S.D. Texas Declines to Enjoin Pending Foreign Arbitration Proceeding

The Southern District of Texas has denied an ex parte emergency application for a temporary restraining order which sought to enjoin a pending foreign arbitration proceeding because the party seeking the order failed to meet its burden under Rule 65 of the Federal Rules of Civil Procedure.

In S&T Oil Equipment and Machinery, LTD v. Juridica Investments Ltd., No. H-11-0542 (S.D. Tex., March 10, 2011), S&T Oil entered into an investment contract with Juridica Investments Limited (“JIL”) under which JIL would provide S&T Oil with partial funding for the costs and fees arising from an arbitration proceeding between S&T Oil and the Romanian government. The arbitration was held before the International Centre for the Settlement of Investment Disputes in Washington, D.C. between 2007 and 2009, during which S&T Oil was represented by King & Spalding.

The investment agreement between JIL and S&T Oil required all disputes between the parties be arbitrated and further mandated that any arbitration proceedings must be held in Guernesy, Channel Islands, where JIL was incorporated. Additionally, the agreement stated all arbitrations were to be conducted through the London Court of International Arbitration (“LCIA”). JIL initiated arbitration proceedings against S&T Oil on December 22, 2010. S&T Oil sought to enjoin the arbitration by filing an ex parte emergency application for a temporary restraining order in the Southern District of Texas.

Before the court, S&T Oil alleged the arbitration clause in the parties’ investment agreement was unenforceable under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards as implemented through 9 U.S.C. §§ 201-208, procured by fraud and substantially and procedurally unconscionable under Texas law. According to S&T Oil, the arbitration agreement was substantively unconscionable for three reasons:

1. It would be significantly more expensive to arbitrate before the LCIA in Guernsey;
2. JIL had the ability to influence the selection of arbitrators through a shared board member with the LCIA, which presented an undisclosed conflict of interest and fraudulent inducement in the formation of the agreement; and
3. Holding the arbitration in Guernsey would deprive S&T Oil of its day in court.

S&T Oil also argued procedural unconscionability on the basis that its counsel, King & Spalding, acted in its own interest when it advised S&T Oil to enter into the funding investment agreement with JIL.

According to the court, because S&T Oil merely presented LCIA’s schedule of arbitration costs and a comparison of air travel costs, but did not provide an estimate of the total costs of arbitration, the company failed to demonstrate the expense of arbitration before the LCIA in Guernsey would be materially greater than federal litigation in Houston. Additionally, no estimate regarding the expense of domestic litigation was offered. The court also stated travel costs were not necessarily implicated in the matter because the arbitration provision at issue provided for alternatives to in-person hearings.

Next, S&T Oil asserted that a non-disclosed conflict of interest existed since one of JIL’s non-executive Board of Directors was also a member of the Board of Directors for LCIA. LCIA’s board members are responsible for appointing the LCIA Court which then appoints arbitrators to specific proceedings. JIL responded by presenting an affidavit which stated the board member in question was never a board member of LCIA and had no influence on the selection and appointment of arbitrators. According to the Southern District, S&T Oil failed to meet the evidentiary burden necessary to refute the affidavit.

The court then refused to find substantive unconscionability despite a requirement that the arbitration be conducted in Guernsey because both parties were sophisticated commercial entities and the arbitration provision was prominent within the larger investment agreement.

Finally, the court dismissed S&T Oil’s procedural unconscionability argument because the company also retained independent counsel unaffiliated with King & Spalding to review the agreement with JIL. S&T Oil’s independent legal counsel reviewed the agreement and informed S&T Oil that the arbitration clause was likely enforceable.

Because S&T Oil failed to establish any of the four elements necessary pursuant to Rule 65, the Southern District of Texas denied the company’s motion for an emergency temporary restraining order.

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