Court May Appoint Arbitrator under FAA and New York Convention Any Time There Is a “Mechanical Breakdown” in the Arbitrator Selection Process unless an Integral Forum Selection Clause Has Failed
BP Exploration Libya Ltd. v. ExxonMobil Libya Ltd., 2012 U.S. App. LEXIS 15706 (5th Cir. July 30,2012):
BP Exploration Libya Limited ("BP"), ExxonMobil Libya Limited ("Exxon"), and Noble North Africa Limited ("Noble") are entangled in a disagreement over the appointment of arbitrators to hear and decide their dispute related to the alleged breach of an assignment agreement. The case arises from an underlying dispute implicating the interests of these three parties, under an agreement to arbitrate that seems designed for a two-party dispute. Notwithstanding that the parties agreed to arbitrate before three arbitrators, the district court, in an effort to fit the arbitration agreement to the dispute at hand, ordered the parties to proceed to arbitration before five arbitrators: three party-appointed arbitrators, who then would choose two neutral arbitrators. If the party-appointed arbitrators could not agree, the district court ordered the parties to petition the Secretary-General of the Permanent Court at The Hague (the "PCA") for appointment of the two neutral arbitrators. Now on appeal, we hold that there was a lapse in the naming of arbitrators in the parties' agreement, that the district court was authorized to exercise appointment power under 9 U.S.C. § 5, and that the district court erred in deviating from the parties' express agreement to arbitrate before a three-member panel. ***
On March 31, 2009, Noble and Exxon entered into and executed a Drilling Services Agreement ("Drilling Agreement"). Noble agreed to provide offshore drilling contractor services to Exxon, specifically the use of Noble's semi-submersible drilling rig, the Noble Homer Ferrington (the "Rig"), to drill certain deepwater oil wells for Exxon in the waters off of Libya. On March 3, 2010, Exxon and BP entered into an Assignment Agreement, wherein Exxon agreed to assign, and BP agreed to assume, the Drilling Agreement for the time necessary for BP to drill two deepwater oil wells in those Libyan waters. The Assignment Agreement required Noble, who consented to the assignment, to maintain the Rig according to the safety and operational standards provided in the Drilling Agreement. Under the terms of the Assignment Agreement, BP agreed to take possession of the Rig and assume Exxon's obligations no later than June 1, 2010.
In anticipation of acceptance, BP conducted an inspection of the Rig in late April 2010. BP found several problems that implicated the Drilling Agreement's safety and operational requirements. BP orally and in writing informed Exxon of its concerns and requested that Exxon address the problems to BP's satisfaction before BP accepted assignment of the Rig and Drilling Agreement. Noble also was informed of the problems in a detailed report. ***
BP conducted additional inspections of the Rig that summer, but remained unsatisfied with the Rig's condition and so informed Exxon after the final inspection in late July. Exxon responded on August 2, informing BP that it should continue working with Noble to resolve the issues, consistent with the Rig's assignment to BP as of June 30, 2010. That same day, Exxon informed Noble by letter that BP was responsible for paying Noble for its services from June 30, 2010 until the end of the Assignment Period. In response, BP informed Exxon that Noble should not send invoices to BP because assignment of the Rig had yet to occur, and until BP was satisfied that the Rig complied with the Drilling Agreement's requirements, BP disclaimed any contractual relationship with Noble. By subsequent letter dated August 16, 2010, BP informed Exxon and Noble that, because the two parties had materially breached the Assignment Agreement, it was exercising its right to terminate the agreement. BP's letter, moreover, disclaimed any obligation to pay either party under the agreement.
The Drilling Agreement and Assignment Agreement contain arbitration provisions that govern any disputes arising out of the respective agreements. But the Assignment Agreement's arbitration provision, found in Section 33, contemplated two different arbitration scenarios: arbitration over a dispute between Exxon and BP; and arbitration over any dispute to which Noble was a party. Specifically, in the Assignment Agreement, the parties agreed:
Any difference arising out of or in connection with the terms of the Assignment Agreement (regardless of the nature of the question or dispute) shall as far as possible be settled amicably. Failing an amicable settlement within (3) three months of the written notification by one party to the other of a difference, or such longer period as the parties may agree, any dispute or difference arising out of [sic] relating to this Assignment Agreement shall be referred to arbitration before three (3) arbitrators in accordance with the International Arbitration Rules of the American Arbitration Association. Each Party shall appoint one (1) arbitrator. The two (2) arbitrators so appointed shall appoint the third arbitrator, who shall chair the arbitral tribunal. . . .
For avoidance of doubt, the parties agree that the dispute resolution mechanism in this section 3 shall apply only to disputes between [Exxon] and [BP] and that any disputes to which [Noble] is a party shall be governed by the language contained in Sections 18.1 and 18.2 of the [Drilling] Agreement which are incorporated by reference herein and made a part hereof for such purpose as though set out in full herein.
Section 18.1 of the Drilling Agreement simply provides that the "General Maritime Law of the United States" shall govern the validity of the Drilling Agreement and all matters pertaining thereto. *** Section 18.2 of the Drilling Agreement *** states in relevant part: "Any dispute arising out of, or in connection with, this contract shall be finally settled by arbitration under the rules of the Arbitration and Conciliation Act 1990, by three (3) arbitrators appointed in accordance with such rules . . . ." Thus, for any dispute to which Noble was a party arising out of the Assignment Agreement, BP and Exxon and Noble agreed to arbitrate before three arbitrators appointed in accordance with the rules of the Arbitration and Conciliation Act 1990 ("ACA").
Incorporated as part of the Laws of the Federation of Nigeria, the ACA is based on the 1985 UNCITRAL1 Model Law on International Commercial Arbitration, and the 1976 UNCITRAL Arbitration Rules ("1976 UNCITRAL Rules"). The ACA consists of four Parts and three Schedules. Part I relates to arbitration, in general; Part II relates to conciliation; Part III contains additional provisions relating to international commercial arbitration and conciliation; and Part IV contains miscellaneous provisions. Schedule 1 to the ACA contains the "Arbitration Rules" (hereinafter, the "ACA Rules"), which are, for the most part, similar to Parts I and III of the ACA. Because Section 18.2 refers to the "rules" of the ACA, the provisions related to arbitrator appointment found in the ACA Rules, not the ACA itself, control our analysis. In the event of a conflict between the ACA and ACA Rules, however, the provisions of the ACA control.
The procedure to appoint arbitrators where the parties' arbitration agreement calls for three arbitrators is found in Articles 7(1)-(3) of the ACA Rules. Article 7(1) states: "If three arbitrators are to be appointed, each party shall appoint one arbitrator; and the two arbitrators thus appointed shall choose the third arbitrator." Once the first party has appointed its arbitrator, the respondent party has thirty days to appoint its arbitrator; the two arbitrators then have thirty days to appoint the third arbitrator. "If within thirty days after the receipt of a party's notification of the appointment of an arbitrator the other party has not notified the first party of the arbitrator he has appointed," Article 7(2) states that "the first party may request the court to appoint the second arbitrator." And, "[i]f within thirty days after the appointment of the second arbitrator the two arbitrators have not agreed on the choice of the presiding arbitrator," then Article 7(3) states that "the presiding arbitrator shall be appointed by the court in the same way as a sole arbitrator would be appointed under Article 6." For purposes of Article 7, the ACA defines "court" as "the High Court of a State, the High Court of a Federal Capital Territory, Abuja or the Federal High Court." The ACA, however, as alluded to above, has similar sections related to arbitrator appointment, the main substantive difference being that, if an arbitrator is to be appointed, the "appointing authority," instead of the "court," shall appoint the necessary arbitrator(s) to comprise the tripartite panel. "[A]ppointing authority" is defined as the "Secretary-General of the Permanent Court of Arbitral at The Hague." ***
With Exxon taking the position that BP was responsible for paying Noble under the terms of the Assignment Agreement and BP disclaiming any such obligation, Noble was left with no party paying the rate to which it believed it was entitled under the agreements. Accordingly, on August 27, 2010, as "a party" to a dispute arising out of the Assignment Agreement, Noble served an arbitration demand on BP and Exxon, maintaining that one or both of them was responsible for payment and seeking damages related to their alleged breach of the agreements. By its notice of demand, Noble also designated its arbitrator, Daryl Bristow, in accordance with Article 7(1) of the ACA Rules.
Almost immediately, BP and Exxon, as co-respondents to Noble's demand, realized the arbitrator appointment procedure set forth in Article 7 appeared unworkable for a dispute among three parties. The respondent party is to select the second arbitrator under Article 7(1) — would that fall to Exxon, BP, or both; if both BP and Exxon designated an arbitrator, then there would be three arbitrators, but no neutral arbitrator to preside over the panel. Resisting any suggestion of joint appointment of the second arbitrator, BP and Exxon began negotiating with Noble to reach agreement on an alternative selection procedure. Noble, for some unknown reason, decided not to petition the "court" or "appointing authority" for appointment of the second arbitrator under Article 7(2), but that appears irrelevant as BP and Exxon disavowed any idea that they should be considered one "party" under Article 7 and were determined to appoint their own arbitrators to represent their interests on any arbitral panel.
On October 22, 2010, however, during a point where negotiations appeared to have irretrievably broken down, BP filed suit in federal district court in Houston, Texas under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (the "New York Convention"), 21 U.S.T. 2517, 330 U.N.T.S, as implemented by the FAA, 9 U.S.C. §§ 201, et seq., seeking judicial intervention in the parties' arbitrator appointment process pursuant to 9 U.S.C. § 5. Section 5 directs the district court to follow any method provided in the agreement for naming or appointing an arbitrator(s) or umpire, but
if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.
9 U.S.C. § 5. Reserving all rights and objections to the arbitrator appointment procedure specified in the ACA Rules, BP also designated its arbitrator, David Caron. In November, Exxon designated its arbitrator, the Honorable Robert M. Parker. ***
The FAA provides that "[a]n appeal may be taken from . . . a final decision with respect to an arbitration that is subject to this title." 9 U.S.C. § 16(a)(3); see also Amgen, Inc. v. Kidney Ctr. of Delaware Cnty., Ltd., 95 F.3d 562, 565 (7th Cir. 1996) ("[Section] 16 also includes a provision that affects orders issued under the FAA when the arbitration has nothing to do with any litigation."). "Section 16(a)(3) [ ] preserves immediate appeal of any 'final decision with respect to an arbitration,' regardless of whether the decision is favorable or hostile to arbitration." Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 86 (2000). The FAA does not define the term "final decision," but the Supreme Court has held the term should be afforded the "well-developed and longstanding meaning" in 28 U.S.C. § 1291 — that is, a decision that "'ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.'" Id. (quoting Catlin v. United States, 324 U.S. 229, 233 (1945)); see also Brown, 462 F.3d at 391 (same); Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 482 (5th Cir. 2002) (same). And although "[t]he FAA [ ] permit[s] parties to arbitration agreements to bring a separate proceeding in a district court to enter judgment on an arbitration award once it is made (or to vacate or modify it), [ ] the existence of that remedy does not vitiate the finality of the [d]istrict [c]ourt's resolution" of a "final decision with respect to an arbitration." Id.
In this case, no party challenges the notion that their underlying dispute is subject to binding arbitration per the agreements. *** The district court's order therefore ended the litigation on the merits and is a "final order with respect to an arbitration" under 9 U.S.C. § 16(a)(3), over which we exercise jurisdiction to review. See Brown, 462 F.3d at 391 ("In this case, the district court granted the sole remedy sought by the plaintiffs in the Federal Actions--an order compelling arbitration."); Stop & Shop Supermarket Co. LLC v. United Food & Commercial Workers Union Local 342, 246 F. App'x 7, 9-10 (2d Cir. 2007) (reviewing merits of district court order under § 5 appointing replacement arbitrator where plaintiff filed action in federal district court requesting judicial intervention to determine appropriate arbitrator under parties' agreement); Nat'l Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462, 464-66 (8th Cir. 2003) (reviewing merits of district court order appointing replacement arbitrator where plaintiff filed suit in federal district court under 9 U.S.C. § 5 seeking only a court-appointed replacement after arbitrator resigned during the arbitral proceedings); Amgen, 95 F.3d at 567 (holding that district court order under 9 U.S.C. § 7 issuing a summons and compelling compliance with the summons to aid ongoing arbitral proceedings was appealable under § 16(a)(3) as a "final decision" because the order "disposed of all the issues before [the district court], and [the order] provided the sole relief requested, even though [the district court] did retain jurisdiction over the case"); Manze v. State Farm Ins. Co., 817 F.2d 1062, 1067 (3d Cir. 1987) (holding that an order appointing a neutral arbitrator is final and appealable under 28 U.S.C. § 1291 where it represents the full relief sought and "will not in the normal course of procedure be followed by another judicial order which will be required to carry the arbitration award into effect" (internal quotation marks and emphasis omitted)); cf. Saturn Distrib. Corp. v. Paramount Saturn, Ltd., 326 F.3d 684, 686 (5th Cir. 2003) (holding that order compelling arbitration, which arose out of independent proceedings, was a "final decision" under Green Tree). ***
"Consistent with this statutory scheme of promoting the resolution of commercial disputes through arbitration rather than litigation, the FAA expressly favors the selection of arbitrators by parties rather than courts." Shell Oil Co. v. CO2 Comm., Inc., 589 F.3d 1105, 1109 (10th Cir. 2009). But Congress recognized that judicial intervention may be required in certain circumstances "to 'move the parties to an arbitrable dispute out of the court and into arbitration as quickly and easily as possible.'" Gulf Guar., 304 F.3d at 489 (quoting Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 22 (1983)). Hence, as part of the "very limited" jurisdiction granted to the courts under the FAA to intervene in the arbitral process before an award, 9 U.S.C. § 5 authorizes a court to intervene "to select an arbitrator upon application of a party," in three instances: (1) if the arbitration agreement does not provide a method for selecting arbitrators; (2) if the arbitration agreement provides a method for selecting arbitrators but any party to the agreement has failed to follow that method; or (3) if there is "a lapse in the naming of an arbitrator or arbitrators." Id. at 486, 490 (internal quotation marks and emphasis omitted). The statute thus illustrates congressional intent to "facilitat[e] arbitration when impasse in selection" of arbitrators has occurred, but "contemplates that the parties must follow the contractual procedure for arbitrator selection if such exists." Pac. Reins. Mgmt. Corp. v. Ohio Reins. Corp., 814 F.2d 1324, 1327 (9th Cir. 1987). Courts will not hesitate to vacate an award if arbitrators are not selected pursuant to the method specified in an arbitration agreement. Bulko v. Morgan Stanley DW Inc., 450 F.3d 622, 625 (5th Cir. 2006) (citing cases where award vacated when arbitration panel not appointed in accordance with specified method in contract).
The facts of this case do not implicate the first and third bases for judicial intervention under § 5 because the arbitration agreement did provide a method of selecting arbitrators and the parties availed themselves of that method, notwithstanding that method's inherent problems in this case. The parties appear to concede as much, with the crux of their disagreement over whether there was a "lapse in the naming of an arbitrator or arbitrators or umpire." Exxon and BP argue there was a lapse; Noble strongly disagrees. ***
We agree with Exxon and BP that the arbitrator appointment process specified in Section 18.2 of the Drilling Agreement to which the parties agreed to be bound in Section 33 of the Assignment Agreement has reached a "mechanical breakdown" or lapse, thereby authorizing the district court to intervene under § 5. We define "lapse," for purposes of 9 U.S.C. § 5, to "mean[ ] 'a lapse in time in the naming of the' arbitrator or in the filling of a vacancy on a panel of arbitrators, or some other mechanical breakdown in the arbitrator selection process.'" In re Salomon Shareholders' Derivative Litig., 68 F.3d 554, 560 (2d Cir. 1995) (citing Pac. Reins., 814 F.2d at 1327). In Pacific Reinsurance, for example, the Ninth Circuit held that the district court acted within its authority under § 5 in designating an arbitrator, even though seven of the parties' twelve contracts contained an appointment method, where the parties' deadlock over whether that method should apply to the other five contracts resulted in a lapse in the naming of the "umpire" arbitrator. Pac. Reins., 814 F.2d at 1327-28. And in Stop & Shop Supermarket, 246 F. App'x at 11, each party to the arbitration agreement had selected an arbitrator, which the other party then refused to recognize as legitimate under the parties' arbitration agreement. The Second Circuit affirmed the district court's appointment of an arbitrator under § 5 because the parties' deadlock in naming arbitrators resulted in a lapse. Id.
Footnote 7. The "lapse" here in the naming of arbitrators is different from the situation where the arbitration agreement contains a forum selection clause, and subsequent to execution of the parties' arbitration agreement, the forum becomes "unavailable" for some reason. In such a situation, we have held that a district court may not appoint substitute arbitrators and compel arbitration in another forum under 9 U.S.C. § 5, thereby "circumvent[ing] the parties' designation of an exclusive arbitration forum," if "the choice of that forum 'is an integral part of the agreement to arbitrate, rather than an ancillary logistical concern.'" Ranzy v. Tijerina, 393 F. App'x 174, 176 (5th Cir. 2010) (quoting Brown v. ITT Consumer Fin. Corp., 211 F.3d 1217, 1222 (11th Cir. 2000)); Nat'l Iranian Oil Co. v. Ashland Oil, Inc., 817 F.2d 326, 333-34 (5th Cir. 1987); see also In re Salomon Shareholders' Derivative Litig., 68 F.3d 554, 561 (2d Cir. 1995) (same).
The parties in this case too have reached an impenetrable deadlock over the appointment of arbitrators to hear their dispute. ***
Our conclusion that there has been a lapse in the naming of arbitrators under the terms of the parties' arbitration agreement is supported by the general understanding that the 1976 UNCITRAL Rules, upon which the ACA Rules are modeled, do not address how a panel of three arbitrators is to be selected in multi-party disputes. The 1976 UNCITRAL Rules were amended in 2010. During the revision process, the UNCITRAL Working Group noted that "Articles 6 to 8"--which correspond to Article 7 of the ACA Rules--"deal with the appointment of arbitrators, but they do not include provisions dealing with appointment of arbitrators in multi-party cases." UNCITRAL, Working Group II (Arbitration), Forty-fifth Session, Vienna, 11-15 Sept. 2006, U.N. Doc. A/CN.9/WG.II/WP.143 (¶¶45, 47); see also UNCITRAL, Working Group II (Arbitration), Fortieth Session, Vienna, 25 June-12 July 2007, U.N. Doc. A/CN.9/614 (¶62) ("[A]rticles 6 to 8, which dealt with the appointment of arbitrators, did not include provisions dealing with appointment of arbitrators in multiparty cases."). Pursuant to the Working Group's recommendations, the drafters of the 2010 UNCITRAL Rules added Articles 10(1) and 10(3), provisions which are relevant to this case. Article 10(1) provides that "where three arbitrators are to be appointed and there are multiple parties as claimant or as respondent, unless the parties have agreed to another method of appointment of arbitrators, the multiple parties jointly, whether as claimant or respondent, shall appoint an arbitrator." But "in the event of any failure to constitute the arbitral tribunal under these Rules," Article 10(3) states that "the appointing authority shall, at the request of any party, constitute the arbitral tribunal and, in doing so, may revoke any appointment already made and appoint or reappoint each of the arbitrators and designate one of them as the presiding arbitrator." Notwithstanding Noble's argument to the contrary, these amendments confirm our conclusion that, in this case, Article 7 of the ACA Rules does not provide a method to resolve the lapse in the naming of three arbitrators.
Footnote 8. Although these two provisions appear to point directly to the resolution of this case, these rules are model rules of the UNCITRAL that have not been incorporated as part of the ACA; indeed, the 2010 UNCITRAL Rules post-date the ACA Rules by more than twenty years. Accordingly, they do not control our analysis.
***Despite the parties' clear agreement to arbitrate this particular dispute before three arbitrators, the district court ordered arbitration before five arbitrators: the three-party appointed arbitrators, and two neutral arbitrators to be chosen unanimously by the three party-appointed arbitrators, or, in the event of their disagreement, by the PCA. Noble argues the district court was authorized to "designate and appoint" the arbitrators affected by the lapse, subject to the proviso in § 5 that "unless otherwise provided in the agreement the arbitration shall be by a single arbitrator." 9 U.S.C. § 5. Because the parties' arbitration agreement provided for a three-member arbitral panel, Noble contends the district court violated § 5's plain language limiting the district court's appointment power--as well as the principle that the parties' arbitration agreement should be enforced according to its terms, see Rent-A-Center, 130 S. Ct. at 2776--by ordering arbitration before five arbitrators. ***
We agree with Noble that the district court was limited to appointment of three arbitrators under that portion of 9 U.S.C. § 5 which states: a district court "shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator." 9 U.S.C. § 5 (emphasis added). Although we have not had many occasions to interpret 9 U.S.C. § 5, our narrow reading of the statute's plain language is confirmed by our previous discussion in Gulf Guaranty, where we reasoned that, although § 5 gives the district court authority to select an arbitrator, its express terms do not authorize a court to remove an arbitrator from service. Gulf Guar. 304 F.3d at 490 ("[T]here is no authorization under the FAA's express terms for a [federal district] court to remove an arbitrator from service." (emphasis in original)). Hence, where the parties' agreement provides for three arbitrators, such as here, the district court is limited under § 5 to appointment of three arbitrators. By ordering the parties to proceed to arbitration before a five-member arbitral panel, the district court ignored § 5's plain language (that the district court "shall designate and appoint an arbitrator or arbitrators or umpire . . . ; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator"), thereby discarding the parties' agreement in Section 18.2 to arbitrate before three arbitrators and imposing a condition of arbitration to which none of the parties had agreed.
We thus disagree with BP's suggestion that the district court, in effect, had carte blanche to select any method of appointment and any number of arbitrators it considered appropriate. The fact that the ACA Rules fail to address the specific circumstances here does not mean the district court can ignore the parties' written arbitration agreement; instead, that failure, or lapse, provides the basis for judicial intervention under § 5. BP's argument, furthermore, overlooks the fact that the district court could have appointed three arbitrators itself, with or without party consultation, thereby adhering to the parties' agreement as well as resolving the parties' impasse. Although we appreciate that the district court's solution attempted to embrace the fairness of a tripartite panel when chosen by two parties, the parties' written arbitration agreement is the best evidence of what the parties intended. See Univ. Reins. Corp. v. Allstate Ins. Co., 16 F.3d 125, 129 (7th Cir. 1994). Here, that agreement, embodied by Section 33 of the Assignment Agreement and Section 18.2 of the Drilling Agreement, in explicit and certain terms, provided for arbitration before three arbitrators. This provision should not command less deference from the district court simply because the parties' chosen process of selecting those three arbitrators has failed. See 9 U.S.C. § 2 (written arbitration provisions "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract").
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