The Fifth Circuit has affirmed a district court’s ruling vacating an arbitrator’s decision reforming a contract for mutual mistake, finding that reformation was outside the authority provided to the arbitrator by the parties’ agreement.
The dispute arose from the sale of a business, which included the assets, customer lists, and customer contracts of the business. The agreement provided for the buyer to make future payments contingent upon the buyer achieving certain levels of ongoing revenue from the seller’s former customers. The seller would receive $7 million if an agreed upon threshold amount of revenue was achieved in the first 9 months after the sale, with this payment reduced proportionately to the extent the revenue was under the threshold and reaching $0 if the revenue was less than 90% of the threshold. At the end of nine months, the parties disagreed regarding whether revenues from two customers should be counted toward meeting the threshold amount, such that the seller claimed that it was owed a payment while the buyer asserted that seller was owed nothing.
The parties submitted the matter arbitration, and the arbitrator adopted the seller’s position that revenues from both excluded customers should be counted toward the threshold. However, the arbitrator also decided that the parties had made a mutual mistake in their initial calculation of the threshold amount. He then reformed the agreement to fix that mistake, leading to a new calculation under which the buyer was owed no payment.
The buyer challenged arbitration award in court, and by the time the matter got before the Fifth Circuit. the only issue was whether the arbitrator had exceeded his authority by deciding the issue of mutual mistake and reforming the contract. The court noted that the parties went to arbitration under the authority of a provision saying that, in the case of a dispute over the revenue calculation, the parties would “select [an arbitrator] to resolve any remaining dispute over the Seller’s proposed adjustments . . . .” This, the court held, only allowed the arbitrator to resolve disputes over the question of “Seller’s proposed adjustments,” and not to decide whether the parties had erred in calculating the threshold amount. In reaching this conclusion, the court noted that the arbitration provision was only one of four separate arbitration provisions in the agreement, each of which was dedicated to different types of disputes, with the agreement further providing that other disputes would be decided by state or federal courts in Texas. Thus, the issue of mutual mistake was outside of the authority given by the parties to the arbitrator, and the court remanded the matter to the district court to decide the issue of mutual mistake.