Fifth Circuit: You Should Not Be Allowed a Second Bite at the Apple Through Arbitration

The United States Court of Appeals for the Fifth Circuit held that a party waived its right to arbitrate by waiting one year after the suit was filed before seeking to compel arbitration.

In Petroleum Pipe Americas Co., v. Jindal Saw Ltd., (No. 08-20461) (5th. Cir. July 9, 2009) Defendant Jindal Saw Ltd. (“Jindal”) is an Indian manufacturer of pipelines and plaintiff Petroleum Pipe Americas Corp. (“PPA”) is a Texas corporation whose affiliate regularly purchases pipelines from Jindal since 2004. Those purchase orders do not contain an arbitration clause. In 2006, the parties resolved a dispute over allegedly defective pipelines (P110 pipe) with a Settlement Agreement, which includes the following clause:

The parties agree to have the dispute if any to have the same arbitrated [sic] than litigated. All disputes arising in connection with the present contract shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by a Sole Arbitrator . . . . The law governing the contract and the arbitration procedure shall be English law. The place of arbitration shall be London.

On May 30, 2007, PPA sued Jindal in state court for breach of contract and breach of warranty based on allegedly defective pipelines L80 and N80, but not any of the P110 pipe. Jindal removed promptly to federal court, filed an answer and counterclaimed for: (1) breach of the Settlement Agreement and purchase orders, (2) unjust enrichment or restitution for the amount Jindal paid to PPA under the Settlement Agreement, (3) promissory estoppel, and (4) money had and received. The court encouraged settlement of the dispute, and over the next several months, the district court held a series of off-record conferences with the parties.

However, on May 29, 2008, ten days after the last conference and a year after PPA had sued, Jindal moved to compel arbitration. PPA resisted the order and argued that (1) the the claims did not fall within the scope of the Settlement Agreement and (2) Jindal waived its right to arbitrate by substantially invoking the judicial process. The district court denied the motion to compel arbitration and Jindal now appeals.

The Fifth Circuit now decides whether Jindal has waived its right to arbitrate. First, the court pointed out that a court finds waiver “when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party.” The court then cited three factors to consider in the finding of prejudice:

(1) whether discovery occurred relating to arbitrable claims;

(2) the time and expense incurred in defending against a motion for summary judgment; and

(3) a party’s failure to timely assert its right to arbitrate.

After discussing the arguments presented by the parties, the court held that “Jindal substantially invoked the judicial processby waiting to move to arbitrate until the district court’s pronouncements in the May 19 conference and that PPA was prejudiced thereby.” Accordingly, the court affirmed the district court’s judgment to stay arbitration and compel arbitration.

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