Can parties modify written arbitration agreements through conduct during proceedings? Pacific Development v. Orton Explained

In Pacific Development v. Orton, the Utah Supreme Court addressed whether parties can modify the scope of a written arbitration agreement through their conduct during arbitration proceedings. The Court’s ruling provides important guidance for practitioners about the formalities required for arbitration agreement modifications.

Background and Facts

Pacific Development contracted with Orton Excavation for construction work on two plats within a subdivision. When disputes arose over payment amounts, the parties executed a written arbitration agreement that specifically acknowledged “issues relating to Plat B of Riderwood Village have been resolved” and stated the arbitration would “focus on the remaining issues of the dispute, those which relate to Plat C.” Despite this clear limitation, both parties presented evidence relating to Plat B during the arbitration proceedings, and the arbitrator issued awards for both plats.

Key Legal Issues

The primary issue was whether an arbitrator exceeded his authority under Utah Code Section 78-31a-14(1)(c) when ruling on disputes outside the written agreement’s scope. Pacific also claimed the arbitrator manifestly disregarded the law regarding the covenant of good faith and fair dealing.

Court’s Analysis and Holding

The Utah Supreme Court reversed the Court of Appeals’ finding that the arbitration agreement was implicitly modified by the parties’ conduct. The Court emphasized that written arbitration agreements must be modified through express written agreements, not mere conduct. The Court reasoned that allowing implicit modifications would “circumvent the statutory requirements” of the Utah Arbitration Act and undermine the predictability that encourages arbitration. However, the Court affirmed the ruling on manifest disregard, finding the arbitrator properly considered and applied the good faith doctrine.

Practice Implications

This decision reinforces that arbitration agreements require strict adherence to their written terms. Practitioners should ensure any scope modifications are documented in writing with explicit agreement from all parties. The ruling also clarifies that presenting evidence outside an agreement’s scope, even with apparent acquiescence, cannot expand arbitrator authority without formal modification.