Fifth Circuit Overturns Lower Court’s Order Partially Vacating Arbitral Award

The United States Court of Appeals for the Fifth Circuit has overturned a lower court’s order vacating a portion of an arbitral award. In BNSF Railway Co. v. Alstom Transportation, Inc., No. 13-11274 (5th Cir. Feb. 5, 2015), a railroad company, BNSF, hired another company, Alstom, to manage its locomotive maintenance program. At the time, the parties signed a maintenance agreement that contained an arbitration provision. The clause stated any future disputes between the companies would be resolved by a panel of arbitrators and governed by the laws of the State of Illinois. In addition, the clause provided the arbitral panel with the authority to “award ordinary and direct damages, but not consequential or incidental damages.”

Initially, BNSF deemed Alstom’s performance unacceptable. As a result, the companies negotiated an amended agreement that provided BNSF with the opportunity to unilaterally terminate the contract for any reason. Later, BNSF chose to retire a number of the company’s locomotives from active duty. This decision triggered a provision in the parties’ contract that required the companies to negotiate an appropriate “reasonable economic adjustment” in favor of Alstom. Before the two businesses began negotiations, however, BNSF terminated the maintenance agreement.

BNSF next “sought declaratory relief in the district court.” In response, Alstom filed a motion to compel arbitration based on the parties’ maintenance agreement. The district court granted Alstom’s motion and ordered the dispute to be arbitrated under the Federal Arbitration Act (“FAA”).

Following arbitral proceedings, an arbitration panel found that the railroad company terminated the parties’ maintenance contract in order to avoid negotiations with Alstom. Because of this, the panel ruled that BNSF breached the Illinois covenant of good faith and fair dealing when it terminated the agreement. In addition, the panel stated the company also breached the parties’ agreement when it failed to confer with Alstom over any reasonable economic adjustments that were required. As a result, the panel issued an award for “out-of-pocket costs, minus penalties and liquidated damages” in favor of Alstom.

After Alstom filed a motion to confirm the arbitral award, the district court found that the arbitration panel issued an award for damages that were prohibited under the terms of the parties’ maintenance agreement. As a result, the court vacated that portion of the panel’s decision stating “BNSF violated the Illinois covenant of good faith and fair dealing.” Alstom then appealed the district court’s order to the nation’s Fifth Circuit Court of Appeals.

On appeal, Alstom argued that the district court committed error when it vacated a portion of the arbitral panel’s award. According to the court, a party who challenges an arbitration award bears a heavy burden. The appeals court said:

The question before us is whether the arbitrators “(even arguably) interpreted” the Agreement in reaching their award. Id. at 2068. The parties’ arguments implicate three provisions in the Agreement. Sections 13.2, 15.6, and 18.1, respectively, give BNSF the right to terminate the Agreement “without cause”; authorize the Panel to consider Illinois law when the Agreement does not contain an answer to a question in dispute; and provide that the Agreement should be generally governed by and construed according to Illinois law. The Panel’s discussion of the duty of good faith and fair dealing is framed as an interpretation of the meaning of the “without cause” provision. The Panel appears to have concluded that the “without cause” language in the Agreement was ambiguous. Even if they had not, they could have turned to Illinois law in the first instance to aid their interpretation of the “without cause” language under § 18.1. In either event, the arbitrators were “arguably interpreting” the agreement when they construed the term “without cause” by reference to Illinois law. See Oxford Health, 133 S.Ct. at 2068. BNSF fails to show that the Panel could not have been interpreting the Agreement when it concluded that Illinois law imposes a limitation on the right to terminate “without cause” based on the covenant of good faith and fair dealing.

BNSF argues that the Panel should have interpreted the termination provision as giving it a right to terminate the Agreement for any reason whatsoever. BNSF also contends that the Panel “completely botched” the application of Illinois law when it applied the covenant of good faith and fair dealing. But error in interpreting a contract is not grounds for setting aside an arbitrator’s award.

As we have said too many times to want to repeat again, the question for decision by a federal court asked to set aside an arbitration award is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.

Next, the appellate court stated the arbitration panel’s damages award demonstrated that it interpreted the parties’ contract. According to the court, most of the railroad company’s claims regarding the damages awarded to Alstom “boil down to a complaint that the Panel misinterpreted the Agreement.” After stating that “convincing a court of an arbitrator’s error—even his grave error—is not enough,” the Fifth Circuit held:

Because BNSF failed to carry its burden to show that the Panel was not even arguably interpreting the Agreement, “[t]he [Panel]’s construction holds, however good, bad, or ugly.” Id. at 2071. We reverse the district court on its alternative holding that the Panel failed to even arguably interpret the Agreement when it awarded Alstom damages.

The appellate court then overruled BNSF’s claim that the arbitral award should be dismissed under the Texas Arbitration Act or the Illinois Arbitration Act despite that the maintenance agreement did not reference either law. The Fifth Circuit stated arbitration may only proceed under non-FAA rules “if a contract expressly references state arbitration law.” Since the contract did not unambiguously state the companies intended to utilize non-FAA standards, the appeals court held that the FAA standard of review applied in the case.

Finally, the Court of Appeals refused to consider BNSF’s claim “that the district court erred when it ordered the parties to arbitrate gateway questions of arbitrability,” because the appellate court found that the railroad company’s claim impermissibly asked the court to expand BNSF’s rights without filing a cross-appeal.

Ultimately, the nation’s Fifth Circuit Court of Appeals reversed the district court’s order vacating a portion of the arbitration award.  After stating it did not have the authority to confirm the arbitration panel’s decision, the appeals court remanded the case back to the district court with instructions to reinstate the entire arbitral award.

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