Opinion ID: 29604
Heading Depth: 3
Heading Rank: 2

Heading: The Affiliates Lawsuit

Text: The TransAtlantic Affiliates participated fully in the arbitration proceedings, never objecting to their being subject to arbitration or to any other aspect of the proceedings except for the results reached by the arbitrator in making his award, which, on appeal, the TransAtlantic Affiliates, like the district court, label as manifest disregard for the law by the arbitrator. On appeal to us, the Plaintiffs assert two independent and alternative bases for reversing the district court: (1) the parties’ waiver of the right to appeal the legal rulings and award of an arbitrator; and (2) the district court’s legal error in (a) applying an impermissible standard to justify reviewing the substance of the dispute and the arbitrator’s award, and, alternatively, (b) the district court’s holding that the arbitrator manifestly disregarded the law of Texas governing contractual damages and that this constitutes arbitrator misconduct.7
As a preliminary contention, the Plaintiffs insist that the TransAtlantic Affiliates violated an express provision of the Agreement when they filed a counterclaim seeking vacatur of the award, and that the district court erred reversibly by entertaining 7 FAA § 16 authorizes our review of the district court’s order vacating the arbitration award. See 9 U.S.C. § 16(a)(1)(E); Atlantic Aviation, Inc. v. EBM Group, Inc. 11 F.3d 1276, 1280 (5th Cir. 1994); Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321, 327 (1st Cir. 2000); Jays Foods, L.L.C. v. Chem. & Allied Prod. Workers Union, 208 F.3d 610, 613 (7th Cir. 2000). 8 that counterclaim which unquestionably constitutes an appeal of the arbitration proceedings and the arbitrator’s award. The Plaintiffs rely on the fifth paragraph of § 17.2.2, which contains the arbitration provision of the Agreement: The decision of the arbitrator shall be final and binding on all Shareholders and shall be enforceable in any court of competent jurisdiction. The Shareholders agree to exclude any right of application or appeal to the courts of any jurisdiction in connection with any question of law arising in the course of arbitration or with respect to any award made, except for enforcement purposes as stated above. (emphasis added) In their district court counterclaim, the TransAtlantic Affiliates do not assert any vice in the making of the Agreement or their joinder therein; neither do they contest the general applicability of the above-quoted waiver of appeal. Rather, they take the position that, despite its unambiguous and unconditional wording, the contractual waiver of the right to appeal in any court anywhere regarding any question of law or any award is inapplicable to an appeal based on a claim that an award was made in manifest disregard for the law. This is so, they argue, because that constitutes “misconduct” by the arbitrator. We perceive this argument as advocating a policy that a general waiver of appeal that does not expressly state that the waiver applies even to the four grounds listed in § 10(a) of the FAA, does not preclude the seeking of vacatur on one or more of those grounds. Even assuming arguendo that the Agreement’s broad and 9 unconditional waiver of judicial appeal would not prohibit an appeal grounded in one or more of § 10(a)’s grounds, the TransAtlantic Affiliates were not entitled to appeal the arbitrator’s award here by asserting manifest disregard for the law. First, we have never reversed our rejection of the “manifest disregard for the law” standard of review of arbitration awards in commercial contract cases. We must, therefore, reject the TransAtlantic Affiliates position (which was successful in the district court) equating manifest disregard for the law with “misconduct by the arbitrator,” the latter being one of the four exclusive grounds listed in § 10(a) of the FAA for vacating an arbitration award. Consequently, even when we assume without granting that the TransAtlantic Affiliates’ waiver of appeal does not apply to a claim of arbitrator misconduct, such an appeal cannot be based on manifest disregard of the law as a proxy for such misconduct. As signatories to the Agreement, which contains the arbitration clause that includes the quoted waiver of appeal, the TransAtlantic Affiliates are held to knowledge of the law of arbitration, including the extremely narrow and chary approach of the federal courts to an appeal of the merits of an arbitration award, especially when appeal has been waived unconditionally in the contract. This deemed knowledge includes, inter alia, that the list of grounds for review contained in § 10(a) of the FAA is exclusive and, more importantly, that in this circuit manifest 10 disregard for the law is not equated with arbitrator’s misconduct. Thus, the district court erred as a matter of law in hearing the appeal, which the TransAtlantic Affiliates dressed in the garb of a counterclaim, grounded in manifest disregard of the law. Our long-standing rejection of that ground for vacatur in commercial contract cases pretermits its being considered under the aegis of any of the four grounds under § 10(a) even if appeals based on § 10(a) are not prohibited by the waiver of appeal in the Agreement. We must, therefore, reverse the district court’s vacatur of the arbitration award as it applies to the TransAtlantic Affiliates. 2. Alternative Ground for Reversal: Merits of Appeal Furthermore, even if we assume without granting that the waiver of appeal is inapplicable here, and assume further that, in this commercial contract case governed by Texas substantive law, manifest disregard of the law could somehow constitute misconduct by the arbitrator, our review of the district court’s vacatur of the award vis-à-vis the TransAtlantic Affiliates on those grounds ultimately leads to reversal.
Article XVII of the Agreement contains § 17.2, which is styled Governing Law and Dispute Resolution. Subsection 17.2.1 specifies that the “Agreement shall be governed and interpreted according to the substantive law of the State of Texas.” That is followed by subsection 17.2.2, which is the six-paragraph arbitration provision 11 of the Agreement. The first sentence of the first paragraph of 17.2.2 states: Any and all disputes or differences relating to, arising out of or in connection with this Agreement which cannot be settled amicably shall be finally settled by arbitration pursuant to this Section 17.2.2. (emphasis added). .... The second paragraph of 17.2.2 then reiterates: The substantive law of Texas shall be applied without reference or regard to any rules and procedures regarding conflicts of law which would refer the matter to the laws of another jurisdiction.
At this juncture, the details of the controversy underlying the dispute between the two shareholder groups and their respective guarantors are not important. It is sufficient unto this appeal that the controversy involved accusations by the Plaintiffs that the Defendants breached the Agreement in such a manner as to cause the Concession Contract to be lost, thereby damaging Tarpon-Benin and its shareholders. The dispute is a stereotypical breach of contract controversy, and the Plaintiffs instigated arbitration in an effort to resolve their breach of contract claims. At the end of the day, the arbitrator ruled in favor of the Plaintiffs, concluding that the Defendants had breached their obligations under the Agreement, causing Tarpon-Benin to violate express obligations under the Concession Contract following the initial drilling of a dry hole in Block 2, including specifically 12 the obligations to provide a training program for the citizens of Benin and to conduct extensive geophysical operations. This, according to the arbitrator, resulted in the corporation’s loss of the Concession Contract. In the arbitration proceedings, the Plaintiffs asserted that the loss of the Concession Contract was caused at least in part by TransAtlantic’s unilateral notification to the government of Benin that TransAtlantic was “relinquishing” its interest in Tarpon-Benin —— a step that the Plaintiffs insisted neither TransAtlantic nor its affiliates had the legal right to take. This in turn prompted the Plaintiffs to refuse to accept TransAtlantic’s “declarations of transfer.” Based on all oral and written submissions, the arbitrator concluded that the TransAtlantic Affiliates had breached the Agreement, causing the Plaintiffs to suffer damage of $1.35 million, plus fees and interest.8
In the Affiliates’ Lawsuit, the district court ignored the waiver of appeal, ignored our long-standing rejection of manifest disregard of the law as grounds for vacatur in commercial contract cases, and proceeded to consider the merits of the arbitration award against the TransAtlantic Affiliates under the manifest error doctrine, ultimately reversing the arbitration ruling and vacating the award. It is anything but clear, however, that we have ever 8 See supra n.3. 13 accepted the manifest error doctrine as a ground for vacating arbitration awards in commercial contract cases in which the substantive law of Texas is applicable under the Federal Arbitration Act (“FAA”). Indeed, we expressly rejected that doctrine in McIlroy v. PaineWebber, Inc.9 and R.M. Perez & Associates., Inc. v. Welch.10 Those precedents not only recognize the exclusivity of the list of four grounds for vacatur expressly set forth in § 10 of the FAA, to wit, (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.11 They also eschew manifest disregard as either an additional ground for vacatur or a manifestation of arbitrator misconduct. We acknowledge that the subsequent statement in Williams v. Cigna Financial Advisers, Inc.,12 to the effect that “clear approval of the ‘manifest disregard’ of the law standard in the review of arbitration awards under the FAA” was signified by the Supreme 9 989 F.2d 817, 820 n.2 (5th Cir. 1993)(noting this circuit’s refusal to adopt manifest disregard for the law as a ground for vacatur). 10 960 F.2d 534, 539 (5th Cir. 1992)(“[T]his circuit never has employed a ‘manifest disregard of the law’ standard in reviewing arbitration awards”). 11 See id. at 540 (quoting Forsyth Int’l, S.A. v. Gibbs Oil Co. of Texas, 915 F.2d 1017, 1020 (5th Cir. 1990)). 12 197 F.3d 752, 759 (5th Cir. 1999). 14 Court in First Options,13 sent a somewhat conflicting signal by referring to dicta included in the parenthetical citation to an earlier case. The above-quoted statement from Williams is likewise dicta, as the controversy there involved employment discrimination, to which a different standard might apply. Furthermore, the arbitration award in that case was affirmed, not vacated. But even if the subject pronouncement in Williams were not dicta and no distinction could be drawn on the basis of that being an employment case, we would remain bound to follow the pronouncements in Perez and McIlroy as earlier precedents,14 in the absence of an unequivocal and unambiguous reversal by the Supreme Court —— and, we cannot read First Options to qualify as such for issues such as those under consideration here. It is no longer necessary to repeat the jurisprudential authority for the universally recognized proposition that arbitration is favored. When it comes to an order of the district court that vacates an arbitration award, our review is plenary.15 And, in conducting our plenary review, we defer to the arbitrator’s 13 First Options of Chicago, Inc. v. Kaplan, 517 U.S. 938, 942 (1995). 14 See Smith v. Penrod Drilling Corp., 960 F.2d 456, 459 n. 2 (5th Cir. 1992)(acknowledging that the earlier of prior conflicting panel decisions control). 15 Forsythe Int’l, S.A. v. Gibbs Oil Co. of Texas, 915 F.2d 1017, 1020-21 (5th Cir. 1990). 15 resolution of the dispute whenever possible.16 But even if we were to assume arguendo that the district court did not err in applying the manifest error standard (or that we could affirm for other reasons by applying, de novo, one of the four standards of § 10 of the FAA), we would reverse that court’s vacatur in the Affiliates Lawsuit. As noted, the Agreement specifies that the substantive law of Texas is controlling. Without reiterating the extensive case law cited by the parties in their respective appellate briefs, we are convinced that the arbitrator’s award against the TransAtlantic Affiliates cannot be reversed and vacated on the basis of manifest disregard of Texas law. If we were authorized to review the substance of the arbitrator’s award under a less deferential standard, we, like the district court, might find the damages too speculative; but we have no such authority and neither did the district court. Furthermore, even if we were to conclude that, under the evidence here, the damages awarded by the arbitrator were indeed speculative, we would not view this putative error as rising to the level of manifest disregard of the law. A difference of opinion between courts as to the degree of speculation required to cross that line does not even approach the level of egregiousness required to constitute manifest disregard; it amounts to nothing more than a difference of opinion among jurists of reason. 16 Anderman/Smith Operating Co. v. Tennessee Gas Pipeline Co., 918 F.2d 1215, 1218 (5th Cir. 1990). 16 But the boundaries of federal courts’ latitude in this respect are far too narrow to permit such a review and ruling by a court that is considering enforcement of an arbitrator’s award under circumstances such as these. Moreover, there is a surfeit of Texas common law to the effect that majority shareholders may owe a fiduciary-like duty to minority shareholders, casting significant doubt on the clarity and certainty of the Texas law applicable to this issue.17 As Texas law is, at a minimum, unclear on the underlying contractual cause of action asserted by the Plaintiffs in the instant arbitration proceedings, neither we nor the district court are legally positioned to say that the arbitrator was guilty of prejudicial misconduct, exceeded his powers, or otherwise opened his award to the possibility of reversal by the court. We repeat for emphasis that, even though we might disagree with the arbitrator’s analysis and even though we might judge the damages to be speculative, the acts of the arbitrator in this case fall well short of the kind of misconduct required to constitute grounds for vacatur. There is no hint of arbitrariness, caprice, or reckless disregard for the provisions of Texas law governing this matter. As such, the district court erred as a matter of law in vacating the arbitration award against the TransAtlantic Affiliates on grounds of arbitrator misconduct. 17 See, e.g., Patton v. Nicholas, 279 S.W.2d 848 (Tex. 1955); Davis v. Sheerin, 754 S.W.2d 375 (Tex. App.——Houston [ISD Dist.] 1988, writ denied); Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. App.——Fort Worth 1984, writ ref’d n.r.e.). 17 In summary, on the basis of the parties’ waiver of the right to appeal any aspect of an arbitration award and, alternatively, on the basis of the court’s legal errors, first in applying the manifest-disregard-of-the-law standard and then in misapplying it to the instant facts, we reverse the court’s vacatur, reinstate the award to the Bettis Affiliates, and remand for enforcement by the court after conducting any ministerial proceedings, consistent herewith, that might be needed to effectuate enforcement of the award.