If You Seek To Limit The Authority Of Your Arbitrators, Your Arbitration Clause Must Be Clear

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In 2020, the Fifth Circuit Court of Appeals issued its decision in Soaring Wind Energy LLC (SWE) v. CATIS USA Inc., et al.  In that case, the various members of a limited liability company (LLC) entered into an agreement to provide worldwide marketing of wind energy equipment and services.  The agreement contained an arbitration clause that required all disputes between the parties to be arbitrated.  The arbitration clause contained the following language.

17.10 No Consequential or Punitive Damages.  IN NO EVENT SHALL ANY MEMBER OR ANY OF ITS RESPECTIVE REPRESENTATIVES OR AFFILIATES BE LIABLE TO THE COMPANY OR TO ANY OTHER MEMBER OR ITS REPRESENTATIVES OR AFFILIATES FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES.

After an evidentiary hearing lasting several days, the Arbitration Panel awarded SWE $62.9 million in lost profits. The losing party sought to overturn the Award arguing that the Panel exceeded its powers by awarding lost profits damages. Arbitration awards are difficult to overturn and only a few narrow grounds exist to ask a court to vacate an award. However, one of the most powerful grounds is a showing that the Arbitration Panel exceeded the authority granted to them by the arbitration clause.

This case was governed by Delaware law. Under Delaware law, courts have found that certain types of lost profits are considered consequential damages but that other types of lost profits are considered direct or actual damages. Texas courts like Delaware, have issued several opinions involving lost profits, some of which hold they are consequential damages and others which find them to be direct damages.

SWE argued that these “lost profits” damages were the direct result of the breach of the parties’ agreement not to compete directly on wind power project(s). They contended the damages were not related to a “collateral business arrangement,” but were an integral part of what the parties bargained for in their agreement. The opposition took the position that lost profits are consequential damages and that the Panel had exceeded its authority by awarding consequential damages when the arbitration clause prohibited the award of consequential damages.

The Court concluded that the Panel’s decision had drawn its essence from the agreement and that they had followed Delaware law in doing so.  Thus, even though the arbitration clause stated that the parties could not recover consequential damages, the Court held the Panel did not exceed its authority.

Drafters of contracts have a great deal of power to control many issues that come before an arbitration panel including the damages which a Panel can award. The language used here did not define consequential damages, nor did it say the Panel cannot award lost profits.

This case provides a useful lesson in the drafting of your arbitration clause. If you want to preclude the recovery of lost profits damages, the clause needs to clearly state that the Panel is not authorized to award lost profit damages of any type. Arbitration is a process largely controlled by the agreement of the parties. It is imperative, however, that you use the arbitration agreement to specify the process you imagine.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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