Tuco Inc. v. Burlington Northern R. Co.

• Citation: 912 S.W.2d 311
• Decision Date: 27 October 1995
• Docket Number: No. 07-95-0110-CV,07-95-0110-CV
• Parties: TUCO INC. and Southwestern Public Service Company, Appellants, v. BURLINGTON NORTHERN RAILROAD COMPANY and the Atchison, Topeka & Santa Fe Railway Company, Appellees.
• Court: Court of Appeals of Texas

Page 311

912 S.W.2d 311

TUCO INC. and Southwestern Public Service Company, Appellants, v. BURLINGTON NORTHERN RAILROAD COMPANY and the Atchison Topeka & Santa Fe Railway Company, Appellees.

No. 07-95-0110-CV.

Court of Appeals of Texas Amarillo.

Oct. 27, 1995.

Rehearing Overruled Dec. 13, 1995.

Locke, Purnell, Rain, Harrell, Michael H. Collins, Michael J. Boydston, Cynthia Keely Timms, Carr, Fouts, Hunt & Wolfe, Dallas, Donald M. Hunt, Lubbock, Hinkle, Cox, Eaton, Coffield & Hensley, Paul W. Eaton, Richard R. Wilfong, Charles Watson, Jr., Amarillo, for appellants.

Conant, Whittenburg, Whittenburg & Schachter, George Whittenburg, Charles G. White, Amarillo, Steptoe & Johnson, Samuel M. Sipe, Jr., Washington, DC, Freeborn & Peters, Harry L. DeLung, Jr., Chicago, IL, for appellees.

Before DODSON, BOYD and QUINN, JJ.

BOYD, Justice.

In this appeal, TUCO Inc. (TUCO) and Southwestern Public Service Company (SPS), appellants, challenge rendition of summary judgment in favor of appellees, Burlington Northern Railroad Co. and the Atchison, Topeka & Santa Fe Railway Co., confirming an arbitration award. The arbitration at issue concerned the proper construction to be given to specific portions of long term shipping contracts between TUCO and Burlington Northern Railroad Company and TUCO and Atchison, Topeka & Santa Fe Railway Company. Because the relevant facts and issues are the same as to each of the appellees as recognized by their submission of a joint brief, we refer to them collectively as the carriers. In their challenge, appellants present three basic arguments why the award is invalid: 1) the arbitration panel disregarded the applicable law, 2) the panel exceeded its authority, and 3) there was evident partiality on the part of the neutral arbitrator. TUCO presents these arguments in seven points of error and SPS presents five points. For the reasons discussed herein, we reverse the judgment of the trial court.

The relationships between the parties are not complex. TUCO purchases coal mined in the state of Montana and sells it to SPS to fuel its electricity generating plants in the Texas Panhandle. In 1984, TUCO and the carriers entered into agreements for shipment of the coal through the end of 2002. Each of these agreements were reduced to writing and included a merger clause providing that the writing represented the entire agreement between the parties. Because of the protracted life of the contracts, each included provisions for two types of periodic adjustments to the rate paid by TUCO. The first type of adjustment was an automatic quarterly adjustment based on an index published by the Interstate Commerce Commission. This index, and the adjustments based on it, specifically excluded changes due to carrier productivity.

The contracts also provided for "rate reviews." The rate reviews were not automatic but could be invoked by either party in October of 1987 and 1990, and every two to four years thereafter. These rate reviews provided a mechanism for reviewing the performance of the automatic adjustments and accounting for the effect of changes in the carriers' productivity. It is the allocation of the benefits flowing from the carriers' gains in productivity that form the basis of the present dispute.

The agreements provided that disputes "with respect to any specific section under this agreement" would be resolved by arbitration conducted pursuant to the Texas General Arbitration Act, Tex.Rev.Civ.Stat.Ann. art. 224-238 (Vernon 1973 & Supp.1995). The agreements further provided that TUCO and the carriers were to each select an arbitrator and that those party arbitrators were to mutually choose a third arbitrator. The agreements stated that they were to be governed by, and construed in accordance with, Texas law except as to matters related to common carrier obligations governed by federal law.

In 1987, the parties successfully conducted a rate review without resort to any of the dispute resolution provisions of the contracts. TUCO initiated a second rate review in 1990. During this review the parties were unable to reach an agreement on several issues, including the sharing of productivity gains. The dispute on productivity gains focused on whether the agreement provided for different treatment of "movement specific" and "system wide" productivity gains or whether they were to be treated the same. Generally stated, the carriers take the position that the agreement was that all productivity gains were to be allocated eighty percent to the carriers and twenty percent to TUCO, while TUCO contends that, under the terms of the written contract, the eighty percent/twenty percent distribution was limited to "movement specific" productivity gains and that the sharing of "system wide" productivity gains consisted of the carriers receiving all of the benefit of system wide improvements in productivity made between rate reviews but that all of these benefits were to be shifted to it at the time of the rate review.

Being unable to resolve their dispute, TUCO invoked the arbitration clauses calling for arbitration of the interpretation of section 10 of the written contract specifically listing subsections 10.0 "Intent" and 10.2 "Rate Review" as the provisions to be construed and further setting out ten specific issues to be resolved. The letter stated that TUCO reserved the right to submit additional issues relating to the interpretation of section 10. TUCO selected retired attorney Richard Hardy of Florida as its arbitrator and the carriers selected Baltimore attorney Emried Cole as its arbitrator. The parties each submitted a list of potential candidates for the third arbitrator's position. Two names appeared on both lists, one of which was George Beall, also a Baltimore attorney. After discussions with Beall concerning his ability to serve and consultation with the parties, Hardy and Cole agreed on Beall as the final arbitrator.

After his selection but before the commencement of the arbitration hearings, Beall accepted Thomas F. Mullan as a client. Mullan had previously been represented by the Baltimore firm of Venable, Baetjer, Howard & Civiletti, the same firm with which appellees' arbitrator, Cole, was associated. Because Venable, Baetjer could not represent Mullan due to a conflict of interest, Mullan's former attorney at Venable, Baetjer either suggested Beall as a possible replacement or concurred with Mullan's inquiry about using Beall. Beall's representation of Mullan was not brought to the attention of the parties to the arbitration proceeding.

At a week-long arbitration hearing, the parties submitted extensive written and oral evidence. Several weeks after the evidentiary portion of the hearing, and shortly before the closing presentations, TUCO's attorney became aware of what it characterizes as the referral from Venable, Baetjer to Beall. It made no objections to Beall's continued participation. By a two-to-one vote, with Hardy dissenting, the panel's award was favorable to the carriers on most issues, including the allocation of benefits arising from increased productivity. The panel found that the documents executed by the parties did not reflect their true intent on the issue of productivity sharing because of a mistake on the part of the drafters of the writing. In his dissent attacking the panel's award, Hardy asserted the award failed to follow the applicable law, went beyond the panel's authority and was the result of actual bias on the part of Beall.

Appellants brought suit in district court seeking to vacate the award, an order directing the parties to rearbitrate "all appropriate issues," and for attorneys fees and costs. The carriers counterclaimed for confirmation of the award and attorneys fees. Both sides made motions for summary judgment based on extensive summary judgment evidence. The trial court overruled appellants' motion, granted the carriers' motion and rendered judgment confirming the award. Hence, this appeal.

Before addressing appellants' specific points of error, we must initially determine what law is applicable to this case. Section 22 of the written contract contains a general statement that it is to be construed according to Texas law except as to matters relating to common carrier obligations. Section 12, concerning arbitration of disputes under the agreement, provides that disputes "shall be arbitrated pursuant to the provisions of the Texas General Arbitration Act." Tex.Rev.Civ.Stat.Ann. art. 224-238 (Vernon 1973 & Supp.1995). In addition to these provisions, we must determine the effect of the Federal Arbitration Act (FAA). 9 U.S.C. §§ 1-16.

The FAA declares provisions in contracts to arbitrate disputes irrevocable and enforceable if the contracts involve maritime transactions or interstate commerce. 9 U.S.C. § 2. The act creates a federal body of law of arbitrability, Volt Information Sciences Inc. v. Bd. of Trustees of Stanford Univ., 489 U.S. 468, 475, 109 S.Ct. 1248, 1253-54, 103 L.Ed.2d 488 (1989); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983); Batton v. Green, 801 S.W.2d 923, 927 (Tex.App.--Dallas 1990, no writ), the purpose of which is to overcome courts' traditional refusal to enforce arbitration agreements, Allied-Bruce Terminix Companies, Inc., v. Dobson, 513 U.S. ----, ----, 115 S.Ct. 834, 838, 130 L.Ed.2d 753, 762 (1995). It does not, however, completely preempt state law concerning arbitration, nor does it alter the substantive law to be applied by the arbitrator in resolving the underlying dispute, such as contract interpretation. Volt, 489 U.S. at 477, 109 S.Ct. at 1255.

The FAA displaces state law only to the extent the state law is in conflict with the federal act's purpose of enforcing the parties' contractual obligation to arbitrate. Id. at 477, 109 S.Ct. at 1255. The FAA does not dictate any particular form or procedural rules of arbitration different from...