Babcock & Wilcox Co. v. PMAC, Ltd.

Decision Date23 September 1993
Docket NumberNo. A14-93-00148-CV,A14-93-00148-CV
PartiesThe BABCOCK & WILCOX COMPANY, Appellant, v. PMAC, LTD., Appellee. (14th Dist.)
CourtTexas Court of Appeals

James E. Doyle, Ronald J. Restrepo, Houston, for appellant.

Leonard H. Simon, Timothy Henderson, Todd J. Zucker, Houston, for appellee.

Before J. CURTISS BROWN, C.J., and ELLIS and LEE, JJ.

OPINION

ELLIS, Justice.

This is an appeal from a final judgment confirming a $1,000,000 arbitration award in favor of PMAC, LTD. (PMAC) 1. The Babcock & Wilcox Company (B & W), appeals from that award and raises four points of error contending that the arbitration process was flawed. We affirm.

In the summer of 1987, Grady Nance, acting on behalf of B & W, contacted Robert Alpert, the President of PMAC's corporate general partner, and invited him to bid on the purchase of seven steel plants located in Pennsylvania and Texas. During the bid process, Alpert inspected the plants, including the East Works Plant located in Beaver Falls, Pa., and had extensive discussions with B & W's former manager of tubing operations. In December 1987, PMAC was one of three bid finalists. However, B & W awarded the purchase contract to a non-finalist, Lone Star Technologies, Inc. (Lone Star). On July 7, 1988, a fire destroyed the building and certain equipment at B & W's East Works Machine Shop. Thereafter, B & W, who had a "replacement policy" on the machine shop building and equipment, filed a claim with its insurance carrier. The carrier hired a company that specialized in adjusting industrial insurance claims to prepare a damage analysis. The adjusting company in turn hired Fred Donaldson, who inspected the machine shop and filed a report. B & W received a settlement in the amount of $2,783,301 from the insurance carrier. Although B & W had promised to give Lone Star a $100,000 credit for the building and equipment destroyed by the fire, the transaction between B & W and Lone Star subsequently fell through. In the summer of 1989, B & W contacted Alpert to determine whether he was still interested in purchasing the plants.

On November 17, 1989, after a one-day negotiation, the parties executed a Letter Agreement for PMAC's purchase of the B & W plants and Alpert placed $5,000,000 cash in escrow. On the same day, Nance and B & W's counsel, Jack Arnold, informed Alpert and his counsel, William Boyar, that the building and certain equipment at B & W's East Works Machine Shop had been destroyed by fire and that B & W had filed an insurance claim. On January 15, 1990, PMAC executed the Purchase and Sale Agreement (the purchase agreement). The purchase agreement called for a reduction in the purchase price by the fair market value of the assets destroyed by the fire at the East Works Machine Shop (the destroyed assets). The purchase agreement also called for a valuation of those assets by an independent, third-party appraiser agreed upon by the parties. In early March 1990, the parties agreed to use MB Valuation Services (MB) as the independent appraiser.

On March 29, 1990, after exchanging numerous drafts, the parties agreed to a Memorandum (the instruction memorandum) which provided MB with joint instructions, as required by the purchase agreement, on the methodology for determining the fair market value of the destroyed assets. The instruction memorandum called for the determination of the fair market value of the destroyed assets on an "as is, where is basis, assuming that the fire had not occurred." It also declared that "fair market value shall be expressed in terms of money that may reasonably be expected to exchange between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts as of a certain date." It further stated that the appraiser could consider certain factors in determining fair market value including: (1) use of the assets; (2) location of the assets; (3) supply and demand; (4) replacement cost for the assets; (5) age of the assets; and (6) any other "appropriate" factors. The instruction memorandum was not actually executed until two months later.

Attached to the instruction memorandum was a schedule of destroyed assets that corresponded to the list contained in the purchase agreement. Although B & W had previously supplied an additional description of the destroyed assets, the MB appraiser Allen Bealmear, withdrew on July 27, 1990, because he did not have "sufficient information to perform an appraisal based on fair market value." Before Bealmear's withdrawal, B & W had rejected requests by both PMAC and Bealmear to obtain the insurance claim file. The parties were subsequently unable to agree on fair market value by the October 4, 1990, closing date. On that date, the parties executed a Second Amendment (the second amendment) to the purchase agreement that required B & W to produce the insurance claim file and provided, in the event of a dispute regarding the fair market value of the destroyed assets, for arbitration. The amendment also limited B & W's maximum liability to PMAC for the assets to $1,200,000. Although B & W produced the insurance file for PMAC five days later, the parties were unable to agree on the fair market value of the destroyed assets.

On January 15, 1991, PMAC filed its demand for arbitration with the American Arbitration Association. B & W answered on February 18, 1991. Thereafter, the parties engaged in extensive discovery. On October 1, 1991, each party filed a Pre-Arbitration Statement. On November 8, 1991, PMAC filed a lawsuit in state court alleging that B & W fraudulently induced PMAC to enter into the entire transaction. The suit also sought declaratory relief as well as actual and punitive damages, attorney's fees, interest, and costs. On December 16, 1991, B & W moved to stay the litigation and to compel arbitration. On January 29, 1992, the trial court ordered the parties to arbitration and stayed the instant lawsuit pending the completion of that proceeding.

The arbitration proceeding began on April 21, 1992, and concluded on April 24, 1992. On the first day of the arbitration proceeding, PMAC served B & W's trial counsel with an Amended Demand for Arbitration. That motion is not included in the record. According to PMAC, the motion requested a determination of the value of the destroyed assets above the liability cap set in the amendment, plus attorney's fees and exemplary damages. Two months later, on June 27, 1992, the arbitrator awarded PMAC $1,000,000 and required B & W to pay that amount within thirty days. On June 30, 1992, B & W moved to vacate or modify the award in the trial court. On August 12, 1992, PMAC filed a response and moved to confirm the award. On August 24, 1992, after a hearing, the trial court denied B & W's motion and confirmed the award. On October 19, 1991, after a hearing, the trial court entered judgment confirming the arbitration award and awarding PMAC $1,000,000, plus pre- and post-judgment interest. The court denied PMAC's request for attorney's fees. B & W's motion for new trial was overruled and B & W perfected this appeal.

In its first point of error, B & W contends the trial court erred in failing to find that the arbitrator exceeded his authority. B & W asserts that the second amendment to the purchase agreement contained a narrowly drawn arbitration clause which restricted the arbitrator's jurisdiction solely to determining the fair market value of the destroyed assets. B & W maintains that the arbitrator exceeded his authority by admitting evidence other than of fair market value.

The parties do not dispute that the transaction at issue involves interstate commerce and is governed by the Federal Arbitration Act (the Act). 9 U.S.C. § 1, et seq. (1970). Judicial review of a commercial arbitration award is extraordinarily narrow, and is limited only to sections 10 and 11 of the Act. Forsythe Int'l, S.A. v. Gibbs Oil Co. of Tx., 915 F.2d 1017, 1020 (5th Cir.1990). The issue upon review of an arbitrator's award is whether the arbitration proceedings were fundamentally unfair. Id. Although review is de novo, we must give strong deference to the arbitrator and are not free to correct the arbitration award. See McIlroy v. Painewebber, Inc., 989 F.2d 817, 819-29 (5th Cir.1993) (citing Forsythe Int'l, 915 F.2d at 1020-21)).

Section 10(a)(4) of the Act provides that an award may be vacated "where 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." Whether a contract's arbitration clause requires arbitration of a given dispute is a matter of contract interpretation and a question of law for the court. AT & T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 649, 106 S.Ct. 1415, 1418-19, 89 L.Ed.2d 648 (1986); Beckham v. William Bayley Co., 655 F.Supp. 288, 290 (N.D.Tex.1987). A party cannot be compelled to submit a dispute to arbitration unless there has been a contractual agreement to do so. Neal v. Hardee's Food Sys., Inc., 918 F.2d 34, 37 (5th Cir.1990). The law imposes a presumption in favor of arbitrability which requires, whenever the scope of an arbitration clause is fairly debatable or reasonably in doubt, that the court decide the question of interpretation in favor of arbitration. Beckham, 655 F.Supp. at 290. The weight of this presumption is heavy. Mar-Len of La., Inc. v. Parsons-Gilbane, 773 F.2d 633, 636 (5th Cir.1985).

However, the strong federal policy that favors resolving doubts in favor of arbitration cannot serve to stretch a contractual clause beyond the scope intended by the parties or authorize an arbiter to disregard or modify the plain and unambiguous provisions of the agreement. See Teamsters v. Stanley Structures, Inc., 735 F.2d 903, 905 (5th Cir.1984); Beckham, 655 F.Supp. at 291-92. Thus, where an arbitration clause is narrowly...

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