Opinion ID: 672322
Heading Depth: 4
Heading Rank: 3

Heading: Application of the Essence Test

Text: 72 We now turn to the arbitrator's award of damages to the former Isoetec shareholders to see if its essence is rationally inferable from the letter or purpose of the agreement described in the preceding section. The arbitrator first explained that the damages award was based on a breach of warranty by Executone, a rationale that Executone attacks as contrary to the disclaimers and limited warranties made by Executone in the distributor agreement. In its subsequent letter to Executone, the arbitrator explained that the award of damages had been made under the purchase agreement, not under the distributor agreement, and that the special nature of the environment created by the purchase agreement contributed to the arbitrator's decision. Taking the arbitrator's awards and explanations as a whole, it appears that the arbitrator believed (1) that as a matter of generally accepted accounting principles, the Isoetec shareholders were not entitled to record the sale to Stewart Title as 1989 earnings in view of the fact that the sale effectively washed out after the end of 1989 while the audit was in progress, but (2) that furthering the intent of the parties as expressed in the purchase agreement required Executone to bear the post-December 31, 1989 loss of the Stewart Title sale because Executone, in its capacity as the purchaser of Isoetec's business, was responsible for that loss. 73 We conclude that the arbitrator's award did draw its essence from the purchase agreement executed by Executone, Isoetec, and the Isoetec shareholders because it is rationally inferable from the parties' central purpose in drafting the agreement--which was to reach a purchase price based on a fair calculation of Isoetec's adjusted pre-tax profits for the year ended on December 31, 1989--and because the award is not contrary to express terms of the parties' agreement. Executone contends that the award is contrary to releases executed by the parties and to its disclaimers and limited warranties made in the distributor agreement. We find each of these contentions insufficient to justify overturning the arbitrator's award. 74 First, Executone relies on a release agreement executed by the parties and attached to the purchase agreement as Exhibit A. In this document, Isoetec and its shareholders executed a broad release of Executone from liability by reason of any matter, cause, information, or thing whatsoever from the beginning of the world to the Effective Date of this Release [June 5, 1989]. Executone argues that this release shields Executone from any liability for damages arising out of the Stewart Title transaction because the contract of sale between Stewart Title and Isoetec had already been executed (in March 1989) when the release was executed. The former Isoetec shareholders respond that this release was executed long before the critical events leading to the Stewart Title dispute occurred and so could not have encompassed damages arising out of those events. They also contend that Executone unsuccessfully presented this argument to the arbitrator, although we of course cannot verify this because we have no transcription of the arbitration proceedings. Executone also relies on similar releases executed by Isoetec's shareholders individually in early 1990 as barring the arbitrator's award. 75 The argument based on the individual releases executed by the Isoetec shareholders can be easily disposed of; those releases do not release claims arising out of the purchase agreement, and the arbitrator could certainly have rationally concluded that this claim arose out of that agreement. Nor do we believe that the release incorporated into the purchase agreement itself was so crystalline as to bar the damages award made by the arbitrator. The arbitrator may well have interpreted the release agreement not to apply to disputes (such as the Stewart Title dispute) arising out of events occurring predominately after the execution of the release. Even if this is a case in which the arbitrator may have read the contract differently than we would have read it--a conclusion we could not reach in the absence of a clear picture of the facts presented to the arbitrator--we cannot say that the arbitrator ignored plain contractual language en route to its final decision. See Misco, 484 U.S. at 38, 108 S.Ct. at 370-71 (The arbitrator may not ignore the plain language of the contract; but the parties having authorized the arbitrator to give meaning to the language of the agreement, a court should not reject an award on the ground that the arbitrator misread the contract.). The cases cited by Executone concerning an arbitrator's lack of authority to contravene a settlement reached by an employer and an aggrieved employee after a dispute has arisen but prior to arbitration, Ohio Edison Co. v. Ohio Edison Joint Council, 947 F.2d 786 (6th Cir.1991), and Northwest Airlines, Inc. v. International Ass'n of Machinists, Air Transp. Dist. Lodge # 143, 894 F.2d 998 (8th Cir.1990), are not on point. 76 Executone also contends that the arbitrator ran afoul of the express disclaimers of liability and limitations of warranty included by Executone in the distributor agreement. In that agreement, Executone made certain warranties with respect to the products, spare parts, and software that it was to supply to Isoetec under the distributor agreement and limited its obligation under the warranties to repair or replace defective parts or software. Executone also excluded all other warranties, express or implied. 77 Based on the limited record before us, we must conclude that the arbitrator was arguably construing or applying the contract[s], Misco, 484 U.S. at 38, 108 S.Ct. at 370-71, when it made its award, despite the limited warranties made by Executone. In the first place, as the arbitrator observed, the limited warranties were made by Executone in the distributor agreement rather than in the purchase agreement. We have already seen that the purchase agreement could have changed the dynamics of the Executone-Isoetec relationship and ended their coinciding interests in seeing Isoetec perform profitably in 1989. The arbitrator may have reasonably concluded that the limitations of liability dictated by Executone should not be given the same strict interpretation in the new environment created by the purchase agreement as it would in a normal supplier-distributor situation. Although the purchase agreement admittedly did not include a covenant by Executone not to take actions solely for the purpose of deflating the Isoetec purchase price--the contract is silent on that point--the arbitrator could reasonably have interpreted the contract not to allow overreaching by Executone in the absence of a clause whereby the owners of Isoetec expressly agreed to run such a risk. That the arbitrator refused to read a standard repair and replace limited warranty in a distributor agreement as such an extreme cession of rights by the Isoetec shareholders under the purchase agreement is hardly surprising. Additionally, factual bases may have emerged during the course of the arbitration for overriding the limited warranties. See TEX.BUS. & COM.CODE ANN. Sec. 2.719(b) (Tex.UCC) (Vernon 1968) (Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this title.). 78 We conclude that the arbitrator's award did not contradict express contractual terms. Our inability to hold that the arbitrator undoubtedly exceeded its authority requires us to resolve our doubt in favor of the arbitration. Valentine Sugars, 981 F.2d at 213. Indeed, it appears to us that the arbitrator was faithful to the central purpose of the purchase agreement, which was to provide to the Isoetec shareholders a fair purchase price for the Isoetec business. Certainly, at a minimum, the award was rationally inferable from the parties' agreements. 79 We AFFIRM the district court's confirmation of the arbitration award. 80