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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 92-2555
_____________________
EXECUTONE INFORMATION SYSTEMS, INC.,
Plaintiff-Appellee,
Cross-Appellant.
versus
LLOYD K. DAVIS, ET AL.,
Defendants-Appellants,
Cross-Appellees.
_________________________________________________________________
Appeals from the United States District Court
for the Southern District of Texas
_________________________________________________________________
(July 12 1994)
Before KING and JONES, Circuit Judges, and KAZEN,1 District
Judge.
KING, Circuit Judge:
The main issue on this appeal is whether the district court
correctly enforced a decision rendered by an arbitrator.
I. BACKGROUND
A. NEGOTIATIONS
The plaintiff in this case is Executone Information Systems,
Inc. ("Executone"). According to its original complaint,
Executone is a Virginia corporation with its principal place of
1 District Judge of the Southern District of Texas, sitting
by designation.
1

business in Connecticut. Executone is the manufacturer of
communications products, including telephone equipment. At least
at the time this dispute arose, Executone's practice was to
market its products to other distributors.
Executone brought this action against Lloyd K. Davis, Edward
H. White III, and High Technology Specialists, Inc. ("HTS").
These three parties (collectively referred to in this opinion as
"the former Isoetec shareholders") are all former shareholders of
Isoetec Texas, Inc. ("Isoetec"), a Texas corporation with its
principal place of business in Texas. Executone alleged and the
defendants admitted that Davis and White were Texas residents and
HTS was a Delaware corporation with its principal place of
business in Texas. According to Davis and White, HTS's interest
in this suit has been transferred to Davis.
It appears that Isoetec was formed in 1985 for the purpose
of serving as a Texas distributorship for Executone's products.
At some point the parties began negotiations with a view to an
eventual purchase of Isoetec by Executone. These negotiations
culminated in the execution of a purchase agreement on June 5,
1989. Under the terms of the agreement, Executone agreed to
purchase all of the stock or assets of Isoetec by January 1,
1990. The parties also entered into new distributor and
marketing agreements on June 5, 1989. As part of the
consideration for all of these agreements, Executone, Isoetec,
and Isoetec's shareholders executed a broad release agreement
whereby Executone released all claims or contracts that it might
2

have against Isoetec and its shareholders, and Isoetec and its
shareholders released their claims and contracts against
Executone. The release is also dated June 5, 1989.
The purchase agreement required Isoetec to furnish Executone
with Isoetec's unaudited balance sheets and all related financial
statements for the period from January 1 through September 30,
1989, no later than October 31, 1989. The parties agreed that
the purchase price would be calculated according to a formula
based in part on a multiple of Isoetec's 1989 "adjusted pre-tax
profits," if any, and that the purchase would be effective no
later than January 1, 1990. They further agreed that an "interim
closing" would occur no later than January 19, 1990, and that an
interim purchase price would be calculated based upon Isoetec's
unaudited financial statements for the purposes of that closing.
However, calculation of the final purchase price was agreed to
occur only after an audit and a subsequent review of that audit.
Isoetec agreed to obtain an audit of its 1989 financial
statements by the accounting firm of BDO Seidman and to make that
audit available to Executone within twenty-one days of receipt.
Executone agreed to obtain a review of the BDO Seidman audit from
Arthur Andersen & Co. within twenty-one days of receiving that
audit. The final purchase price was to be calculated based on
the audit information, and the parties agreed to adjust any
consideration paid under the interim purchase price to reflect
the final purchase price. The parties also included the
following clause in the purchase agreement:
3

Any bona fide dispute over the 1989 Audit, GAAP as that term
is defined in Exhibit D [to the purchase agreement], or
regarding computation of the Isoetec Purchase Price pursuant
to Exhibit B [to the purchase agreement] shall be subject to
final resolution by Price Waterhouse within the 21 Day
Period [following Executone's receipt of the BDO Seidman
audit].
The time-table set forth in the purchase agreement was not
strictly observed, although according to the former Isoetec
shareholders, Executone did take over the operations of Isoetec
on January 1, 1990. The interim closing of the purchase of
Isoetec by Executone occurred on February 16, 1990. The interim
purchase price established for the purposes of that closing was
approximately $3,000,000, based on adjusted pre-tax profits for
1989 of $1,136,001. At the February 16 closing, Executone
apparently issued some shares of Executone stock and a $1,000,000
promissory note, plus some cash and other convertible notes, to
the Isoetec shareholders as required under the purchase
agreement, and the Isoetec shareholders delivered their Isoetec
stock to Executone. On or about April 1, 1990, Executone made a
payment of $250,000 on the notes issued to the former Isoetec
shareholders.
The BDO Seidman audit was slow in coming. In the interim,
Arthur Andersen notified BDO Seidman in April 1990 of certain
irregularities in Isoetec's preliminary financial statements.
Executone claims that the BDO Seidman audit was finally made
available to Executone on May 30, 1990. Under the BDO Seidman
audit, the final purchase price was calculated to be
approximately $2,900,000. All parties agree that Executone
4

disputed BDO Seidman's conclusions. Davis contacted Executone's
chief operating officer by letter dated June 7, 1990, advising
Executone to engage Price Waterhouse and submit whatever disputed
matters it wished. The letter concluded by pointing out that the
twenty-one day period for such submission would expire on June
20, 1990. In Executone's responsive letter, it accused Isoetec
of obstructing the Price Waterhouse arbitration and advised
Isoetec that Executone would engage Price Waterhouse within the
appropriate time period.
Price Waterhouse contacted both Davis and Executone by
letter dated June 15, 1990, outlining the conditions under which
it would arbitrate the dispute. Counsel for the former Isoetec
shareholders contacted Executone and advised that some changes to
Price Waterhouse's engagement letter needed to be made. On June
18, 1990, Executone sent Price Waterhouse an executed copy of the
engagement letter and a check as a retainer for the engagement.
The dispute, however, did not immediately go to arbitration.
According to the former Isoetec shareholders, Executone did not
pay the installment due on its promissory notes on July 1, 1990.
On July 2, 1990, Executone filed suit in federal district court
for the Southern District of Texas against Davis, White, and HTS
("the Isoetec defendants").
B. LITIGATION AND ARBITRATION
Executone's suit against the Isoetec defendants contained
six counts, including breach of contract, common law fraud, and
violations of the securities laws of Texas and the United States.
5

Requested relief included specific performance, damages, or
rescission. Federal jurisdiction was predicated on both
diversity of citizenship and federal question and pendent
jurisdiction by virtue of the count based on federal securities
law. The Isoetec defendants answered and counterclaimed, also
alleging fraud and securities law violations.
In November 1990, Executone moved for partial summary
judgment, asking the court to "find that the dispute is subject
to final resolution by Price Waterhouse." The Isoetec defendants
opposed this motion. The district court first sent the parties
to non-binding mediation, then entered the following order: "It
is hereby ORDERED that the parties in the above action submit all
issues to Price Waterhouse for final resolution within thirty
(30) days pursuant to the terms of their agreement."
We must examine the correspondence between the parties and
Price Waterhouse (referred to hereinafter as "the arbitrator") in
some detail. Executone submitted a number of issues challenging
Isoetec's computations of its 1989 adjusted pre-tax profits on
the basis of the accounting principles used by Isoetec. The
arbitrator's resolution of these "accounting issues," as they
have been styled by the parties, has not been directly challenged
in this litigation, and indeed it appears that the document
whereby Executone described and submitted these issues to the
arbitrator has not even been included in the record. It is clear
from the record, however, that one of the accounting issues
concerned the so-called "Stewart Title transaction." It appears
6

that Isoetec entered into a contract in March 1989 with Stewart
Title Company ("Stewart Title") to provide Stewart Title with
telephone equipment, and that Isoetec's 1989 financial statements
included $295,000 in profits from this sale. According to the
arbitrator's report, Stewart Title had the equipment removed some
time after 1989, apparently because it was dissatisfied with the
equipment. Executone thus contended that Isoetec should not be
allowed to count the $295,000 profit from the Stewart Title
transaction because subsequent to year end, Stewart Title
exercised its contractual right to return the equipment.
The Isoetec shareholders submitted their own list of issues
to the arbitrator (the "other issues"). These issues generally
charged Executone with taking actions that decreased Isoetec's
1989 profits by varying amounts. For instance, the shareholders
charged that Executone had breached the distributor agreement by
overcharging Isoetec for Executone equipment, thereby reducing
Isoetec's profits and causing Isoetec to lose several contracts
in 1989. The Isoetec shareholders also claimed that Isoetec and
Executone had agreed that Executone would bid on a telephone
installation needed by the Dallas Independent School District,
that Executone and Isoetec had agreed to share the profits, and
that Executone had failed to bid on the contract as promised.
Two of the Isoetec shareholders' "other issues" concerned
the Stewart Title transaction. We reprint those two issues as
submitted in full:
3.
Loss of Stewart Title Dallas and Fort Worth systems due to
equipment shortage and deficiencies. As a result of the
7

defective software provided to Stewart Title - Houston,
Stewart Title - Dallas and Stewart Title - Fort Worth
canceled the existing contracts with Isoetec Texas, Inc. for
installations in their Dallas and Fort Worth offices. These
installations totalled $135,000.00, and the net profits
after commissions would have been $38,000.00. Thus, 1989
profits should be increased by $38,000.00. . . .
. . . .
5.
Additional costs on Stewart Title - Houston installation due
to problems with Executone equipment. As a result of
problems experienced with equipment provided by Executone
and as a result of problems with the software provided by
Executone on the Stewart Title - Houston installation,
Isoetec Texas, Inc. was forced to assign several additional
people to the job. Isoetec Texas, Inc. also had additional
system redesign costs and other additional labor and
material costs on that job as a result of Executone's
equipment problems, resulting in a total additional cost to
Isoetec Texas, Inc. in 1989 (and thus a reduction of 1989
profits) in the amount of $110,000.00. . . .
After receiving the parties' submissions and based on those
submissions, the arbitrator contacted the parties by letter dated
August 14, 1991, summarizing the arbitrator's understanding of
Isoetec's "other issues." The letter stated:
I believe the hearing will be most efficient if the "other"
issues are handled separately from the "accounting" issues.
Our understanding is that the "other" issues include the
following:
1.
Alleged overcharges under the Distributor Agreement.
2.
Alleged loss of contracts due to the alleged
overcharges.
3.
Alleged loss of contracts due to equipment shortages
and deficiencies.
4.
Potential loss due to alleged failure to bid on a
D.I.S.D. contract.
5.
Alleged loss due to employment of Mary Jo Green.
6.
Alleged compromise of independence by BDO Seidman.
7.
Alleged damages due to loss of asset purchase option.
The letter also advised the parties to bring supporting
documentation relevant to each of the "other issues." With
respect to the third issue, regarding loss of contracts, the
8

arbitrator advised the parties to make available
"[c]orrespondence regarding deficiencies and shortages" and
"[e]xpert citations regarding equipment functionality or lack
thereof." Counsel for the Isoetec shareholders sent the
arbitrator a letter agreeing that the arbitrator's letter listed
all of the "remaining issues other than the accounting issues";
we have found nothing in the record to indicate that Executone
ever acknowledged or objected to the arbitrator's August 14,
1991, letter.
The arbitrator released separate reports regarding the
"accounting issues" and "other issues" in October 1991. In its
report regarding the accounting issues, the arbitrator ruled that
the $295,000 claimed by Isoetec as profits from the Stewart Title
transaction could not be included as adjusted pre-tax profits for
purposes of the purchase price computation. The arbitrator also
ruled that certain other deductions should be made. The
deductions in 1989 adjusted pre-tax profits required by the
arbitrator totalled over $400,000. Under the terms of the
arbitrator's report regarding the accounting issues, the final
purchase price of Isoetec should have been roughly
$1,100,000SQsubstantially less than the interim purchase price of
some $3,000,000.
What the arbitrator gave Executone with one hand, however,
it took away with the other. In its report regarding the "other
issues," the arbitrator awarded $1,187,000 in damages to the
former Isoetec shareholders, explaining that Executone had
9

breached warranties with respect to the equipment involved in the
Stewart Title transaction. Thus, the arbitrator awarded the
former Isoetec shareholders damages "equivalent to the impact on
the purchase price of not having [the Stewart Title transaction]
completed under its terms." Because the arbitrator deemed
Executone the prevailing party, it deducted $125,000 in costs and
fees from this damages award, for a total damages award of
$1,062,000.
Returning to court, both Executone and the Isoetec
defendants moved for summary judgment. Executone requested the
court, among other things, to ignore the arbitrator's award of
damages to the former Isoetec shareholders and to declare the
final purchase price to be $1,093,921. The Isoetec defendants
requested judgment in their favor in the amount of $2,573,567.27.
This amount, of course, included the $1,062,000 damages award in
favor of the former Isoetec shareholders and interest on that
award.
The district court heard oral argument on the summary
judgment motions on March 13, 1992. The court then directed the
parties to file supplemental letter briefs addressing the scope
of an arbitrator's authority and circumstances under which an
arbitrator's decision can be set aside. On April 14, 1992, the
district court entered an order denying Executone's motion for
summary judgment and granting the Isoetec defendants' motion for
summary judgment. In its final judgment, entered on June 23,
1992, the district court ordered that the arbitrator's award be
10

adopted in all respects. The judgment further contained the
following orders: (1) it awarded to the Isoetec defendants
$1,187,000 with no prejudgment interest on such amount; (2) it
directed that Executone should give the former Isoetec
shareholders 383,399 new shares of Executone stock in exchange
for the 246,619 shares previously issued; (3) it directed
Executone to file a registration statement with the Securities
and Exchange Commission (SEC) registering all shares of stock
issued to the defendants; (4) it awarded Executone the $125,000
in fees awarded by the arbitrator and $48,579 (plus interest) as
the amount that Executone had overpaid for Isoetec; and (5) it
required former Isoetec shareholders who had owned stock
appreciation rights in Isoetec and who had received Executone
stock in exchange for those rights to surrender their Executone
stock thereby received.
This appeal and cross-appeal followed.
C. ISSUES ON APPEAL
The Isoetec defendants have been designated the appellants
for purposes of this appeal. They raise several issues for our
consideration. They contend that the district court erred in
refusing to award them prejudgment interest from January 1, 1990,
costs, and attorneys' fees. They also argue that the district
court erred in ordering that part of the arbitrator's award
should be satisfied by requiring the former Isoetec shareholders
to exchange the 246,619 shares of Executone stock that they had
already received for 383,399 new shares of Executone stock.
11

Finally, they attack the district court's order that required the
former shareholders of Isoetec to surrender to Executone the
Executone stock received in exchange for their stock appreciation
rights.
Executone argues in support of all of the district court
rulings attacked by the Isoetec defendants. Additionally, as
cross-appellant, Executone argues that the district court should
have set aside the arbitrator's award of damages to the Isoetec
shareholders for Executone's breach of warranty.
We note that the proceedings before the arbitrator were not
transcribed and are not a part of the record on appeal.
II. STANDARD OF REVIEW
Our review of the district court's confirmation of an
arbitrator's award is de novo. Anderman/Smith Operating Co. v.
Tennessee Gas Pipeline Co., 918 F.2d 1215, 1218 n.2 (5th Cir.
1990), cert. denied, 111 S. Ct. 2799 (1991). Our review of the
arbitrator's award itself, however, is very deferential. Id. at
1218. We must sustain an arbitration award even if we disagree
with the arbitrator's interpretation of the underlying contract
as long as the arbitrator's decision "'draws its essence'" from
the contract. Id. (quoting United Paperworkers Int'l Union v.
Misco, Inc., 484 U.S. 29, 36 (1987)); see 9 U.S.C. � 10(d)
(permitting the district courts to vacate an arbitration award
when "the arbitrators exceeded their powers"). In other words,
we must affirm the arbitrator's decision if it is rationally
12

inferable from the letter or the purpose of the underlying
agreement. Id. (citing Local Union 59, Int'l Bhd. of Elec.
Workers v. Green Corp., 725 F.2d 264, 268 (5th Cir.), cert.
denied, 469 U.S. 833 (1984)). In deciding whether the arbitrator
exceeded its authority, we resolve all doubts in favor of
arbitration. Valentine Sugars, Inc. v. Donau Corp., 981 F.2d
210, 213 (5th Cir.), cert. denied, 113 S. Ct. 3039 (1993).
III. ANALYSIS
A. EXECUTONE'S CROSS-APPEAL
Executone contends that we should reverse the district
court's adoption of the portion of the arbitrator's decision
awarding the former shareholders of Isoetec damages of
$1,187,000. The first prong of Executone's two-pronged attack is
that the issue on which the award was based was not actually
submitted for arbitration. Second, Executone argues that the
award does not draw its essence from the parties' agreements.
1. Was the Matter "Submitted" to the Arbitrator?
In Executone's view, the arbitrator's award of damages to
the former Isoetec shareholders must be modified and corrected
because it was awarded "upon a matter not submitted" to the
arbitrator. Title 9 of the United States Code authorizes the
district courts to modify or correct an arbitration award
"[w]here the arbitrators have awarded upon a matter not submitted
to them," 9 U.S.C. � 11(b); see also Totem Marine Tug & Barge,
Inc. v. North Am. Towing, Inc., 607 F.2d 649, 651 (5th Cir. 1979)
13

("Although arbitrators enjoy a broad grant of authority to
fashion remedies . . ., arbitrators are restricted to those
issues submitted."). The former Isoetec shareholders contend
that we should defer to the arbitrator's interpretation of the
issue submitted to it for decision just as we defer to the
arbitrator's interpretation of the contract.
We begin by noting that the question of whether a party can
be compelled to arbitrate, as well as the question of what issues
a party can be compelled to arbitrate, is an issue for the court
rather than the arbitrator to decide. Litton Fin. Printing Div.
v. NLRB, 111 S. Ct. 2215, 2226 (1991); AT&T Technologies, Inc. v.
Communications Workers, 475 U.S. 643, 649 (1986); see also Neal
v. Hardee's Food Sys., Inc., 918 F.2d 34, 37 (5th Cir. 1990)
(reviewing the arbitrability question de novo); District 37 of
Int'l Ass'n of Machinist & Aerospace Workers v. Lockheed Eng'g &
Mgmt. Servs. Co., 897 F.2d 768, 770 (5th Cir. 1990) ("[T]he
arbitrability of a grievance is an issue for judicial
determination."). Doubts are to be resolved in favor of
arbitrability. AT&T, 475 U.S. at 650.
Executone focuses on the letters sent to the arbitrator by
the parties, contending the three matters related to the Stewart
Title transaction were submitted to the arbitrator as follows:
(1) should the final Isoetec purchase price reflect a $295,000
profit in 1989 from the Stewart Title transaction, (2) were the
former shareholders of Isoetec entitled to a $110,000 credit for
additional labor and material costs incurred by Isoetec in
14

connection with the Stewart Title transaction, and (3) were the
former shareholders of Isoetec entitled to a $38,000 credit for
profits lost when Stewart Title canceled its Dallas and Fort
Worth contracts with Isoetec. Executone also contends that the
arbitrator answered all three issues "no," in favor of
Executone's position. However, the arbitrator allocated the
fault for the $295,000 lost profit to Executone, and it awarded
the former Isoetec shareholders in damages the amount that they
lost in terms of the final purchase price based on a breach of
warranty theory. In Executone's view, the arbitrator effectively
awarded the former Isoetec shareholders some eight times the
$148,000 they had requested.
After a careful review of the record, we conclude that the
issue decided by the arbitrator in favor of the former Isoetec
shareholders with respect to the Stewart Title transaction was
sufficiently submitted by the parties.1 The arbitrator itself
plainly believed that the Stewart Title issue submitted for
resolution was sufficiently broad in scope to justify the award.
Soon after the arbitrator released its report regarding the
"other issues" to the parties, counsel for Executone wrote a
letter to the arbitrator strongly objecting to the Stewart Title
1 We take note of the view expressed by our sister circuits
that the arbitrator's interpretation of the scope of the issues
submitted to him is entitled to the same judicial deference
accorded his interpretation of the agreement being arbitrated, El
Dorado Technical Servs., Inc. v. Union General de Trabajadores,
961 F.2d 317, 321 (1st Cir. 1992); Pack Concrete, Inc. v.
Cunningham, 866 F.2d 283, 285 (9th Cir. 1989), but find it
unnecessary to adopt or reject that view given the clear facts of
this case.
15

damage award, asserting that Executone "never had an opportunity
to respond to [the Stewart Title] claim because the former
shareholders of Isoetec never requested the relief you awarded."
The arbitrator responded in a letter, defending its conclusion
that the parties had submitted the issue decided. That letter
read, in pertinent part:
As previously stated, we disagree with your statement that
EXECUTONE never had an opportunity to respond to the Stewart
Title - Houston issue. My August 14, 1991, letter to
EXECUTONE and Isoetec, which outlined the anticipated agenda
for the evidentiary hearing, clearly listed "Alleged loss of
contracts due to equipment shortages and deficiencies" as a
"non-accounting" dispute. Further, Isoetec in the last
paragraph of page four of its response to matters submitted
by EXECUTONE states "because EXECUTONE delayed in delivering
the additional hardware and software, Stewart [Title]
removed the system." This allegation was further discussed
at considerable length at the evidentiary hearing held in
our Dallas office on September 13, 1991, and we believe
EXECUTONE had every opportunity to address this issue.
We note that the August 14, 1991, letter from the arbitrator to
the parties effectively served as a submission agreement when it
was accepted by the parties without objection.
Admittedly, an issue concerning "Alleged loss of contracts
due to equipment shortages and deficiencies" is somewhat broad,
but this does not weaken our conclusion that the issue decided
was submitted to the arbitrator. The Valentine Sugars case is
instructive. The parties in that case had entered a joint
venture whereby one party would provide a formula for a resin to
be used to manufacture waferboard and the other would buy an
industrial spray dryer to spray dry the liquid resin. Valentine
Sugars, 981 F.2d at 211-12. The resin turned out to be faulty,
so the joint venture was unsuccessful. Id. at 212. In the
16

aftermath, one party sued the other and the dispute went to
arbitration. Id. The demand for arbitration simply requested
the panel to arbitrate "'a dispute concerning a commercial matter
involving several contracts signed on the 29th day of June, 1984
. . . .'" Id. at 213. The arbitrators decided in their award
which party owned the spray dryer, the district court confirmed
the award, and on appeal Valentine Sugars claimed that the issue
of ownership of the spray dryer had not been submitted. Id. We
affirmed the confirmation of the award, expressing our sympathy
with Valentine but concluding that the broad language of the
arbitration demand "gave the arbitrators the power to do whatever
was necessary to resolve any disputed matter arising out of the
joint venture." Id. As we observed, federal law does not impose
any requirements as to how specific a notice of arbitration must
be, and we declined to develop a code of pleading for arbitration
ourselves. Id.
We distinguish Totem, a case relied upon heavily by
Executone, in which we reversed an arbitrator's award because the
arbitrator both improperly expanded the subject matter of the
arbitration and improperly engaged in ex parte communications
with one of the parties. Totem, 607 F.2d at 653. In the
arbitration at issue in Totem, the party that ultimately
prevailed claimed several items of damages totalling some
$87,000, with the largest single item claimed being $45,000. Id.
at 651. The arbitration panel, however, awarded the prevailing
party some $158,000, including a $117,000 item of damages that
17

the prevailing party had not even requested. Id. We vacated the
award, noting that it is "anomalous for the arbitration panel to
award an unrequested item of damages three times larger than any
item claimed," id., and concluding that the arbitrators had
ignored the dispute actually submitted to them and dispensed
"their 'own brand of industrial justice,'" id. at 652 (citation
omitted).
For the reasons outlined above we do not agree with
Executone's contention that the arbitrator in the instant case,
like the arbitration panel in Totem, decided an unsubmitted
issue. Executone's focus on the two "other issues" related to
the Stewart Title transaction as described by the former Isoetec
shareholders' letter to the arbitrator, rather than on the
arbitrator's summary of the issues to be decided, is misplaced.
Additionally, we disagree with a key assumption underlying
Executone's argument based on Totem, which is that the instant
case also involves an arbitration award far in excess of the
amount actually sought by the aggrieved party. Executone's
assertion that the shareholders received some eight times the
$148,000 in damages they requested with respect to the Stewart
Title transaction is disingenuous. The shareholders sought a
$148,000 adjustment in the calculation of Isoetec's 1989 pre-tax
profits, not $148,000 in damages; application of the multiplier
called for in the purchase agreement would have had a substantial
inflationary effect on the actual award had the shareholders
prevailed. Thus, Executone's argument that the $1,187,000 award
18

to the shareholders was eight times the amount sought by them is
fallacious. Additionally, Executone ignores the financial stakes
represented by the Stewart Title accounting issue, which was
whether Isoetec was entitled to record $295,000 in 1989 profits
from the Stewart Title transaction. Had the arbitrator resolved
this issue against Executone, the arbitration award in favor of
the former Isoetec shareholders would closely resemble the actual
award. It is clear to us that the arbitrator's award was, in
terms of size, well within the parameters envisioned by the
parties.
The same facts that support our conclusion that the Stewart
Title issue decided by the arbitrator was actually submitted also
support the conclusion that the issue was arbitrable. It is
well-settled that the arbitrator's jurisdiction is defined by
both the contract containing the arbitration clause and the
submission agreement. Piggly Wiggly Operators' Warehouse, Inc.
v. Piggly Wiggly Operators' Warehouse Indep. Truck Drivers Union,
Local No. 1, 611 F.2d 580, 583-84 (5th Cir. 1980). If the
parties go beyond their promise to arbitrate and actually submit
an issue to the arbitrator, we look both to the contract and to
the scope of the submissions to the arbitrator to determine the
arbitrator's authority. Id. at 584; see also United Food and
Commercial Workers, Local Union No. 7R v. Safeway Stores, Inc.,
889 F.2d 940, 946 (10th Cir. 1989); Sun Ship, Inc. v. Matson
Navig. Co., 785 F.2d 59, 62 (3d Cir. 1986). Thus, the parties
may agree to arbitration of disputes that they were not
19

contractually compelled to submit to arbitration. Dorado Beach
Hotel Corp. v. Union de Trabajadores de la Industria Gastronomica
de Puerto Rico Local 610, 959 F.2d 2, 4 (1st Cir. 1992); Piggly
Wiggly, 611 F.2d at 584. As we have already concluded, the
parties agreed to allow the arbitrator to decide the issue of
"Alleged loss of contracts due to equipment shortages and
deficiencies." Because the parties agreed to submission of this
broad issue to the arbitrator, it is irrelevant to our decision
whether Executone might have properly objected to submission of
the issue on the grounds of non-arbitrability. Piggly Wiggly,
611 F.2d at 584-85.
In summary, the district court ordered the parties to submit
all issues to the arbitrator for final resolution. Before the
arbitration commenced, the arbitrator sent the parties a summary
of the issues it would decide and advised the parties that one of
the issues to be arbitrated was Isoetec's alleged loss of
contracts due to deficiencies in Executone's equipment.
Executone has cited nothing in record to show that it responded
to the summary in any way to disabuse the arbitrator of its view
of the issues to be decided. The arbitrator's notice was broad
enough to include the issue of the "loss" of the Stewart Title -
Houston contract due to faulty equipment and software. Although
we are not free from doubt regarding the arbitrator's
interpretation of the scope of its mandate, "we resolve all
doubts in favor of arbitration." Valentine Sugars, 981 F.2d at
213. We conclude that the issue decided by the arbitrator was
20

sufficiently submitted by the parties and therefore decline to
reverse the arbitrator's interpretation of the scope of the
Stewart Title issue.
2. Did the Award "Draw Its Essence"
From the Parties' Contract?
The other strand of Executone's argument that we should
reverse the arbitrator's award is the contention that the award
does not "draw its essence" from the contracts between the
parties. Before analyzing this claim it is worth quoting in full
the rationale given by the arbitrator for the award of $1,187,000
in damages to the former Isoetec shareholders:
Issue 3
Alleged loss of contracts due to equipment deficiencies
Dispute Resolver's decision - Damages are awarded to
the former shareholders of Isoetec in the amount of
$1,187,000.
Rationale - The claim is a breach of warranty claim
related to the functionality of the hardware and
software provided by EXECUTONE. Section 7(A) of the
Distributor Agreement addresses the warranties of
EXECUTONE. Section 7(A) states "EXECUTONE's obligation
under this warranty shall be limited to repair or
replace any part(s) or Software which may prove
defective under normal and proper use and service for
the Warranty Period. []EXECUTONE shall not be
responsible for any labor costs incurred by Distributor
during the Warranty Period." Section 7(A) further
states "IN NO EVENT SHALL EXECUTONE BE LIABLE FOR
SPECIAL OR CONSEQUENTIAL DAMAGES..." The testimony and
supporting documents produced at the September 13, 1991
evidentiary hearing support[] a finding that the
hardware and/or software did not function properly and
that EXECUTONE approved the design of the system prior
to installation; therefore, Isoetec has a valid breach
of warranty claim. The testimony further supports a
finding that the equipment would still be in use but
for the functionality problems. The damage amount
therefore is equivalent to the impact on the purchase
price of not having this sale completed under its
terms. Additional lost profits and labor costs are not
recoverable under this claim.
21

In its letter to Executone's counsel after the award had been
made, the arbitrator offered the following additional
explanation:
[T]he damage amount of $1,187,000 in our report is the
calculated result under the Purchase Agreement of the
$295,000 reduction in income related to the Stewart Title -
Houston contract, and represents the economic damage to
Isoetec of EXECUTONE's actions; it does not represent lost
profits or damages under the Distributor Agreement. The
calculation of this amount is based upon the provisions of
the Purchase Agreement. We believe this damage calculation
is appropriate for the following reasons: 1) the Purchase
Agreement was the agreement under which this dispute
resolution process arose, and 2) the special nature of the
environment which the Purchase Agreement created causes
certain actions taken by the parties to the Agreement to
have an economic impact beyond that which would have existed
outside this environment.
Executone contends that the award does not "draw its essence"
from the parties' contracts and that we must therefore vacate the
arbitrator's award of damages.
a. The "Essence" Test
We first turn to the case law to flesh out our standard of
review, the rather metaphysical "essence" test. The test dates
back to the Supreme Court's decision in United Steelworkers v.
Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960), in which
the Court stated that an arbitrator's award "is legitimate only
so long as it draws its essence from the collective bargaining
agreement." See also United Paperworkers Int'l Union v. Misco,
Inc., 484 U.S. 29, 38 (1987) ("[A]s long as the arbitrator is
even arguably construing or applying the contract and acting
within the scope of his authority, that a court is convinced he
committed serious error does not suffice to overturn his
22

decision."). As might be expected, the cases applying Enterprise
Wheel have arisen largely in the labor relations context, in
which arbitration is prevalent, but we have also applied the
"essence" test in other cases involving the review of arbitration
awards. E.g., Anderman/Smith, 918 F.2d at 1216-17; Totem, 607
F.2d at 650.
A leading case from this circuit applying the "essence" test
is Brotherhood of R.R. Trainmen v. Central of Ga. Ry., 415 F.2d
403, 412 (5th Cir. 1969), cert. denied, 396 U.S. 1008 (1970), in
which we stated that an arbitration award "must have a basis that
is at least rationally inferable, if not obviously drawn, from
the letter or purpose of the collective bargaining agreement. . .
. [T]he award must, in some logical way, be derived from the
wording or purpose of the contract." Phrased another way, the
question is whether the arbitrator's award "was so unfounded in
reason and fact, so unconnected with the wording and purpose of
the collective bargaining agreement as to 'manifest an infidelity
to the obligation of an arbitrator.'" Id. at 415 (quoting
Enterprise Wheel, 363 U.S. at 597). We also indicated that the
arbitrator's selection of a particular remedy is given even more
deference than his reading of the underlying contract, stating
that the remedy lies beyond the arbitrator's jurisdiction only if
"there is no rational way to explain the remedy handed down by
the arbitrator as a logical means of furthering the aims of the
contract." Id. at 412. In making our "essence" inquiry, we are
23

not limited to the arbitrator's explanations for his award; as we
stated in Anderman/Smith,
this Court does not review the language used by, or the
reasoning of, the arbitrators in determining whether their
award draws its essence from the contract. This Court looks
only to the result reached. The single question is whether
the award, however arrived at, is rationally inferable from
the contract.
918 F.2d at 1219 n.3.
Given our expansive reading of the "essence" test, it is not
surprising that we have frequently upheld arbitration awards
against challenges on this ground. For instance, we have upheld
an arbitrator's award of back pay despite the fact that the
underlying collective bargaining agreement neither permitted nor
precluded such a remedy. Minute Maid Co. v. Citrus Workers,
Local 444, 331 F.2d 280, 281 (5th Cir. 1964). In Amalgamated
Meat Cutters of N. Am., Dist. Local No. 540 v. Neuhoff Bros.
Packers, Inc., 481 F.2d 817, 819 (5th Cir. 1973), we enforced an
arbitrator's award reinstating employees accused of theft and
held that it was permissible for the arbitrator to require the
employer to prove the employees guilty beyond a reasonable doubt.
In United Steelworkers of Am. v. United States Gypsum Co., 492
F.2d 713, 728-32 (5th Cir.), cert. denied, 419 U.S. 998 (1974),
we enforced an arbitrator's award, agreeing that it was within
the arbitrator's power to find that an employer had breached a
promise to negotiate a wage increase and to award the employees
what the arbitrator believed would have been gained through
negotiations.
24

These cases may be contrasted with those in which we have
vacated arbitration awards. We have held that an arbitrator may
not invalidate the very agreement from which he derives his
power. International Ladies' Garment Workers' Union v. Ashland
Indus., Inc., 488 F.2d 641, 643-44 (5th Cir.), cert. denied, 419
U.S. 840 (1974). We have also held that "arbitral action
contrary to express contractual provisions will not be respected"
on judicial review. Delta Queen Steamboat Co. v. District 2
Marine Eng'rs Beneficial Ass'n, 889 F.2d 599, 604 (5th Cir.
1989), cert. denied, 498 U.S. 853 (1990); see also Misco, 484
U.S. at 38 ("The arbitrator may not ignore the plain language of
the contract . . . ."). Thus, if a collective bargaining
agreement permits an employer to discharge an employee for
"proper cause," and the arbitrator expressly or implicitly finds
that proper cause existed, we will vacate the arbitrator's
inconsistent reinstatement award. Delta Queen, 889 F.2d at 604;
Container Prods., Inc. v. United Steelworkers of Am., Local 5651,
873 F.2d 818, 819-20 (5th Cir. 1989).
b. The Particulars of the Purchase Agreement
Having determined that we must uphold the arbitrator's award
if the arbitrator's award was drawn "from the letter or the
purpose" of the underlying contract, Brotherhood of R.R.
Trainmen, 415 F.2d at 412, we turn to the particulars of the
Executone-Isoetec purchase agreement. As we have already seen,
the parties agreed in mid-1989 that Executone would buy either
all of Isoetec's stock or all of Isoetec's assets at the
25

beginning of 1990. The parties further agreed that the purchase
price to be paid by Executone would be based on Isoetec's
adjusted pre-tax profits for 1989. To ensure that Isoetec's 1989
records accurately reflected its profits for the year, the
parties agreed that Isoetec would procure an audit from BDO
Seidman and Executone would provide for a subsequent review from
Arthur Andersen. From this, it is clear that a predominate
purpose of the parties in drafting the purchase agreement was to
make sure that the Isoetec purchase price fairly reflected
Isoetec's 1989 profits. Indeed, Isoetec specifically agreed to
operate normally during 1989 "and not manage the business simply
to artificially increase 1989 earnings." In sum, the parties
agreed to accept a purchase price for Isoetec based on a
"snapshot" view of Isoetec's 1989 earnings, and specifically of
Isoetec's 1989 adjusted pre-tax profits, as of December 31,
1989.2
Although the parties contemplated that the audit and review
process would extend into 1990, they also contemplated that the
change of ownership of Isoetec would occur no later than January
1, 1990. The purchase agreement states, "The Isoetec Purchase
2 The purchase agreement provided, in part, as follows:
An interim Isoetec Purchase Price will be computed in
accordance with the provisions of Exhibit B [to the purchase
agreement] on the basis of unaudited financial statements of
Isoetec Texas as of and for the year ending December 31,
1989 . . ., for the purpose of the Closing. Within 21 days
of receipt by Executone of BDO Seidman's audit of the
financial statements of Isoetec Texas as of and for the year
ending December 31, 1989 ("the 1989 Audit") . . . , a final
Isoetec Purchase Price will be computed . . . .
26

shall be effective, at Executone's option, as of either September
30, 1989 or January 1, 1990." In transactions of this kind, it
is typical for the buyer to take over the operations of the
purchased company immediately or shortly after the closing
balance sheet date, even though the preparation of the year-end
financial statements and the audit are still in progress and the
calculation of the final purchase price cannot yet be done.
Under generally accepted accounting principles, however, events
occurring subsequent to the end of the relevant year can have a
substantial impact on a company's profitability for that year;
the failure subsequent to year end of a sale apparently completed
during the year is just one example of this kind of event.
Frequently, if not inevitably, the buyer is presented with
opportunities to depress the purchase price by conducting the
business of the acquired company in such a way as to diminish the
company's profitability for the previous year.
This situation may well have occurred in the instant case.
We know from the arbitrator that the Stewart Title - Houston
transaction, scheduled for completion, and considered by the
Isoetec shareholders and their auditor to have been completed,
during 1989, was rescinded by Stewart Title after the end of
1989. Indeed, the arbitrator's resolution of the accounting
issues reflects that the return of the equipment by Stewart Title
after year end was the cause of the accounting adjustment to
Isoetec's pre-tax profits for 1989 that eliminated the $295,000
in profits from the Stewart Title transaction that had been
27

recorded by Isoetec and approved by Isoetec's auditor.3 We do
not know (because the testimony before the arbitrator was not
transcribed) what actions, if any, Executone, as the manager of
the business after 1989, took to resist that rescission or to
remedy the problems perceived by Stewart Title. We do know that
the dynamics of the purchase agreement could well have provided
Executone with an incentive not to resist the rescission and
thereby to reduce Isoetec's profitability in 1989 in order to
reduce the final Isoetec purchase price. The purchase agreement
contains no provision that would allow Executone to operate
Isoetec after 1989 in such a way as to manipulate the purchase
price adversely to the interests of the former Isoetec
shareholders (nor would we expect the former Isoetec shareholders
3 The arbitrator's report on the accounting issues gave the
following rationale for disallowing the $295,000 profit from the
Stewart Title transaction:
Dispute Resolver's decision - A decrease in income before
income tax expense and extraordinary item by $295,000 is to
be recognized.
Rationale - The Dispute Resolver believes that the right of
return does not preclude the recognition of a sale when all
of the requirements of FAS No. 48 are met. However, the
removal of the equipment by Stewart Title subsequent to year
end evidenced that revenue recognition was not appropriate
during the year ended December 31, 1989. In this case, the
amount of future returns could be reasonably estimated based
on facts which arose subsequent to year end but before the
issuance of financial statements.
The Delivery and Installation Certificate dated September
29, 1989 made the ultimate sale contingent upon the
completion of additional phases in accordance with
definitive timetables. Due to the passage of time (the
inventory still has not been returned), the inventory should
be valued in accordance with Exhibit D of the Agreement
which requires that used inventory be valued at 25% of cost.
28

to agree to such a provision), nor does the purchase agreement
contain any provision precluding those shareholders from
recovering in the event that any such manipulation took place.
Further, under the peculiar circumstances of this case,
Executone in its capacity as the purchaser of Isoetec's business
also had the opportunity before the close of 1989 to manipulate
the purchase price of the Isoetec business adversely to the
interests of the Isoetec shareholders. Through 1989 Executone
continued to perform as Isoetec's supplier of equipment. We know
from the arbitrator's report on the accounting issues, see supra
note 3, that in September 1989 (which was four months after the
date originally scheduled for completion of Isoetec's contract
with Stewart Title), Isoetec and Stewart Title agreed upon a
timetable for correction of the deficiencies that Stewart Title
perceived in the Executone equipment delivered by Isoetec under
that contract. We also know that the Isoetec shareholders'
response to Executone's submitted issues alleged that Stewart
Title ultimately removed the system "because EXECUTONE delayed in
delivering [] additional hardware and software." From these two
pieces of information in the record, it is clearly possible that
the arbitrator concluded that Executone in its capacity as
purchaser of the Isoetec business delayed during late 1989 in
delivering the hardware and software necessary for Isoetec
successfully to complete the Stewart Title contract, thereby
reducing the amount that Executone would be required to pay for
Isoetec's business. Again, the purchase agreement contained no
29

provision that would allow Executone to delay supplying Isoetec
with the necessary hardware and software to complete the Stewart
Title contract so as to manipulate the purchase price adversely
to the interests of the Isoetec shareholders, nor does that
agreement preclude the shareholders from recovering in the event
that any such manipulation took place.
c. Application of the "Essence" Test
We now turn to the arbitrator's award of damages to the
former Isoetec shareholders to see if its essence is rationally
inferable from the letter or purpose of the agreement described
in the preceding section. The arbitrator first explained that
the damages award was based on a "breach of warranty" by
Executone, a rationale that Executone attacks as contrary to the
disclaimers and limited warranties made by Executone in the
distributor agreement. In its subsequent letter to Executone,
the arbitrator explained that the award of damages had been made
under the purchase agreement, not under the distributor
agreement, and that the "special nature of the environment"
created by the purchase agreement contributed to the arbitrator's
decision. Taking the arbitrator's awards and explanations as a
whole, it appears that the arbitrator believed (1) that as a
matter of generally accepted accounting principles, the Isoetec
shareholders were not entitled to record the sale to Stewart
Title as 1989 earnings in view of the fact that the sale
effectively washed out after the end of 1989 while the audit was
in progress, but (2) that furthering the intent of the parties as
30

expressed in the purchase agreement required Executone to bear
the post-December 31, 1989 loss of the Stewart Title sale because
Executone, in its capacity as the purchaser of Isoetec's
business, was responsible for that loss.
We conclude that the arbitrator's award did draw its essence
from the purchase agreement executed by Executone, Isoetec, and
the Isoetec shareholders because it is rationally inferable from
the parties' central purpose in drafting the agreementSQwhich was
to reach a purchase price based on a fair calculation of
Isoetec's adjusted pre-tax profits for the year ended on December
31, 1989SQand because the award is not contrary to express terms
of the parties' agreement. Executone contends that the award is
contrary to releases executed by the parties and to its
disclaimers and limited warranties made in the distributor
agreement. We find each of these contentions insufficient to
justify overturning the arbitrator's award.
First, Executone relies on a release agreement executed by
the parties and attached to the purchase agreement as Exhibit A.
In this document, Isoetec and its shareholders executed a broad
release of Executone from liability "by reason of any matter,
cause, information, or thing whatsoever from the beginning of the
world to the Effective Date of this Release [June 5, 1989]."
Executone argues that this release shields Executone from any
liability for damages arising out of the Stewart Title
transaction because the contract of sale between Stewart Title
and Isoetec had already been executed (in March 1989) when the
31

release was executed. The former Isoetec shareholders respond
that this release was executed long before the critical events
leading to the Stewart Title dispute occurred and so could not
have encompassed damages arising out of those events. They also
contend that Executone unsuccessfully presented this argument to
the arbitrator, although we of course cannot verify this because
we have no transcription of the arbitration proceedings.
Executone also relies on similar releases executed by Isoetec's
shareholders individually in early 1990 as barring the
arbitrator's award.
The argument based on the individual releases executed by
the Isoetec shareholders can be easily disposed of; those
releases do not release claims arising out of the purchase
agreement, and the arbitrator could certainly have rationally
concluded that this claim arose out of that agreement. Nor do we
believe that the release incorporated into the purchase agreement
itself was so crystalline as to bar the damages award made by the
arbitrator. The arbitrator may well have interpreted the release
agreement not to apply to disputes (such as the Stewart Title
dispute) arising out of events occurring predominately after the
execution of the release. Even if this is a case in which the
arbitrator may have read the contract differently than we would
have read itSQa conclusion we could not reach in the absence of a
clear picture of the facts presented to the arbitratorSQwe cannot
say that the arbitrator ignored plain contractual language en
route to its final decision. See Misco, 484 U.S. at 38 ("The
32

arbitrator may not ignore the plain language of the contract; but
the parties having authorized the arbitrator to give meaning to
the language of the agreement, a court should not reject an award
on the ground that the arbitrator misread the contract."). The
cases cited by Executone concerning an arbitrator's lack of
authority to contravene a settlement reached by an employer and
an aggrieved employee after a dispute has arisen but prior to
arbitration, Ohio Edison Co. v. Ohio Edison Joint Council, 947
F.2d 786 (6th Cir. 1991), and Northwest Airlines, Inc. v.
International Ass'n of Machinists, Air Transp. Dist. Lodge # 143,
894 F.2d 998 (8th Cir. 1990), are not on point.
Executone also contends that the arbitrator ran afoul of the
express disclaimers of liability and limitations of warranty
included by Executone in the distributor agreement. In that
agreement, Executone made certain warranties with respect to the
products, spare parts, and software that it was to supply to
Isoetec under the distributor agreement and limited its
obligation under the warranties "to repair or replace" defective
parts or software. Executone also excluded all other warranties,
express or implied.
Based on the limited record before us, we must conclude that
the arbitrator was "arguably construing or applying the
contract[s]," Misco, 484 U.S. at 38, when it made its award,
despite the limited warranties made by Executone. In the first
place, as the arbitrator observed, the limited warranties were
made by Executone in the distributor agreement rather than in the
33

purchase agreement. We have already seen that the purchase
agreement could have changed the dynamics of the Executone-
Isoetec relationship and ended their coinciding interests in
seeing Isoetec perform profitably in 1989. The arbitrator may
have reasonably concluded that the limitations of liability
dictated by Executone should not be given the same strict
interpretation in the new environment created by the purchase
agreement as it would in a normal supplier-distributor situation.
Although the purchase agreement admittedly did not include a
covenant by Executone not to take actions solely for the purpose
of deflating the Isoetec purchase priceSQthe contract is silent
on that pointSQthe arbitrator could reasonably have interpreted
the contract not to allow overreaching by Executone in the
absence of a clause whereby the owners of Isoetec expressly
agreed to run such a risk. That the arbitrator refused to read a
standard "repair and replace" limited warranty in a distributor
agreement as such an extreme cession of rights by the Isoetec
shareholders under the purchase agreement is hardly surprising.
Additionally, factual bases may have emerged during the course of
the arbitration for overriding the limited warranties. See TEX.
BUS. & COM. CODE ANN. � 2.719(b) (Tex. UCC) (Vernon 1968) ("Where
circumstances cause an exclusive or limited remedy to fail of its
essential purpose, remedy may be had as provided in this
title.").
We conclude that the arbitrator's award did not contradict
express contractual terms. Our inability to hold that the
34

arbitrator undoubtedly exceeded its authority requires us to
resolve our doubt in favor of the arbitration. Valentine Sugars,
981 F.2d at 213. Indeed, it appears to us that the arbitrator
was faithful to the central purpose of the purchase agreement,
which was to provide to the Isoetec shareholders a fair purchase
price for the Isoetec business. Certainly, at a minimum, the
award was rationally inferable from the parties' agreements.
We AFFIRM the district court's confirmation of the
arbitration award.
B. THE APPEAL BY THE FORMER SHAREHOLDERS OF ISOETEC
The former shareholders of Isoetec raise several issues for
our consideration.
1. Prejudgment Interest and Costs
First, the former shareholders of Isoetec argue that the
district court erred in denying them recovery of costs and
prejudgment interest on the amount awarded to them by the
arbitrator. According to the former shareholders, Texas law has
long recognized that prevailing parties are entitled to recover
prejudgment interest as a matter of law. In their view, they
received a net judgment for some $1,925,000 despite Executone's
contention that it owed nothing to the former shareholders. They
seek interest at the Texas prejudgment interest rate of 10%,
accruing from January 1, 1990, the date Executone was to have
purchased Isoetec. In response, Executone relies on the
arbitrator's conclusion that Executone was the prevailing party
35

and claims that the district court enjoyed broad discretion in
deciding whether prejudgment interest is appropriate.
Texas law governs the award of prejudgment interest on the
arbitrator's award. See Schlobohm v. Pepperidge Farm, Inc., 806
F.2d 578, 583-84 (5th Cir. 1986) (applying Texas law in reviewing
a district court's award of prejudgment interest on an
arbitration award); see also Moses H. Cone Memorial Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983) (noting that
the Arbitration Act "creates a body of federal substantive law
establishing and regulating the duty to honor an agreement to
arbitrate, yet it does not create any independent federal-
question jurisdiction"); Northrop Corp. v. Triad Int'l Marketing
S.A., 842 F.2d 1154, 1155 (9th Cir. 1988) (applying state law "to
the determination of prejudgment interest in a diversity suit
under the Federal Arbitration Act"). Under Texas law, prevailing
parties receive prejudgment interest as a matter of course.
Richter, S.A. v. Bank of Am. Nat'l Trust and Sav. Ass'n, 939 F.2d
1176, 1197 (5th Cir. 1991). An arbitration award bears interest
in the same manner as a judgment of a court of last resort in
Texas. Kermacy v. First Unitarian Church, 361 S.W.2d 734, 735-36
(Tex. Civ. App.SQAustin 1962, writ ref'd n.r.e.).
We find nothing in the cases to suggest that prejudgment
interest is appropriately awarded only to parties who prevail to
the full extent of the relief they have sought. The award of
prejudgment interest is "based on the equitable grounds that an
injured party should be made whole." Matthews v. DeSoto, 721
36

S.W.2d 286, 287 (Tex. 1986). This policy is advanced by awarding
prejudgment interest to a party who has received part of the
relief he has sought no less than by making the award in cases in
which the party prevails completely. Thus, the arbitrator's
statement that Executone was the prevailing party should have no
bearing on the prejudgment interest question. This is the
approach we implicitly took in Schlobohm, in which we affirmed an
award of prejudgment interest to a party who received an
arbitration award of roughly half the amount he requested.
Schlobohm, 806 F.2d at 579, 583-84.
Executone argues that it was within the district court's
discretion to refuse to award prejudgment interest to the former
Isoetec shareholders. The Texas Supreme Court has made clear
that the award of prejudgment interest, although equitable in
nature, is not generally a matter for the trial court's
discretion. Matthews, 721 S.W.2d at 287; see also Concorde
Limousines, Inc. v. Moloney Coachbuilders, Inc., 835 F.2d 541,
549 (5th Cir. 1987) ("We read Cavnar[ v. Quality Control Parking,
Inc., 696 S.W.2d 549 (Tex. 1985),] and Matthews as creating a
regime in which equitable prejudgment interest is awarded as a
matter of course when the trier of fact finds that damages
accrued before the time of judgment."). We have recognized,
however, that the district courts can make an exception to this
general rule if they "cannot address through other means any
equitable concerns that favor the defendant," even to the point
of eliminating the award of interest entirely. Concorde
37

Limousines, 835 F.2d at 549. If the district court denies
prejudgment interest without explanation, our appropriate course
is to remand the issue so that the court may either explain the
exceptional circumstances warranting the denial of interest or
award interest at the appropriate rate. Id. at 549-50; American
Int'l Trading Corp. v. Petroleos Mexicanos, 835 F.2d 536, 540-41
(5th Cir. 1987); see also Richter, 939 F.2d at 1197-98 (affirming
the denial of prejudgment interest for the reasons given by the
district court).
We conclude that remand is necessary in the instant case.
It is tempting to conclude simply that the former shareholders of
Isoetec are foreclosed from receiving prejudgment interest
because it was denied them by the arbitrator. See Schlobohm, 806
at 584 ("This is not a case in which the parties have submitted
their entire dispute to arbitration, thus arguably preventing the
district court from modifying the award by adding pre-award
interest."). It does not appear to us, however, that the issue
of prejudgment interest was presented to the arbitrator; indeed,
the arbitrator was not even requested to perform the final
calculation of the Isoetec purchase price, but rather only to
rule on various claims with respect to Isoetec's 1989 profits.
It was left to the district court to perform the final
calculation. The court, we note, concluded that the final
purchase price under the arbitrator's decision was $1,351,208,
and that Executone was entitled to a credit of $48,579 for
overpayment plus interest from April 1, 1990. Interest on the
38

former Isoetec shareholders' $1,187,000 damages award was denied
as not "appropriate" without further explanation.
Discerning no reason for the dissimilar treatment of the
parties, we must VACATE the district court's denial of
prejudgment interest to the former shareholders of Isoetec and
REMAND for further proceedings on the matter. We intimate no
views on the merits of whether the former Isoetec shareholders
are entitled to prejudgment interest.
As for the district court's decision to tax all costs of
court to the parties incurring the same, we have recognized that
the lower courts have wide discretion in this determination and
that reversal is warranted only upon a clear showing of abuse of
discretion. Sidag Aktiengesellschaft v. Smoked Foods Prods. Co.,
854 F.2d 799, 801-02 (5th Cir. 1988). The former Isoetec
shareholders have not made the requisite showing, so we AFFIRM
the award of costs.
2. Attorneys' Fees
The former Isoetec shareholders next argue that the district
court erred in failing to award them their attorneys' fees
incurred since the date of the arbitration award in their attempt
to enforce that award. For support they rely on our decision in
International Ass'n of Machinists, Dist. 776 v. Texas Steel Co.,
639 F.2d 279, 283 (5th Cir. Unit A Mar. 1981), in which we held
that a district court's refusal to award attorneys' fees to a
union for seeking judicial enforcement of an arbitration award
should be reviewed for abuse of discretion. In Texas Steel we
39

reversed the district court's denial of attorneys' fees, holding
that the employer's grounds for challenging the arbitration award
were "without merit" and that its refusal to abide by the
arbitration award on the grounds raised was "without
justification." Id. at 284; see also Amalgamated Meat Cutters of
N. Am., Local Union 540 v. Great W. Food Co., 712 F.2d 122, 125
(5th Cir. 1983) ("A party to an arbitral award is not entitled to
the attorneys' fees it incurs in enforcing that award unless the
noncomplying party's refusal to abide by the award was 'without
justification.'"). See generally John B. Spitzer, Annotation,
Labor Arbitration: Recoverability of Attorneys' Fees in Action to
Compel Arbitration or to Enforce or Vacate Award, 80 A.L.R. FED.
302 (1986). Under the circumstances presented in Texas Steel, we
concluded that the denial of attorneys' fees was an abuse of
discretion. 639 F.2d at 284. Because Executone's challenge of
the arbitration award, unlike that of the employer in Texas
Steel, goes to the question of the arbitrator's authority, and
because Executone's position is not a frivolous one, we find no
abuse of discretion by the district court in the instant case.
The former Isoetec shareholders argue in the alternative
that they are entitled to recover their attorneys' fees under the
terms of the purchase agreement itself. The agreement provided,
in pertinent part, "The prevailing party in any litigation,
arbitration, or other proceedings arising out of this Purchase
Agreement shall be reimbursed for all reasonable costs and
expenses incurred in such proceedings, including reasonable
40

attorneys' fees." Plainly all of the parties emerged from
arbitration with less than they had hoped to receive. The
arbitrator concluded that Executone was the "prevailing party."
We find no error in the district court's implicit agreement with
the arbitrator that the former Isoetec shareholders were not
"prevailing parties" entitled to attorneys' fees and so AFFIRM
the denial of fees.
3. The Award of Executone Stock
The district court's final judgment ordered the former
Isoetec shareholders to exchange the 246,619 shares of Executone
stock that they had previously received for 383,399 new shares of
Executone stock under the terms of the purchase agreement. The
former Isoetec shareholders now contend that the district court
should not have awarded them the Executone stock but rather
should have awarded them the cash value of that stock as it
existed in 1990, $912,489. Further discussion of the terms of
the purchase agreement is necessary to unravel this argument.
The purchase agreement allowed Executone to pay part of the
purchase price for Isoetec with Executone stock. At the February
1990 closing, it appears that Executone opted to pay some
$912,000 of the interim purchase price with Executone stock. At
the time, the stock was worth $3.70 per share on the national
stock exchange, so the Isoetec shareholders now defendants in
this suit received 246,619 shares. The purchase agreement also
provided that the number of shares would be adjusted at the time
the final Isoetec purchase price was determined to reflect the
41

value of Executone stock after the public announcement of
Executone's 1989 year-end earnings and thereby to maintain the
value of the consideration. According to the former Isoetec
shareholders, this provision entitled them to receive another
136,780 shares in May of 1990, to reflect a drop in the price of
Executone stock. The purchase agreement also required Executone
to register the stock paid to the Isoetec shareholders with the
SEC; Executone asserts that it did file the required registration
form and concedes that the registration never became effective,
but Executone alleges that this failure was due to the misconduct
of the Isoetec shareholders in procuring the audit. The lack of
registration has apparently prevented the former Isoetec
shareholders from selling their Executone stock.
As we have noted, the arbitrator did not compute the final
Isoetec purchase price or address the issue of how the final
purchase price should be paid to the former Isoetec shareholders.
The district court, therefore, could not simply enforce the
arbitrator's award but rather was required to enforce the
parties' contracts consistently with the arbitrator's award.
After the arbitrator's award was released, the former Isoetec
shareholders moved for summary judgment requesting judgment to be
rendered in their favor in cash; Executone's cross-motion for
summary judgment contended that the number of shares it had
issued to the former Isoetec shareholders would have to be
adjusted, but only so that identical percentages of the final
purchase price and the interim purchase price would be
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represented by Executone stock and using the relevant 1990 stock
prices as references. The relevant portion of the purchase
agreement provides as follows:
The number of shares of Restricted Stock issued at Closing
(the "Estimated Restricted Stock") shall also be adjusted
[upon calculation of the final Isoetec purchase price] as
necessary to reflect the change in the average closing price
used to calculate the number of shares of Restricted Stock
issued at Closing from the average closing price over the 20
trading days immediately prior to Closing . . . to the
average closing price of Executone's publicly-traded common
stock, par value $.01 per share, over the 20 trading days
that occur after the public announcement of Executone's . .
. 1989 year-end earnings . . . . If the number of shares of
Restricted Stock is to be adjusted upward, Executone shall
promptly issue new certificates in the aggregate amount of
such increase, in the names of the holders of the Estimated
Restricted Stock.
From our review of the record is apparent that the district
court accepted the position advanced by Executone's counsel at
the oral argument regarding the parties' post-arbitration summary
judgment motions. According to the presentation made by
Executone's counsel, Executone's 1989 year-end earnings were
announced in March 1990, followed by a drop in the value of
Executone's stock to an average of $2.38 over the next twenty
days. The district court used this $2.38 figure in ordering
Executone to issue 383,399 shares of stock to the former Isoetec
shareholders in exchange for the 246,619 shares previously issued
(246,619 shares at $3.70 per share is equivalent in value to
383,399 shares at $2.38 per share). The final judgment thus
seems to conform to the plain language of the purchase agreement.
According to the former Isoetec shareholders, however, this
forced exchange of Executone stock is inadequate to put them in
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the same position as if the contract had been carried out because
the Executone stock is now worth much less than it was in May of
1990. See Reynolds Metal Co. v. Westinghouse Elec. Corp., 758
F.2d 1073, 1079 (5th Cir. 1985) ("[T]he rules for contract
damages are intended to place the victim of the breach in the
same position he would have occupied had the breach not
occurred."). The former shareholders also assert that all the
parties contemplated that the former Isoetec shareholders would
sell their Executone stock as soon as possible after Executone
registered the stock in 1990.
Executone responds that the former shareholders are making
an equitable argument that they are in no position to assert. In
Executone's view, the Isoetec shareholders knew that the purchase
agreement expressly provided that the Executone stock delivered
at the interim closing could not be sold, and they also knew that
they would not receive transferable Executone stock until the
final purchase price had been calculated. Executone contends
that it was the shareholders who are to blame for the long delay
in calculation of the final purchase priceSQbecause they
overstated Isoetec's 1989 earnings and because they delayed the
arbitration and forced Executone to file suit. Executone also
contends that the former shareholders' complaints about
Executone's delay in registering its stock with the SEC is an
exercise in misdirection. In Executone's view, its initial
failure to register the stock was Isoetec's fault because Isoetec
delayed in providing Executone with the 1989 audit report;
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Executone asserts in its brief that it has now complied with the
district court's order requiring Executone to deposit the stock
with the district court and to file a registration statement.
The district court's order with respect to the Executone
stock is, in our view, in harmony with the relevant provisions of
the purchase agreement. Finding no error, we AFFIRM that portion
of the final judgment.
4. The SAR Holders
The former Isoetec shareholders raise one other issue.
Certain Isoetec employees held stock appreciation rights ("SARs")
in Isoetec that entitled them to receive cash for their SARs upon
the sale of Isoetec. Executone entered into an agreement
(apparently at the time of the February 1990 closing) with the
SAR holders whereby the SAR holders agreed that they would accept
some Executone stock in lieu of cash upon the sale of Isoetec to
Executone. According to Executone, the SAR holders received
Executone stock worth a total of $290,001, plus $190,834 in cash.
The district court's final judgment stated as follows:
It is further ORDERED that upon entry of this Judgment the
defendants, representing the former shareholders of Isoetec
Texas, Inc., surrender to Executone the non-negotiable
promissory notes and convertible promissory notes issued by
Executone to the former shareholders of Isoetec on February
6, 1990, and any stock appreciation rights they received in
Executone stock.
(emphasis added).
The former Isoetec shareholders claim that the district
court erred in requiring the SAR holders to surrender the
Executone stock they received in lieu of their SAR cash payments.
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In their view, the SAR stock "has no relation to the purchase
price stock and constitutes no part of this suit" because
"Executone has requested no relief" from the SAR agreement. The
former shareholders also complain that this portion of the
judgment below affects persons not parties to this suit, but as
Executone points out, the part of the judgment complained of
orders only the "defendants, representing the former shareholders
of Isoetec . . . [to] surrender to Executone . . . any stock
appreciation rights they received in Executone stock" (emphasis
added). Thus, the order was directed only to the parties before
the court.
Executone responds that its agreement with the SAR holders
provided that the stock issued to them would be returned to
Executone, revalued, and reissued once the final purchase price
was determined. Executone also points out that the shareholders
themselves filed a brief with the district court requesting the
court to recalculate the amounts due the SAR holders as part of
its final judgment. The former shareholders respond that the
sole purpose of the recalculation was to ensure an accurate
calculation of the purchase price because the SARs were included
on Isoetec's income statement as an expense.
We review the record to determine when issues regarding the
rights of the SAR holders were raised in the district court. It
appears that the parties proposed final Isoetec purchase prices
to the district court in their post-arbitration motions for
summary judgment, each purportedly based on the arbitrator's
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decision. Executone contended that the final Isoetec purchase
price should be $1,093,921. The former Isoetec shareholders
filed a response to Executone's motion in which they argued that
Executone's figure was incorrect; part of their argument was that
Executone's calculation assumed that the value of the SAR
holders' rights remained $480,844, as originally calculated, and
that the SAR holders' rights should actually be devalued to
$202,500 under the terms of the arbitrator's award. In a
subsequent response to Executone, the former shareholders again
contended that the value of the SAR holders' rights had to be
reduced in order to calculate the final purchase price. Attached
to that response is a copy of the agreement drawn up to deal with
the rights of the SAR holders. According to this agreement, the
SAR holders were divided into three classes, and Executone was to
pay the members of each class cash or Executone stock in
satisfaction of the SAR holders' rights. The amounts of cash and
stock paid by Executone were to "be adjusted in the same manner
as the consideration received by the Shareholders pursuant to the
Purchase Agreement, if at all."
After the district court entered its order granting the
former Isoetec shareholders' summary judgment motion and denying
that of Executone, the former shareholders filed a proposed final
judgment that did not mention the SAR holders. Executone filed
an objection, complaining that the proposed final judgment
ignored the recalculation of the SAR holders' rights that the
former shareholders had earlier called for and arguing that "any
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person receiving benefits of this judgment should have to tender
their stock appreciation rights. Otherwise, they will be
afforded a double recovery." The former Isoetec shareholders
responded that Executone was claiming "[f]or the first time in
this case" a right to offset for the impact of the arbitrator's
decision on the SARs. The former shareholders acknowledged that
the arbitration award reduced Isoetec's liability for SARs and
thus increased Isoetec's income, but they contended that
Executone's claim for any overpayment to the SAR holders had
never been an issue in the case. They concluded that "Executone
has agreements with the SAR holders (of whom only Ed White is a
party here), which agreements cover any reduction in the amount
of the SARs and how such reduction would be handled, and those
matters are best left to those agreements." The district court
then entered the final judgment, including the passage quoted
supra about which the former shareholders now complain.
Executone explains the district court's decision as follows.
At the closing, the SAR holders received $290,001 worth of
Executone stock and $190,834 in cash. In their calculation of
the final purchase price, the former Isoetec shareholders
themselves represented to the court that the SARs were worth only
$202,500. Thus, argues Executone, the court acted properly in
ordering the SAR holders (or at least the one before the court,
defendant White) to return the stock that they had received for
their SARs. The problem with this logic, of course, is that the
district court's order leaves the SAR holders as a group with
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even less than the $202,500 that the former Isoetec shareholders
argued that the SAR holders were entitled to receive.
We find ourselves unable to pass on the merits of the former
shareholders' argument and must remand for further proceedings.
Executone's own argument in support of the district court's order
implies that the SAR holders are entitled to receive new
Executone stock to reflect the final purchase price, in
accordance with the provisions of the purchase agreement. The
district court gave no explanation for divesting the SAR holders
of the Executone stock that they had received for their SARs. We
must therefore VACATE the portion of the district court's final
judgment ordering the defendants to surrender to Executone any
stock appreciation rights they had received in Executone stock
and REMAND this issue for clarification. Once again, we intimate
no views whatsoever on the proper outcome.
IV. CONCLUSION
We VACATE and REMAND the portion of the final judgment
requiring the defendants to surrender any stock appreciation
rights they received in Executone stock. We also VACATE the
district court's denial of the defendants' request for
prejudgment interest, and we REMAND for further proceedings
consistent with this opinion. The remainder of the district
court's judgment is AFFIRMED.
49