between MCI and Gateway was one of special confidence.
Instead, Gateway admits that it was "nominally the subcontractor in
the ensuing contract with VADOC," and that it understood that MCI
was "a competitor of Gateway even before the [contract] was
signed...." Given their history as competitors as well as the
14
In its brief, Gateway suggests that "[a] fiduciary duty
may arise either as a result of a formal relationship, such as a
partnership or joint venture, or through an informal
relationship...." Since their contract expressly disclaims the
formal relationship, Gateway's argument rests on the strange
notion that a standard subcontracting agreement somehow burdened
MCI with fiduciary duties.
15
language of the contract disclaiming any present fiduciary
relationship, the argument that Gateway and MCI had a special,
informal relationship of repose and trust that imposed fiduciary
duties on MCI is untenable.
Further, neither Gateway's observation that MCI enjoyed
"vastly superior financial resources" nor that "Gateway was
entirely dependent upon MCI to represent Gateway fairly and
honestly in MCI's communications with VADOC" transforms the
relationship from contractual to fiduciary.15 Of course, financial
disparity between parties is not sufficient to make them
fiduciaries. Also, the record belies Gateway's complete dependence
on MCI and establishes that, although MCI was the prime contractor
with VADOC, Gateway operated as an independent subcontractor.16 For
example, Gateway had access to the Virginia prisons to operate and
maintain its equipment and software. Additionally, if necessary,
Gateway could communicate directly with VADOC. Properly
understood, Gateway's agreement with MCI was nothing more than a
standard subcontract that imposed contractual obligations on both
parties but which did not create either a formal or an informal
fiduciary relationship.
There is no support under Virginia law for holding that MCI
15
Gateway's ill-conceived notion of fiduciaries would impose
fiduciary duties on virtually all subcontracting relationships
since the resources of the parties as well as their rights and
obligations under these contracts usually vary.
16
See, e.g., Agreement, Apr. 29, 1991, at Article 2
(independent contractor status) & Article 5 (Gateway's
responsibilities).
16
and Gateway were fiduciaries. As a result, the arbitrator's award
of punitive damages is not supported by an independent tort and is
contrary to Virginia law.
III. CONCLUSION
For the reasons provided, this court VACATES the award of
punitive damages and otherwise AFFIRMS the arbitration award.
17
