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Monday, July 21, 2014

Fifth Circuit Sends Case to Arbitration 2 1/2 Years After Litigation Begins

5th CircuitIn Al Rushaid v. Nat'l Oilwell Varco, Inc., plaintiffs sued eight entities for breach of contract.  The District Court found that the disputed contracts could result in damages in the hundreds of millions of dollars.  Discovery would have to take place on several continents.  Accordingly, although plaintiffs served all defendants except National Oilwell Varco Norway (NOV Norway) in August 2011, the District Court set a trial date in June 2013.

In August 2012, plaintiffs served NOV Norway, which invoked an arbitration clause in September 2012.  The District Court denied NOV Norway's motion to compel arbitration, finding that the dispute was not within the scope of the arbitration clause and that NOV Norway had waived its right to arbitrate.  

The Fifth Circuit rejected both the District Court's conclusion that there was no agreement to arbitrate and its conclusion that NOV Norway had waived its right to arbitrate.  On the first issue, the District Court's ruling was based on its finding that plaintiffs' claims against NOV Norway related to an NOV Norway price quotation that did not include an arbitration clause.  The Fifth Circuit concluded that the price quotation was merely a supplement to terms provided in a general agreement called the ORGALIME.  The Fifth Circuit concluded that the relationship between the two documents was sufficiently established so that the ORGALIME's arbitration clause should apply to disputes relating to the price quotation.

Under Fifth Circuit precedent, a party waives its right to arbitrate if it (1) “substantially invokes the judicial process” and (2) thereby causes “detriment or prejudice” to the other party.  The District Court found that this standard was met because NOV Norway's co-defendants engaged in extensive discovery and because all co-defendants are jointly owned and controlled and were represented by the same legal counsel.  The extent to which NOV Norway's codefendants' conduct could be imputable to it in a context such as this raised a question of first impression for the Fifth Circuit.  In this case, the Court found that, although NOV Norway might have benefitted from the discovery conducted by its co-defendants, it had not thereby invoked the judicial process, as this occurred before NOV Norway was served.  After it was served, discovery continued but NOV Norway did not participate.  

The District Court's denial of NOV Norway's motion to compel arbitration was vacated.  NOV Norway is the only defendant that may avail itself of arbitration.  The case was remanded for a determination of whether there should be a stay of proceedings in the District Court pending the outcome of arbitration between plaintiffs and NOV Norway.

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