Soaring Wind Energy, L.L.C. v. Catic USA In ( 2020 )

Case: 18-11192 Document: 00515261052 Page: 1 Date Filed: 01/07/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 18-11192 January 7, 2020
Lyle W. Cayce
Clerk
SOARING WIND ENERGY, L.L.C.; TANG ENERGY GROUP, LIMITED;
THE NOLAN GROUP INCORPORATED; MITCHELL W. CARTER;
JAN FAMILY INTERESTS, LIMITED;
MARY M. YOUNG, Individually and as the Independent Executrix
of the Estate of Keith P. Young, Jr., Deceased,
Plaintiffs–Appellees,
versus
CATIC USA INCORPORATED,
Also Known as AVIC International USA, Incorporated;
AVIC INTERNATIONAL HOLDING CORPORATION;
AVIC INTERNATIONAL RENEWABLE ENERGY CORPORATION;
AVIATION INDUSTRY CORPORATION OF CHINA;
CHINA AVIATION INDUSTRY GENERAL AIRCRAFT COMPANY
LIMITED,
Defendants–Appellants.
Appeals from the United States District Court
for the Northern District of Texas
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Before DAVIS, SMITH, and COSTA, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Catic USA, 1 a California corporation with Chinese corporate parentage,
appeals the confirmation of an adverse arbitral award. Having determined
that this court has jurisdiction, we affirm: The arbitration panel was fairly
constituted and did not exceed its authority.
I.
A dispute among members of Soaring Wind Energy, LLC (sometimes
called “the LLC”), was submitted to an arbitration panel, which awarded the
LLC $62.9 million against Catic USA (and its AVIC-group affiliates) and
ordered that Catic USA be divested of its shares in the LLC without compen-
sation. A judgment of the district court confirmed that award. Catic USA,
joined by its various Chinese affiliates, appeals.
The origins of Soaring Wind Energy trace to 2007, when representatives
of Tang Energy Group (“Tang Energy”) and Catic USA began talks of creating
a vehicle for wind-energy marketing and project development. They confirmed
those talks in a Memorandum of Understanding, which the Soaring Wind
Agreement (the “Agreement”) superseded.
The Agreement created the LLC, whose “business” would be “to provide
worldwide marketing of wind energy equipment, services and materials
related to wind energy, including, but not limited to, marketing wind turbine
generator blades and wind turbine generators and developing wind farms.”
Each member agreed to “conduct activities constituting the Business [only] in
and through [Soaring Wind] and its Controlled subsidiaries.” Class A
1 Catic USA is also known as AVIC International USA.
2
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members agreed that such prohibition extended to their affiliates.
The Agreement also outlined a procedure for resolving disputes. Under
its terms, “any controversy, dispute, or claim arising under or related to [the
Agreement],” after failed attempts at negotiation, “shall be submitted to bind-
ing arbitration.” Each “Disputing Member”—defined as “each Member that is
a party to [the] Dispute”—would then have the opportunity to name its own
arbitrator. Those selected as arbitrators would themselves choose an addi-
tional arbitrator (or two additional arbitrators if necessary to achieve an odd
number). The panel would have the authority “to grant injunctive relief and
enforce specific performance” and to issue a final, court-enforceable decision,
though it would lack “authority to award special, exemplary, punitive or con-
sequential damages.”
After years without Catic USA’s providing Soaring Wind any financial
support, a representative from Tang Energy requested that one of Catic USA’s
Chinese AVIC-group affiliates 2 help fund Soaring Wind. An AVIC representa-
tive responded that “AVIC International has already provided a total of
50 million USD in financing to wind power projects in the US and will keep[]
trying in the future.” Paul Thompson—himself a Class B member of Soaring
Wind—served as president and CEO of one such affiliate, 3 through which the
AVIC group appeared to have invested millions of dollars in wind power project
development. 4
2Two years after Catic USA signed the Agreement, its parent company formed AVIC
International Renewable Energy Corporation (“AVIC IRE”) as a majority-owned subsidiary.
AVIC IRE’s stated purpose, like Soaring Wind’s, included developing wind power projects.
3Thompson ran Ascendant Renewable Energy Corporation (“Ascendant”), which itself
funded at least one major wind farm project to completion between 2011 and 2012. Ascendant
was formed as a wholly owned subsidiary of AVIC IRE.
4The arbitration panel found that AVIC IRE or its subsidiaries had developed at least
five wind turbine projects in the United States, with additional projects located abroad.
3
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Tang Energy subsequently demanded arbitration against Catic USA,
Thompson, and Catic USA’s non-signatory corporate affiliates. Among other
things, Tang claimed that Catic USA had breached the Agreement through the
actions of its Chinese corporate affiliates. Tang named its arbitrator in its
demand, and the four remaining Class A members 5 joined Tang in the dispute
and, accordingly, named their respective arbitrators. Catic USA and Thomp-
son answered Tang’s demand and named their own arbitrators, but Catic
USA’s non-signatory Chinese affiliates refused to participate in the arbitra-
tion. As the Agreement required, the seven selected arbitrators then collec-
tively appointed two more.
Catic USA and Thompson preemptively sued the claimants in federal
court, seeking a declaratory judgment that the panel was improperly consti-
tuted. 6 Specifically, they claimed both that fundamental fairness and the
Agreement required each side of the dispute to select an arbitrator, who would
then select a third and final arbitrator. The district court dismissed those
claims for lack of subject matter jurisdiction under the FAA. 7 Catic USA and
Thompson made similar arguments before the arbitration panel, which deter-
mined for itself that it was constituted according to the Agreement’s unambig-
uous terms.
After a five-day hearing, the arbitration panel issued its final award in
favor of the claimants. The panel determined that “Catic USA breached the
5 Appellees Young, Carter, Jan Family Interests, and the Nolan Group.
6 One of Catic USA’s non-signatory affiliates also preemptively sued the claimants,
successfully obtaining a judgment declaring that its “party status to the arbitration [could]
only be determined by a court, and not an arbitrator . . . .” Ascendant Renewable Energy
Corp. v. Tang Energy Grp., Ltd., No. 3:14-CV-3314-K, 2015 U.S. Dist. LEXIS 103518, at *8
(N.D. Tex. Aug. 4, 2015).
AVIC Int’l USA, Inc. v. Tang Energy Grp., Ltd., No. 3:14-CV-2815-K, 2015 U.S. Dist.
7
LEXIS 13968 (N.D. Tex. Feb. 5, 2015), aff’d, 614 F. App’x 218 (5th Cir. 2015) (per curiam).
4
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[Soaring Wind] Agreement by its Affiliates engaging in the ‘Business’ of
[Soaring Wind Energy].” It further found that the AVIC group, including Catic
USA, “operate[d] as one entity” and that “AVIC HQ and its wholly owned sub-
sidiaries created additional subsidiaries in an attempt to get around its prom-
ises made in the [Soaring Wind] Agreement to Claimants.” The panel con-
cluded that Catic USA and its non-signatory Chinese affiliates should be held
“jointly and severally liable to [Soaring Wind] in the amount of $62.9 USD
million” in lost profits owed to the LLC. 8
The arbitration panel noted that “[t]he lost profits set forth in [its] award
are due to [Soaring Wind Energy] for distribution to the Claimants through
their percentages set forth in the [Soaring Wind] Agreement.” The panel did
not, however, stop at ordering that Catic USA pay the monetary damages: “[I]n
order to prevent [Catic] USA and Thompson from profiting from their breaches
of the [ ] Agreement,” the panel wrote, “they should be prohibited from receiv-
ing any profit from any award to [Soaring Wind].” Thus, in addition to the
$62.9 million damages, the panel ordered that “[Catic] USA and Thompson’s
equity interest in [Soaring Wind] should be divested . . . .” 9
The claimants sought judicial confirmation of the arbitral award against
Catic USA and its Chinese affiliates. At the claimants’ request, the district
court bifurcated the proceedings, staying the case against the Chinese enti-
ties. 10 The court then confirmed the award in its entirety against Catic USA.
8The panel arrived at that amount by accepting AVIC IRE’s vice president’s admis-
sion that the AVIC group had invested $50 million in wind power projects in the United
States. At an anticipated 15% rate of return, the discounted present value of the $50 million
investment was $62.9 million.
9The panel allowed Catic USA a $350,000 credit for its initial capital contribution to
Soaring Wind.
10 That case, relating most importantly to the Chinese entities’ joint and several lia-
bility for Catic USA’s damages, remains stayed pending the resolution of this appeal.
5
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Catic USA and its Chinese affiliates appeal.
II.
“[C]ourts, including this Court, have an independent obligation to deter-
mine whether subject-matter jurisdiction exists . . . .” Arbaugh v. Y&H Corp.,
546 U.S. 500, 514 (2006). Accordingly, we requested nostra sponte that the
parties address federal subject-matter jurisdiction under either complete
diversity or the New York Convention (“NY Convention”). 11
The parties vainly try to taint each other’s assertions with those made
in the district court. Catic USA notes that “diversity jurisdiction,” not
jurisdiction under the NY Convention, “is the only basis for jurisdiction” that
the plaintiffs had invoked. Similarly, the plaintiffs highlight that, although
Catic USA contends that jurisdiction is lacking on appeal, it invoked the
NY Convention when seeking declaratory judgment before arbitration. Those
points are irrelevant, as “[i]t is well settled . . . that the subject matter juris-
diction of a federal court can be challenged at any stage of the litigation (includ-
ing for the first time on appeal), even by the party who first invoked it.” Ran-
dall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 585 (5th Cir. 1999).
Attempting to sidestep that maxim, the plaintiffs characterize juris-
diction under the NY Convention—here, whether a legal relationship bears a
“reasonable relation” to a foreign state—as a “jurisdictional fact” capable of
party admission. But what should amount to a “reasonable relation” under
9 U.S.C. § 202 is patently a question of law, not of fact. Catic USA could cer-
tainly admit facts—such as the existence of its Chinese affiliates or of projects
Soaring Wind contemplated abroad—and those binding facts might be decisive
11 “The Convention on the Recognition and Enforcement of Foreign Arbitral Awards,”
9 U.S.C. §§ 201 et seq.
6
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in a jurisdictional inquiry. See State Farm Fire & Cas. Co. v. Flowers, 854 F.3d
842, 845 (5th Cir. 2017). A party is not, however, bound by its previous legal
arguments as to jurisdiction. See Canion, 196 F.3d at 585.
The district court did not address whether there is complete diversity,
but it appears to have assumed, without explanation, the applicability of the
NY Convention. We examine de novo the presence of federal subject-matter
jurisdiction, Pershing, LLC v. Kiebach, 819 F.3d 179, 181 (5th Cir. 2016),
keeping in mind that its absence would require dismissal, Arbaugh, 546 U.S.
at 506.
A.
For the district court to have diversity jurisdiction under 28 U.S.C.
§ 1332, “all persons on one side of the controversy [must] be citizens of different
states than all persons on the other side” at the time the complaint was filed.
Harvey v. Grey Wolf Drilling Co., 542 F.3d 1077, 1079 (5th Cir. 2008). Catic
USA is a California corporation. It is undisputed that, as of the initiation of
the arbitration, Catic USA was a member of Soaring Wind, LLC, and because,
for diversity jurisdictional purposes, “the citizenship of a LLC is determined by
the citizenship of all of its members,” id. at 1080, Soaring Wind was at least at
that point a citizen of California.
The arbitration panel purported to divest Catic USA of its membership
interest in Soaring Wind. The question is whether that decision alone—absent
subsequent judicial confirmation—effected Catic USA’s termination from
Soaring Wind and, consequently, Soaring Wind’s loss of California citizenship.
If not, this court would lack diversity jurisdiction.
Catic USA contends that diversity jurisdiction is lacking because the
arbitral award divesting it of its membership in Soaring Wind had no legal
effect pending court confirmation. The plaintiffs respond that, under the
7
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freedom of contract recognized under Delaware law, the Agreement must be
interpreted as granting the arbitration panel “final, binding” authority to ter-
minate Catic USA’s membership in the LLC.
Plaintiffs’ focus on Delaware’s freedom of contract misses the point. The
question is not whether the Agreement granted the arbitration panel authority
to issue an award divesting Catic USA of membership. Even assuming the
panel did have such authority, it is an entirely separate question whether the
panel’s decision had immediate legal effect.
It did not. It is well settled that, absent voluntary compliance, an arbi-
tral award requires judicial confirmation to effect a change in legal status. 12
Plaintiffs’ attempt to characterize the “final, binding” authority of the panel as
including coercive legal authority is unpersuasive. Such commonly used terms
“merely reflect a contractual intent that the issues joined and resolved in the
arbitration may not be tried de novo in any court.” M & C Corp. v. Erwin Behr
GmbH & Co., 87 F.3d 844, 847 (6th Cir. 1996). They do not grant arbitrators
“the coercive power to enforce the award” without being first “transformed into
a judgment, which can be executed with the enforcement mechanism of the
state.” Schlumberger, 195 F.3d at 220. That an arbitral award be “final” does
not obviate the need for judicial confirmation; it only allows for such
confirmation. 13
Granted, parties may contract to change membership in an LLC without
12Schlumberger Tech. Corp. v. United States, 195 F.3d 216, 220 (5th Cir. 1999); see
also Mulhall v. UNITE HERE Local 355, 618 F.3d 1279, 1293 (11th Cir. 2010); D.H. Blair &
Co. v. Gottdiener, 462 F.3d 95, 104 (2d Cir. 2006); Suter v. Munich Reins. Co., 223 F.3d 150,
156 (3d Cir. 2000); Camping Constr. Co. v. Dist. Council of Iron Workers, 915 F.2d 1333,
1347–48 (9th Cir. 1990).
13See Grissom v. Nationwide Mut. Ins. Co., 599 A.2d 1086, 1090 (Del. Ch. 1991) (“The
general rule is that an Arbitration Award may be confirmed only if it is a final decision.”).
8
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court approval. It is entirely different, however, when parties seek an
involuntary termination of membership. Plaintiffs acknowledge that “a judg-
ment would be needed, for example, to enforce a damages award by levying the
judgment debtor’s assets.” But equity interest in an LLC is also an asset, an
involuntary transfer of which no arbitrator may effect without judicial
confirmation.
The plaintiffs are correct that the Agreement does not mandate judicial
review of arbitration awards. Indeed, it specifies that an arbitral award “may
be filed in any court of competent jurisdiction and may be enforced by any Dis-
puting Member as a final judgment of such court.” But the “optional” nature
of judicial review here does not mean, as plaintiffs contend, that the arbitral
award has inherent legal effect. Instead, judicial confirmation would be unnec-
essary (or “optional”) should all parties voluntarily acquiesce to the award.
Catic USA has not done so, which is precisely why plaintiffs seek judicial
confirmation.
B.
Even without diversity of citizenship, this court would have jurisdiction
should this case relate to an arbitration agreement or award “falling under”
the NY Convention. 14 It is undisputed that the action to confirm the award
“relates to” the award; the question is whether that award “falls under” the
Convention. An “arbitral award arising out of a legal relationship” between
U.S. citizens falls under the Convention if that “relationship involves property
located abroad, envisages performance or enforcement abroad, or has some
other reasonable relation with one or more foreign states.” 15
14 9 U.S.C. § 203; see also Stemcor USA Inc. v. CIA Siderurgica do Para Cosipar,
927 F.3d 906, 909 (5th Cir. 2019) (on pet. for reh’g).
15 9 U.S.C. § 202; see also Freudensprung v. Offshore Tech. Servs., Inc., 379 F.3d 327,
9
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Catic USA contends that the Agreement does not involve property
abroad and does not reasonably relate to a foreign state. Catic USA suggests
that this court remand with instruction to determine whether its non-signatory
Chinese corporate affiliates were party to the Agreement and whether the
agreement contemplated performance abroad. If the answer to both questions
be no, then there would be no subject matter jurisdiction.
The plaintiffs respond that the Agreement has a reasonable relation to
China. They note that Catic USA is a subsidiary of AVIC IHC, which is itself
a subsidiary of AVIC HQ—a state-owned enterprise of the People’s Republic of
China. They further note the arbitrators’ finding that “AVIC HQ exercised
such complete control” over Catic USA so that the two companies “operate[d]
as one entity,” and “[w]hen [Catic] USA signed the [Soaring Wind] Agreement,
it was doing so on orders from AVIC HQ.” According to the plaintiffs, “the
Chinese entities’—and Chinese state’s—involvement pervaded the parties’
relationship,” conferring jurisdiction under the Convention.
There is no question that the relationship among the parties broadly
relates to China. Tang Energy had partnered with AVIC HQ 16 on projects
within Chinese territory from 1997 through the mid-2000s. The success of
those projects inspired them to create Soaring Wind, conceived as a partner-
ship between Tang and AVIC HQ’s U.S. subsidiary. The pre-Agreement Mem-
orandum of Understanding envisioned that 9.5% of Soaring Wind’s equity
would be owned by AVIC HQ, whose “offices and employees in China [would]
be available for support as needed.” 17 An AVIC HQ vice president—who held
339–40 (5th Cir. 2004).
16 At the time, the Chinese umbrella AVIC organization was known as “Catic.”
The eventual Agreement differed from the Memorandum of Understanding by not
17
mentioning Catic International and by increasing Catic USA’s profit interest.
10
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no position in Catic USA—signed that Memorandum on Catic USA’s behalf.
Following the creation of Soaring Wind, Tang contracted separately with one
of Catic USA’s Chinese affiliates to obtain $300 million in financing for wind
power project development. Plaintiffs are thus correct in stating that
“[a]lthough only United States citizens signed the Soaring Wind Agreement,
the parties’ relationship both (i) involved Chinese citizens, including arms of
the Chinese government, and (ii) had a reasonable relation to China.”
The statute, however, concerns not the “parties’ relationship” but the
“legal relationship” whence the arbitral award arose. 9 U.S.C. § 202. That
legal relationship is the Agreement, which plaintiffs accuse Catic USA of vio-
lating and which provided the basis for the underlying arbitration. We look,
therefore, not to the general relationship among the parties but to the foreign
character, if any, of the Agreement itself.
It is not dispositive that Catic USA, as signatory to the Agreement, is a
subsidiary of a Chinese corporate umbrella. Congress has not granted federal
jurisdiction whensoever there exist a legal relationship bearing any reasonable
relation with a foreign state; more precisely, it has specified there be “some
other reasonable relation” with a foreign state. Id. (emphasis added). The
“reasonable relation” is thus limited 18; it must be akin to “involv[ing] property
located abroad” or “envisag[ing] performance or enforcement abroad”—that is,
the relationship must contemplate overseas action or involvement. See id.; see
also Yates v. United States, 135 S. Ct. 1074, 1086–87 (2015) (plurality opinion)
(discussing the textual canon of ejusdem generis). It might be enough if an
agreement “call[] . . . for meetings to be held in” a foreign country or if it should
18 “[W]here general words follow specific words in an enumeration . . , the general
words are construed to embrace only objects similar in nature to those objects enumerated
by the preceding words.” William N. Eskridge, Jr., INTERPRETING LAW 77 (2016) (quoting
2A SUTHERLAND STATUTES AND STATUTORY CONSTRUCTION § 47:17 (7th ed. 2015)).
11
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“contain a list of mandatory [foreign] vendors . . . .” 19 It is not enough, however,
that one party, though a U.S. citizen, should happen to bear foreign corporate
parentage. 20
The Agreement makes explicit reference neither to China nor to any
Chinese citizen, nor even to any foreign place or entity. 21 Aside from a generic,
stated purpose “to provide worldwide marketing” in wind energy, the Agree-
ment appears to evince a domestic character: It creates a Delaware company,
comprised entirely of U.S. citizen-members, with a principal place of business
in Texas. As per the Agreement, the underlying arbitration proceeded in
Texas, under Delaware substantive law. In short, it would appear on its face
that the Agreement bears no relation to China (or any other foreign state).
Our analysis of the Agreement’s relation to a foreign state does not,
however, end at the four corners of the contract. 22 The Agreement specifies
that a member would be in breach should its “[a]ffiliate[] . . . participate in
wind farm land development projects . . . except through an entity owned by
both [Soaring Wind Energy] and CATIC . . . .” Such “affiliates” of Catic USA
include a variety of Chinese entities, a fact of which the contracting parties
19Outokumpu Stainless USA LLC v. Converteam SAS, No. 16-00378-KD-C, 2017 U.S.
Dist. LEXIS 11995, at *16 (S.D. Ala. Jan. 30, 2017), aff’d in relevant part, 902 F.3d 1316 (11th
Cir. 2018), cert. granted, 139 S. Ct. 2776 (2019).
20See Access Info. Mgmt. of Haw., LLC v. Shred-It Am., Inc., No. 10-00622, 2010 U.S.
Dist. LEXIS 116862, at *17 (D. Haw. Nov. 2, 2010) (“[I]t is irrelevant to the inquiry that [the
defendant] is a wholly-owned subsidiary of a [foreign] corporation . . . .”); Williams v. Deutsche
Bank AG, No. 3:05-CV-1395-N, 2006 U.S. Dist. LEXIS 75426, at *13 (N.D. Tex. Feb. 9, 2006)
(“[T]hat a domestic signatory of the agreement is a subsidiary of a foreign corporation . . .
does not give the arbitration agreement a ‘reasonable relation’ with a foreign state.”).
21The contract’s “Definitions” section specifies that “CATIC” refers to “CATIC (USA),
a California corporation.”
22 See, e.g., ChampionsWorld, LLC v. U.S. Soccer Fed’n, Inc., 890 F. Supp. 2d 912, 927
(N.D. Ill. 2012) (looking to the foreign “nature” of the business); Nomanbhoy v. Vahanvaty,
No. 11-C-2456, 2011 U.S. Dist. LEXIS 147033, at *25–26 (N.D. Ill. Dec. 21, 2011) (evaluating
extracontractual testimony to determine whether the parties envisaged performance abroad).
12
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were well aware. A Chinese entity’s actions on foreign soil could (and did)
trigger breach for one of the LLC’s (domestic) members. Moreover, the arbitral
award holds those Chinese affiliates jointly and severally liable for damages to
the claimants. Such factors are enough for the Agreement to bear a relation to
China sufficient for federal jurisdiction under the NY Convention.
III.
“We review a district court’s order confirming an arbitration award de
novo [and] may affirm the district court’s decision on any basis presented to
the district court and argued in the district court.” Light-Age, Inc. v. Ashcroft-
Smith, 922 F.3d 320, 322 (5th Cir. 2009) (per curiam). Despite that, “our
review of the arbitrator’s award itself . . . is very deferential.” Timegate Stu-
dios, Inc. v. Southpeak Interactive, LLC, 713 F.3d 797, 802 (5th Cir. 2013).
Indeed, this court may vacate the award only if “the arbitrators exceeded their
powers” 23 by acting “contrary to express contractual provisions” 24 or if the
award otherwise violates the NY Convention. 25 Even then, appellants face a
heavy burden, as “[a] reviewing court examining whether arbitrators exceeded
their powers must resolve all doubts in favor of arbitration.” Rain CII Carbon,
LLC v. ConocoPhillips Co., 674 F.3d 469, 472 (5th Cir. 2012).
Seeking to vacate the award, Catic USA and its Chinese affiliates
advance three theories: (1) The district court erred by confirming the award
without first reviewing the arbitrators’ power over Catic USA’s Chinese
affiliates; (2) the arbitration panel was improperly constituted; and (3) the
award includes speculative or punitive damages rendering it unenforceable.
23 9 U.S.C. § 10(a)(4).
24 Beaird Indus., Inc. v. Local 2297, Int’l Union, 404 F.3d 942, 946 (5th Cir. 2005).
25 See 9 U.S.C. § 207.
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A.
Catic USA suggests that the district court could not have confirmed the
arbitral award without first determining that the company’s Chinese affiliates
were subject to arbitration. It notes that the arbitration panel first found the
affiliates to be subject to arbitration, then drew an adverse inference from their
refusal to participate. Without that inference, Catic USA contends, the arbi-
trators had no basis for finding breach.
The panel’s inference that one or more of Catic USA’s affiliates financed
a wind power development project in violation of the Agreement was based on
more than the affiliates’ non-participation in the arbitration. First, the panel
had access to AVIC IRE Vice President Xu Hang’s e-mail that “AVIC Interna-
tional [had] already provided a total of $50 million USD in financing to wind
power projects in the US,” none of which had flowed to Soaring Wind. Second,
the AVIC Group’s press releases and online publications referenced ongoing
(non-Soaring Wind) wind-power development projects. Catic USA failed to
provide any meaningful rebuttal to such evidence.
Catic USA made its proverbial bed; therein it must lie. The company
signed an agreement specifying that the actions of its affiliates could constitute
its own breach. Whether Catic USA’s non-signatory affiliates themselves be
subject to the arbitration is irrelevant: Catic USA “assum[ed] the obligation of
its affiliates’ performance.” 26 The arbitration panel reasonably found that a
breach had occurred; given the deference owed to the panel, 27 we decline to
26Xtria LLC v. Tracking Sys., Inc., No. 3:07-CV-0160-D, 2007 U.S. Dist. LEXIS 68997,
at *10 (N.D. Tex. Sept. 18, 2007).
27 Catic USA attempts to frame the issue as akin to whether its Chinese affiliates were
subject to the Agreement, a question undisputedly outside the traditional deference given to
arbitrators. See Bridas S.A.P.I.C. v. Gov’t of Turkm., 345 F.3d 347, 354 (5th Cir. 2003). But
the answer to that question is immaterial to the issue at hand, which is whether conduct
occurred triggering Catic USA’s breach. That “is a question of fact,” Tex. Capital Bank N.A.
14
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disturb that finding.
B.
Catic USA claims that the panel was improperly constituted. It notes
that one side (the plaintiffs) appointed five arbitrators, the other side (Catic
USA and Thompson) only two. That method of selection was against the terms
of the contract, which, according to Catic USA, required an equal number of
appointed arbitrators per side. Because the panel was improperly selected,
Catic USA contends, this court owes no deference to its award.
In addition, Catic USA’s Chinese affiliates contend that—even assuming
the Agreement’s process of appointing arbitrators were followed—the result
nevertheless violated the NY Convention’s due process and public policy re-
quirements. They aver that it was fundamentally unfair (and therefore invalid
under the Convention) for one side to appoint more than twice as many arbi-
trators as the other. As this court must observe “the [Convention’s] grounds
for refusal . . . of recognition or enforcement of the award,” 9 U.S.C. § 207, the
Chinese companies suggest we set the award aside.
1.
The Federal Arbitration Act requires that “[i]f in the agreement provi-
sion be made for a method of naming or appointing an arbitrator or arbitrators
or an umpire, such method shall be followed . . . .” Id. § 5. Arbitrators
appointed contrary to the contract necessarily “exceed[] their powers,” id.
§ 10(a)(4), and, in such a case, “judicial deference is at an end,” PoolRe Ins.
Corp. v. Org. Strategies, Inc., 783 F.3d 256, 262 (5th Cir. 2015). Catic USA is
thus correct that, should the selection of the arbitration panel fundamentally
v. Dall. Roadster, Ltd. (In re Dall. Roadster, Ltd.), 846 F.3d 112, 127 (5th Cir. 2017), the
resolution of which we generally leave to the arbitrators.
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“depart[] from the contractual selection process,” vacatur would be the appro-
priate remedy. Id. at 263.
There was no such departure. Catic USA notes “that there were only
two sides in this dispute,” but the Agreement contemplates the number of par-
ties, not the number of sides. The Agreement lists seven total, signatory
“Members.” 28 For a dispute under the Agreement, “each Member that is a
party to such Dispute is . . . a ‘Disputing Member.’” And each Disputing Mem-
ber would have the opportunity to “name an Arbitrator (or otherwise agree in
writing to the Arbitrator(s) therefore chosen as its designated arbitrator).”
This case involves two sides, but, more importantly, it features seven members;
suppose Eris had tossed the Apple of Discord into a Soaring Wind conference
room, prompting a free-for-all among the parties—the arbiter selection process
would have remained the same.
This court already noted that “AVIC [was] asking us to rewrite their
agreement’s arbitration provision to require that every arbitration among
these multiple parties comprise only two ‘sides’ . . . [and] precisely three arbi-
trators . . . .” AVIC Int’l, 614 F. App’x at 219. Catic USA has since clarified
that its proffered reading allows for more than two “sides” to a dispute (and
more than three arbitrators) but nevertheless requires each “side” have equal
say in arbitrator selection. But as stated above, the Agreement contemplates
the number of parties, not the number of sides. Given that Catic USA does not
(and cannot) seriously question that each Claimant is “a party to [the] Dis-
pute,” it cannot escape the conclusion that the Agreement’s written procedure
was followed.
28 CATIC (USA), also known as AVIC USA; Tang Energy Group, Ltd.; Keith P. Young;
Mitchell W. Carter; Jan Family Interests, Ltd.; The Nolan Group, Inc.; Paul E. Thompson.
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Catic USA would therefore have us hold that following the text of the
Agreement in this case leads to “absurd results.” Under the Agreement, Catic
USA posits, “ten minority shareholders . . . could unite together to eject a
majority shareholder that controls 90% of the LLC from membership . . . [by]
appointing ten of the eleven arbitrators to rubber-stamp its coup.” As in this
case, Catic USA submits, “the formation of a stacked, unfair arbitration panel
is an absurd result to which no reasonable party would ever agree.”
But the risk of such an occurrence is precisely within the plain terms to
which Catic USA agreed. Catic USA urges this court not to choose from among
competing, reasonable interpretations but to discard the plain text of the
Agreement out of so-called fairness. “It is not the court’s role to rewrite the
contract between sophisticated market participants, allocating the risk of an
agreement after the fact, to suit the court’s sense of equity or fairness.” 29 One
must assume that Catic USA did not expect to be outnumbered in any dispute
falling under the Agreement; that its expectations were frustrated does not
render the Agreement absurd or unfair.
2.
Federal courts are to enforce the NY Convention. 30 Its Article V(1)(b)
provides that a court may refuse to recognize or enforce an award where “[t]he
party against whom the award is invoked was not given proper notice of the
appointment of the arbitrator or of the arbitration proceedings or was other-
wise unable to present his case . . . .” This court has construed that passage as
“essentially sanction[ing] the application of the forum state’s standards of due
29 Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 624 (Del. Ch. 2005), rev’d
in part on other grounds, 901 A.2d 106 (Del. 2006).
30 9 U.S.C. § 201; see also Recognition and Enforcement of Foreign Arbitral Awards,
Dec. 29, 1970, 21 U.S.T. 2517.
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process, in this case, United States standards of due process.” Karaha Bodas
Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d
274, 298 (5th Cir. 2004) (quotation marks omitted). The hearing must “meet[]
the minimal requirements of fairness—adequate notice, a hearing on the evi-
dence, and an impartial decision by the arbitrator” once the parties have had
“an opportunity to be heard at a meaningful time and in a meaningful manner.”
Id. at 299 (quotation marks omitted).
Catic USA’s Chinese affiliates claim that the arbitration proceedings
violated due process, reasoning that because the two sides appointed an un-
equal number of arbitrators, the panel’s decision could not have been impartial.
That contention, when taken to its logical conclusion, would require this court
to invalidate any arbitral award not issued by an evenly appointed panel.
We reject that notion. The Agreement was not a contract of adhesion but
a bespoke deal made between extremely sophisticated parties. The Agreement
did not inherently favor one party or another; it just so happened that Catic
USA was outnumbered. The agreed-upon selection process was followed to the
letter: Catic USA and Thompson selected the arbitrators and received the
process they were due.
C.
Catic USA contends that, even assuming the panel was properly con-
stituted, the award is improper. Specifically, Catic USA claims that the panel
exceeded its authority by awarding speculative and punitive damages in viola-
tion of the Agreement’s written terms. Catic USA notes that the Agreement
expressly foreclosed any liability among members or affiliates for “exemplary,
punitive, special, indirect, consequential, remote, or speculative damages,” and
the Agreement denied any arbitrator the power to award such damages. Catic
USA contends (1) that the panel’s estimation of lost profits was speculative and
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(2) that by divesting Catic USA of its LLC membership interest yet holding it
liable for the LLC’s total estimated lost profits, the award was punitive. Catic
USA suggests that, because the award reflects an abuse of the panel’s author-
ity, this court vacate and remand for further proceedings.
An “arbitral action contrary to express contractual provisions will not be
respected on judicial review.” Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314,
1325 (5th Cir. 1994) (quotation marks omitted). The Agreement explicitly
stated that “[t]he Arbitrators shall have no authority to award special, exem-
plary, punitive or consequential damages.” Thus, the contract itself “limited
the arbitrator’s own authority.” Timegate, 713 F.3d at 805 n.17. We generally
defer to arbitrators’ interpretation of their own authority, see Rain, 674 F.3d
at 472, but if the panel exceeded its authority, “it would be incumbent upon us
to vacate [the] award, in spite of the discretion typically granted to arbitral
decisions,” Bridas, 345 F.3d at 365.
1.
“[T]he standard remedy for breach of contract is based upon the reasona-
ble expectations of the parties ex ante.” Siga Techs., Inc. v. PharmAthene, Inc.,
132 A.3d 1108, 1130 (Del. 2015). Such damages “must be proven with rea-
sonable certainty, and no recovery can be had for loss of profits which are deter-
mined to be uncertain, contingent, conjectural, or speculative.” Id. at 1131
(quotation marks omitted). At the same time, “certain presumptions apply
when evaluating harm and loss. Where the injured party has proven the fact
of damages . . , less certainty is required of the proof establishing the amount
of damages.” Id. (emphases in original). Thus, “[r]esponsible estimates that
lack mathematical certainty are permissible so long as the court has a basis to
make a responsible estimate of damages.” Del. Express Shuttle, Inc. v. Older,
No. 19596, 2002 Del. Ch. LEXIS 124, at *60 (Del. Ch. Oct. 23, 2002). And on
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the margins, it is an “established presumption that doubts about the extent of
damages are generally resolved against the breaching party.” Siga, 132 A.3d
at 1131.
The award is based on much more than speculation. Having found that
Catic USA breached the agreement by investing (via an affiliate) at least $50
million in wind-farm development in an outside entity, the arbitration panel
was tasked with estimating claimants’ resulting lost profits, if any. The panel
found that Catic USA’s affiliated AVIC group would invest in any given project
only if it anticipated a minimum 15% return; it then discounted that return to
determine the present value of the lost profits.
Catic USA does not contest that AVIC’s anticipated rate of return was
15% or that the panel employed an appropriate discount rate; instead, it
attacks the panel’s assumption that AVIC’s investment did (or would) generate
profits. It is true that, although the amount of lost profits may be estimated,
claimants generally “must show that there would [have been] some future
profits” but for the breach. Id. at 1133 (emphasis added). But in this case,
Catic USA has refused to provide the relevant information, and it was thus
within the arbitration panel’s authority to infer that AVIC’s investment was
indeed profitable. See id. at 1131 n.132 (noting that damages may be inferred
when uncertainty results from the breaching party’s own actions).
2.
“Historically, damages for breach of contract have been limited to the
non-breaching parties’ expectation interest.” E.I. DuPont de Nemours & Co. v.
Pressman, 679 A.2d 436, 445 (Del. 1996). “Punitive damages . . . increase the
amount of damages in excess of the promisee’s expectation interest . . . .” Id.
at 446. The Agreement explicitly denied arbitrators the authority to award
punitive damages. “Thus, if punitive damages were indeed awarded in this
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case, it would be incumbent upon us to vacate such an award, in spite of the
discretion typically granted to arbitral decisions.” Bridas, 345 F.3d at 365.
Catic USA contends that the panel issued what are effectively punitive
damages. Given the panel’s determination that Catic USA’s breach denied
Soaring Wind $62.9 million in lost profits, claimants would be owed expec-
tation damages of $31.45 million to reflect their 50% interest in the company.
But by awarding the full $62.9 million while simultaneously divesting Catic
USA and Thompson of their equity interest, Catic USA suggests, the panel
granted the claimants what is, in substance, double their expected damages.
The panel acknowledged that “[t]he lost profits set forth in [its] award
are due to [Soaring Wind] for distribution to the Claimants through their
percentages set forth in the [ ] Agreement.” Insofar as it divested Catic USA
and Thompson of their equity interests, the award served not necessarily to
compensate the claimants or the LLC but “to prevent [Catic] USA and Thomp-
son from profiting from their breaches.”
Although the panel did not have the authority to issue punitive damages,
it did possess powers to grant court-enforceable injunctive relief. The question
thus is whether the divestment constitutes permissible injunctive (or equita-
ble) relief or improper punitive damages.
It is the former. The panel divested Catic USA and Thompson of their
interest in Soaring Wind to prevent them from receiving incidental benefit for
breaching their duties, duties owed not only to the other members of the LLC
but also to the LLC itself. Unlike punitive damages, which are based on a
perceived reprehensibility of the breaching party’s actions or flow from a desire
to make examples of them, see E.I. DuPont, 679 A.2d at 445–46, the divestment
operates to achieve what the panel considered a fair result. Such concern—
that relief not only compensate parties financially but also achieve a just
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outcome, ex aequo et bono—is precisely a matter of equity. 31 Catic USA’s
theory that the divestment effectively doubles the damages—and is therefore
substantively indistinguishable from punitive damages—is well taken, but,
given the broad scope of “equitable” relief, 32 combined with the deference we
must grant the arbitration panel, 33 we decline to set aside the divestment as
punitive and not equitable.
The judgment confirming the arbitration award is AFFIRMED.
31 See 1 J. POMEROY, EQUITY JURISPRUDENCE § 363, at 8–9 (5th ed. 1941).
32 See Great-W. Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 212–18 (2002).
33 See Rain, 674 F.3d at 472.
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