## Facts

- A property owner (trustee of a realty trust) hired a construction manager under a standard-form construction agreement to build a condominium and parking garage.
- The contract required arbitration of covered disputes under the American Arbitration Association (AAA) Construction Industry Arbitration Rules.
- The owner asserted claims exceeding $2.8 million; the contractor asserted claims exceeding $1.17 million.
- Arbitration hearings began in 1987 and continued intermittently through early 1990.
- During the ongoing arbitration, the contractor requested interim security.
- The arbitral panel issued an interim order directing the owner-trustee to provide a $1,000,000 irrevocable letter of credit (payable on demand) to the AAA as security for any eventual award against the owner.
- The contract contained no separate provision authorizing interim security beyond the incorporated AAA rules.

## Issues

1. Whether arbitrators acting under AAA Construction Industry Arbitration Rules incorporated into a construction contract may order interim security (a letter of credit) to secure payment of a potential future arbitration award.
2. Whether a court should confirm/enforce, or instead vacate, an interim arbitral order requiring such security when the governing agreement and rules do not expressly authorize it.

## Decision

- The Supreme Judicial Court of Massachusetts affirmed the Superior Court judgments vacating the interim arbitral order.
- The court held the arbitrators lacked authority under the applicable AAA Construction Industry Arbitration Rules to compel interim security to secure satisfaction of a potential future award.
- The interim order requiring a $1,000,000 letter of credit was not enforceable because it exceeded the powers granted by the parties’ agreement and incorporated rules.

## Legal Principles

- Arbitrators derive their authority from the parties’ arbitration agreement, including any arbitration rules incorporated by reference; actions beyond that grant are invalid.
- An interim arbitral directive requiring a party to post security for a possible future award is unauthorized unless the agreement or governing arbitration rules clearly confer that power.
- In the absence of clear arbitral authority to impose interim security, provisional relief aimed at securing eventual recovery is generally a matter for courts rather than arbitrators.

## Conclusion

The court upheld vacatur of an interim arbitration order requiring a $1,000,000 letter of credit because the parties’ contract and the incorporated AAA Construction Industry Arbitration Rules did not authorize arbitrators to compel interim security for a potential future award.


Charles Constr. Co. v. Derderian, 412 Mass. 14, 586 N.E.2d 992 (Mass. 1992)