Opinion
Civil No. 99-545(DSD/JMM).
January 24, 2002
Thomas A. Foster, Esq. and Foster Associates, Minneapolis, MN, counsel for plaintiff.
Patricia J. Lee-O'Halloran, Esq. and Fabyanske, Westra Hart, Minneapolis, MN, Seth M. Colton, Esq. and Lommen, Nelson, Cole Stageberg, Minneapolis, MN, Thomas K. Cauley, Esq. and Sidley, Austin, Brown Wood, Chicago, IL, counsel for defendants and third-party plaintiffs.
ORDER
This matter is before the court upon plaintiff's motion to confirm the arbitrators' award and dissent dated July 11, 2001, and the supplemental arbitrators' award and dissent for attorneys' fees, costs and interest dated September 29, 2001, and defendants' motion to vacate the arbitrators' award and dissent dated July 11, 2001, and the supplemental arbitrators' award and dissent for attorneys' fees, costs and interests dated September 29, 2001. Based upon a review of the file, record and proceedings herein, and for the reasons stated, plaintiff's motion is granted in part and denied in part and defendants' motion is granted in part and denied in part.
BACKGROUND
Plaintiff Gas Aggregation Services, Inc. d/b/a/ Gas Services, Inc. ("GSI"), a Minnesota corporation, is a gas marketing company that specializes in providing the peaking needs of utilities in Minnesota and elsewhere. GSI makes contracts for the purchase and sale of gas and for its transfer from the producers or owners of gas to purchasers. Defendant Howard Avista Energy Marketing, LLC and Howard Energy Marketing, Inc. ("Howard Energy") are Delaware corporations with their principal place of business in Michigan. Howard Energy is a full service gas trading company which buys and sells large quantities of natural gas as a commodity and also provides gas supply services to utilities, marketers and industrial customers in Michigan and elsewhere.
This dispute arises from a series of contracts between the parties for the purchase and delivery of natural gas. An arbitration panel issued an award and dissent dated July 10, 2001, and a supplemental award and dissent for attorneys' fees, costs and interest dated September 9, 2001. Plaintiff moves this court to confirm the arbitration award and defendants move this court to vacate the award because defendants allege that the award fails to "draw its essence" from the subject contracts, exhibits a manifest disregard of the law, fails to make a final and complete resolution of the dispute and wholly lacks support in the record. (Defs.' Mem. Law (1) Responding Pl.'s Mot. Entry of Judgment on Arbitration Awards and (2) Supp. Mot. Vacate Arbitration Awards at 2.) In particular, defendants ask the court to vacate the arbitration award because they contend that the arbitration panel made the following errors:
(1) Disregard of sale price in contracts: Defendants contend that the majority exceeded the panel's authority by substituting "monthly average market prices" for the prices agreed to by the parties in the relevant contracts without explaining its rationale for ignoring the clear terms of the contracts;
(2) Loss of Business Damages: Defendants argue that the majority improperly awarded damages for loss of business because it ignored the unambiguous liquidated damages provisions in the governing contracts, disregarded well-established Minnesota law submitted to it and failed to base the award on the record;
(3) Attorneys' Fees, Interest and Costs: Defendants assert that the panel ignored controlling Minnesota law and wrongly awarded GSI attorneys' fees, prejudgement interest and costs, and also failed to make a final, determinative award concerning attorneys' fees, prejudgment interest and costs; and
(4) NSP Receivable: Defendants believe that the majority impermissibly determined an issue not properly before the panel and granted GSI the rights to a receivable that is the subject of a proceeding before the Ramsey County District Court — an issue that this court did not, and could not, submit to the panel. (Defs.' Mem. Law (1) Responding Pl.'s Mot. Entry of Judgment on Arbitration Awards and (2) Supp. Mot. Vacate Arbitration Awards at 2-3).
For the following reasons, the court denies plaintiff's motion to confirm the arbitration award as to the sales price, the loss of business damages, and attorneys' fees, costs and interest and grants plaintiff's motion to confirm the award as to the NSP receivable. The court also grants defendants' motion to vacate the award as to the sales price, the loss of business damages and attorneys' fees, costs and interest and denies defendants' motion as to the NSP receivable.
DISCUSSION
A. The Arbitration Award
"[C]ourts play only a limited role when asked to review the decision of an arbitrator." United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 36 (1987); see also Missouri River Servs., Inc. v. Omaha Tribe of Nebraska, 267 F.3d 848, 855 (8th Cir. 2001) ("our review of an arbitration award is very limited."); Inter-City Gas Corp. v. Boise Cascade Corp., 845 F.2d 184, 187 (8th Cir. 1988) ("judicial review of arbitration awards is restricted, and the courts will not review the merits of those awards. . . .") (citations omitted). Pursuant to the Federal Arbitration Act, courts have authority to vacate the arbitration panel's award under the following circumstances:
(1) Where the award was procured by corruption, fraud or undue means.
(2) Where there was evident partiality or corruption in the arbitrators.
(3) Where the arbitrators were guilty of misconduct . . . [and]
(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definitive award upon the subject matter was not made.9 U.S.C.A. § 10 (West 2001). For instance, courts may vacate arbitration awards where the arbitration panel ignores unambiguous contract language, see e.g., Missouri River Servs., 267 F.3d at 854, displays a manifest disregard of applicable law, see id., or makes an award that has no basis in the record, see e.g., Sargent v. Paine Webber, Jackson Curtis, Inc., 674 F. Supp. 920, 922 (D.D.C. 1987).
Plaintiff asserts that defendants cannot appeal the arbitration award because the parties agreed to "binding arbitration from which there is no appeal." (Foster Aff., Ex. A) This argument fails because defendants do not appeal the arbitration award, but instead move the court to vacate it. The FAA specifically provides for motions to vacate. 9 U.S.C.A. § 10.
1. Sale Price in Contract
Defendants assert that the court should vacate the award of damages related to the price substitutions in GSI's Trading Account because the majority ignored the unambiguous terms of the underlying contracts. According to defendants, contracts evidenced by the transaction confirmations generated and maintained by defendants for each transaction exclusively determined the rights and obligations of the parties concerning GSI's Trading Account. (Pl.'s Mem. Law Supp. Mot. Confirm Arbitration Awards at 7.) Because the court finds that the arbitration panel ignored those contractual terms, the court vacates that portion of the arbitration award.
Section 10 of the FAA provides in relevant part:
(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration — . . .
(4) Where the arbitrators exceed their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.9 U.S.C.A. § 10. Both the Supreme Court and Eighth Circuit have consistently held that arbitrators who fail to base an award on the contract before them have exceeded their authority and direct courts to vacate such an award under the FAA. See e.g., United Paperworkers, 484 U.S. at 38 (finding an arbitrator's award "must draw its essence from the contract and cannot simply reflect the arbitrator's own notions of industrial justice."); United Steelworkers v. Enterprise Wheel and Car Corp., 363 U.S. 593, 597 (1960) (holding that an arbitrator's award in a labor context is "is legitimate only so long as it draws its essence from the collective bargaining agreement."); Missouri River Servs., 267 F.3d at 854-55 (stating that arbitrator cannot disregard unambiguous contract language and craft her own remedy); Keebler Co. v. Milk Drivers and Dairy Employees Union, Local No. 471, 80 F.3d 284, 287 (8th Cir. 1996) ("A reviewing court . . . may vacate an arbitration award when . . . the arbitrator ignores the plain language of the contract."; Inter-City Gas Corp. v. Boise Cascade Corp., 845 F.2d at 187 ("Although the arbitrator may interpret ambiguous language, the arbitrator may not disregard or modify unambiguous contract provisions.").
In Inter-City Gas Corp., a case which addressed natural gas trading, the court determined a dispute over which of two retail rates should apply under the terms of the parties' contract. Inter-City Gas Corp., 845 F.2d at 186. The arbitrator found that the lower price applied and awarded damages to the buyer; the district court confirmed the award. Id. The Eighth Circuit found that the arbitrator disregarded the plain and unambiguous contract language and thus vacated the award. Id. at 188. See also, Missouri River Servs., 267 F.3d at 855 (vacating arbitration award because the arbitrator did not interpret the contract.); Hormel Co. v. United Food Commercial Workers, Local 9, 879 F.2d 347, 352 (8th Cir. 1989) (vacating arbitration award because arbitrator's award did not draw its essence from an interpretation of explicit provisions of the contract).
Here, as in Inter-City Gas Corp., a dispute arose between the parties over the whether the stated contract price or a "monthly average market price" should be used to determine the balance of GSI's Trading Account. The contacts between plaintiff and defendants explicitly stated a price term. (Colton Aff. Ex. B.) The contracts allowed for only one price — the price plainly stated in the contracts, which were trade confirmations. Similar to the arbitrator in Inter-City Gas Corp., however, the arbitration panel in this case ignored the price term when they determined that the "monthly average market price" should be used. Since the contracts unambiguously specified a price term and since the panel ignored the term, the court finds that the arbitration panel exceeded its authority and therefore vacates that portion of the arbitration award pursuant to the FAA, 9 U.S.C.A. § 10.
The court rejects plaintiff's assertion that the trade confirmation defendants offered into evidence is irrelevant. Instead, the court finds that the Goose Creek transaction was a part of the GSI Trading Account and thus was a part of the transactions giving rise to this dispute over the GSI Trading Account. Moreover, because the Goose Creek trade confirmation was a part of the record before the arbitration panel, the court relies on that confirmation in concluding that the panel ignored the price terms specified in the contracts between the parties, including the Goose Creek trade confirmation.
2. Damages for Loss of Business
Defendants claim that the court also should vacate the award of damages for loss of business because defendants assert that the majority overlooked unambiguous contract terms, manifestly disregarded the law and failed to base its award on the record. Because the court finds that the award fails to draw its essence from the unambiguous contractual language, the court also vacates that portion of the award.
As discussed above, an arbitrator's award "must draw its essence from the contract and cannot simply reflect the arbitrator's own notions of industrial justice." United Paperworkers, 484 U.S. at 38. Here the terms of the relevant contracts clearly limited damages for non-performance to the cost of replacement gas, stating that "[t]he party failing to perform under a firm agreement . . . shall pay the non-failing party for market loss to replace the non-performed purchase or sale plus any unused firm transportation demand charges resulting directly from the non-performance." (Colton Aff., Ex. B at 36.) Under Minnesota law, such express limitations on damages preclude other recovery unless the limitations "fail [their] essential purpose," which neither party alleges. Transport Corp., Inc. v. International Bus. Mach. Corp., 30 F.3d 959 (8th Cir. 1994). In ignoring this limitation on damages provision in the contracts, the majority's award fails to draw its essence from the contract. The court therefore vacates that portion of the award.
3. Attorneys' Fees, Costs and Interest
Defendant further contends that the court should vacate the arbitration award of attorneys' fees, costs and prejudgment interest because the award manifests a disregard of the applicable law and did not make a final determination of the issues. The court vacates the award on those grounds.
A court may vacate an arbitration award where it "evidences a manifest disregard for the law." See Missouri River Servs., 267 F.3d at 854 (quoting Hoffman v. Cargill Inc., 236 F.3d 458, 461 (8th Cir. 2001)). An award "`manifests disregard for the law where the arbitrators clearly identify the applicable, governing law and then proceed to ignore it.'" Id. Under Minnesota law, a litigant cannot recover attorneys' fees or costs unless there is a specific contract or statute authorizing such recovery. See Barr/Nelson, Inc. v. Tonto's Inc., 336 N.W.2d 46, 53 (Minn. 1983) (attorneys' fees); Geske v. Marcolina, 624 N.W.2d 813, 816 (Minn.Ct.App. 2001) (citing Barr/Nelson); In re Wang, 441 N.W.2d 488, 496 (Minn. 1989) (costs). The arbitration panel acknowledged that the Minnesota Prevention of Consumer Fraud Act ("Consumer Fraud Act") provided the only relevant legal basis for an award of attorneys' fees to GSI when it stated that GSI sought attorneys' fees under the Minnesota Consumer Fraud Act. (Colton Aff., Ex. B. at 25) The panel then recognized in its award that defendants "presented the panel with a decision of the Minnesota Supreme Court holding that the Consumer Fraud Act does not apply to GSI's dispute with [defendants]." (Colton Aff., Ex. B. at 25) Nevertheless, the arbitration award provided GSI attorneys' fees, (Colton Aff., Ex. B at 26), a decision which evidences manifest disregard of the law. The court therefore vacates the panel's award of attorneys' fees and costs.
Plaintiff also admits the award of attorneys' fees and costs must be based upon a violation of the Consumer Fraud Act. (Pl.'s Mem. Law Supp. Mot. Confirm Arbitration Awards at 11.)
The court also vacates that portion of the award because it failed to make a final determination of attorneys' fees and prejudgment interest. Section 10(a)(4) of the FAA allows a court to vacate an award where the arbitrators fail to make a "mutual, final, and definite award upon the subject matter submitted. . . ." 9 U.S.C.A. § 10(a)(4). The finality requirement specifies that an award must "resolve all issues submitted to the arbitration, and determine each issue fully so that no further litigation is necessary to finalize the obligations of the parties under the award." Dighello v. Busconi, 673 F. Supp. 85, 90 (D.Conn. 1987). The finality requirement therefore mandates that arbitrators decide both issues of liability and damages. Michaels v. Mariforum Shipping, S.A., 624 F.2d 411, 413-14 (2d Cir. 1980).
Here the panel failed to make a final determination as to attorneys' fees and prejudgment interest. In particular, the award provided:
The panel has not sought to make a purely legal ruling with respect to [attorneys' fees and prejudgment interest.] The panel emphasizes that, should a Minnesota or federal court of competent jurisdiction determine that GSI is not legally entitled to Attorneys' Fees and Prejudgment Interest, such a determination should not and does not affect the other findings, conclusions or awards made by the panel herein.
(Colton Aff., Ex. B at 27-28.) Because the panel notes that it did not make a "purely legal ruling" on the issues of attorneys' fees and prejudgment interest and invites judicial determination of the two issues, the obligation of the parties as to those two items was not fully and finally determined. The court therefore also vacates the award of attorneys' fees and prejudgment interest pursuant to 9 U.S.C.A. § 10(a)(4).
4. NSP Receivable
Finally, defendants request that the court vacate the award of the NSP receivable to plaintiff because defendants assert that the panel did not have jurisdiction over the matter. The court concludes that the panel's award of the NSP receivable is proper and confirms that award.
An arbitrator exceeds its authority under Section 10(a)(4) of the FAA when it makes an award on subject matter not submitted to arbitration. See, e.g., Fahnestock Co. v. Waltman, 935 F.2d 512, 515 (2d Cir. 1991). The arbitration stipulation instructs the arbitration panel to arbitrate "all claims in this action." (Stipulation and Order to Compel Arbitration and Stay Litigation at 2.) As defendants acknowledge, the claims in this action include those that were filed with the court prior to referral to arbitration. (Defs.' Mem. Law (1) Responding Pl.'s Mot. Entry of Judgment on Arbitration Awards and (2) Supp. Mot. Vacate Arbitration Awards at 24.) Plaintiff included an argument that it was entitled to the NSP receivable in its complaint. (Compl. ¶¶ 28-29, 44-47.) Defendants therefore cannot now claim that the panel's award was beyond the scope of its authority. The court therefore confirms that portion of the arbitration award.
CONCLUSION
For the foregoing reasons, IT IS HEREBY ORDERED that:
1. Plaintiff's motion to confirm the arbitration awards as to the sales price, the loss of business damages, and attorneys' fees, costs and interest is denied;
2. Plaintiff's motion to confirm the awards as to the NSP receivable is confirmed;
3. Defendants' motion to vacate the arbitration awards as to the sales price, the loss of business damages and attorneys' fees, costs and interest is granted; and
4. Defendants' motion to vacate the arbitration awards as to the NSP receivable is denied.