The Northern District of Texas in Dallas has dismissed a lawsuit challenging the selection of a panel of arbitrators. In AVIC Intern. USA, Inc. et al. v. Tang Energy Group, Ltd. et al., No. 3:14-CV-2815-K (February 5, 2015), AVIC and Thompson (“plaintiffs”) entered into a wind energy joint investment agreement with Tang and four others (“defendants”). The parties’ signed contract contained a provision that required any future disputes to be resolved through binding arbitration. According to the agreement, any arbitral proceedings would be heard by a panel of arbitrators that were selected by each disputing member as well as one or two additional arbitrators who were chosen by the resulting panel.
In June 2014, one of the defendants filed a demand for arbitration with the American Arbitration Association (“AAA”) pursuant to the terms of the joint investment agreement. Next, each party to the contract joined in the dispute and selected an arbitrator. The chosen panel of seven arbitrators then selected two additional neutrals to consider the $2.25 billion dispute.
Prior to the AAA proceeding, the plaintiffs filed a lawsuit in the Northern District of Texas. According to the plaintiffs, the large panel of arbitrators deviated from the alternative dispute resolution provision included in the parties’ contract. The plaintiffs argued that each side of the dispute, rather than each signatory to the contract, should be allowed to collectively select a single arbitrator. As chosen, the plaintiffs claimed the panel was unfairly balanced in favor of the defendants. Because of this, the plaintiffs asked the federal court to reconstitute the arbitral panel.
In response to the plaintiffs’ complaint, the defendants filed a motion to dismiss the case for lack of subject matter jurisdiction. In their motion, the defendants claimed the Texas court lacked jurisdiction to consider the dispute before the arbitral panel issued its award. In addition, the defendants claimed the case at hand did not fall within the narrow scope of situations in which the Federal Arbitration Act (“FAA”) allows a court to intervene in the arbitration process.
First, the Northern District of Texas stated a “court’s jurisdiction to intervene in the arbitration process before an award has been issued is very limited under the Federal Arbitration Act.” The court next said although “judicial intervention may be required in certain circumstances,” the law clearly states “that the parties must adhere to their contractual arbitrator selection procedure if one exists.” Despite this, a court may select an arbitrator:
(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 court added that a lapse normally means “a lapse in time in the naming of the arbitrator or in the filling of a vacancy on a panel of arbitrators, or some other mechanical breakdown in the arbitrator selection process.”
Next, the court turned to the facts of the case before it. According to the Northern District of Texas, the burden of establishing that jurisdiction actually existed was on the plaintiffs. The federal court then said there was no dispute regarding the fact that the parties entered into a valid agreement to arbitrate.
After that, the federal court dismissed the plaintiffs’ argument that a lapse in the arbitral process occurred because they refused to participate in arbitration proceedings before the selected panel. The court then stated the plaintiffs’ claim there was a mechanical breakdown in the arbitrator selection process was without merit since each party to the dispute named an arbitrator without delay.
The Texas court also dismissed the plaintiffs’ assertion that the arbitral process described in the parties’ contract violated their constitutional rights. The court said such a challenge was procedural and “for an arbitrator to decide.” In addition, the federal court stated it had no authority to remove an arbitrator prior to an award under the FAA.
Because the court lacked jurisdiction to entertain the plaintiffs’ challenges before an arbitration award was issued, the Northern District of Texas in Dallas granted the defendants’ motion to dismiss the lawsuit.