Fifth Circuit Rules on Arbitrator Appointment Process

by Jeremy Clare

The United States Court of Appeals for the Fifth Circuit ruled that the district court exceeded its authority under 9 U.S.C. § 5 by not limiting the number of arbitrators appointed to the number agreed to by the parties in the arbitration agreement.

Background

In BP Exploration Libya Ltd., v. ExxonMobil Libya Ltd., v. Noble North Africa Ltd. No. 11-20547 (5th Cir. July 30, 2012), ExxonMobil Libya (“Exxon”) and Noble North Africa (“Noble”) entered into and executed a Drilling Services Agreement in which Noble agreed to provide offshore drilling services to Exxon for deepwater oil wells. Exxon subsequently entered into an Assignment Agreement with BP Exploration Libya (“BP”) in which Exxon agreed to assign the Drilling Agreement with Noble to BP for the time necessary for BP to drill two deepwater oil wells. BP conducted an inspection of the drilling rig and found several problems. BP requested that Exxon address the issues. Exxon eventually told BP that it should work with Noble to resolve the problems and that the assignment had already occurred. Noble then served an arbitration demand on both BP and Exxon because neither party was paying under the contract. With the notice of demand, Noble also designated its arbitrator.

Arbitration Provisions

Both the Drilling Agreement and Assignment Agreement contain arbitration provisions. The Assignment Agreement specifically addressed two different arbitration scenarios: (1) a dispute between Exxon and BP; and (2) any dispute to which Noble is a party. The provision states, “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 18.2 of the Drilling Agreement states, “[a]ny 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 in which Noble is a party, the parties agreed to arbitrate before three arbitrators appointed according to the Arbitration and Conciliation Act 1990 (“ACA”).

When three arbitrators are to be appointed, the ACA Rules provide that the first party appoints one arbitrator, the respondent party appoints a second arbitrator, and the two arbitrators then have thirty days to appoint the third arbitrator. After Noble served the arbitration demand on both BP and Exxon, it was apparent that the current appointment structure would not work for the dispute. Exxon and BP would not appoint an arbitrator jointly and Noble did not want an alternative selection procedure. All three parties appointed an arbitrator to the dispute. BP ultimately filed suit in federal district court under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (the “New York Convention”).

District Court

BP sought judicial intervention in the arbitrator appoint process pursuant to 9 U.S.C. § 5. Exxon answered BP’s Complaint and agreed with BP that a lapse had occurred in the arbitrator appointment process. Noble filed a Motion to Dismiss and argued that there had been no lapse in the process. Without holding oral argument, the district court granted BP’s motion and ordered the three arbitrators previously selected to select two neutral arbitrators. If they were unable to select two neutral arbitrators within thirty days, the Secretary-General of the Permanent Court of Arbitral at The Hague, the “Appointing Authority” under the ACA Rules. Thus, the district court ordered that the arbitration continue under a five arbitrator panel. Noble appealed the decision.

Fifth Circuit

The Fifth Circuit Court recognized that, under the Federal Arbitration Act (“FAA”), courts have limited jurisdiction to intervene in the arbitral process before an award. 9 U.S.C. § 5 authorizes courts to intervene in three situations: “(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.” The crux of the disagreement was whether there was a “lapse in the naming of an arbitrator or arbitrators.” The Fifth Circuit agreed with Exxon and BP that the arbitrator appointment process reached a mechanical breakdown that authorized the district court to intervene under 9 U.S.C. § 5. The Court reasoned that the breakdown in the process might delay the arbitration indefinitely without judicial intervention, the exact reason Congress enacted § 5. The district court did not err in intervening in the dispute.

The Fifth Circuit also determined whether the district court exercised its authority under § 5 correctly. Under 9 U.S.C. § 5, 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.” The Court concluded that the district court had authority to appoint, at most, three arbitrators, not five, and by ordering the parties to proceed before a five-member panel, the district court ignored § 5’s plain language. The Fifth Circuit ordered the district court, on remand, to enter an order appointing three arbitrators.

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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.