The Dispute
The dispute arose between BNSF Railway Company ("BNSF") and Level 3 Communications, LLC ("Level 3") in connection with the renewal of a Master Right-of-Way Agreement ("MROW"). The initial term of the agreement was set to expire, with Level 3 having the option to extend it for two renewal periods, subject to negotiation of a new rate. Despite extending the negotiation period multiple times, the parties failed to reach agreement on a new rate. The MROW provided that, should the parties fail to agree on a renewal rate during the negotiation period, an appraisal process would be used to determine a mutually agreeable rate.
Level 3 instead initiated AAA arbitration, alleging BNSF acted in bad faith during negotiations and therefore waived its right to enforce the appraisal process. BNSF moved to dismiss, arguing that (1) any agreement to negotiate in good faith was unenforceable under Texas law, and (2) the appraisal process was a required condition precedent to arbitration. The panel disagreed, stayed the appraisal, found BNSF had not negotiated in good faith, and imposed a previously negotiated rate.
BNSF sought vacatur in the Texas Business Court, arguing that the arbitral panel exceeded its authority when it “replaced a contractually-mandated appraisal process with arbitration.”
After confirming that both the Federal Arbitration Act and the Texas Arbitration Act applied, the Court explained that under both statutes, a court must confirm an arbitration award unless the movant demonstrates grounds for vacatur. In this instance, BNSF argued that the arbitrators exceeded their authority by determining a matter that the relevant agreement did not submit to their judgment.
Substantive vs. Procedural Arbitrability
The Court began by distinguishing between two categories of arbitrability:
- Substantive arbitrability concerns whether the parties agreed to arbitrate a particular dispute, traditionally a judicial determination unless delegated to arbitrators.
- Procedural arbitrability involves whether prerequisites to arbitration (e.g., conditions precedent) have been satisfied, presumptively an issue for the arbitrators to decide.
BNSF raised challenges under both categories.
Substantive Arbitrability
Because the MROW did not otherwise conflict with the AAA Commercial Rules on this point, the Court held that the parties' adoption of the AAA Commercial Rules “removed questions of substantive arbitrability from the hands of the court and placed them squarely in the hands of the arbitrators.” Accordingly, the arbitral panel, and not the court, was empowered to determine whether the renewal‑rate dispute fell within their authority.
Procedural Arbitrability
BNSF alternatively argued that arbitration could not proceed because Level 3 bypassed a required condition precedent: the appraisal process. The Court rejected that argument as well, explaining that procedural arbitrability questions rest with arbitrators unless the contract expressly assigns them to a court. The MROW contained no such language. Because Texas law places these issues within the arbitrator’s purview, the panel acted within its authority.
Key Takeaways
- Incorporating AAA Rules is a delegation clause. As the Court emphasized, adopting the AAA Commercial Rules shifts gateway questions of substantive arbitrability to the arbitrator.
- Contractual appraisal, valuation, or expert determination mechanisms may be superseded. If an arbitrator finds waiver, breach of good faith, or futility, a contractual appraisal process may not control the outcome.
- The Texas Business Court now has statutory jurisdiction over arbitration-related disputes. Amendments to the Business Court statute give it jurisdiction to confirm or vacate arbitration awards and enforce arbitration agreements, provided the underlying dispute falls within its subject‑matter jurisdiction.
/Passle/MediaLibrary/Images/2026-02-13-21-18-43-524-698f9533751df97040693603.png)
/Passle/MediaLibrary/Images/2026-02-13-21-20-42-964-698f95aa99773b21433b42a9.png)
/Passle/6932ed9acb3df5dbeef98cc4/SearchServiceImages/2026-03-13-23-51-47-422-69b4a313bf28f5daedf5dcca.jpg)