Fifth Circuit finds incorporation of AAA rules shows clear and unmistakable intent to arbitrate threshold question of arbitrability | Practical Law

Fifth Circuit finds incorporation of AAA rules shows clear and unmistakable intent to arbitrate threshold question of arbitrability | Practical Law

Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel), Leah Witters (Associate) and Daniel Hickman (Associate), White & Case LLP

Fifth Circuit finds incorporation of AAA rules shows clear and unmistakable intent to arbitrate threshold question of arbitrability

Published on 01 Aug 2012 • USA (National/Federal)
Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel), Leah Witters (Associate) and Daniel Hickman (Associate), White & Case LLP
The United States Court of Appeals for the Fifth Circuit has affirmed a district court's confirmation of an arbitral award, finding that the arbitration agreement's incorporation of the American Arbitration Association rules demonstrates the parties "clearly and unmistakably" intended to leave the question of arbitrability to an arbitrator.
In Petrofac, Inc. v DynMcDermott Petroleum Operations Co., (5th Cir. July 17, 2012), Petrofac, a subcontractor for design and installation of transportable degas plants, had a disagreement with the general contractor, DynMcDermott Petroleum Operations Company (DM). The parties' contract required binding arbitration on any Request for Equitable Adjustment (REA).
Petrofac submitted an REA, claiming that DM disrupted its ability to perform its work and seeking damages for delays, disruption costs, lost productivity, and acceleration costs. After the parties failed to negotiate a resolution to the REA dispute, they entered into an agreement to arbitrate using the American Arbitration Association (AAA) Construction Industry Arbitration Rules (AAA rules).
When Petrofac filed for arbitration, it submitted a new damages calculation that relied on a different methodology (Adams Report). DM objected, arguing that Petrofac was essentially creating a new claim that fell outside the agreement to arbitrate. The arbitration panel rejected the argument, finding that the arbitration agreement covered all disputes under the parties' contract.
The panel awarded Petrofac damages. The district court confirmed the award. DM appealed, arguing that the panel exceeded its authority by awarding damages on a claim not covered by the parties' arbitration agreement because the figure was based on the Adams Report.
The Fifth Circuit explained that the intent of the parties governs whether the arbitral panel can determine questions of arbitrability. As the Supreme Court has stated, the parties must clearly and unmistakably agree to arbitrate arbitrability. The court then held that expressly incorporating the AAA rules is "clear and unmistakable" intent to arbitrate arbitrability because the AAA rules explicitly grant the arbitral panel authority to rule on its own jurisdiction, including on disagreements over the existence, scope, and validity of the underlying arbitration clause. As such, the arbitral panel properly made the decision that the damages calculation in the Adams Report fell within the agreement to arbitrate.
This case demonstrates the position of many circuit courts that "clear and unmistakable" intent to arbitrate arbitrability can be established through agreement to a set of rules, specifically the AAA Rules, that authorise the panel to rule on its own jurisdiction.