Beaumont COA Overturns Jefferson County Order Denying Arbitration in Energy Dispute

The Beaumont Court of Appeals has reversed a Jefferson County district court’s order denying an energy company’s motion to compel arbitration.  In Oxbow Calcining LLC v. Port Arthur Steam Energy, LP, Nos. 09-18-00359-CV and 09-18-00392-CV, (Tex. App. – Beaumont, December 13, 2018), a company that manufactures petroleum calcined coke from petroleum coke, Oxbow, entered into a Heat Energy Agreement (“HEA”) with Port Arthur Steam Energy, L.P. (“PASE”) to route portions of its manufacturing heat waste through PASE’s plant.  PASE would then use the heat to create steam energy and share a portion of the profits with Oxbow. The parties’ contract contained a binding arbitration clause.

In response to reduced demand for calcined coke, Oxbow’s waste heat production diminished and PASE eventually stopped sending profit-sharing payments to the company.  Oxbow initiated arbitration proceedings against PASE and an arbitration panel issued an approximately $3.5 million award in favor of PASE.  PASE then sought to confirm the arbitration award in a Harris County court and Oxbow responded by filing a motion to vacate the award based on purported arbitrator partiality.  Following a lengthy appellate process, the arbitral award was eventually confirmed.

Later, Oxbow further reduced production in an effort to comply with state and federal air quality requirements.  PASE then sent Oxbow a “Notice of Failure to Perform Material Obligations” pursuant to the terms of the parties’ HEA.  After mediation efforts between the two companies failed, Oxbow notified PASE it was suspending its waste heat production indefinitely.

In June, PASE filed a lawsuit in Jefferson County seeking a Turnover Order to assist the company in collecting on its earlier arbitration award.  Oxbow responded to PASE’s petition by filing a motion to transfer venue and a motion to compel arbitration.  The Jefferson County court granted PASE’s request for a Turnover Order and denied both of Oxbow’s motions.  Oxbow then filed an interlocutory appeal with the Ninth District Court of Appeals in Beaumont.

The Beaumont court issued a temporary stay in the case and ordered the Jefferson County court to conduct a Texas Rules of Appellate Procedure Rule 24 hearing.  Following the Rule 24 hearing, the lower court required “Oxbow to post a $2,353,284 bond and an additional $8,979,720 bond if any appeal remains pending on February 15, 2019.”

Next, Oxbow argued on appeal that the district court committed error when it denied the company’s motion to compel arbitration because PASE’s lawsuit was subject to the HEA’s mandatory arbitration provision.  The company also claimed the Rule 24 security ordered by the trial court was excessive and the lower court erred when it issued a Turnover Order.

The Beaumont Court of Appeals first addressed whether “the matters asserted in PASE’s Petition and Application for Post-Judgment Enforcement constitute a dispute not litigated in the prior arbitration.” According to PASE, the company’s lawsuit was filed solely in order to collect on the prior arbitration award.  Oxbow, however, disagreed and argued the parties’ current dispute arose several years after the arbitral award was issued.

The appellate court agreed with Oxbow:

The HEA provides that each dispute of any kind or nature between PASE and Oxbow arising out of or in connection with the HEA, if not resolved within thirty days of the delivery of the required notice, shall be submitted by either party to binding arbitration pursuant to the AAA Commercial Rules, which provide in Rule R-7(a) that the arbitrator has the power to rule on his or her own jurisdiction and on arbitrability of any claim or counterclaim. The HEA, with its broad arbitration clause and incorporation of the AAA Commercial Rules, clearly and unmistakably shows that PASE and Oxbow intended to delegate gateway issues, such as jurisdiction and arbitrability, to the arbitrator. See, e.g., Trafigura Pte. Ltd. v. CNA Metals Ltd., 526 S.W.3d 612, 616-18 (Tex. App.—Houston [14th Dist.] 2017, no pet.) (finding persuasive and applying reasoning of other Texas appellate courts and federal cases holding that express incorporation of the AAA rules constitutes clear and unmistakable evidence of the parties’ intent to delegate issues of arbitrability to the arbitrator); Schlumberger Tech. Corp. v. Baker Hughes Inc., 355 S.W.3d 791, 802-03 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (broad arbitration clause and incorporation of AAA Commercial Arbitration Rules by reference in the arbitration agreement sufficient to show parties intended the arbitrator to decide arbitrability); Saxa Inc. v. DFD Architecture Inc., 312 S.W.3d 224, 229-31 (Tex. App.—Dallas 2010, pet. denied) (broad arbitration clause that explicitly incorporated AAA rules served as clear and unmistakable evidence of parties’ intent to delegate question of arbitrability to arbitrator); Rio Grande Xarin II, Ltd. v. Wolverine Robstown, L.P., Nos. 13-10-00115-CV & 13-10-00116-CV, 2010 Tex. App. LEXIS 5189, at **20-23 (Tex. App.—Corpus Christi July 6, 2010, pet. dism’d) (mem. op.) (not designated for publication) (arbitration clause in earnest money contract stating that arbitration would be conducted “in accordance with the Commercial Arbitration Rules of the American Arbitration Association[]” clearly and unmistakably showed intent that arbitrator determine arbitrability); see also Crawford Prof’l Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 262-63 (5th Cir. 2014); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012) (“We agree with most of our sister circuits that the express adoption of [the AAA] rules presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”) We conclude the trial court abused its discretion when it denied Oxbow’s Motion to Compel Arbitration. Issue one is sustained.

After that, the appellate court held the lower court abused its discretion when it issued a Turnover Order in the case.

Finally, the Ninth District Court of Appeals in Beaumont reversed the Jefferson County court’s order denying Oxbow’s motion to compel the parties’ dispute to arbitration, reversed the lower court’s Turnover Order, and vacated the district court’s Rule 24 Order because no appellate security was required.

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