Fifth Circuit Un-Vacates Arbitration Award, Offering Guidance to District Courts

Curved railroad track

“When an arbitration goes an opponent’s way on the basis of questionable contract interpretation, parties often seek refuge in [Section] 10(a)(4).  But the Supreme Court has made clear that district courts’ review of arbitrators’ awards under [that Section] is limited to the ‘sole question… of whether the arbitrator (even arguably) interpreted the parties contract.’”

Those two sentences of the Fifth Circuit’s recent opinion in BNSF Railway Co. v. Alstom Transportation, Inc., __F.3d__, 2015 WL 507874 (5th Cir. Feb. 5, 2015), are indicative not only of the result of the opinion, but also of the Court’s attempt to educate the district courts within its reach.  You almost get the sense the Court is saying “if I have to say this one more time…”

The Northern District of Texas had vacated an arbitration award.  The arbitrators found, in part, that BNSF breached its covenant of good faith and fair dealing when it exercised its termination rights under the parties’ agreement.  The agreement gave BNSF the right to terminate without cause, at any time.  The district court could not see how the arbitrator avoided that contractual language to find against BNSF, and therefore ruled that the arbitrators had exceeded their power within the meaning of Section 10(a)(4) of the FAA.

The Fifth Circuit disagreed.  For the benefit of any other district courts that had mis-understood the meaning of Sutter, the Fifth Circuit took this opportunity to give a “how to” tutorial on evaluating motions to vacate arbitration awards.  As a start, the Court notes that “district courts should consult the arbitrator’s award itself” and look for textual evidence that the arbitrator interpreted the contract.  To be even more helpful, the Court suggests that evidence may be found in the arbitrator’s definition of her task, or citations to the contract, or analysis of the contract, or conclusions that “are framed in terms of the contract’s meaning.”  Because in this case, the arbitrators framed their analysis as an interpretation of the “without cause” provision of the contract, the Fifth Circuit found reversal required and reinstated the arbitration award.

[The Fifth Circuit also easily tossed aside the railroad’s argument that the award should be vacated under the Texas or Illinois state arbitration acts.  It cited case law that the FAA rules apply unless there is clear and unambiguous contractual language selecting state arbitration acts.]