Houston Appeals Court Holds U.S. Courts Lack Authority Under Arbitration Agreement

In an interesting case currently on appeal to the Supreme Court of Texas, the Houston [1^st] Court of Appeals vacated a trial court’s order appointing a three-person arbitration panel because the court was not the authority contemplated in the parties’ arbitration agreement.

In In re Aramco Services Co., No. 01-09-00624-CV, (Tex. App. – Houston [1^st], March 19, 2010), DynCorp International, LLC and Aramco entered into a contract for a computer system which was to be manufactured in the U.S. and installed at Aramco’s offices in Saudi Arabia. The contract contained a Saudi “Choice of Law” provision and an arbitration clause which stated:

2. Arbitration

Any dispute, controversy or claim arising out of or relating to this Contract . . . which is not settled by agreement between the parties shall be finally settled in accord with the Arbitration Regulations, Council of Ministers Decision No. 164, dated 21 Jumada II 1403 (“the Regulations”) and the Rules For Implementation of the Arbitration Regulations effective as of 10 Shawal 1405 (“the Rules”) and any amendments to either then in force, by one or more arbitrators appointed in accordance with the Regulations, the Rules and this Contract.

….

Article 10

If the parties have not appointed the arbitrators, or if either of them fails to appoint his arbitrator(s) . . . and there is no special agreement between the parties, the Authority originally competent to hear the dispute shall appoint the required arbitrators upon request of the party who is interested in expediting the arbitration, in the presence of the other party or in his absence after being summoned to a meeting to be held for this purpose. The Authority shall appoint as many arbitrators as are necessary to complete the total number of arbitrators agreed to by the parties; the decision taken in this respect shall be final.

(Emphasis added.)

The Rules for Implementation of the Arbitration Regulations (“the Rules”), also referenced repeatedly in the Contract, are written in Arabic, and they provide, in part:

Article 3

The Arbitrator must be a Saudi national or a Moslem foreigner chosen amongst the members of the liberal professions or other persons. He may also be chosen amongst state officials after agreement of the authority on which he depends. Should there be several arbitrators, the Chairman must know the Shari’a, commercial laws and the customs in force in the Kingdom.

DynCorp filed suit in Houston seeking payment of certain monies pursuant to the contract. Aramco filed a motion to compel arbitration which the trial court granted. DynCorp then filed a motion to compel arbitration before JAMS or the American Arbitration Association. The trial court granted DynCorp’s motion in part and ordered the parties to submit to the court the name, address and qualifications of potential arbitrators and stated,

Further, Plaintiff’s motion to compel, to the extent it asks this Court to determine any procedure for the conduct of the arbitration (language, venue, etc.), the motion is denied, as the Contract does not provide this Court with the authority to resolve the arbitration procedure disputes.

Aramco filed a motion for clarification and reconsideration which was denied by the trial court. After both parties proposed potential arbitrators to the court, Aramco filed an objection because “the arbitrators proposed by DynCorp were unqualified to serve under the Regulations and Rules because they were neither Muslims nor Saudi nationals.” The trial court overruled Aramco’s objections and appointed a three party arbitration panel which consisted of two non-Muslims. Aramco filed a writ of mandamus to the Court of Appeals alleging “the trial court abused its discretion by (1) appointing arbitrators (2) who are not Muslims or Saudi nationals.”

After briefly reviewing the law applicable to contract and arbitration agreement interpretation, the Houston Court stated:

Here, “no party . . . interested in expediting the arbitration” requested that the trial court appoint arbitrators under Article 10 of the Regulations. Even if the request contemplated by Article 10 had been presented to the trial court, the trial court is not the “Authority” empowered to appoint arbitrators. For example, Article 8 of the Regulations provides that the “Secretariat” of the “Authority . . . shall be in charge of all the summons and notices,” and Article 12 of the Rules specifies that notice must be provided in Arabic. Article 9 of the Rules provides that the clerk of the “Authority” will act as “secretary of the arbitral proceedings,” which Article 25 specifies are to be conducted in Arabic. Unrebutted expert testimony accepted into evidence by the trial court suggested that the “Authority” had to be a court of Saudi Arabia. In the face of such evidence and the plain provisions of the Contract, the Rules, and the Regulations, the trial court erred when it concluded that it could act as the “Authority.” In light of our conclusion that the trial court could not be the “Authority” empowered to appoint arbitrators pursuant to the parties’ agreement, we do not reach the question concerning the empanelment of non-Muslim arbitrators.

The Houston Court of Appeals held that the trial court lacked authority to appoint an arbitral panel to decide the parties’ dispute. Because of this, the Appeals Court did not decide whether the trial court abused its discretion when it appointed non-Muslim and non-Saudi nationals to the arbitration panel. The Houston Court conditionally granted Aramco’s writ of mandamus and directed the trial court to vacate its previous orders.

The Houston Court’s holding is not completely surprising as arbitration agreements based on religious precepts or scripture have been upheld in Texas in the past. For example, the Beaumont Court of Appeals recently held in The Woodlands Christian Academy v. Weibust, 09-10-00010-CV, (Tex. App. – Beaumont, October 7, 2010), that an arbitration agreement in an employment contract was valid and enforceable despite that the agreement included biblical scripture aspects and the parties failed to seek biblically based meditation prior to submitting their dispute to arbitration. More about that case here.

In 2005, the 5^th Circuit upheld an arbitral award in an employment dispute in Prescott v. Northlake Christian School, No. 04-31182, unpublished, (5^th Cir. 2005) where,

In reaching his decision, the arbitrator determined that NCS had wrongfully discharged Prescott by failing to follow Biblical precepts, as required in her employment contract; specifically, the conflict resolution process described in Matthew 18.

That case was before the Fifth Circuit for the second time, previously as Prescott v. Northlake Christian School, 369 F. 3d 491 (5^th Cir. 2004).

In Jabri v. Quadra, No. 2-02-415-CV, (Tex. App. – Fort Worth, May 8, 2003), the Court of Appeals held that a “trial court abused its discretion in finding the Arbitration Agreement to be invalid and in denying Appellants’ motions to stay litigation and compel arbitration under the Texas General Arbitration Act.” The arbitration agreement provided in part:

1. The Parties agree to arbitrate all existing issues among them in the above mentioned Cause Numbers in the appropriate District Court, which includes the Divorce Case, the child custody of the [sic] Noor Qaddura and Farah Qaddura, the determination of each party’s responsibilities and duties according to the Islamic rules of law by Texas Islamic Court.

2. All parties agree to sign the Texas Islamic Court required legal forms, and each party pays his required fees.

3. The panel of arbitrators of Texas Islamic Court will be formed according to the rules and regulations of Texas Islamic Court.

Disputing will definitely be watching the Aramco case as it brings up some fascinating legal questions. If the Supreme Court of Texas chooses to hear the case and determines that a U.S. court does in fact have the authority to appoint arbitrators, the next question will be: May a U.S. court appoint only Muslim (or Saudi) arbitrators pursuant to the parties’ agreement? (An interesting analysis of this question may be found at the Volokh Conspiracy.)

What are your thoughts?

Technorati Tags: arbitration, ADR, law