Fifth Circuit Holds Procedural Questions for ICDR to Decide

The United States Court of Appeals for the Fifth Circuit has held that procedural challenges to the selection of an arbitrator in an international dispute must be determined by the International Centre for Dispute Resolution (“ICDR”).  In Adam Technologies International S.A. de C.V. v. Sutherland Global Services, Inc., No. 12-10760, (5th Cir., September 05, 2013), Sutherland Global Services, Inc. (“Sutherland”) sought arbitration in New York with Adam Technologies International S.A. de C.V. (“Adam”) over more than $618,000 in unpaid services that were allegedly due to the company.   Sutherland filed its demand with the American Arbitration Association in pursuant to the parties’ Master Services Agreement (“MSA”).

About three months later, Adam sought to stay the arbitration in a Dallas state court.  According to Adam, the parties did not conduct their transaction using the MSA but instead relied on a letter of intent that contained a different forum selection clause.  Sutherland subsequently removed the case to federal court due to diversity of citizenship where it was determined that the MSA controlled the dispute.  The district court then dismissed the case pending arbitration.  About one month later, Adam filed a motion with the court to alter or amend the judgment.

Three months later, the parties engaged in an unsuccessful mediation before an attorney who previously represented Sutherland in a separate dispute.  Because mediation was not successful and the parties could not agree on a sole arbitrator, the parties each selected an arbitrator to serve on a three member panel.  Sutherland chose an arbitrator and Adam chose the parties’ former mediator.  After the ICDR informed the companies that both arbitrators agreed to serve on the panel, Sutherland challenged Adam’s choice.  Despite that Adam argued the challenge was made too late, the ICDR sustained it and appointed a new arbitrator.  Both arbitrators then selected the third member of the panel and set a hearing date.

Before the hearing date was set, the district court vacated its previous order:

The court held it was not necessary to determine whether Adam had brought suit under an expired agreement, which was the conclusion in the vacated order. Instead, because any doubts over the coverage of an arbitration agreement are to be resolved in favor of arbitration, the court held that it was for an arbitrator to determine which of the parties’ agreements controlled. This left undecided whether the Master Services Agreement superseded the Letter of Intent. Because only the Master Services Agreement provided for arbitration, this amended ruling left for the arbitrator the decision of whether arbitration was required. The amended order did not address what was to occur if the arbitration determined, which it did not, that the Letter of Intent controlled and that arbitration was not the procedure to be followed to resolve the dispute.

Additionally, the district court failed to issue a new judgment.  Adam responded by filing a motion to vacate the judgment and challenged the ICDR’s appointment of an arbitrator on a number of procedural grounds.  The court held that Adam’s challenges “presented procedural questions which were left to the discretion of the ICDR to decide.”  After the district court refused Adam’s request for relief, the company filed an appeal with the Fifth Circuit.  Before the appeal was heard, however, the arbitral panel issued an award in favor of Sutherland and Sutherland filed a motion to confirm in a New York federal court.  The New York case was stayed pending resolution of the Texas case.

First, the Fifth Circuit appeals court addressed Sutherland’s argument that the district court lacked “subject matter jurisdiction over Adam’s post-judgment motion to appoint an arbitrator,” despite that the company invoked diversity jurisdiction in order to remove the case to federal court.  According to the court, “Sutherland’s contention is, in effect, an attack on the procedural method by which Adam sought an appointment of an arbitrator by post-judgment motion instead of an independent action.”  The Fifth Circuit continued,

The judgment dismissing Adam’s initial lawsuit operated, in all practical effect, as the functional equivalent of an order compelling arbitration between these parties. We conclude that ancillary jurisdiction existed to allow the district court later to evaluate whether the dismissal that allowed the dispute to be taken to arbitration was being thwarted. The district court eventually decided it had no role to play, but we find no absence of jurisdiction for making that evaluation and reaching that conclusion.

Next, the Court of Appeals tackled Adam’s assertion that the district court should have appointed an arbitrator after the ICDR sustained Sutherland’s objection to using the parties’ mediator.  The court stated,

Here, there was no mechanical breakdown that required the court’s intervention. Instead, it was Adam’s own noncompliance with the ICDR’s procedural requirements that prompted the ICDR to appoint an arbitrator, an appointment which the ICDR determined was in accordance with its rules. Article 36 of the ICDR Rules states an arbitral tribunal or administrator shall interpret these rules.

The Fifth Circuit next dismissed Adam’s argument that the district court was required to fully evaluate the company’s request to reinstate the former mediator because “the parties’ agreement provided that they should be able to appoint their choice arbitrators; further, Adam argues the agreement imposed no time limit. Adam thus concludes the ICDR did not follow the agreement’s method of appointing arbitrators and the district court was required to intervene.”  According to the Court of Appeals, the “law presumes that ‘procedural questions’ are for an arbitrator to decide.”

Additionally,

Second, at the time Adam challenged the arbitrator-selection process in the Texas district court, three arbitrators were already empaneled, and no arbitration award had yet been made. The court had no statutory authority to reach the merits of Adam’s argument after the arbitration process had proceeded but “prior to issuance of the arbitral award.” Gulf Guar. Life Ins. Co., 304 F.3d at 488, 490; see Brook, 294 F.3d at 673-74.

Adam advances a related argument that the district court was required to appoint an arbitrator, which necessarily implicates Adam’s request in the district court to remove two arbitrators. This circuit has explained, though, the Federal Arbitration Act “does not provide for removal of an arbitrator from service prior to an award, but only for potential vacatur of any award.” Gulf Guar. Life Ins. Co., 304 F.3d at 490. Adam did not, and could not have at the time, move for a vacatur of an award in the district court. Therefore, we cannot conclude the district court erred in denying the motion to appoint an arbitrator based on this argument.

Finally, the Fifth Circuit stated Adam’s objection to the propriety and timing of the former mediator’s dismissal and the ICDR’s selection of a replacement arbitrator by stating,

These contentions amount to procedural challenges, and the language of the parties’ arbitration agreement, as well as the law’s presumption, mandates these issues be resolved by arbitration.

After finding, “[t]he district court denied the motion after determining the challenges to the appointment presented procedural questions to be decided by the International Centre for Dispute Resolution,” the Fifth Circuit Court of Appeals affirmed the district court’s decision.

Only Judge Garza dissented from the Fifth Circuit’s holding by stating,

The district court did not have ancillary jurisdiction over Adam’s motion. A federal court does not automatically retain jurisdiction to hear a motion to enforce a settlement agreement in a case it has previously dismissed.