Papalote Creek II, L.L.C. v. Lower Colorado River

Case: 17-50852 Document: 00514875536 Page: 1 Date Filed: 03/15/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
March 15, 2019
No. 17-50852 Lyle W. Cayce
Clerk
PAPALOTE CREEK II, L.L.C., formerly known as Papalote Creek Windfarm
II, L.L.C.,
Plaintiff–Appellant,
v.
LOWER COLORADO RIVER AUTHORITY,
Defendant–Appellee.
Appeal from the United States District Court
for the Western District of Texas
Before HIGGINBOTHAM, ELROD, and HO, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
Papalote Creek II, LLC (Papalote) appeals the district court’s order
compelling Papalote to arbitrate a dispute raised by Lower Colorado River
Authority (LCRA)—whether their contractual agreement limits LCRA’s
liability to $60 million. The arbitration clause requires Papalote and LCRA to
arbitrate “any dispute [that] arises with respect to either [p]arty’s
performance.” Because the dispute that LCRA has raised is an interpretative
dispute—not a performance dispute—we reverse and remand.
Case: 17-50852 Document: 00514875536 Page: 2 Date Filed: 03/15/2019
No. 17-50852
I.
This is the second time Papalote and LCRA have appeared before us. See
Lower Colo. River Auth. v. Papalote Creek II, LLC, 858 F.3d 916 (5th Cir. 2017)
(Papalote I). In the previous appeal, we vacated the district court’s order
compelling arbitration on ripeness grounds without addressing whether
LCRA’s dispute is arbitrable. Id. at 918. This case has returned to us with
subsequent procedural development after the remand. We summarized the
relevant facts in Papalote I:
In December 2009, LCRA entered into a Power Purchase
Agreement [(Agreement)] with [Papalote]. Papalote planned to
build an 87-turbine wind farm in Texas . . . , and under the
[Agreement], LCRA agreed to purchase all of the energy . . . at a
fixed price for an 18-year term.
Relevant to this appeal are four sections of the [Agreement]: § 4.3,
§ 9.3, § 13.1, and § 13.2. First, § 4.3, which is entitled “Liquidated
Damages Due to [LCRA's] Failure to Take,” provides a formula for
how to calculate the liquidated damages that LCRA would owe to
Papalote in the event that LCRA failed to take all of the Project's
energy. As noted above, LCRA is required to take all of the energy
generated by the Project. However, should LCRA fail to do so, § 4.3
details how to calculate Papalote's “exclusive remedy” of liquidated
damages. This liquidated damages calculation would depend in
part on the difference between the [Agreement’s] fixed price and
the price that Papalote is otherwise able to obtain in selling the
energy.
Second, § 9.3, which is entitled “Limitation on Damages for Certain
Types of Failures,” provides the following: [Papalote's] aggregate
liability for [its failure to construct and operate the wind farm by
the agreed-upon date] shall be limited in the aggregate to sixty
million dollars ($60,000,000). [LCRA's] damages for failure to
perform its material obligations under [the Agreement] shall
likewise be limited in the aggregate to sixty million dollars
($60,000,000). . . .
Finally, § 13.1 and § 13.2 provide a two-step arbitration procedure.
The first step, as dictated in § 13.1, requires, inter alia, that “[i]f
2
Case: 17-50852 Document: 00514875536 Page: 3 Date Filed: 03/15/2019
No. 17-50852
any dispute arises with respect to either Party's performance
hereunder,” the senior officers of LCRA and Papalote meet in an
attempt to resolve the dispute. Under the second step, as outlined
in § 13.2, if the dispute is not resolved through the first step within
a certain timeframe, either party may submit that dispute “to
binding arbitration[.]” . . .
Papalote completed construction of the Project in 2010, and in the
ensuing years, LCRA complied with its obligations under the
[Agreement] by purchasing all of the energy generated by the
Project. In April 2015, however, LCRA initiated discussions with
Papalote regarding the [Agreement]. . . . [I]n June 2015, LCRA
sent Papalote a letter stating that, pursuant to § 13.2, LCRA was
“initiat[ing] the arbitration process to resolve the dispute between
LCRA and Papalote regarding LCRA's limitation of liability under
the [Agreement] and its impact on LCRA's performance
obligations.” LCRA also noted that it “intends to continue to fully
perform its obligations under the [Agreement] during this
arbitration process.” . . . Papalote rejected LCRA’s request to
proceed to arbitration, reasoning that “[a]n academic question
about the damages LCRA might owe for a hypothetical breach
simply does not constitute a ‘dispute’ that is proper for arbitration
under the [Agreement].” Papalote also argued that a dispute over
LCRA’s potential liability limitation was not covered by the
arbitration provision in the PPA, which was limited to disputes
regarding performance obligations.
Following Papalote’s refusal to arbitrate, LCRA filed a petition to
compel arbitration in Texas state court on June 30, 2015. Papalote
timely removed the petition to federal district court on the basis of
diversity jurisdiction. . . . In February 2016, the district court
granted LCRA's petition to compel arbitration. . . . [T]he district
court framed the question as “whether the dispute LCRA seeks to
arbitrate—whether or not LCRA's liability would be capped at $60
million in the event it elected to purchase from Papalote less than
the total amount of energy it contracted to buy—qualifies as a
dispute ‘with respect to either Party's performance’ under the
[Agreement].” In answering that question, the district court
recognized that, “in a certain sense, one could understand
‘performance’ to concern only those promises which were the
essence of the [Agreement]—the sale and production of wind
energy—and conceptualize the buyer’s obligation to pay for failing
3
Case: 17-50852 Document: 00514875536 Page: 4 Date Filed: 03/15/2019
No. 17-50852
to take as compensation for its failure to perform, rather than as
an independent performance obligation.” The district court
reasoned, however, that ‘the better view here . . . is that LCRA’s
bargained-for-obligation to pay Papalote a specified sum if LCRA
takes less than all of the energy produced is itself a performance
obligation under the [Agreement].”
Id. at 919–20.
Although Papalote appealed the order compelling arbitration, the
district court denied a stay of arbitration pending appeal. Id. at 921 n.2.
Papalote, however, did not appeal the denial of a stay pending appeal; instead,
on June 1, 2016, Papalote and LCRA submitted to us a “Joint Motion to Abate
Appeal Without Prejudice to Automatic Reinstatement” to allow the parties to
fully arbitrate. After we stayed the appeal, the parties arbitrated their
dispute, and on June 28, 2016, the arbitrator issued a decision in LCRA’s favor,
stating that § 9.3 of the Agreement limits LCRA’s liability to $60 million. After
the arbitrator’s adverse decision, Papalote moved to reinstate the appeal,
which we granted. In addition to seeking the reinstatement of the appeal,
Papalote also initiated a separate suit in the district court by filing a motion to
vacate the arbitration award. The district court stayed the proceedings for
Papalote’s motion to vacate the arbitration award pending the appeal of the
initial order compelling arbitration. While the appeal was pending, “[o]n
October 10, 2016, LCRA notified Papalote that it would cease taking energy
under the [Agreement] beginning on October 12, 2016, and that its resulting
liquidated damages would be capped at $60 million per § 9.3.” Id.
In the previous appeal, Papalote argued that LCRA’s dispute: (1) was
not ripe when the district court compelled arbitration; and (2) was outside the
scope of the arbitration clause. We agreed with Papalote that the dispute was
not ripe because LCRA was still taking energy from Papalote when the district
court compelled arbitration. Id. at 927. In holding so, we concluded that
4
Case: 17-50852 Document: 00514875536 Page: 5 Date Filed: 03/15/2019
No. 17-50852
LCRA’s subsequent decision to cease taking energy after the district court
compelled arbitration could not “retroactively cure the void order compelling
Papalote to an arbitration that it should not have been forced to attend at the
time.” Id. Accordingly, we vacated the order compelling arbitration and
remanded without addressing the arbitrability issue. Id. n.6.
On remand, the district court dismissed LCRA’s initial suit concerning
its petition to compel arbitration. In Papalote’s separate suit to vacate the
arbitration award, the district court lifted the stay, and LCRA filed a cross-
motion to affirm the arbitration award and, alternatively, to compel another
arbitration. Consistent with this court’s judgment in Papalote I, the district
court vacated the arbitration award as it was the fruit of an order that the
district court had entered without subject matter jurisdiction. However,
holding that the dispute was now ripe and again concluding that the dispute
fell within the scope of the arbitration clause, the district court once again
compelled arbitration. Papalote appeals, contending that LCRA’s dispute is
outside of the scope of the arbitration clause.
II.
A.
We review de novo whether the district court properly compelled
arbitration. Hays v. HCA Holdings, Inc., 838 F.3d 605, 608 (5th Cir. 2016).
We begin with “the proper framework for deciding when disputes are
arbitrable.” Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 297
(2010). “Under that framework, a court may order arbitration of a particular
dispute only where the court is satisfied that the parties agreed to arbitrate
that dispute.” Id.; see also id. at 304 n.11 (“The test for arbitrability remains
whether the parties consented to arbitrate the dispute in question.”). This
framework “involves two questions: ‘(1) whether there is a valid agreement to
arbitrate between the parties; and (2) whether the dispute in question falls
5
Case: 17-50852 Document: 00514875536 Page: 6 Date Filed: 03/15/2019
No. 17-50852
within the scope of that arbitration agreement.’ ” Gross v. GGNSC Southaven,
LLC, 817 F.3d 169, 176 (5th Cir. 2016) (quoting Tittle v. Enron Corp., 463 F.3d
410, 418 (5th Cir. 2006)). Because neither Papalote nor LCRA disputes the
validity of the Agreement’s arbitration clause, this appeal concerns only
whether LCRA’s dispute falls within the scope of that arbitration clause.
Determining the scope of an arbitration clause is a matter of contract.
Hebbronville Lone Star Rentals, LLC v. Sunbelt Rentals Indus. Servs., LLC,
898 F.3d 629, 632 (5th Cir. 2018); see also First Options of Chi., Inc. v. Kaplan,
514 U.S. 938, 943 (1995) (observing that arbitration is “simply a matter of
contract” and “a way to resolve those disputes—but only those disputes—that
the parties have agreed to submit to arbitration”). Under Texas law, the
primary object of contract interpretation “is to ascertain and give effect to the
intent of the parties as that intent is expressed in the contract.” Seagull
Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006).
Although both federal law and Texas law create a presumption in favor of
arbitrability, “unambiguous language controls when the question is the scope
of an arbitrator’s power,” and the “policy that favors resolving doubts in favor
of arbitration ‘cannot serve to stretch a contractual clause beyond the scope
intended by the parties.’ ” Hebbronville Lone Star Rentals, 898 F.3d at 632–33
(quoting Smith v. Transp. Workers Union of Am., AFL-CIO Air Transp. Local
556, 374 F.3d 372, 375 (5th Cir. 2004)); see also G.T. Leach Builders, LLC v.
Sapphire V.P., L.P., 458 S.W.3d 502, 521 (Tex. 2015) (discussing presumption
of arbitrability under Texas law).
The parties may agree upon a broad language in the arbitration clause
either by incorporating “[t]he standard broad arbitration provision
recommended by the American Arbitration Association” or by creating their
own broad provision. United Offshore Co. v. So. Deepwater Pipeline Co., 899
F.2d 405, 409 (5th Cir. 1990). These standard arbitration provisions typically
6
Case: 17-50852 Document: 00514875536 Page: 7 Date Filed: 03/15/2019
No. 17-50852
require arbitration of “[a]ny controversy or claim arising out of or relating to
[the] contract” or “any dispute . . . with respect to the interpretation or
performance.” Id. at 409–10 (emphasis added) (quoting Mar-Len of La., Inc. v.
Parsons-Gilbane, 773 F.2d 633, 634 (5th Cir. 1985)). “[W]hen parties choose
such broad language, only . . . ‘the most forceful evidence of a purpose to
exclude the claim from arbitration’ would render the dispute non-arbitrable.”
Id. (quoting Mar-Len, 773 F.2d at 636).
Alternatively, the parties may agree upon a narrow language in the
arbitration clause by deviating from the broad standard provisions and by
limiting arbitration only to a subset of disputes that may arise out of the
contract. See United Offshore, 374 F.3d at 410; see also Texaco, Inc. v. Am.
Trading Transp. Co., 644 F.2d 1152, 1154 (5th Cir. 1981) (relying on “more
restrictive language limiting arbitration” in declining to compel arbitration).
For example, the parties may limit arbitration to either interpretation-related
disputes or performance-based disputes at the exclusion of other categories of
disputes. Negrin v. Kalina, No. 09-Civ-6234, 2010 WL 2816809, at *5 (S.D.N.Y.
July 15, 2010) (“The parties’ use of precise language in the arbitration clause
suggests an intent to limit arbitration to a particular subset of disputes.”); see
also Taylor v. Inv’rs Assocs., Inc., 29 F.3d 211, 215 (5th Cir. 1994) (applying
expressio unius est exclusio alterius to limit the arbitration clause’s application
to a subset of parties).
We have previously observed that if an arbitration clause “restricts [the
arbitrator’s] power to an interpretation of the contract, it leaves the arbitrator
powerless to decide matters on which the agreement is silent.” United
Offshore, 899 F.3d at 410. In Beckham v. William Bayley Co., a contract for
delivery of “standard” insect screens required arbitration of “[a]ny
disagreement . . . as to the intent of [the] contract”—i.e., interpretation of the
contract. 655 F. Supp. 288, 291 (N.D. Tex. 1987). “Had the parties disputed
7
Case: 17-50852 Document: 00514875536 Page: 8 Date Filed: 03/15/2019
No. 17-50852
whether the screens, as delivered, were in fact ‘standard’ screens, the
arbitration clause would have required that the intent as to the meaning of the
term ‘standard’ be resolved by arbitration.” Id. But the parties agreed on what
“standard” insect screens meant, and the dispute was simply over whether the
delivered insect screens were damaged. Id. Because such a dispute concerned
performance, the court held that the dispute fell outside the scope of the
arbitration clause. Id.The opposite is also true: If the arbitration clause limits arbitration to
performance-related disputes, then the arbitrator cannot decide other matters,
such as interpretative disputes. Cf. Negrin, 2010 WL 2816809, at *6 (holding
that “[t]he arbitration clause cover[ing] disputes relating to ‘non-
performance’ ” did not apply when there was no allegation that “[d]efendants
failed to discharge . . . any obligation under the [contract]”). The Seventh
Circuit has illustrated this distinction:
We can imagine a case in which both parties agree that for example
some form of notice is a condition precedent to performance, and
the only dispute is over whether the notice was given. That
dispute would be arbitrable if the arbitration clause included
performance disputes, not if it did not.
Selcke v. New England Ins. Co., 995 F.2d 688, 690 (7th Cir. 1993). Thus, the
parties may decide what disputes they wish to submit to an arbitrator. If they
limit arbitration to a specific category of disputes, at the exclusion of other
categories of disputes, then the arbitrator’s power is limited to those disputes
to which the parties expressly consented. See First Options, 514 U.S. at 943.
Here, Papalote and LCRA agreed to submit to binding arbitration “[i]f
any dispute arises with respect to either Party’s performance.” This clause
clearly signifies the parties’ intent to limit arbitration to performance-related
disputes only, and the arbitration clause neither requires nor authorizes
8
Case: 17-50852 Document: 00514875536 Page: 9 Date Filed: 03/15/2019
No. 17-50852
arbitration of disputes that are not performance-related disputes, such as
disputes related to the interpretation of the Agreement.
B.
Because the Agreement limits arbitration to “any dispute [that] arises
with respect to either Party’s performance,” LCRA’s dispute—whether the
Agreement limits LCRA’s liability to $60 million—is arbitrable only if it
constitutes a dispute with respect to either LCRA’s or Papalote’s performance.
We hold that LCRA’s dispute is a dispute related to the interpretation of the
Agreement, not a performance-related dispute, and thus does not fall within
the scope of the Agreement’s arbitration clause.
Interpretative disputes arise when the parties disagree over a text’s
meaning. See Interpretation, Black’s Law Dictionary (10th ed. 2014) (“The
ascertainment of a text’s meaning[.]”). Here, LCRA’s own demand letter to
Papalote frames LCRA’s dispute as an interpretative dispute: The letter states
that “[t]he dispute is whether LCRA’s liability is limited to $60,000,000 under
the [Agreement’s § 9.3].” And even LCRA’s brief on appeal observes that this
dispute is “about the meaning of the [Agreement’s] liability limitation.”
LCRA’s Br. at 35 (emphasis added).
As Papalote points out, one needs only to examine the Agreement to
determine what the Agreement says and means, and what LCRA and Papalote
had intended while drafting the Agreement. See Selcke, 995 F.2d at 690. The
issue in this case can be answered without any reference to factual allegations
of failure to perform. See Negrin, 2010 WL 2816809, at *6. Accordingly,
LCRA’s dispute is squarely in the realm of interpretation. 1 See also Papalote
1 We are not alone in making this observation. The previous panel of this court has
made similar observations—albeit in dictum—that this dispute revolved around
interpretation. See Papalote I, 858 F.3d at 924. So did the district court. Although the
district court ultimately concluded that this interpretative dispute related to performance,
thus constituting a performance-based dispute—a conclusion that we reject today—it could
9
Case: 17-50852 Document: 00514875536 Page: 10 Date Filed: 03/15/2019
No. 17-50852
I, 858 F.3d at 924 (noting in dicta that “the underlying claim that LCRA sought
to arbitrate is effectively one for a declaratory judgment [by an arbitrator] that
its interpretation of § 9.3 is correct.”). Here, although Papalote and LCRA
contractually committed “to have someone—other than a judge—decide”
performance-related disputes, they did not agree to have an arbitrator decide
matters of contract interpretation. In re M.W.M., Jr., 523 S.W.3d 203, 207
(Tex. App.—Dallas 2017).
In resisting this conclusion, LCRA heavily relies on the phrase “with
respect to,” which, it contends, means “relating to.” LCRA argues that, because
the interpretative dispute “relat[es] to LCRA’s ongoing and future performance
under the [Agreement],” the interpretative dispute is a dispute “with respect
to” performance. However, § 9.3 is a damages provision, not a provision about
performance, and LCRA’s interpretative dispute is with respect to damages,
not performance. Therefore, even if we agree with LCRA’s broad reading of
the phrase “with respect to,” LCRA cannot prevail. Because LCRA’s
interpretative dispute is outside the scope of the arbitration clause, the district
court erred in compelling Papalote to arbitrate.
III.
For the foregoing reasons, we REVERSE the district court’s order
compelling arbitration and REMAND for further proceedings consistent with
this opinion.
not avoid observing that LCRA’s dispute “concerns the proper interpretation of a clause in
the [Agreement].” Thus, even though LCRA may contend that it has raised a performance-
related dispute, those who have examined its dispute have unavoidably characterized this as
an interpretative one. See Tidelands Marine Serv. v. Patterson, 719 F.2d 126, 128 n.3 (5th
Cir. 1983) (“That which looks like a duck, walks like a duck, and quacks like a duck will be
treated as a duck even though some would insist upon calling it a chicken.”).
10