Introduction

The case of Petrofac, Incorporated v. DynMcDermott Petroleum Operations Company (687 F.3d 671) adjudicated by the United States Court of Appeals for the Fifth Circuit on July 17, 2012, underscores the expansive authority of arbitration panels when parties incorporate established arbitration rules into their agreements. This commentary delves into the background of the case, the pivotal legal issues at stake, and the parties involved, setting the stage for understanding the court's comprehensive affirmation of the arbitration award.

Summary of the Judgment

DynMcDermott Petroleum Operations Company (DM), operating the Strategic Petroleum Reserve for the Department of Energy, subcontracted with Petrofac, Incorporated for the design and installation of a transportable degas plant. A dispute emerged regarding a Request for Equitable Adjustment (REA) submitted by Petrofac, alleging disruptions and seeking damages. After failed negotiations, the matter was directed to arbitration under a binding agreement incorporating the American Arbitration Association (AAA) Construction Industry Arbitration Rules.

The arbitration panel ultimately awarded Petrofac damages, including those based on an expert report by Frank Adams, despite DM's objections that these claims fell outside the arbitration agreement. DM appealed the district court's confirmation of the arbitration award, contending that the panel had overstepped its jurisdiction. The Fifth Circuit affirmed the district court's decision, holding that the arbitration panel had the authority to decide on these claims under the agreed-upon AAA Rules.

Analysis

Precedents Cited

The court referenced several precedents to affirm the arbitration panel's authority:

• FIRST OPTIONS OF CHICAGO, INC. v. KAPLAN, 514 U.S. 938 (1995): Establishing that parties determine who decides arbitrability based on their agreement.
• AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986): Reinforcing that arbitration agreements are to be interpreted based on their explicit terms.
• FALLO v. HIGH-TECH INSTitute, 559 F.3d 874 (8th Cir. 2009): Supporting the view that incorporating AAA Rules clearly delegates arbitrability decisions to the arbitration panel.
• Additional circuits such as the Federal Circuit, 11th Circuit, and others upheld similar interpretations, reinforcing the uniformity of this approach across jurisdictions.

Legal Reasoning

Central to the court’s reasoning was the explicit incorporation of the AAA Rules into the arbitration agreement between DM and Petrofac. These rules confer upon the arbitration panel the authority to rule on its own jurisdiction, including challenging the existence or scope of the arbitration agreement itself. The Fifth Circuit determined that the parties had "clearly and unmistakably" agreed to allow the arbitration panel to decide on arbitrability, thereby encompassing all claims arising out of the subcontract, including those based on the Adams report.

Additionally, the court addressed DM's claims of fraud and undue means in procuring the arbitration award. It found no merit in these allegations, noting that DM had proactively raised these concerns during the arbitration process, only to have them dismissed by the panel. The court emphasized that the distinct nature of Petrofac's claims under the REA was properly handled by the arbitration process.

Regarding prejudgment interest, the court upheld the district court’s decision to order additional interest after DM failed to comply with the arbitration panel's payment deadline, aligning with Texas law that mandates prejudgment interest for prevailing parties.

Impact

This judgment reinforces the authority of arbitration panels when parties incorporate comprehensive arbitration rules such as those of the AAA. It underscores that broad arbitration agreements, especially those explicitly adopting established rules, grant arbitration panels significant discretion in adjudicating not only the substantive claims but also procedural and jurisdictional questions. Future cases involving similar arbitration agreements will likely reference this decision to support the deference courts should afford to arbitration panels.

Complex Concepts Simplified

Binding Arbitration

Binding arbitration is a dispute resolution process where the parties agree to submit their conflicts to an arbitrator or arbitration panel, whose decision is final and enforceable in courts. Unlike mediation, arbitration typically results in a definitive resolution.

Request for Equitable Adjustment (REA)

An REA is a formal request made by a contractor to modify the terms of a contract, usually seeking additional time or compensation due to unforeseen circumstances that affect the contract performance.

Arbitrability

Arbitrability refers to the scope of disputes or claims that can be resolved through arbitration as per the parties' agreement. Determining arbitrability involves assessing whether the specific issues fall within the terms agreed upon for arbitration.

Prejudgment Interest

Prejudgment interest is the interest that accrues on a monetary judgment from the time the injury occurs until the judgment is paid, intended to compensate the prevailing party for the loss of use of the money while the case is pending.

Conclusion

The Fifth Circuit's affirmation in Petrofac, Inc. v. DynMcDermott Petroleum Operations Company solidifies the precedent that when parties explicitly incorporate comprehensive arbitration rules, such as those from the AAA, arbitration panels possess broad authority to adjudicate both the substance and procedural aspects of disputes. This decision emphasizes the judiciary's deference to arbitration agreements and supports the enforceability of arbitration outcomes, reinforcing the reliability and finality of arbitration as a mechanism for dispute resolution in contractual relationships.