Fifth Circuit Decides on Arbitrability of Claims

by Jeremy Clare

The United States Court of Appeals for the Fifth Circuit affirmed the district court’s ruling confirming an arbitration award.

In Petrofac, Inc., v. DynMcDermott Petroleum Operations Company, No. 1-20141 (5th Cir. July 17, 2012), DynMcDermott Petroleum Operations Company (“DM”), which operates the Strategic Petroleum Reserve for the Department of Energy, contracted with Petrofac to design and install a transportable degas plant to service the reserve. DM and Petrofac agreed to enter into binding arbitration for any Request for Equitable Adjustment (“REA”) or contract dispute. In May 2004, Petrofac sent DM a multi-volume REA and asserted that DM disrupted Petrofac’s ability to work and sought damages for differing site conditions, delays, disruption costs, lost productivity, and acceleration costs. In December 2005, Petrofac released DM from some claims, but preserved some specific claims, including the REA “as may be amended or supplemented.” In July 2006, after no resolution could be reached, the parties entered into an agreement to arbitrate the REA and “all claims and disputes between them arising out of or relating to the Subcontract” under the American Arbitration Association’s Construction Industry Arbitration Rules (AAA Rules).

Arbitration

Prior to arbitration, Petrofac provided DM with the “Adams Report” that calculated Petrofac’s damages using a different methodology and reached a higher amount than the original REA. DM objected to the arbitration panel deciding any claims regarding the damages in the Adams Report. The panel dismissed DM’s objection because the arbitration agreement “encompasses all the issues between the parties arising out of this contract.” The panel awarded Petrofac contract damages, damages for a constructive change to the contract, and interest to be paid within thirty days of the award.

District Court

The district court confirmed the award and rejected DM’s argument that the REA and the Adams Report represented different claims. The district court ruled that the arbitration panel did not exceed its authority and the award was not procured through fraud or undue means. The district court also ordered additional prejudgment interest for Petrofac because DM failed to pay the award amount within the thirty day period.

Fifth Circuit

On appeal, the Fifth Circuit Court first considered whether the parties agreed to arbitrate the issue of arbitrability. The Court noted that the parties incorporated the AAA Rules into their arbitration agreement. The rules state that, “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Therefore, the Court held that they agreed to arbitrate arbitrability and upheld the panel’s power to make a determination that the Adam’s Report fell within the agreement to arbitrate.

The Court then considered DM’s contention that Petrofac procured the overtime premium portion of its award through fraud or undue means. Both the arbitration panel and district court rejected DM’s arguments. The Fifth Circuit found no evidence of fraud in the record and agreed with the prior rulings.

DM also argued that the district court committed reversible error by ordering prejudgment interest. The Court noted that “Texas law governs the award of prejudgment interest” and “under Texas law, prevailing parties receive prejudgment interest as a matter of course.” Therefore, DM failed to demonstrate reversible error.

Jeremy Clare is a law clerk at Karl Bayer, Dispute Resolution Expert. Jeremy received his J.D. from the University of Texas School of Law in 2012 and received a B.A. from the University of South Carolina where he studied political science.