Colstrip Energy Ltd. Partnership v. Northwestern Corp.

May 10 2011

DA 10-0346

IN THE SUPREME COURT OF THE STATE OF MONTANA

2011 MT 99

COLSTRIP ENERGY LIMITED
PARTNERSHIP, a Montana limited
partnership,

Plaintiff and Appellant,

v.

NORTHWESTERN CORPORATION, a
Delaware corporation,

Defendant and Appellee.

APPEAL FROM: District Court of the Sixteenth Judicial District,
In and For the County of Rosebud, Cause No. DV 07-57
Honorable Blair Jones, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Ward E. Taleff, Taleff Law Office, P.C., Great Falls, Montana

For Appellee:

Charles E. Hansberry, Stephen R. Brown, Garlington, Lohn
& Robinson, PLLP, Missoula, Montana

Michael R. Engleman, Leon B. Kellner, Dickstein Shapiro, LLP,
Washington, DC

Submitted on Briefs: February 16, 2011

Decided: May 10, 2011
Filed:

__________________________________________
Clerk

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Justice James C. Nelson delivered the Opinion of the Court.

¶1 Colstrip Energy Limited Partnership (CELP) appeals an order of the District Court

for the Sixteenth Judicial District Court, Rosebud County, denying CELP’s motion to

vacate the arbitration award in its dispute with Northwestern Corporation (Northwestern).

We affirm.

¶2 CELP raised the following issues on appeal:

¶3 1. Was it permissible for the arbitrators to find the parties’ contract requires the

use of specific variables to calculate rates but then fail to apply those required contract

variables in the two years in question to avoid awarding damages?

¶4 2. Did the arbitrators exceed their powers when their award relied on the “intent”

of sophisticated parties to an unambiguous contract instead of interpreting the contract as

written?

¶5 3. Did the arbitrators exceed their powers when they issued an award based on

their sense of equity rather than enforcing the parties’ contract as written?

¶6 4. Was the District Court’s failure to vacate the arbitration award an abuse of

discretion where the arbitrators exceeded their powers?

Factual and Procedural Background

¶7 CELP is a Montana limited partnership which owns an electrical generating plant

in Rosebud County. Northwestern is a Delaware corporation and a regulated public

utility conducting business in Montana. Under federal and Montana law, utilities such as

Northwestern are obligated to purchase electricity from small generating facilities such as

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CELP. See 16 U.S.C. § 824a-3(a)(1) (the Public Utility Regulatory Policies Act

(PURPA)), 18 C.F.R. § 292.207, and Title 69, chapter 3, part 6, MCA. Rates under

PURPA are based on the concept of “avoided costs”—the costs at the onset of a power

purchase agreement that the utility avoids by purchasing power from a qualified facility

rather than building a power plant to produce it. The Montana Public Service

Commission (PSC) oversees the implementation of PURPA in Montana.

¶8 In 1984, CELP’s predecessor, AEM Corporation (AEM), entered into a Power

Purchase Agreement (the Agreement) with the Montana Power Company (MPC) for the

sale of energy and capacity from the Rosebud County facility for a term of 35 years. In

March 1988, following the issuance of numerous orders by the PSC implementing

PURPA, AEM and MPC executed a First Amendment to the Agreement. The First

Amendment altered the payment scheme under the Agreement by providing that in

contract years one through fifteen, AEM would essentially receive a fixed rate for

electrical generation. Beginning in the sixteenth contract year, AEM’s annual rates were

to be based upon a formula which adopted specific mandatory variables and methods

contained in PSC Orders 5017 and 5017a issued in 1983. These rates were to be

approved annually by the PSC. The rate formula adopted in the First Amendment

required an annual adjustment by comparing the variables in the new contract year with

the variables from the immediately preceding contract year’s final approved PSC rates.

CELP and Northwestern are the successors to those contracts.

¶9 Eventually, a dispute arose between CELP and Northwestern regarding the

contractual methodology used to calculate CELP’s contract rates for energy and capacity

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for contract years sixteen and seventeen (July 1, 2004 through June 30, 2006). These

were the first years CELP’s rates were subject to the formula contained in the First

Amendment rather than the fixed rate.

¶10 Sometime in 2007, Northwestern advised CELP that it intended to deduct more

than $1 million from its next payment to CELP because of alleged overpayments made

by Northwestern for contract years sixteen and seventeen. In response, CELP filed this

action challenging Northwestern’s claimed offset on the basis that Northwestern had

created its alleged overpayment by using the wrong variable to determine the rates to be

paid to CELP. In its cause of action, CELP sought roughly $22 million in damages from

Northwestern and alleged, among other things, breach of contract; breach of the implied

covenant of good faith and fair dealing; negligent misrepresentation; violation of due

process; deceit; actual fraud; constructive fraud; and abuse of process. CELP also sought

judicial review of two orders of the PSC filed under the Montana Administrative

Procedure Act.

¶11 Northwestern moved to compel arbitration of CELP’s claims based on the

arbitration provision in the Agreement. The District Court ordered CELP’s cause of

action against the PSC bifurcated from its action against Northwestern and ordered CELP

and Northwestern to arbitration. Northwestern did not raise any counterclaims in the

arbitration.

¶12 Over the course of a nearly one-year long arbitration proceeding before a panel of

three arbitrators (the Panel), each party presented its case regarding the proper

interpretation of both the Agreement and the First Amendment. The arbitration

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proceedings included a five-day arbitration hearing in San Francisco with testimony from

several expert witnesses and significant questioning by the Panel. It also included

extensive pre- and post-hearing briefing.

¶13 On August 24, 2009, the Panel issued its Interim Award addressing all of CELP’s

counts against Northwestern, reserving for the Final Award only the question of whether

either party was entitled to costs and fees as the prevailing party under § 29 of the

Agreement. The Panel denied CELP’s contract and tort damage claims as well as all

other relief sought by CELP noting that it was troubled by the manner in which CELP

shifted its arguments in an effort to manufacture a damage case. The Panel concluded

that although Northwestern breached the parties’ contract, CELP failed to prove that this

breach caused CELP to suffer compensable damages or underpayments, or that the

breach entitled CELP to any other relief.

¶14 The Panel issued its Final Award on October 30, 2009, incorporating almost

verbatim the text of the Interim Award. In addition, CELP had sought recovery of its

legal fees and arbitration expenses from the Panel, but the Panel denied that request.

Instead, the Panel determined that because the relief awarded was of a “mixed nature” in

that both CELP and Northwestern gained “victories” and suffered “losses,” each party

should bear its own legal fees and other litigation expenses incurred in arbitration.

¶15 Northwestern filed a motion with the District Court seeking to confirm the

arbitration award while CELP sought to have it vacated. Originally, CELP moved to

modify or correct the Final Award, but at a hearing on the parties’ competing motions,

CELP argued that the Final Award must be vacated in its entirety because it was not

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“fixable in terms of modification, unless you throw out the vast majority of the arbitration

award.” CELP did not challenge the Panel’s failure to award fees and costs.

¶16 The District Court confirmed the Final Award by order dated June 15, 2010. In its

order, the District Court found that CELP failed to cite to any factual evidence or legal

precedent showing that the Panel had disregarded clear Montana law or exceeded the

authority conferred on the Panel by the parties’ Agreement, the District Court’s order

directing the parties to arbitrate, or the scope of the questions presented to the Panel by

CELP. CELP now appeals that ruling.

Discussion

¶17 Judicial review of an arbitration award is strictly limited by statute in Montana.

Dick Anderson Construction, Inc. v. Monroe Construction, 2009 MT 416, ¶ 26, 353

Mont. 534, 221 P.3d 675 (hereinafter “DAC”) (citing Paulson v. Flathead Conservation

Dist., 2004 MT 136, ¶ 18, 321 Mont. 364, 91 P.3d 569; Terra West v. Stu Henkel Realty,

2000 MT 43, ¶ 22, 298 Mont. 344, 996 P.2d 866; Nelson v. Livingston Rebuild Center,

Inc., 1999 MT 116, ¶ 11, 294 Mont. 408, 981 P.2d 1185). Montana’s Uniform

Arbitration Act (Title 27, chapter 5, MCA) provides that a district court must confirm an

arbitration award upon application of a party unless timely urged to vacate or modify the

award. DAC, ¶ 26 (citing May v. First Nat. Pawn Brokers, LTD., 269 Mont. 19, 22, 887

P.2d 185, 187 (1994); § 27-5-311, MCA). When a matter has been submitted to binding

arbitration, courts are not permitted to review the merits of the controversy, but may only

confirm, vacate, modify, or correct an arbitration award pursuant to §§ 27-5-311, -312,

and -313, MCA. DAC, ¶ 26 (citing Paulson, ¶ 18; Nelson, ¶ 11). Furthermore, the party

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seeking to vacate, modify, or correct an arbitration award bears the burden of proving that

one of the statutorily enumerated grounds exists. DAC, ¶ 26 (citing Duchscher v. Vaile,

269 Mont. 1, 6, 887 P.2d 181, 184 (1994)).

¶18 We review a trial court’s decision to confirm an arbitration award to determine if

the court abused its discretion. DAC, ¶ 19 (citing Terra West, ¶ 22). The test for an

abuse of discretion is whether the trial court acted arbitrarily, without employment of

conscientious judgment, or exceeded the bounds of reason resulting in substantial

injustice. DAC, ¶ 19 (internal quotation marks omitted) (citing In re Custody and

Parental Rights of C.J.K., 2005 MT 67, ¶ 13, 326 Mont. 289, 109 P.3d 232; In re KCH,

2003 MT 125, ¶ 11, 316 Mont. 13, 68 P.3d 788).

¶19 We stated in DAC that

[a]rbitration allows parties to engage decision-makers who are technically
skilled or trained in the specific area of industry that is subject to dispute
and to expedite the resolution of disputes by avoiding many of the
formalities inherent in litigation. Arbitration also provides a more stringent
finality to disputes than traditional litigation by limiting the scope of
judicial review of an arbitration award.

DAC, ¶ 38. Thus, this Court can only review whether the District Court abused its

discretion in confirming the arbitration award; we cannot review the merits of the

controversy. DAC, ¶¶ 19, 26. Consequently, we do not address CELP’s first three issues.

Instead, we conclude that the dispositive issue in this case is:

Whether the District Court’s failure to vacate, modify or correct the
arbitration award was an abuse of discretion.

¶20 CELP contends on appeal that the District Court abused its discretion in failing to

vacate or modify the Final Award because the conclusions the arbitrators reached and the

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award the arbitrators made were inconsistent with their own findings, contrary to the

contract, contrary to settled Montana law on interpretation of contracts, and in excess of

the scope of the arbitrator’s powers. CELP further contends that the arbitrators exceeded

their powers by re-writing the Agreement to achieve what they perceived as a fair result

rather than employing recognized rules of contract construction to interpret the

Agreement.

¶21 However, as already indicated, the question before this Court is not whether the

Panel exceeded its authority, as that question was already answered by the District Court.

Rather, the question this Court must answer is whether the District Court abused its

discretion in concluding that the Panel acted within its authority.

¶22 The Panel determined that Northwestern breached the Agreement and the First

Amendment to the Agreement by failing to use in its annual compliance filings submitted

to the PSC two criteria from which CELP’s contract rates are determined: (1) the Handy-

Whitman Index, which the Panel concluded was the contract approved inflation index

that must be applied to annually adjust certain variables used to calculate the contractual

rate inputs, and (2) an annually determined incremental cost of capital (ICC), which is

similarly used to adjust certain contractual rate inputs. Notwithstanding that finding, the

Panel denied all of CELP’s claims on the basis that CELP failed to prove that

Northwestern’s breaches of the Agreement caused CELP to suffer compensable damages

or underpayments, or that those breaches entitled CELP to any relief.

¶23 In making this determination, the Panel referred to certain requirements specified

in the First Amendment and CELP’s failure to comply with those requirements in

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asserting that it had suffered damages as a result of Northwestern’s breach. Thus, the

Panel made the following Findings of Fact in its Final Award:

23. [PSC] Order 5017, ¶ 50 [which had been incorporated into the
First Amendment] further requires that each subsequent year’s dollar
estimates shall be revised to reflect the previous year’s inflation. CELP
sought to avoid this general requirement by taking the position that the
calculation required for Contract Year 16 must be prepared using new data
inputs (Handy-Whitman and a revised ICC which was based on a bankrupt
merchant investing in a speculative coal plant) but then compared to the
filings for Contract Year 15, which did not use those inputs. Performing
the calculation in this manner would yield a huge increase (the “Bump”) in
the rates to be paid to CELP that is not contemplated or permitted by [the
Agreement]. Rather, [the Agreement], properly construed, requires that any
such calculation be performed on a consistent basis as between the Contract
Year for which the new rate is being calculated and the prior Contract
Year’s data. . . .
24. The evidence presented at the Arbitration Hearing failed to
establish that CELP suffered any compensable damages or underpayments
by reason of NorthWestern’s failures to follow contract requirements
regarding use of Handy-Whitman and an annually calculated ICC in
Contract Years 15, 16, or 17. Rather, the underpayment analysis offered by
CELP’s expert witness David Branchcomb found underpayments only
because the analyses depended on an inconsistent and contractually
impermissible comparison of Contract Year 16 to Contract Year 15. As
discussed above, [the Agreement] does not permit the comparison required
by the First Amendment to be performed in such a manner. The evidence
established that if the comparison calculation is performed in a
contractually permissible manner, avoiding the Bump, CELP’s claim of
damages and underpayments in Contract Years 16 and 17 was not proven.
25. . . . CELP also failed to prove compensable damages or
entitlement to any other relief, in support of its tort claims. [Internal
citations omitted.]

And, in its Conclusions of Law, the Panel stated the following:

6. . . . The evidence established that performing the Contract Year
16 calculation in this manner would embed a sudden and very large jump in
the total payments that would be due to CELP thereafter, and that this
“Bump” would persist over the remaining life of the contract. The evidence
presented did not establish that the original contracting parties intended any
such result. The text of the First Amendment, and particularly, the text of

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 [the attachments to the First Amendment] lead us to conclude that [the
Agreement] does not authorize or permit any such inconsistent calculation
causing such a fortuitous “Bump” in the rates paid to CELP. Rather, we
conclude that [the Agreement] requires the comparison between the data for
the Contract Year for which the new rate is being calculated pursuant to the
First Amendment and the data for the immediately prior Contract Year that
must also be considered in the calculation to be performed on a consistent
basis using the same methodology and types of inputs.

¶24 In its June 15, 2010 order confirming the Final Award, the District Court

explained that this interpretation and result advanced by the Panel “is, at a minimum, a

‘plausible’ interpretation of [the Agreement] and First Amendment, and is entitled to due

deference by this Court.”

¶25 The District Court pointed out that in CELP’s brief in support of its motion to

vacate, CELP stated that it did “not seek to vacate the Final Award, but only to modify

and correct it in order to eliminate the inconsistencies within the award and amend it

where it disregards clear Montana Law.” The court also pointed out that at the April 9,

2010 hearing on the parties’ motions, CELP changed its position when it urged the court

to vacate the entire Final Award asserting that the Final Award is not “fixable in terms of

modification, unless you throw out the vast majority of the arbitration award.”

Nevertheless, the District Court determined that CELP failed to meet its burden to

establish any of the statutory grounds for either vacating or modifying the Final Award;

thus, the court concluded that confirmation of the Final Award was appropriate.

¶26 We conclude that the District Court did not abuse its discretion in denying CELP’s

motion to vacate, modify or correct the Final Award. First, as to CELP’s contention that

the District Court should have amended the Final Award, Montana’s Uniform Arbitration

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Act does not permit a court to vacate an arbitration award in part. DAC, ¶ 34 (“there is

no provision in the arbitration statutes for vacating a portion of an arbitration award”).

¶27 Second, Montana law is clear that a non-breaching party is still required to prove

its damages. Knucklehead Land Co. v. Accutitle, Inc., 2007 MT 301, ¶ 31, 340 Mont. 62,

172 P.3d 116. Even CELP conceded in its brief on appeal that “[i]t is well within the

authority of the trier of fact to find that a defendant had a duty, breached it, and caused

injury to the plaintiff, and yet award no compensation when the plaintiff failed to

adequately prove damages.”

¶28 Third, as to CELP’s motion to modify or correct the Final Award, the grounds for

modifying or correcting an arbitration award are set forth in § 27-5-313, MCA:

Modification or correction of award by court. (1) Upon
application made within 90 days after delivery of a copy of the award to the
applicant, the district court shall modify or correct the award if:
(a) there was an evident miscalculation of figures or an evident
mistake in the description of any person, thing, or property referred to in
the award;
(b) the arbitrators awarded upon a matter not submitted to them and
the award may be corrected without affecting the merits of the decision
upon the issues submitted; or
(c) the award is imperfect in a matter of form not affecting the
merits of the controversy. [Emphasis added.]

¶29 The District Court correctly noted in its order confirming the Final Award that the

legal precedent on which CELP relies for its request to modify or correct the Final

Award—that the Panel exceeded its authority—applies only to motions to vacate an

award. Under § 27-5-313, MCA, modification is restricted to matters that do not affect

the merits of the controversy and efforts to overturn an arbitrator’s damage findings are

beyond the scope of modification. In this case, the Panel’s findings regarding CELP’s

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damages are material to the Final Award and relate to the merits of the Panel’s findings

with respect to CELP’s claims against Northwestern because CELP included those

damage claims within the scope of its arbitration demand. Hence, the District Court

correctly denied CELP’s motion to modify or correct the Final Award.

¶30 Fourth, as to CELP’s motion to vacate the Final Award, the grounds for vacating

an arbitration award are set forth in § 27-5-312, MCA:

Vacating an award. (1) Upon the application of a party, the district
court shall vacate an award if:
(a) the award was procured by corruption, fraud, or other undue
means;
(b) there was evident partiality by an arbitrator appointed as a
neutral or corruption in any of the arbitrators or misconduct prejudicing the
rights of any party;
(c) the arbitrators exceeded their powers;
(d) the arbitrators refused to postpone the hearing upon sufficient
cause being shown or refused to hear evidence material to the controversy
or otherwise conducted the hearing, contrary to the provisions of 27-5-213,
in a manner that substantially prejudiced the rights of a party;
(e) there was no arbitration agreement and the issue was not
adversely determined in proceedings under 27-5-115 and the party did not
participate in the arbitration hearing without raising the objection; or
(f) a neutral arbitrator failed to make a material disclosure required
by 27-5-116. An award may be vacated because of a material
noncompliance with 27-5-116 no later than 90 days following discovery of
the failure to disclose. [Emphasis added.]

¶31 In this case, CELP alleged that the Panel exceeded its authority by re-writing the

Agreement to achieve what the Panel perceived as a fair result rather than employing

recognized rules of contract construction to interpret the Agreement. However, the

District Court noted that in making this argument, CELP did not cite to any evidence in

the record that the Panel manifestly disregarded Montana law. Citing Geissler v. Sanem,

285 Mont. 411, 417-18, 949 P.2d 234, 239 (1997), the court explained that the

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challenging party must demonstrate through evidence in the record that the “arbitrator

appreciates the existence of a clearly governing legal principle but decides to ignore or

pay no attention to it.” The court determined that there was “no evidence in the record to

support the argument that the Panel was aware of a clearly governing principle of law and

nevertheless ignored it in reaching its decision.” The court also stated that “CELP has

failed to show that the Panel’s rulings exceeded the authority vested in them by the broad

arbitration referrals in the parties’ Agreement, the Arbitration Referral Order, and

CELP’s own Demand for Arbitration.” Therefore, the court correctly determined that it

lacked the authority to vacate the Final Award.

¶32 Accordingly, we hold that the District Court’s confirmation of the Final Award

was proper and well within its discretion.

¶33 Affirmed.

/S/ JAMES C. NELSON

We Concur:

/S/ MIKE McGRATH
/S/ MICHAEL E WHEAT
/S/ BRIAN MORRIS
/S/ PATRICIA COTTER

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