GUEST-POST | Professor Alan Scott Rau Comments on BP v ExxonMobil

by Alan Scott Rau

BP Exploration Libya Limited v. ExxonMobil Libya Limited, et al, No. 11-20547 (5th Cir. July 30, 2012) is a little case that illustrates perfectly the muddle that frequently arises when linked agreements bind multiple parties to resolve through arbitration disputes arising out of related transactions.

It is at least clear here, unlike some cases, that there has to be “one arbitration”—this is in fact what the agreements seem to provide for.

The court concludes that for any dispute in which Noble was a party, all three parties “agreed to arbitrate before three arbitrators appointed in accordance with the rules of the [Nigerian] Arbitration and Conciliation Act 1990.” This does not, surprisingly, mean that the arbitration was to take place in Nigeria under Nigerian law—-in which case it would seem completely inappropriate in the first place for a U.S. court to intervene at all by appointing arbitrators—for the contract, in a section that the court does not even bother to quote, requires the arbitration to take place in Houston. So the U.S. is the “seat,” or “primary jurisdiction.”

Since this case falls under the New York Convention, I suppose that the court would be permitted to appoint arbitrators under section 206 of Chapter Two of the FAA. A necessary move (implicit in the opinion but also never made explicitly by the court) is that resort to section 5 of the “domestic” FAA would not be “in conflict with” the Convention, and so the court could look to the more detailed provisions of section 5 which tells us what is supposed to take place when there is a “lapse” in the naming of the arbitrator.

Now when we get to this point—which is where the opinion begins!—it is clear that there is no perfect solution. As Johnson wrote, the “case is undoubtedly hard, but in political regulations, good cannot be complete, it can only be predominant.”

What are the choices? (a) To take it upon itself to appoint a panel of 5, as the district court did, is sensible but likely to be unwieldy. (b) For the court to name an arbitrator jointly for the two respondents is to deny each of them the right to name an arbitrator, and is troubling where, as here, the alignment between them is completely adversarial—so they don’t each get “their own” arbitrator, while the claimant does. (c) For the court to name all of the members of a three-person panel is, as is well known, a common choice in both institutional and ad hoc (e.g., the new UNCITRAL Rules) arbitrations: It seems the best of those mentioned—but may be unfair (i) where the alignment of the parties is not in fact completely adversarial, on this issue giving rise to procedural jockeying and satellite litigation, and (ii) in all cases denies the claimant his own bargained-for right to appoint “his own” arbitrator.

In any event, the explanation for the Fifth Circuit’s choice of solution “(b)”—-court appointment for the two respondents jointly should they be unable to agree between themselves—does not lie in any instrumental choice as to what seems “the best” solution. It lies instead in the simpler fact that U.S. courts are strongly wedded to the proposition that the agreement must be enforced “as written.” This is in part (i) a function of the language of the statute (shall appoint “in accordance with the provisions of the agreement’), in part (ii) a reflection of the “plain meaning” fallacy, and in part (iii) an attempt to honor the values of party autonomy. A well-known older case, Lipschutz v. Gutwirth, 106 N.E.2d 8 (N.Y. 1952), involved a partnership agreement among three members of a family; the “tripartite” arbitration clause provided that the father and his son would name one arbitrator, and the father’s brother (the son’s uncle) would name a second. The obvious assumption was that the father and son would be on “the same side” in any dispute—-but there was a change of alignment in the partnership not originally contemplated, and the father and uncle brought a proceeding against the son. The court nevertheless held that alternatives (a) and (c) were impermissible—the uncle could not be deprived of “his contractual right” to name an arbitrator—and so the father and son would have to name “their” arbitrator jointly—or have one named for them.

So, there can be no “reformation” of a clause when circumstances not envisaged earlier make the clause “unworkable” or discordant with its original purpose.

The lesson, of course, is that courts and legislators are pretty poor at dealing with problems of this sort: They create challenges to the ingenuity and foresight and drafting ability of counsel—but that after all is where the ultimate responsibility ought to lie anyway.

Alan Scott Rau is the Mark G. and Judy G. Yudof Chair Professor of Law at The University of Texas at Austin School of Law. He received his BA and LLB from Harvard University. Professor Rau teaches and writes in the areas of Contracts and Alternative Dispute Resolution (particularly Arbitration). He is co-author of Processes of Dispute Resolution: The Role of Lawyers (3rd ed., 2002); ADR and Arbitration: Statutes and Commentary (West, 1998), and Cases and Materials on Contracts (West, 2nd ed. 1992), and the author of several articles, including most recently “The Arbitrability Question Itself” (American Review of International Arbitration, 1999); “La Contractualisation de l’Arbitrage: Le Modele Americain” (Revue de l’Arbitrage, 2001), and “All You Need to Know About Separability in Seventeen Simple Propositions” (American Review of International Arbitration, 2003). He serves on the Commercial and International Panels of the American Arbitration Association, and has been a visiting faculty member at the University of Toronto, China University of Political Science and Law in Beijing, Willamette University College of Law, the University of Geneva; and the Universities of Paris-I and Paris-II. Some of Professor Rau’s scholarly papers may be downloaded at the Social Science Research Network.