Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos ( 1994 )

Reversed and remanded by published opinion. Judge Donald RUSSELL wrote the majority opinion, in which Judge WIDENER joined. Judge K.K. HALL wrote a dissenting opinion.

OPINION

DONALD RUSSELL, Circuit Judge:

Cargill Rice, Inc. (Cargill) appeals the district court’s orders dismissing its motion to compel arbitration of its dispute with Empre-sa Nicaragüense de Alimentos Básicos (ENABAS) before arbitrators chosen by mutual agreement of the parties, and confirming an arbitration award in favor of ENABAS granted by arbitrators who were not so chosen. We agree with Cargill that arbitration of the parties’ dispute could properly proceed only before mutually-chosen arbitrators; as a result, we reverse both of the district court’s orders.

I.

Cargill and ENABAS, an agency of the Nicaraguan government, entered into a commercial contract under which Cargill was to deliver rice to ENABAS in Nicaragua. A dispute developed over the condition of the rice when it arrived in Nicaragua; the parties agreed that this dispute should be resolved under the arbitration clause of their contract. That clause, translated from Spanish, stated in relevant part: “Any dispute ... which may arise in the ... performance of this Contract shall be resolved by arbitral award (decision of arbitrators) chosen by mutual agreement. This can be in Nicaragua or the Rice Millers’ Association [RMA] of the United States.”¹

ENABAS made a demand to arbitrate the parties’ dispute with the RMA. Under the RMA arbitration rules, the RMA arbitration committee appoints the arbitrators. RMA Arbitration Rule 8(a). Cargill wrote to the arbitration committee, calling to its attention that the arbitration clause in the parties’ contract required that the arbitrators for the parties’ dispute be chosen by mutual agreement and contending that arbitrators not so chosen would lack jurisdiction to arbitrate the dispute. The arbitration committee rejected this contention and appointed itself as the three-member arbitration panel for the dispute.

Cargill responded by filing an action in the Eastern District of Virginia to compel arbitration of the parties’ dispute before arbitrators chosen by mutual agreement of the parties, but the district court dismissed it. The arbitration panel appointed by the RMA arbitration committee proceeded to arbitrate the dispute and awarded ENABAS $1,338,-796.44, which was subsequently confirmed by the district court.

Cargill takes this appeal from the district court’s confirmation of ENABAS’ award and the district court’s earlier dismissal of its action to compel arbitration before arbitrators mutually-chosen by the parties. Cargill presses the point it has made throughout the ease: that the arbitration clause in the parties’ contract expressly requires arbitrators chosen by mutual agreement of the parties.

II.

Because “arbitration is a matter of contract,” AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986), parties may determine by contract the method under which arbitrators for their disputes will be appointed, Universal Reinsurance Corp. v. Allstate Ins. Co., 16 F.3d 125, 128 (7th Cir.1994); Szuts v. Dean Witter Reynolds, Inc., 931 F.2d 830, 831 (11th Cir. 1991); Avis Rent A Car System, Inc. v. Garage Employees Union, 791 F.2d 22, 24 (2d Cir.1986); ATSA of California, Inc. v. Continental Ins. Co., 754 F.2d 1394, 1395-96 (9th Cir.1985) (amending original opinion reported at 702 F.2d 172, 175-76 (9th Cir. 1983)). In fact, the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16, expressly states in section 5 that if the parties have provided in their contract “a method of naming or appointing an arbitrator or arbitrators ..., such method shall be followed.” 9 U.S.C. § 5.

The arbitration clause in Cargill and ENABAS’ contract states: “Any dispute ... which may arise in the ... performance of this Contract shall be resolved by arbitral award (decision of arbitrators) chosen by mutual agreement. This can be in Nicaragua or the Rice Millers’ Association of the United States.” This clause indicates that the arbitrators are to be chosen by mutual agreement — under the clause’s language, the only subjects, other than the arbitrators, that could be “chosen by mutual agreement” are the award or the decision and, in an arbitration, the award and the decision cannot be “chosen by mutual agreement” because they are determined by the arbitrators. This “mutual agreement” must be mutual agreement of the parties, for the arbitration clause suggests no one else who could mutually agree. The arbitration clause, therefore, expressly sets forth the parties’ method for appointing arbitrators — appointment by mutual agreement of the parties — and section 5 of the FAA requires us to ensure their method be followed.²

ENABAS makes two attempts to evade this interpretation of the arbitration clause. First, it attempts to persuade us that the clause’s language “chosen by mutual agreement” refers to the arbitral forum, not the arbitrators. We reject this interpretation because nothing in the sentence that speaks of “chosen by mutual agreement” makes any reference to arbitral forums.

Second, ENABAS contends that, in any event, we must defer to the determination by the RMA arbitration committee that the arbitration clause does not require arbitrators chosen by mutual agreement of the parties. We find this position untenable. While we do, of course, defer in some circumstances to contractual interpretations of arbitrators, we are aware neither of any authority nor any reason to defer to the contractual interpretation of the arbitration committee of an arbi-tral forum. That the members of this arbitration committee later appointed themselves as the arbitrators does not alter our determination not to accord their interpretation deference.

Furthermore, even if the arbitrators here could somehow have interpreted the contract to determine how they should be selected (which appears impossible because the determination of how they should be selected obviously had to precede their selection), their interpretation would not be entitled to deference because it would have involved a determination of their own jurisdiction. See AT & T Technologies, 475 U.S. at 651, 106 S.Ct. at 1419 (stating that an arbitrator should not be given “the power to determine his own jurisdiction”) (quotations omitted); International Ass’n of Machinists v. General Elec. Co., 865 F.2d 902, 904 (7th Cir.1989) (Posner, J.) (“The arbitrator is not the judge of his own authority....”); Bear Stearns & Co. v. N.H. Karol & Assocs., Ltd., 728 F.Supp. 499, 501-02 (N.D.Ill.1989).

Having interpreted the arbitration clause to require that the arbitrators be chosen by mutual agreement of the parties, we turn to the district court’s two orders in these consolidated cases. In one order, it confirmed an award granted to ENABAS by arbitrators appointed by the RMA arbitration committee.³ Arbitration awards made by arbitrators not appointed under the method provided in the parties’ contract must be vacated, Szuts, 931 F.2d at 832; Avis, 791 F.2d at 26; Bear Stearns, 728 F.Supp. at 501 (“[A]rbitrator[s] who [are] improperly elected ha[ve] no power to resolve a dispute between the parties....”); this confirmation of an award granted by arbitrators not chosen by mutual agreement of the parties is, therefore, reversed and the arbitration award vacated.

The district court’s other order, dismissed Cargill’s action under section 4 of the FAA⁴ to compel arbitration before arbitrators chosen by mutual agreement of the parties.⁵ Because Cargill was entitled to an arbitration before such arbitrators, this order is also reversed and Cargill’s action is remanded for the district court to compel an arbitration before such arbitrators. The arbitration clause does not set forth how this choice of arbitrators by the parties should be conducted; the district court shall, therefore, require that it be conducted under the standard method, where both parties choose an arbitrator and these arbitrators select a third arbitrator. If these arbitrators cannot agree on this selection, the district court, under section 5 of the FAA, shall appoint the third arbitrator. 9 U.S.C. § 5 (“[I]f for any ... reason there shall be a lapse in the naming of an arbitrator ..., then ... the court shall designate and appoint an arbitrator.”).⁶ Finally, the district court shall conduct any fact-finding necessary to determine where the arbitration should proceed.

III.

For the reasons stated, the district court’s orders are reversed and Cargill’s action to compel arbitration before arbitrators chosen by mutual agreement of the parties is remanded with the instructions set forth above.

REVERSED AND REMANDED

1 . ENABAS submits the translation set forth in the text; Cargill's translation differs only in that it reads the last sentence to state, "This could be in Nicaragua or the Rice Millers’ Association of the United States," rather than, "This can be in Nicaragua or the Rice Millers' Association of the United States.” This minor variance does not affect our analysis.

2 . We note that the RMA apparently will allow such an arbitration before arbitrators chosen by mutual agreement of the parties because while its rules state that the arbitrators are to be selected by the RMA arbitration committee, it is "flexible enough to allow the parties to request a method of appointment [of arbitrators],” according to ENABAS' counsel’s statement at oral argument. Even if the RMA does not allow arbitration by arbitrators chosen by mutual agreement of the parties, however, the parties' arbitration still must proceed before arbitrators who are so chosen. The parties' provision in their contract for a method of appointing arbitrators must be honored over their provision of the RMA as a possible arbitral forum, for the FAA explicitly states that if the parties have provided in their contract "a method of naming or appointing an arbitrator or arbitrators ..., such method shall be followed," 9 U.S.C. § 5 (emphasis added), and it does not explicitly require that the parties’ selection of an arbitral forum be followed.

3 . ENABAS contends that Cargill's appeal of this arbitration was untimely, but this argument is without merit.

4 . Section 4 of the FAA, 9 U.S.C. § 4, provides:

A party aggrieved by the alleged failure ... of another to arbitrate under a written agreement for arbitration may petition any United States district court .-.. for an order directing that such arbitration proceed in the manner provided for in such agreement.... The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.

5 . ENABAS contends that the district court lacked personal jurisdiction over it in this action under the Foreign Sovereign Immunities Act (FSIA), 28 UAC. §§ 1330, 1602-1611, and that, in any event, it was not properly served under the FSIA. We find no merit in either contention.

6 . Both the dissenting opinion and ENABAS place great emphasis on the fact that the arbitration clause in the parties' contract does not specify the manner in which the parties are mutually to agree on arbitrators. Rather than enforcing the clause’s provision that the parties appoint the arbitrators by mutual agreement and thereby requiring the court to determine the manner in which this designated method of appointment is to occur, they argue that, for practical reasons, we should simply allow the RMA arbitration committee to select the arbitrators — after all, the parties did specify the RMA as a possible arbitral forum.

In deciding arbitration cases, however, we are not governed simply by our own determination of what is favorable from the standpoint of practical reasons; first and foremost, we are governed by the FAA. The FAA provides absolutely no authority for disregarding the parties' choice that the arbitrators be appointed by their mutual agreement, and instead allowing the arbitrators to be appointed by the arbitration committee of an organization that appears in the parties’ contract only because they designated it as a possible arbitral forum. In fact, to so allow the RMA arbitration committee to appoint the arbitrators would plainly violate section 5 of the FAA, which states: “If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators ..., such method shall be followed.” 9 U.S.C. § 5. No amount of practical reasons could justify our reaching a result that so clearly violates the FAA.