Opinion
NO. 2013-CA-000019-MR
05-30-2014
BIG RIVERS ELECTRIC CORPORATION APPELLANT v. CITY OF HENDERSON, KENTUCKY; and CITY OF HENDERSON UTILITY COMMISSION d/b/a HENDERSON MUNICIPAL POWER AND LIGHT APPELLEES
BRIEF FOR APPELLANT: C. Scott Greene Atlanta, Georgia John R. McCall Sheryl G. Snyder Theresa A. Canaday Jason P. Renzelmann Louisville, Kentucky BRIEF FOR APPELLEES: K. Gregory Haynes Virginia Hamilton Snell David A. Calhoun Louisville, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM HENDERSON CIRCUIT COURT
HONORABLE KAREN LYNN WILSON, JUDGE
ACTION NO. 09-CI-00693
OPINION
AFFIRMING
BEFORE: CLAYTON, MAZE, AND NICKELL, JUDGES. CLAYTON, JUDGE: Big Rivers Electric Corporation (hereinafter "Big Rivers") appeals the Henderson Circuit Court's confirmation of an arbitration award and denial of its motion to vacate the award. The arbitration arose from a dispute concerning the sale of energy between Big Rivers and the City of Henderson, Kentucky, and its electric utility company, City of Henderson Utility Commission d/b/a Henderson Municipal Power and Light (hereinafter collectively "the City"). The parties differ as to the interpretation of their respective rights under the 1998 amendments to the original Power Sales Contract. At the behest of Big Rivers, the dispute was submitted to a panel of arbitrators.
But after the panel made its award, Big Rivers moved the circuit court to vacate the decision of the panel. After careful consideration, we affirm.
FACTS
Big Rivers is an electric cooperative company that has its headquarters in Henderson, Kentucky. Big Rivers provides power to member cooperatives and utilities on the wholesale market. The City of Henderson is an entity that receives power from Big Rivers on the wholesale market. Prior to 1970, the City had one electric station, but in 1970, Big Rivers and the City agreed to build a second station. The agreement was that the City would own the station and Big Rivers would operate it. The station was built near Sebree and is known as "Station Two."
The parties entered into a Power Sales Contract and operating agreement to govern their rights to the capacity and energy output of Station Two and their responsibilities for the costs. The Power Sales Contract provided that each year the City would reserve part of Station Two's capacity to serve its customers and that Big Rivers could sell the power that the City had not reserved.
Big Rivers' 1996 bankruptcy reorganization resulted in an agreement by which subsidiaries of Louisville Gas & Electric Corporation (hereinafter "LG&E") temporarily assumed Big Rivers' rights and obligations for Station Two under the contracts with the City. In 1998, the parties amended the original agreement.
Amendments to the agreement included the treatment of energy produced at Station Two from the capacity the City had reserved from this station but did not actually use. The amended terms related to this issue were set forth in a new section titled Section 3.8. The provisions in Section 3.8 did not take practical effect for several years because of Big Rivers' reorganization in bankruptcy.
In 2009, LG&E returned the operation of Station Two to Big Rivers. At this juncture, Big Rivers and the City discovered that they had a different understanding of the meaning of Section 3.8. Big Rivers claimed during the negotiations that "unwound" the 1998 transactions which returned operations of Station Two to Big Rivers, that the City for the first time was asserting that it had a right to market Excess Henderson Energy without offering it first to Big Rivers at the price delineated in Section 3.8(c). To resolve the dispute, Big Rivers filed a Demand for Arbitration with the American Arbitration Association limited to a declaration of the parties' rights to Excess Henderson Energy under Section 3.8.
The issues submitted to arbitration by Big Rivers were (a) whether the City can sell Excess Henderson Energy directly to a third party without first offering the energy to Big Rivers and (b) whether the City is entitled to offer the Excess Henderson Energy to Big Rivers at a price higher than the explicit contractual price of $1.50 per MWh plus certain variable costs. A panel of three arbitrators held an evidentiary hearing over the course of two weeks from November 5 through November 13, 2011. After the hearings concluded, the matter was left open to allow the parties the opportunity to submit post-hearing briefs.
Oral arguments occurred on March 14, 2012. On May 31, 2012, the panel released a four-page award, which was signed by two of the three arbitrators, and separate concurring award by the panel chair.
In the award, the panel decided that Section 3.8(d) was ambiguous because it did not provide Big Rivers a price for Excess Henderson Energy purchased from the City. The majority noted that its reasoning was bolstered by the fact that the $1.50 per MWh price cited in Sections 3.8(a) and (c) is omitted from Section 3.8(d). Further, the panel concluded that while Big Rivers did have the first right to purchase such energy, the City's offer to Big Rivers could be at the same price as a firm or bona fide offer received by the City from a third party. The chair of the panel concurred with the award but opined that given market changes since 1998, the award's reliance on the 1998 contract was unworkable.
Big Rivers filed a motion in circuit court to vacate the arbitrators' award under the Federal Arbitration Act (hereinafter the "FAA"). It made three arguments to support its position - that the arbitrators had exceeded their powers; failed to render a mutual, final, and definite award; and, exhibited a manifest disregard for the law.
On December 5, 2012, the circuit court entered its order wherein it observed that the standard of review to vacate arbitration awards was very narrow and permitted only the most egregious of awards to be vacated. Moreover, the circuit court held that the arbitrators did not exceed their power when they interpreted the contract's language, that they made a final and definite award, and that they did not show a manifest disregard for the law. Accordingly, the circuit court denied the motion to vacate and confirmed the arbitration award. Big Rivers now appeals this decision.
ANALYSIS
Standard of Review
Since the arbitration clause in the Power Sales Contract does not specify that arbitration must occur in Kentucky, the Kentucky Uniform Arbitration Act does not apply. Ally Cat, LLC v. Chauvin, 274 S.W.3d 451 (Ky. 2009). Moreover, in arbitration cases not governed by the Kentucky Uniform Arbitration Act, our Court has applied the vacatur provisions of the FAA. McClellan v. Serv. Corp. Intern., 2010 WL 476005 (Ky. App. 2010).
Given that the parties recognize that the FAA is the controlling authority, the issue for this Court is to determine whether any basis exists under the FAA to vacate the arbitration award. It is well established that courts should play only a limited role in reviewing the decisions of arbitrators. Dawahare v. Spencer, 210 F.3d 666, 669 (6th Cir. 2000). Indeed, the FAA presumes that arbitration awards will be confirmed. Id.
Significantly, the FAA, 9 U.S.C.A. § 1-16, expresses a federal policy favoring enforcement of arbitration awards. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25, 111 S.Ct. 1647, 1651, 114 L.Ed.2d 26 (1991). Parties are encouraged to agree to arbitration because the FAA ensures that "arbitration awards are both fair and final." Solvay Pharm., Inc. v. Duramed Pharm., Inc., 442 F.3d 471, 475 (6th Cir. 2006). Further, the Act promotes finality "by substantially limiting the occasions for judicial review," id., and expressing a "presumption that arbitration awards will be confirmed." Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 328 (6th Cir. 1998). It has been stated that when courts are called on to review an arbitrator's decision, the review is one of the narrowest standards of judicial review in American jurisprudence. Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 643 (6th Cir. 2005).
Our standard of review in such cases entails the application of clear error review for factual findings and de novo review for questions of law. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 420 (6th Cir. 1995). Furthermore, this Court may set aside an award under the FAA only if certain statutory or judicially created grounds are present. Id.
Under the FAA, courts may vacate an arbitration award under four express statutory grounds. A court may vacate an arbitration award if the award was procured by corruption, fraud, or undue means; if the arbitrators were evidently partial or corrupt; if the arbitrators were guilty of misconduct so that a party's rights were prejudiced; or, if the arbitrators exceeded their powers or executed them so imperfectly that a final, definite award was not made. See 9 U.S.C.A. § 10(a)(1)-(4) (2002). Finally, though accompanied by some uncertainty, judicial intervention may be appropriate where arbitrators act with "manifest disregard for the law." Hall St. Assoc., L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008).
Hence, in light of the policies underlying the FAA, a party seeking vacatur of an arbitration award has a high standard to meet. Questar Capital Corp. v. Gorter, 909 F.Supp.2d 789, 799 (W.D.Ky. 2012). We review this matter with these standards in mind.
Parties' positions regarding vacatur
Big Rivers asserts that the award should be vacated based on 9 U.S.C.A. § 10(a)(4), that is, "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." Big Rivers maintains that the arbitrators exceeded their authority by inventing a right of first refusal, which does not exist in the contract. Furthermore, Big Rivers argues that the arbitrators rendered an indefinite award by failing to provide any operational terms necessary to put the "right of first refusal" into practice. Therefore, Big Rivers requests that the Court of Appeals vacate the award and remand the dispute to a new panel.
In response, the City contends that the panel appropriately addressed the terms of the contract and that the award was definite and final. We now turn to these issues.
I. Award exceeded arbitrators' authority.
Section 3.8
The pertinent and disputed parts of Section 3.8 are set forth below:
(a) In the event that . . . City does not take the full amount of energy associated with its reserved capacity from Station Two (determined in accordance with the Agreement), Big Rivers may, at its discretion, take and utilize all such energy ... not scheduled or taken by City (the "Excess Henderson Energy"), in accordance with Section 3.8(c).
. . . .
(c) Following the end of each calendar month, Big Rivers shall notify City of the amount of Excess Henderson Energy and energy associated with Excess Henderson Capacity, if any, taken by Big Rivers during the previous month, and Big Rivers Shall pay City prior to the 25th day of the then current month for the amount of Excess Henderson Energy and energy associated with Excess Henderson Capacity so taken by it at a rate equal to $1.50 per mWh [plus certain variable production costs].
(d) . . . City further agrees that it shall not at any time be permitted to sell or commit to any person other than Big Rivers any Excess Henderson Energy without having first offered Big Rivers the opportunity to purchase such Excess Henderson Energy. Big Rivers shall have a reasonable period of time after submission of the City's scheduled energy requirements to decide whether to purchase any Excess Henderson Energy not scheduled by City. Big Rivers agrees to notify City thereafter if it does not intend to purchase such energy, and agrees to give City a response within a reasonable time so that the City may take efforts to resell this power to third parties. . . .
We begin with Big Rivers' interpretation of the language of the amended contract. Big Rivers maintained that Section 3.8 must be read as a whole. Thus, according to Big Rivers, the language unambiguously gives it the right to purchase as much Excess Henderson Energy as it chooses at the price specified in Section 3.8(c) and including the variable costs associated with the purchase of specific energy. Additionally, Big Rivers proffers that Section 3.8(d) does not change this interpretation. It contends that Section 3.8(d) only provides that the City must first offer Big Rivers the opportunity to purchase such Excess Henderson Energy, and only then, does the City have the right to resell this energy to third parties.
To summarize, Big Rivers believes that if the language of Section 3.8 is read as a whole section with each part an integral part of the others, it means that the City must make excess energy available to Big Rivers at the contractual price of $1.50 MHw plus costs before it can make any efforts to sell it to third parties. Thus, the arbitrators exceeded their authority by ignoring the plain meaning of the contract and inventing a first right of refusal. Based on Big Rivers' understanding of the amendments, it concludes that the award is not entitled to deference because the arbitrators' construction of the contract is implausible.
Next, we consider the City's view of the language in Section 3.8. In contrast to Big Rivers, the City contends that, as the owner of Station Two, it has always had the right to its reserved capacity; logically, when the contract was amended, it would retain the power to sell the energy to third parties. The City asserts that Section 3.8(d) preserves the City's right to this energy conditioned only upon allowing Big Rivers the opportunity to match a third-party's offer. Furthermore, the City opines that if it does not have any third-party offers, then Section 3.8(a) and (c) govern and Big Rivers purchases energy under these provisos.
The City takes the position that it takes or schedules all the energy in its reserved capacity that is not "excess" energy, and it has the right to do what it wants with that energy. Whereas Big Rivers posits that the agreement's language refers to "Excess Henderson Energy" and no distinction is made between the scheduled and the unscheduled energy.
The City also contends that while the language "right of first refusal" is not specifically used in Section 3.8, it is implicit. Obviously, the City maintains the amendment provides Big Rivers with this benefit. If there is excess energy, the City has the right to sell it to third parties under Section 3.8(d), provided it first offered it to Big Rivers. To support its interpretation of the amendment, the City highlights that Section 3.8(d) does not refer back to the $1.50 per MWh price in Section 3.8(c). Therefore, the $1.50 per MWh price found in Section 3.8(c) only has relevancy if the City does not have a third party willing to pay more.
The City also distinguishes Section 3.8(a) from Section 3.8(d) by pointing out that Section 3.8(a) refers to the generation of energy whereas Section 3.8(d) refers to the future purchase of energy. Countering Big Rivers' contention that Section 3.8 must be read as a whole, the City points out that Section 3.8(d) would be meaningless because in that scenario Big Rivers could always purchase the City's excess energy for $1.50 per MWh and would never be able to sell it to third parties at market prices.
Actual controversy
Our delineation of the parties' undeniable difference of interpretation of the contract is to underscore that contrary to Big Rivers' assertion that the arbitrators rewrote the plain meaning of the contract, the contract terms were ambiguous and subject to at least two different meanings. The arbitrators noted the parties' different perception of the language in the arbitration award:
There is an actual controversy among Big River's [sic] and Henderson/HMPL regarding whether (a) Henderson/HMPL can sell Excess Henderson Energy directly to a third-party without first offering the energy to Big River's [sic] and (b) Henderson/HMPL is entitled to offer the Excess Henderson Energy to Big River's [sic] at a price higher than the explicit contractual price of $1.50 MWh plus certain variable production costs. Respondents [the City] agree that the arbitration concerns the interpretation of Section 3.8 of the power sales contract. Respondents claim that Big River's [sic] interpretation of the agreement as amended is unreasonable and would be illegal.Hence, under their authority to interpret contract terms, the panel addresses the issue and interprets the contract language.
Arbitrators' actions
As explicated in the City's brief, the arbitrators had excellent credentials to arbitrate this action. The proceedings had all the earmarks of a trial. The parties filed position statements, exchanged written discovery, and deposed numerous witnesses and retained expert witnesses. The evidentiary hearing lasted seven days. The panel allowed the parties' counsel to present and question nineteen witnesses. Thus, besides the panels' qualifications in the matter, they were well-versed in the intricacies of the case.
The arbitrators' authority to settle the dispute derives from the parties' contract and the scope of the issues submitted by the parties to arbitration. In the case at bar, arbitration is provided for in the parties' contracts and, for this particular dispute, Big Rivers submitted a demand for arbitration to have a panel of arbitrators make a declaration of the parties' rights under the language of Section 3.8.
Contrary to Big Rivers' assertion that the arbitrators merely appeared to interpret the language of the contract, arbitration award on its face reveals that the arbitrators were interpreting Section 3.8. The panel unanimously decided that the City had the right to energy reserved under Section 3.8 and for which it paid the fixed cost of producing. Even though the Chair of the panel filed a concurring award, he joined with the majority's decision that Section 3.8 gave the City the right to sell energy within its reserved capacity at a price determined by the market.
Further, the decision of the arbitrators seems quite plausible. In essence, the parties had two extremely different interpretations of the language. And the arbitrators' decision is not something completely outrageous or unreasonable based on the words of the agreement. In fact, the arbitrators' award is more in line with the interpretation made by the City. The mere fact that the arbitrators found the City's reasoning more convincing does not make their decision implausible.
Impact of Oxford Health Plans, LLC v. Sutter
A recent United States Supreme Court decision, Oxford Health Plans, LLC v. Sutter, 133 S.Ct. 2064, 2068, 186 L.Ed.2d 113 (2013), is particularly relevant to this case. The decision reinforced that under the FAA, courts may vacate an arbitrator's decision only in very unusual circumstances.
As noted in Oxford Health Plans, arbitration is a "matter of consent." Id. at 2066. The limited review statutorily ascribed to an arbitration award supports "arbitration's essential virtue of resolving disputes straightaway." Id. at 2068 (citations omitted). Certainly, if parties were allowed to regularly challenge arbitration awards on appeal, arbitration becomes "merely a prelude to a more cumbersome and time-consuming judicial review process." Id.
Oxford Health Plans held that "[b]ecause the parties 'bargained for the arbitrator's construction of their agreement,' an arbitral decision 'even arguably construing or applying the contract' must stand, regardless of a court's view of its (de)merits." Thus, the sole question for a reviewing court is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he/she got its meaning right or wrong. Id at 2066. This is extremely significant. When a decision of an arbitration panel is reviewed for the purposes of vacatur, it is only necessary to decide that they construed the contract and not whether the reviewing court agrees with their construal.
Like Oxford Health Plans, Big Rivers chose arbitration. Similarly, Big Rivers contested the arbitral award under 9 U.S.C.A. § 10(a)(4) and moved the court to vacate an award because "the arbitrators exceeded their powers." However, instead of exceeding their authority, the arbitrators interpreted the meaning of Section 3.8 as requested in the demand letter.
Even the most rudimentary glance at the award reveals that the arbitrators interpreted the language of the amendment. Under Oxford Health Plans, the test is whether the arbitrator (even arguably) interpreted the parties' contract, not whether [s]he got its meaning right or wrong. Id. As stated in Oxford Health Plans, "[t]he arbitrator's construction holds, however good, bad, or ugly." Id. at 2071. To prevail, Big Rivers must do more than present a lengthy recitation of the arbitrators' supposed legal errors. It must establish that the arbitrators exceeded their power - it did not do so.
Moreover, Oxford Health Plans' application is not so narrow that it only addresses arbitrators' interpretation of whether a contract authorizes class actions. The Supreme Court's construction of § 10(a)(4) in Oxford Health Plans was broader than the class action context, and articulates a rule for all § 10(a)(4) petitions for vacatur of an arbitration award. DIRECTV, LLC v. Arndt, 2013 WL 5718384 (11th Cir. 2013).
Big Rivers relies heavily on the Supreme Court decision, Stolt-Nielson, S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 671, 130 S.Ct 1758, 1767 176 L.Ed.2d 605 (2010), for the proposition that the arbitrators "may not ignore the plain language of the contract." But Oxford Health Plans addressed and distinguished Stolt-Nielson:
In Stolt-Nielsen, the arbitrators did not construe the parties' contract, and did not identify any agreement authorizing class proceedings. So in setting aside the arbitrators' decision, we found not that they had misinterpreted the contract, but that they had abandoned their interpretive role. Here, the arbitrator did construe the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration. So to overturn his decision, we would have to rely on a finding that he misapprehended the parties' intent. But § 10(a)(4) bars that course: It permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly. Stolt-Nielsen and this case thus fall on opposite sides of the line that § 10(a)(4) draws to delimit judicial review of arbitral decisions.Id. at 2070.
Without a doubt, it is not our responsibility as an appellate court to decide or interpret the language in Section 3.8. Instead, pursuant to Oxford Health Plans, we must decide whether the arbitrators (even arguably) interpreted the parties' contract regardless of whether they got its meaning. Here, the arbitrators most definitely interpreted the disputed language and, thus, they did not exceed their authority.
II. Arbitrators' decision was not final and definite
Big Rivers' second reason that the arbitrators' award must be vacated is based on its position that not only did the arbitrators exceed their authority but also they so imperfectly executed the mechanism of the award that the parties' rights were not defined, and the decision contained ambiguities that will lead to new controversies. In other words, the award should resolve the entire dispute and should be sufficiently clear and specific to be judicially enforceable. IDS Life Ins. Co. v. Royal Alliance Associates, Inc., 266 F.3d 645, 650 (7th Cir. 2001).
For instance, Big Rivers articulates that the arbitrators' conception of Big Rivers' "right of first refusal" does not specify the operational terms necessary to effectuate the arbitrators' decision about the effect of the amendment's language. Big Rivers argues that because the award is indefinite and not final, it requires vacatur. It cites Sand Bros. & Co. v. Generex Pharms., Inc., 279 A.D.2d 377 (N.Y. App. Div. 2001), as support for its legal reasoning. Nonetheless, Sand Bros. is a New York State case and, as such, does not have persuasive authority.
The City, however, argues that the award is definite and final. Initially, the City observes that "first right of refusal" language has been allowed in Kentucky even when it is missing important terms. See Brownies Creek Collieries, Inc. v. Asher Coal Mining Co., 417 S.W.2d 249, 251-52 (Ky. 1967). The City posits that the price is left open in the award because the market price for energy fluctuates. Regarding Big Rivers' assertion that the award is not definite because it does not include the precise words "firm offer" or "bona fide offer," the City notes that commonsense words are inferred in law all the time.
Here, the arbitrators decided that when the City does not require all of its capacity it reserved in good faith, it may offer the excess to third parties subject to Big Rivers' first right to purchase the energy. The award states that the "price at which the energy will be offered to Big Rivers shall be the price at which City has a firm offer from a third party. Big Rivers shall then notify City within a reasonable time if it does not intend to purchase such energy so that City can sell the power to third parties." This language is sufficient for definiteness and finality within the purview of the high standard for vacation of an award. Consequently, we agree with the circuit court and the City that the terms of the agreement are indefinite or nonfinal to the point of allowing the arbitration award to be vacated under 9 U.S.C. § 10(a)(4).
CONCLUSION
It is not within our judicial authority to ascertain the meaning of the contract language in Section 3.8 nor to determine whether the arbitrators were correct in their interpretation. Rather, based on the federal policy favoring enforcement of arbitration awards and courts' limited role in reviewing the decisions of arbitrators, we reach our decision based on the fact that the arbitrators on the panel were "arguably construing . . . the contract." Oxford Health Plans, 133 S.Ct. at 2068 (citations omitted). Further, we conclude that the award was sufficiently final and definite.
Accordingly, we affirm the Henderson Circuit Court decision confirming the arbitration award and denying the motion to vacate the award.
MAZE, JUDGE, CONCURS.
NICKELL, JUDGE, CONCURS BY SEPARATE OPINION.
NICKELL, JUDGE, CONCURRING: This case once again demonstrates the inherent risks parties assume—and the significant legal rights they surrender—when agreeing to resolve disputes through binding arbitration, rather than accessing the courts, where higher standards for judicial review are provided for their protection. Had these parties not knowingly and voluntarily agreed to be bound by the decision of the arbitration panel, our review would not be limited merely to whether the panel "even arguably" interpreted the sales contract. Instead, so long as properly raised below, we could have considered the substance of the actual errors alleged by Big Rivers.
Under current law, however, as most recently demonstrated in Oxford Health Plans, it is exceptionally difficult for a reviewing court to overturn an arbitration decision, and "[a] party seeking relief . . . bears a heavy burden." Oxford Health Plans, 133 S.Ct. at 2068 (citations omitted). Regrettably, it appears "bargained for" arbitrators are free to arbitrarily and capriciously construe and apply contracts—with their decisions immune from any substantive judicial review, regardless of how "right or wrong" they are, notwithstanding "even a serious error," and despite how "bad, or ugly"—so long as the arbitrators act within the scope of contractually delegated authority and the decision bears even a glancing, cursory reference to contractual provisions. Id. (citations omitted).
In the present case, the parties contractually agreed to submit any disputes arising under a contract to binding arbitration. Pursuant to the task they were presented by the parties, a panel of three arbitrators interpreted that contract, which was susceptible to multiple interpretations. The parties, therefore, received that for which they bargained, and we as a reviewing court may delve no further. The mere fact that the panel chose the interpretation favored by the City, instead of that argued by Big Rivers, is insufficient ground for reversal. Thus, I concur. BRIEF FOR APPELLANT: C. Scott Greene
Atlanta, Georgia
John R. McCall
Sheryl G. Snyder
Theresa A. Canaday
Jason P. Renzelmann
Louisville, Kentucky
BRIEF FOR APPELLEES: K. Gregory Haynes
Virginia Hamilton Snell
David A. Calhoun
Louisville, Kentucky