Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos

• Decision Date: 27 May 1994
• Docket Number: Nos. 92-1708,93-1452,93-1438,s. 92-1708
• Parties: CARGILL RICE, INCORPORATED, Plaintiff-Appellant, v. EMPRESA NICARAGUENSE DEALIMENTOS BASICOS, Defendant-Appellee. (Two Cases) EMPRESA NICARAGUENSE DEALIMENTOS BASICOS, Plaintiff-Appellee, v. CARGILL RICE, INCORPORATED, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 223

25 F.3d 223

CARGILL RICE, INCORPORATED, Plaintiff-Appellant, v. EMPRESA NICARAGUENSE DEALIMENTOS BASICOS,

Defendant-Appellee. (Two Cases)

EMPRESA NICARAGUENSE DEALIMENTOS BASICOS, Plaintiff-Appellee, v. CARGILL RICE, INCORPORATED, Defendant-Appellant.

Nos. 92-1708, 93-1438, 93-1452.

United States Court of Appeals Fourth Circuit.

Argued Oct. 1, 1993.

Decided May 27, 1994.

ARGUED: Patrick Vincent Martin, Hill, Rivkins, Loesberg, O'Brien, Mulroy & Hayden, New York City, for appellant. Paul Stuart Reichler, Reichler, Milton & Medel, Washington, DC, for appellee. ON BRIEF: Robert Charles Seldon, Krooth & Altman, Sterling, VA, for appellant. Gregory Lynn Murphy, Murphy, McGettigan & West, Alexandria, VA, for appellee.

Before RUSSELL, WIDENER, and HALL, Circuit Judges.

Reversed and remanded by published opinion. Judge Donald RUSSELL wrote the majority opinion, in which Judge WIDENER joined. Judge K.K. HALL wrote a dissenting opinion.

OPINION

DONALD RUSSELL, Circuit Judge:

Cargill Rice, Inc. (Cargill) appeals the district court's orders dismissing its motion to compel arbitration of its dispute with Empresa Nicaraguense de Alimentos Basicos (ENABAS) before arbitrators chosen by mutual agreement of the parties, and confirming an arbitration award in favor of ENABAS granted by arbitrators who were not so chosen. We agree with Cargill that arbitration of the parties' dispute could properly proceed only before mutually-chosen arbitrators; as a result, we reverse both of the district court's orders.

I.

Cargill and ENABAS, an agency of the Nicaraguan government, entered into a commercial contract under which Cargill was to deliver rice to ENABAS in Nicaragua. A dispute developed over the condition of the rice when it arrived in Nicaragua; the parties agreed that this dispute should be resolved under the arbitration clause of their contract. That clause, translated from Spanish, stated in relevant part: "Any dispute ... which may arise in the ... performance of this Contract shall be resolved by arbitral award (decision of arbitrators) chosen by mutual agreement. This can be in Nicaragua or the Rice Millers' Association [RMA] of the United States." ¹

ENABAS made a demand to arbitrate the parties' dispute with the RMA. Under the RMA arbitration rules, the RMA arbitration committee appoints the arbitrators. RMA Arbitration Rule 8(a). Cargill wrote to the arbitration committee, calling to its attention that the arbitration clause in the parties' contract required that the arbitrators for the parties' dispute be chosen by mutual agreement and contending that arbitrators not so chosen would lack jurisdiction to arbitrate the dispute. The arbitration committee rejected this contention and appointed itself as the three-member arbitration panel for the dispute.

Cargill responded by filing an action in the Eastern District of Virginia to compel arbitration of the parties' dispute before arbitrators chosen by mutual agreement of the parties, but the district court dismissed it. The arbitration panel appointed by the RMA arbitration committee proceeded to arbitrate the dispute and awarded ENABAS $1,338,796.44, which was subsequently confirmed by the district court.

Cargill takes this appeal from the district court's confirmation of ENABAS' award and the district court's earlier dismissal of its action to compel arbitration before arbitrators mutually-chosen by the parties. Cargill presses the point it has made throughout the case: that the arbitration clause in the parties' contract expressly requires arbitrators chosen by mutual agreement of the parties.

II.

Because "arbitration is a matter of contract," AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986), parties may determine by contract the method under which arbitrators for their disputes will be appointed, Universal Reinsurance Corp. v. Allstate Ins. Co., 16 F.3d 125, 128 (7th Cir.1994); Szuts v. Dean Witter Reynolds, Inc., 931 F.2d 830, 831 (11th Cir.1991); Avis Rent A Car System, Inc. v. Garage Employees Union, 791 F.2d 22, 24 (2d Cir.1986); ATSA of California, Inc. v. Continental Ins. Co., 754 F.2d 1394, 1395-96 (9th Cir.1985) (amending original opinion reported at 702 F.2d 172, 175-76 (9th Cir.1983)). In fact, the Federal Arbitration Act (FAA), 9 U.S.C. Secs. 1-16, expressly states in section 5 that if the parties have provided in their contract "a method of naming or appointing an arbitrator or arbitrators ..., such method shall be followed." 9 U.S.C. Sec. 5.

The arbitration clause in Cargill and ENABAS' contract states: "Any dispute ... which may arise in the ... performance of this Contract shall be resolved by arbitral award (decision of arbitrators) chosen by mutual agreement. This can be in Nicaragua or the Rice Millers' Association of the United States." This clause indicates that the arbitrators are to be chosen by mutual agreement--under the clause's language, the only subjects, other than the arbitrators, that could be "chosen by mutual agreement" are the award or the decision and, in an arbitration, the award and the decision cannot be "chosen by mutual agreement" because they are determined by the arbitrators. This "mutual agreement" must be mutual agreement of the parties, for the arbitration clause suggests no one else who could mutually agree. The arbitration clause, therefore, expressly sets forth the parties' method for appointing arbitrators--appointment by mutual agreement of the parties--and section 5 of the FAA requires us to ensure their method be followed. ²

ENABAS makes two attempts to evade this interpretation of the arbitration clause. First, it attempts to persuade us that the clause's language "chosen by mutual agreement" refers to the arbitral forum, not the arbitrators. We reject this interpretation because nothing in the sentence that speaks of "chosen by mutual agreement" makes any reference to arbitral forums.

Second, ENABAS contends that, in any event, we must defer to the determination by the RMA arbitration committee that the arbitration clause does not require arbitrators chosen by mutual agreement of the parties. We find this position untenable. While we do, of course, defer in some circumstances to contractual interpretations of arbitrators, we are aware neither of any authority nor any reason to defer to the contractual interpretation of the arbitration committee of an arbitral forum. That the members of this arbitration committee later appointed themselves as the arbitrators does not alter our determination not to accord their interpretation deference.

Furthermore, even if the arbitrators here could somehow have interpreted the contract to determine how they should be selected (which appears impossible because the determination of how they should be selected obviously had to precede their selection), their interpretation would not be entitled to deference because it would have involved a determination of their own jurisdiction. See AT & T Technologies, 475 U.S. at 651, 106 S.Ct. at 1419 (stating that an arbitrator should not be given "the power to determine his own jurisdiction") (quotations omitted); International Ass'n of Machinists v. General Elec. Co., 865 F.2d 902, 904 (7th Cir.1989) (Posner, J.) ("The arbitrator is not the judge of his own authority...."); Bear Stearns & Co. v. N.H. Karol & Assocs., Ltd., 728 F.Supp. 499, 501-02 (N.D.Ill.1989).

Having interpreted the arbitration clause to require that the arbitrators be chosen by mutual agreement of the parties, we turn to the district court's two orders in these consolidated cases. In one order, it confirmed an award granted to ENABAS by arbitrators appointed by the RMA arbitration committee. ³ Arbitration awards made by arbitrators not appointed under the method provided in the parties' contract must be vacated, Szuts, 931 F.2d at 832; Avis, 791 F.2d at 26; Bear Stearns, 728 F.Supp. at 501 ("[A]rbitrator[s] who [are] improperly elected ha[ve] no power to resolve a dispute between the parties...."); this confirmation of an award granted by arbitrators not chosen by mutual agreement of the parties is, therefore, reversed and the arbitration award vacated.

The district court's other order dismissed Cargill's action under section 4 of the FAA ⁴ to compel arbitration before arbitrators chosen by mutual agreement of the parties. ⁵ Because Cargill was entitled to an arbitration before such arbitrators, this order is also reversed and Cargill's action is remanded for the district court to compel an arbitration before such arbitrators. The arbitration clause does not set forth how this choice of arbitrators by the parties should be conducted; the district court shall, therefore, require that it be conducted under the standard method, where both parties choose an arbitrator and these arbitrators select a third arbitrator. If these arbitrators cannot agree on this selection, the district court, under section 5 of the FAA, shall appoint the third arbitrator. 9 U.S.C. Sec. 5 ("[I]f for any ... reason there shall be a lapse in the naming of an arbitrator ..., then ... the court shall designate and appoint an arbitrator."). ⁶ Finally, the district court shall conduct any fact-finding necessary to determine where the arbitration should proceed.

III.

For the reasons stated, the district court's orders are reversed and Cargill's action to compel arbitration before arbitrators chosen by mutual agreement of the parties is remanded with the instructions set forth above.

REVERSED AND REMANDED

K.K. HALL, Circuit Judge, dissenting:

In my view, the majority has rejected the most reasonable construction of the parties' contract and, in doing so, has instructed the district court to compel a new arbitration on terms that cannot be detected on even the closest reading of the contract. I believe that the arbitration was conducted in compliance with the parties' contract, and there were no...