Bettis Group Inc v. Transatlantic Petro, et

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________________
No. 01-20377
_______________________________
BETTIS GROUP, INC.; ROYAL HOLT BETTIS, JR.;
TARPON BENIN II, INC.; BAHAMAS W.A. LDC;
WEST AFRICA, LDC,
Plaintiffs-Counter Defendants-Appellants,
versus
TRANSATLANTIC PETROLEUM CORP.; ET AL,
Defendants,
TRANSATLANTIC PETROLEUM CORP., formerly
known as PROFCO RESOURCES, LTD.,
Defendant-Counter Claimant-Appellee.
Consolidated with
_______________________________
No. 01-20379
_______________________________
BETTIS GROUP INC.; ROYAL HOLT BETTIS, JR.;
TARPON BENIN II, INC.; BAHAMAS W.A. LDC;
WEST AFRICA LDC,
Plaintiffs-Counter Defendants-Appellants,
versus
SOGW BENIN, LTD; TIFAND, INC.;
TARPON BENIN LDC; BBFI BENIN LTD.;
CANDELA RESOURCES, LTD.,
Defendants-Counter Claimants-Appellees.
_________________________________________________
Appeals from the United States District Court
for the Southern District of Texas
(H-00-CV-3310)
_________________________________________________
December 23, 2002
Before KING, Chief Judge, and REAVLEY and WIENER, Circuit Judges.
PER CURIAM*:
Plaintiffs/Counter-Defendants/Appellants (collectively,
“Plaintiffs”) filed the two captioned lawsuits, which are
consolidated for purposes of this appeal, seeking enforcement of
the arbitration award that they had obtained against the
Defendants/Counter-Claimants/Appellees. In the first case
(hereafter, the “Guarantor Lawsuit”), the district court sustained
the counterclaim of TransAtlantic Petroleum Corp. (“TransAtlantic”)
which asserted that, as guarantor only, it was not subject to the
arbitration provision that led to the award in question. In the
second case (hereafter the “Affiliates Lawsuit”), the district
court concluded that the arbitrator’s award to the Plaintiffs was
grounded in damages that were too speculative to support the award,
thereby constituting “manifest disregard of the law,” which the
court equated with misconduct by the arbitrator. As a result of
these rulings, the district court vacated the arbitration award in
its entirety as to all parties previously found liable by the
arbitrator (collectively, “Defendants”), whether as obligors or
guarantor, and dismissed both actions.
*
Pursuant to 5TH Cir. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH Cir. R. 47.5.4.
2
The Plaintiffs appeal all rulings of the district court in
both suits, principal among which are (1) the court’s determination
that the arbitrator erred in finding that TransAtlantic was bound
to arbitrate, and (2) the court’s vacatur of the arbitration award
as to all Defendants. We reverse these rulings of the district
court and remand with instructions to enforce the arbitrator’s
award as rendered.
I. Facts and Proceedings
Tarpon-Benin, S.A., a company that is not a party to this
litigation, was incorporated pursuant to the laws of the West
African Republic of Benin (“Benin”) by corporate and individual
associates of one of the Plaintiffs, Bettis Group, Inc. (“Bettis
Group”).1 The initial shareholders of Tarpon-Benin were those
affiliates of Bettis Group (collectively “the Bettis Affiliates”)
but not Bettis Group itself. The government of Benin granted
Tarpon-Benin a petroleum drilling concession (the “Concession
Contract”), under which Tarpon-Benin assumed various contractual
obligations and acquired drilling rights, in particular the right
to drill offshore in an area designated as Block 2.
Presumably to obtain additional capital for exploitation of
the Concession Contract, Tarpon-Benin brought Profco Resources,
Ltd. (subsequently renamed TransAtlantic and referred to throughout
this opinion as such) into the venture through the sale of Tarpon-
1
The laws of Benin require seven shareholders, at least one
of whom must be a natural person.
3
Benin stock to individual and corporate affiliates of
TransAtlantic, but not to TransAtlantic itself. At all times
relevant to this appeal, the shareholders of Tarpon-Benin consisted
of (1) the Bettis Affiliates and (2) all captioned Defendants-
Counter Claimants-Appellees other than TransAtlantic (collectively
“the TransAtlantic Affiliates”). Together, the TransAtlantic
Affiliates owned 75% of Tarpon-Benin’s issued and outstanding
stock, controlling its board of directors and its principal
committees, and held the presidency.
The owners of all Tarpon-Benin stock signed a Shareholders
Agreement (the “Agreement”). Although not shareholders themselves,
the two primary corporate players in the venture —— Bettis Group
and TransAtlantic —— signed the Agreement to guarantee some
obligations of some of their respective affiliates that were
shareholders, as expressly set forth in the body of the Agreement.
Specifically, section 6.5 of the Agreement identifies which
obligations of which shareholders among the TransAtlantic
Associates are guaranteed by TransAtlantic:
6.5 Guaranty of SOGW Benin’s Obligations
[TransAtlantic] hereby agrees to guarantee (i)
any and all obligations of SOGW Benin to
[Tarpon-Benin] and (ii) any and all obligations
of SCL, Tifand, and LDC in their capacities as
Shareholders of [Tarpon-Benin].2
2
Section 6.7 of the Agreement mirrors section 6.5, specifying
which obligations of which shareholders among the Bettis Group
Affiliates were guaranteed by Bettis Group: “6.7 Guarantee of West
Africa’s Obligations. The Bettis Group agrees to guarantee (i) any
and all obligations of West Africa to [Tarpon-Benin] and (ii) any
4
After Tarpon-Benin drilled a dry hole in Block 2, differences
developed between the Plaintiffs and the Defendants about the
future of the venture. The Concession Contract with Benin was
eventually lost. When the dispute between the two factions could
not be resolved amicably, the Plaintiffs invoked the arbitration
clause of the Agreement, instituting arbitration proceedings
against the Defendants for breach of the Agreement. These
proceedings, which began in Denver and were transferred to Dallas
by unanimous consent of the participants,3 culminated in an award
of $1.35 million, plus fees and interest, against the Defendants.4
To enforce their arbitration award, the Plaintiffs filed the
captioned lawsuits in federal district court in Houston.
TransAtlantic counterclaimed in the Guarantor Lawsuit, seeking (1)
reversal of the arbitrator’s preliminary ruling that TransAtlantic
was subject to arbitration and (2) vacatur of the arbitration
award. The TransAtlantic Affiliates counterclaimed in the
Affiliates Lawsuit, also seeking vacatur of that award but
contesting neither the validity of the agreement to arbitrate nor
their susceptibility to arbitration. Following the filing of the
and all obligations of Tarpon II and RHB in their capacities as
Shareholders of [Tarpon-Benin].”
3
The transfer to Dallas occurred after TransAtlantic
boycotted the proceedings, although the arbitrator stated that the
proceedings would be moved back to Denver if TransAtlantic decided
to participate and insisted on a Denver situs.
4
In its appellate brief, TransAtlantic states that the award
against it is in “the total sum of $1,848,359.32.”
5
Defendants’ cross-motions for summary judgment, the district court
entered orders in both lawsuits.
As an initial matter in the Guarantor Lawsuit, the district
court reversed the arbitrator’s preliminary ruling that
TransAtlantic was bound to arbitrate, crediting TransAtlantic’s
contention that it did not consent to arbitrate when it signed the
Agreement as guarantor of the obligations of the TransAtlantic
Affiliates, as expressly spelled out in the body of the Agreement.
The court went on to vacate the arbitration award as to
TransAtlantic.
In the Affiliates Lawsuit, the district court vacated the
arbitrator’s award, crediting the TransAtlantic Affiliates’
characterization of the arbitrator’s ruling as constituting
“manifest disregard for the law” and therefore “misconduct” by the
arbitrator. In so doing, the court rejected the Plaintiffs’
contentions that (1) the shareholders’ express waiver of appeal in
the Agreement precluded the court’s appellate review of the award,
(2) manifest disregard of the law is not a valid basis for vacating
the arbitrator’s award anyway, and (3) in fact and in law, the
arbitrator had not manifestly disregarded the law applicable to the
instant dispute. The district court was of the opinion that under
the substantive law of Texas (which is the law selected by the
parties in the Agreement), the damages were too speculative to
support an award, so that the arbitrator’s award of such damages
constituted manifest disregard for the law and thus arbitrator
6
misconduct. In the end, the district court vacated the arbitration
award in toto and dismissed both lawsuits, after which the
Plaintiffs timely filed notices of appeal.
II. Analysis
A. Standard of Review
In the Affiliates Lawsuit, we review de novo the court’s
denial of the Plaintiffs’ motion for summary judgment to enforce
their award in arbitration and the court’s grant of the
TransAtlantic Affiliates’ summary judgment motion to vacate the
arbitration award and dismiss the case. Thus, our review of each
appellate issue in the Affiliates Lawsuit is plenary.5
In the Guarantor Lawsuit, the Plaintiffs and TransAtlantic
filed cross-motions for summary judgment. The district court
denied the Plaintiffs’ motion and granted TransAtlantic’s. Again,
our review of the grant or the denial of a summary judgment is
plenary. Our standard of review of the district court’s rulings
should not, however, be confused or equated with the extremely
restricted and deferential standard to which federal courts are
held when reviewing arbitration proceedings themselves, including
the conduct of the arbitrator and the arbitration award.6
5
Six Flags Over Texas, Inc. v. Int’l Brotherhood of Elec.
Workers, Local No. 116, 143 F.3d 213, 214 (5th Cir. 1998).
6
Brook v. Peak Int’l, Ltd., 294 F.3d 668, 672 (5th Cir.
2002)(noting that the de novo standard of review is “intended to
reinforce the strong deference due an arbitrative
tribunal”)(quoting McIlroy v. Paine Webber, Inc., 989 F.2d 817, 820
(5th Cir. 1993)).
7
B. The Affiliates Lawsuit
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
1. Waiver of Appeal
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.
a. Governing Law; the Arbitration Provision
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.
b. The Dispute
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
c. Vacatur of Arbitration Award to Affiliates
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.
C. The Guarantor Lawsuit
1. Amenability of TransAtlantic to Arbitration Under the
Agreement
After the Plaintiffs invoked the arbitration clause of the
Agreement and commenced proceedings, TransAtlantic asserted that,
as a non-shareholder, guarantor-only, signatory to the Agreement,
it was not bound by the arbitration provisions of the Agreement.
TransAtlantic formalized this contention in its Statement of
Objections filed early in the arbitration proceedings. The
arbitrator rendered a preliminary decision, holding that both
TransAtlantic and Bettis Group were proper parties to the
arbitration, regardless of the fact that they had signed the
Agreement as guarantors only. Thereafter, however, TransAtlantic
refused to participate in the arbitration proceedings.
When, following completion of arbitration, the Guarantor
Lawsuit was instituted by the Plaintiffs to enforce their award,
18
TransAtlantic repeated its contention that it was not subject to
the binding arbitration provision of the Agreement. TransAtlantic
advanced this position in the district court by filing a
counterclaim in which it reiterated the contention that the
arbitrator had rejected in his preliminary ruling, i.e., that
TransAtlantic was not subject to arbitration.
a. Waiver
As an initial contention, the Plaintiffs insist that
TransAtlantic waived any right it might have had to challenge the
arbitrator’s preliminary ruling that TransAtlantic is subject to
the instant arbitration. They ground this waiver claim not in the
wording of the Agreement but in Tex. Civ. Prac. & Rem. § 172.082(f)
(hereafter “82(f)”), which states:
If the arbitration tribunal rules as a
preliminary question that it has jurisdiction,
a party waives objection to the ruling unless
the party, not later than the 30th day after
the date the party receives notice of that
ruling, requests the district court of the
county in which the place of arbitration is
located to decide the matter.
Keeping in mind that this enforcement action was instituted in
federal court and that TransAtlantic filed its counterclaim there,
asserting that it is not subject to arbitration, we must examine
the applicability of 82(f) in the framework of the FAA and the
International Rules of the AAA, as well as the Agreement’s clauses
addressing arbitration and the choice of Texas substantive law.
First, the FAA contains no mechanism for a party in
19
TransAtlantic’s position to bring an interlocutory appeal of an
arbitrator’s ruling that such party is subject to arbitration.
Under the FAA, a party seeking to compel arbitration can seek court
relief under § 4; a successful party can seek enforcement of the
arbitration award under § 9; a party against which an award is made
can seek to vacate such an award under § 10 by filing a motion
pursuant to § 12 within three months after the award is rendered.
But we have been referred to nothing in the FAA or in the AAA’s
International Rules (and have found nothing on our own) that
authorizes a party to seek an interlocutory federal court review of
a preliminary ruling by the arbitrator to the effect that the party
is subject to arbitration.
It follows, then, that if we were to view 82(f) as being
substantive in nature, parties situated like TransAtlantic would
have no remedy in federal court: They could not bring
interlocutory appeals to the district courts under the FAA; and
attempts to bring post-award petitions to vacate arbitration awards
would be thwarted as time-barred by 82(f). We conclude for two
reasons, therefore, that 82(f) does not block judicial
consideration of TransAtlantic’s challenge to its susceptibility to
arbitration on the basis of waiver.
First, we are satisfied that this provision of the Texas Civil
Practice and Remedies Code is procedural rather than substantive;
and, second, that even if it were substantive, 82(f) would be
preempted because it would be in direct conflict with the FAA. We
20
conclude, therefore, that TransAtlantic did not waive its right to
challenge the arbitrator’s preliminary determination that it was
subject to arbitration in this case. (Neither did TransAtlantic
waive or forfeit its right to contest the preliminary ruling by
filing objections with the arbitrator: Such limited appearances to
contest jurisdiction are not general appearances that have the
effect of submitting to the jurisdiction of the tribunal.)
b. Guarantors’ Agreement to Arbitrate
TransAtlantic insists that, by signing the Agreement “for the
sole purpose of guaranteeing certain obligations” of the
TransAtlantic Affiliates as shareholders, and then only “to the
extent specifically provided in this Agreement,” neither it nor
Bettis Group agreed to arbitrate, irrespective of the commitment to
arbitrate of those other signatories whose obligations under the
Agreement they guarantee. We note at the outset that, despite the
expressly limited substantive purpose of TransAtlantic’s joinder in
the Agreement, i.e., as guarantor only, its position is different
from a purely non-signatory guarantor (one who signs a separate
guaranty) seeking to avoid arbitration. Generally, a non-signatory
guarantor to an agreement containing an arbitration provision is
not bound by that provision; the opposite is frequently true for
signatory guarantors.18
We also note that the posture of this case —— a signatory’s
18
See Asplundh Tree Expert Co. v. Bates, 71 F.3d 592, 595 (6th
Cir. 1995).
21
unilateral refusal to participate in an arbitration proceeding that
eventually produces an award against such signatory, followed by a
suit to enforce the award, in which suit the signatory counters by
asserting an affirmative defense of not having been subject to a
broad form arbitration clause —— differs significantly from the
more common posture of a guarantor (1) asserting such an
affirmative defense in a suit to compel arbitration or (2) seeking
a declaratory judgment that it is not subject to such an
arbitration clause. Here, the district court’s standard of review
of a ruling by the arbitrator that a signatory party is subject to
arbitration under a broad form arbitration provision is decidedly
more limited in scope and deferential to the arbitrator than in
either of the more familiar settings of a suit to compel
arbitration or a declaratory action, in either of which the
district court, rather than the arbitrator, would have the first
bite at the apple and the arbitrator basically would have none.
Irrespective of context, however, the law is settled that, to
answer the question whether a signatory party has agreed to
arbitrate a dispute, two considerations must be addressed:
(1) Whether there is a valid agreement to
arbitrate between the parties; and (2) whether
the dispute in question falls within the scope
of that arbitration agreement. When deciding
whether the parties agreed to arbitrate the
dispute in question, “courts generally
...should apply ordinary state-law principles
that govern the formation of contracts.” In
applying state law, however, “due regard must
be given to the federal policy favoring
arbitration, and ambiguities as to the scope of
22
the arbitration clause itself must be resolved
in favor of arbitration.” The second step is
to determine “whether legal constraints
external to the parties’ agreement foreclosed
the arbitration of those claims.”19
It is axiomatic that, unless an arbitration agreement
expressly provides otherwise, the arbitrator is empowered to rule
on his own jurisdiction.20 This includes subject matter
jurisdiction, i.e., which issues are subject to arbitration and
which are outside its scope; and personal jurisdiction, i.e., who
is or is not bound to arbitrate. Here, none challenge the
jurisdiction of the arbitrator to decide the basic contractual
issues submitted by the Plaintiffs, but the Defendants continue to
challenge the arbitrator’s jurisdiction to decide the liability of
Bettis Group and TransAtlantic as guarantors of any award against
those whose obligations they have guaranteed under the Agreement.
Likewise, none challenge the existence or validity of the Agreement
or the arbitration provisions in it, but do challenge the
susceptibility of the two guarantors to mandatory arbitration,
relying on the express limitations of their joinder in the
Agreement to eschew amenability to arbitration.
The Agreement contains no express statement that the
19
Webb v. Investacorp., Inc., 89 F.3d 252, 257-58 (5th Cir.
1996)(internal citations omitted).
20
See American Arbitration Association, International
Arbitration Rules art. 15 (“The tribunal shall have the power to
rule on its own jurisdiction, including any objections with respect
to the existence, scope or validity of the arbitration
agreement.”); see also Tex. Civ. Prac. & Rem. § 172.082(a).
23
guarantors are bound to arbitrate; but neither does it contain an
express statement that the guarantors are exempt from arbitration.
Thus, in applying the rules and maxims of contract interpretation,
the arbitrator was bound to consider all facially applicable
provisions in the context of the Agreement as a whole when
determining whether subject matter jurisdiction included the power
to decide personal jurisdiction over the guarantors and subject
matter jurisdiction over their liability as guarantors to the
claimants on any amount awarded against those whose obligations are
guaranteed. In this case, the arbitrator went the extra mile by
looking beyond the four corners of the Agreement and hearing
extrinsic evidence affecting the jurisdictional issues.
Our examination of the Agreement as a whole, the preliminary
ruling by the arbitrator and his award, and other matters in the
record, satisfies us that the arbitrator was empowered to determine
his own jurisdiction (including jurisdiction over the guarantors),
that he exercised discretion in making those determinations, and
that his determinations are supported by the Agreement as a whole
and the circumstances of its execution.21
We have already noted that TransAtlantic and Bettis Group are
signatories to the Agreement, and that they expressly guarantee the
21
The instant situation is significantly different from that
in Grundstad v. Ritt, 106 F.3d 201 (7th Cir. 1997), in which
neither the guarantee nor the guarantor was mentioned in the
agreement and the arbitration clause expressly referred to the two
principals.
24
obligations undertaken by other parties to the Agreement, which
parties and objections are indisputably subject to arbitration.
Structurally, Article XVII of the Agreement addressing applicable
law and dispute resolution, first designates substantive law of
Texas as applicable and then, in the first sentence of § 17.2.2,
states unequivocally and unconditionally that “[a]ny and all
disputes or differences relating to, arising out of or in
connection with this Agreement...shall be finally settled by
arbitration pursuant to this Section 17.2.2” (emphasis added).
Although it is true, as strenuously insisted by TransAtlantic, that
the subsequent sentences of that paragraph and the remaining
paragraphs of Section 17.2.2 contain multiple references to “the
Shareholders” and none to the guarantors, the above-quoted first
sentence contains no limitation —— no reference to shareholders, or
to guarantors, or to anything other than unqualified applicability
to any and all disputes. Indeed, rather than supporting the
inference that the commitment to settle “any and all disputes or
differences relating to, arising out of or in connection with” the
Agreement should not apply to the guarantors, the omission of the
limiting reference to shareholders from the initial sentence of
Section 17.2.2 provides support for the arbitrator’s determination
that the guarantors are subject to arbitration: Inclusio unius est
exclusio alterius. And, like the position of the guarantors as
signatories to the Agreement, the statement appearing on page 2,
immediately preceding “RECITALS,” confirms that the guarantors “are
25
entering into this Agreement,” albeit for the limited purpose of
guaranteeing certain obligations.
Irrespective, then, of our standard of review —— whether,
pursuant to FAA, one that is extremely deferential to the
arbitrator, or completely de novo,22 or somewhere in between (such
as abuse of discretion) —— we ultimately agree with the
arbitrator’s conclusion that (1) he has the power to determine his
own jurisdiction, including the substantive question of the
responsibility of the guarantor for any award in arbitration
against those whose commitments were guaranteed, and the in
personam amenability of the guarantors to arbitration; (2) that,
when the Agreement is read as a whole, both guarantors are bound to
arbitrate; and (3) as guarantor, TransAtlantic is bound jointly and
severally with those shareholders of Tarpon-Benin against whom the
award in arbitration was rendered. These conclusions comport with
the frequently repeated maxims that (1) “[W]here the parties
include a broad arbitration provision in an agreement that is
‘essential’ to the overall transaction, we will presume that they
intended the clause to reach all aspects of the transaction”23 and
22
See generally First Options, 514 U.S. 938 (1995); Kona Tech.
Corp. v. S. Pac. Transp. Co., 225 F.3d 595 (5th Cir. 2000).
23
See Personal Security & Safety Systems Inc. v. Motorola
Inc., 297 F.3d 388, 394 (5th Cir. 2002); see also Neal v. Hardee’s
Sys., Inc., 918 F.2d 34, 38 (5th Cir. 1990)(“We hold that when the
parties included a broad arbitration clause in the essential
[contracts] covering ‘any and all disputes,’ they intended the
clause to reach all aspects of the parties’ relationship....”).
26
(2) that arbitration clauses are to be liberally read to implement
congressional policy expressed in the Federal Arbitration Act.24
Given the totally broad form arbitration provision of the
Agreement, the recognition of the guarantors as parties to the
Agreement for the limited purpose of guaranteeing obligations
created in the Agreement, and the joinder of the guarantors as
signatories to the Agreement, we are convinced that the arbitrator
had and correctly exercised the power to determine his jurisdiction
over TransAtlantic as guarantor and over the extent of
TransAtlantic’s obligation as guarantor. But even if our review is
de novo, we would agree with the arbitrator’s jurisdictional
ruling. The fact that TransAtlantic boycotted the arbitration
proceedings after the arbitrator ruled preliminarily that
TransAtlantic was subject to arbitration is of no moment. The
arbitrator restricted his award vis-à-vis TransAtlantic to its role
as guarantor, so TransAtlantic has no basis for complaining that
the arbitrator exceeded his authority in that regard. And,
inasmuch as we have concluded earlier that the district court’s
vacatur of the arbitrator’s award against the TransAtlantic
Affiliates must be reversed and the award enforced, our conclusion
that the arbitrator was correct in holding TransAtlantic subject to
arbitration not only requires reversal of the district court’s
jurisdictional ruling to the contrary, but also requires reversal
24
See, e.g., Penzoil Exploration and Prod. Co. v. Ramco Energy
Ltd., 139 F.3d 1061, 1068 (5th Cir. 1998).
27
of that court’s vacatur of the award against TransAtlantic as
guarantor.
III. Recap
For the foregoing reasons, we reverse the district court’s
vacatur of the arbitrator’s award as having been granted in
manifest disregard of Texas law governing contractual damages,
thereby constituting misconduct by the arbitrator. And although we
agree that TransAtlantic did not waive its right to challenge the
arbitrator’s preliminary ruling on jurisdiction, we also reverse
the court’s reversal of the arbitrator’s ruling that TransAtlantic
is subject to arbitration. We reverse as well the court’s vacatur
of the arbitrator’s award against TransAtlantic as guarantor. We
therefore reinstate the award of the arbitrator in all respects and
remand this case to the district court with instructions to enforce
the award of the arbitrator in favor of the Plaintiffs in both of
the cases that are consolidated in this appeal, doing so against
the several Defendants-Appellees in the Affiliates Lawsuit, No. 01-
20379, and jointly and severally against TransAtlantic Petroleum
Corp., Defendant-Appellee in the Guarantor Lawsuit, No. 01-20377.
REVERSED and REMANDED with instructions.
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