BP Exploration Libya Ltd. v. ExxonMobil Libya Ltd. v. Noble N. Afr. Ltd., No. 11-20547 (5th Cir. July 30, 2012)

ExxonMobil Libya Ltd. (“Exxon”) and Noble North Africa Ltd. (“Noble”) had entered into a Drilling Agreement.  Subsequently, Exxon entered into an Assignment Agreement with BP Exploration Libya Ltd. (“BP”), pursuant to which Exxon assigned the Drilling Agreement to BP.  Noble consent to the assignment and was thus a party to the Assignment Agreement. 

Both the Assignment Agreement and the Drilling Agreement contain arbitration provisions.  Unfortunately, the arbitration provisions in both agreements envisioned a two-party dispute, and not a three-party dispute.  More specifically, the Assignment Agreement called for arbitration by three arbitrators pursuant to the International Arbitration Rules of the American Arbitration Association, whereby each party would appoint one arbitrator and those two arbitrators would appoint a third arbitrator to chair the arbitral tribunal.  The Assignment Agreement further provided that if Noble was a party to any dispute arising out of the Assignment Agreement, the arbitration provision of the Drilling Agreement would apply.  That provision provided for arbitration by three arbitrators pursuant to the Arbitration and Conciliation Act of 1990 (“ACA”).  Under Articles 7(1)-(3) of the ACA Rules, each party would appoint one arbitrator and those two arbitrators would appoint a third arbitrator. 

When a dispute arose between the three parties, Noble initiated arbitration proceedings under the ACA.  Pursuant to the ACA Rules, once the first party has appointed is arbitrator, the respondent party has thirty days to appoint its arbitrator; the two arbitrators then have thirty days to appoint the third arbitrator.  If the responding party fails to appoint a second arbitrator within the set time period, the first party may request the court (defined as a court in Nigeria) to appoint the second arbitrator.  Almost immediately after Noble appointed its arbitrator, BP and Exxon, as co-respondents to Noble’s arbitration demand, realized the arbitrator appointment procedure under the ACA would be unworkable for a three-party dispute.   The parties began to negotiate for an alternative arbitrator appointment procedure, but could not reach a resolution.  The thirty-day period for appointing a second arbitrator had lapsed, and Noble did not petition the Nigerian court to appoint the second arbitrator.  With negotiations having broken down, BP filed suit in the federal district court in Houston, seeking judicial intervention in the parties’ arbitrator appointment process under Section 5 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 5.  Section 5 directs the district court to follow any method provided for in the agreement for naming and appointing an arbitrator but if there is a “lapse in the naming of an arbitrator” the court shall name the arbitrator. Section 5 also states that “unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.”

Noble filed a motion to dismiss for failure to state a claim upon which relief may be granted, arguing that there had been no lapse in the process of arbitrator appointment.  Soon thereafter, BP filed a Motion for Final Order under the FAA, proposing four alternative procedures to appoint the arbitrators.  The district court granted BP’s motion for Final Order, holding that each of the three parties should appoint an arbitrator, and that those three arbitrators shall unanimously select two neutral arbitrators and the arbitration shall proceed with a panel of five arbitrators.  The district court thus denied Noble’s motion to dismiss as moot.  Noble appealed. 

On appeal, Noble argued that the district court did not have authority to select the arbitrators since the ACA provided a mechanism for resolving disputes with respect to the arbitration selection process.  Relying on Section 5 of the FAA, however, the Fifth Circuit held there was a lapse in the naming of arbitrators and that the district court did have authority to intervene.  The court defined “lapse” in the Section 5 context as a lapse in time in the naming of an arbitrator or some other mechanical breakdown in the arbitrator selection process.  Because the parties in this case had “reached an impenetrable deadlock over the appointment of arbitrators to hear their dispute,” the Fifth Circuit determined there was a lapse in naming arbitrators and that the district court had authority to intervene.

However, the appellate court determined that the district court had erred in ordering the parties to proceed to arbitration before a panel of five arbitrators.  Section 5 provides for arbitration by a single arbitrator “unless otherwise provided in the agreement,” and here the parties’ agreement provided for three arbitrators.  Accordingly, the Fifth Circuit determined that the district court’s authority under Section 5 was limited to the appointment of three arbitrators.  To hold otherwise would violate the plain language of Section 5 and discard the parties’ agreement by imposing a condition of arbitration to which none of the parties had agreed.  The court noted that “[a]lthough we appreciate that the district court’s solution attempted to embrace the fairness of a tripartite panel when chosen by two parties, the parties’ written arbitration agreement is the best evidence of what the parties intended.”  While Section 5 permits judicial intervention in the event of a lapse in the naming of arbitrators, it is not the province of the court to ignore or rewrite the parties’ arbitration agreement. 

The Fifth Circuit remanded the case with a directive that the district court enter an order appointing three arbitrators, and suggested the district court order the following procedure “as is allowable and workable”: first, BP and Exxon should be required as co-respondents to Noble’s arbitration demand to jointly appoint a second arbitrator; second, if BP and Exxon cannot so agree, the district court shall appoint the second arbitrator; and third, if the two arbitrators cannot agree on a third arbitrator to serve as a neutral member of the arbitral panel, the district court shall appoint the neutral arbitrator.  The Fifth Circuit thus remanded the case back to the district court for further proceedings.