Opinion
CIVIL ACTION NO. H-03-2628
November 10, 2003
MEMORANDUM AND ORDER
Plaintiff, J. Ray McDermott, Inc. ("JRM"), brought this action against the defendant, Bay Ltd., a.k.a. Berry Contracting, L.P., ("Bay"), seeking specific performance of an agreement, injunctive relief, and an order compelling Bay to arbitrate pursuant to the terms of the prime contract between JRM and its customers. Pending before the court are JRM's Motion to Compel Arbitration (Docket Entry No. 1) and Bay's Cross-Motion to Abate and to Compel Arbitration (Docket Entry No. 5). For the reasons stated below, JRM's Motion will be granted in part and denied in part, and Bay's Motion will be denied.
Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1.
I. Factual and Procedural Background
JRM, a marine construction company, engaged Bay as a subcontractor for fabricating the topside of a "SPAR" floating offshore oil and gas production facility in the Gulf of Mexico. A dispute arose in the midst of that project.The commercial relationship between the parties can be traced through a serious of agreements. On January 16, 2001, JRM and Bay entered into an agreement (the "Alliance Agreement") in which the parties jointly committed to the general enterprise of pursuing projects to be undertaken at JRM's Harbor Island facility. "[T]he Alliance Agreement does not contain the particulars of specific projects." The Alliance Agreement contains an arbitration clause stating that "[a]ny dispute arising in connection with this Agreement shall be finally settled by arbitration in Houston, Texas, unless otherwise agreed by both Parties." Arbitration under this agreement is to take place before a panel of three arbitrators, in accordance with the Commercial Rules of the American Arbitration Association ("AAA").
See Alliance Agreement, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit D.
Defendant's Original Answer, Docket Entry No. 4 at ¶ 19.
Alliance Agreement, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit D at § 9.
On June 5, 2001, Bay and JRM executed a Blanket Subcontractor's Agreement ("BSA") that was to govern Bay's work for JRM on behalf of third-party customers. The BSA contains a "Pass Through Provision" whereby the subcontractor, i.e., Bay,
agrees to be bound to the Prime Contract . . . in the same manner and to the same extent as JRM is bound to the Customer under the Prime Contract. To the extent that Prime Contract relates to SUBCONTRACTOR'S WORK, the SUBCONTRACTOR shall assume towards JRM and the relevant Customer all obligations and responsibilities of JRM under the Prime Contract and JRM shall have all of the rights, remedies, and redress against the SUBCONTRACTOR which the Customer has against JRM under the Prime Contract.
BSA, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit A at p. 13.
In the BSA the parties also acknowledge that the "BSA is nonexclusive and JRM reserves the right to engage other contractors and subcontractors to perform similar or identical services except as outlined within the Alliance Agreement effective the 16th of January, 2001." Finally, the BSA contains a merger clause:
Id. at Article 31.
This BSA (with attachments and the relevant WORK ORDER constitutes the entire agreement between the parties hereto and supersedes all prior negotiations, representations or agreements related to this BSA, either written or oral, except to the extent that they are expressly incorporated into this BSA. No changes, alterations or modifications to this BSA shall be effective unless in writing and executed by the authorized signatories for JRM and [Bay].
Id. at Article 30.
On June 15, 2001, a prime contract was executed among a JRM affiliate, SparTEC, Inc., and two companies, Dominion Exploration and Production, Inc. ("Dominion") and Pioneer Natural Resources USA, Inc. ("Pioneer"). This prime contract, termed the Engineering, Procurement, Construction and Installation Agreement (the "EPC"), governs a project known as the Devil's Tower SPAR Project. The EPC explicitly mentions that Bay, as a subcontractor, along with JRM's Harbor Island Fabricators, "will procure the bulk materials, assemble, outfit, install equipment, hook-up and pre-commission" for the project. The EPC also contains an arbitration clause requiring that
EPC, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit C at Exhibit A: Scope of Work, § 6.
[a]ny dispute, controversy or claim arising out of, in relation to or in connection with this AGREEMENT, including without limitation any dispute as to the existence, construction, validity, interpretation, enforceability or breach of this AGREEMENT . . . shall be exclusively and finally resolved by binding arbitration. . . .
Id. at Article 33.5.
An attachment to the EPC further clarifies that arbitration shall be under the Construction Industry Rules of the AAA before a single arbitrator. The EPC also contains a no-encumbrances provision and requires specific performance of all parties' obligations to complete the Devil's Tower project while any arbitration is pending.
Id.
Id. at Article 33.5 and Article 7.5, respectively.
On November 16, 2001, JRM sent a "Letter of Intent" to Bay acknowledging that Bay would be awarded the erection and outfitting of the Devil's Tower topsides. The letter refers to both the BSA and the Alliance Agreement.
Exhibits to Plaintiff's Response in Opposition to Defendant's Cross-Motion, Docket Entry No. 11, Exhibit 5.
On August 27, 2002, JRM wrote to Bay giving notice of its intention to terminate the Alliance Agreement, while expressing JRM's "intention for Bay to complete its current scope of work on the Medusa and Devil's Tower projects in Harbor Island. . . ."
Id., Exhibit 11.
After a dispute erupted between the parties, Bay sought to impose a lien for work performed on the topsides of the Devil's Tower project. On July 8, 2003, Bay initiated an arbitration with the AAA pursuant to the arbitration clause in the Alliance Agreement seeking, inter alia, sums Bay alleged it was owed for work performed fabricating the topsides of the Devil's Tower project. JRM alleges that that arbitration was filed in violation of dispute resolution terms in the prime contract, the EPC.
On July 17, 2003, JRM initiated this action to enjoin the arbitration that Bay had initiated and to compel Bay to arbitrate under the terms of the EPC. On July 25, 2003, JRM filed its own demand for arbitration of its dispute with Bay before the AAA pursuant to the provisions of the EPC, i.e., in accordance with the Construction Industry Arbitration Rules and before a single arbitrator in Houston, Texas.
See id., Exhibit 9.
Bay asks the court to compel arbitration pursuant to the Alliance Agreement and to stay further proceedings pending the outcome of the arbitration before the three-arbitrator panel that Bay commenced on July 8, 2003. JRM asks the court to compel arbitration pursuant to the EPC before a single arbitrator in Houston under the Construction Industry Arbitration Rules. JRM also asks that the court retain jurisdiction over issues related to injunctive relief to effectuate the parties' agreement prior to a final ruling on the arbitration proceeding.
II. Standard of Review
In determining whether a dispute is subject to arbitration, a court must assess whether the parties agreed to arbitrate the particular dispute in question. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 105 S.Ct. 3346, 3354 (1985). Generally, this determination is made by "applying the `federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the [Federal Arbitration] Act.'" Id. (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 103 S.Ct. 927, 941 (1983)). Because both parties agree that the Federal Arbitration Act ("FAA") applies to this dispute, the court applies federal law to its analysis. Section 3 of the Federal Arbitration Act provides:
[I] f any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such action has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.9 U.S.C. § 3. The FAA, by its terms, "leaves no place for the exercise of discretion by the district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds, Inc. v. Byrd, 10 5 S.Ct. 1238, 1241 (1985) (emphasis in original).
The process of determining whether a particular dispute comes within the scope of an arbitration agreement is governed by ordinary principles of contract law. American Heritage Life Ins, v. Lang, 321 F.3d 533, 537 (5th Cir. 2003). Because a valid contract requires mutual assent, generally, "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT T Technologies, Inc. v. Communications Workers of America, 106 S.Ct. 1415, 1418 (1986) (quoting United Steelworkers of America v. Warrior Gulf, 80 S.Ct. 1347, 1353 (1960)).
III. Analysis
A. The Parties' Arguments1. JRM's Position
JRM argues that the Alliance Agreement between the parties was superseded by the BSA "not in toto, but as applicable to the work performed under the BSA." JRM asks the court to recognize that the BSA governs specific projects, while the Alliance Agreement only governed the degree of exclusivity on JRM's bidding of certain projects, not the actual worked performed on the Devil's Tower project or on any other specific project. JRM asserts that the BSA incorporates the arbitration provisions contained in the EPC, and that this arbitration clause supersedes the clause in the Alliance Agreement. JRM further argues that Bay has a legal duty to comply with the EPC, not only in terms of the type of arbitration, but also in keeping the topsides equipment and components free and clear of liens or other encumbrances and in performing all of its duties under the EPC while arbitration is pending.
Plaintiff's Response Brief in Opposition to Defendant's Cross Motion, Docket Entry No. 10 at p. 28.
Id. at p. 6.
2. Bay's Position
Bay argues that the arbitration clause of the Alliance Agreement between Bay and JRM governs this dispute. Bay suggests that, if the BSA had superseded the Alliance Agreement, JRM would not have had to terminate the Alliance Agreement on August of 2002. Finally, Bay argues that, even if the EPC governs the dispute between JRM and Bay, JRM has failed to meet a condition precedent by failing to follow an informal dispute resolution procedure prescribed by that agreement.
"Memorandum in Opposition to Motion to Compel Arbitration and in Support of Cross-Motion to Compel Arbitration, Docket Entry No. 6 at ¶ 17.
B. The Applicable Arbitration Clause
Generally, when confronted with the question of arbitrability, the court must first determine whether the dispute before it is arbitrable. Here, the parties agree that their dispute should be arbitrated. Furthermore, they agree that their dispute involves work performed on the Devil's Tower project. They disagree, however, about which of two agreements, containing disparate arbitration clauses, governs this dispute. In analyzing whether a particular dispute falls within the purview of a particular arbitration agreement, the court should apply ordinary state law principles governing contract formation. Webb v. Investacorp, Inc., 89 F.3d 252, 258 (5th Cir. 1996) (citing First Options of Chicago, Inc. v. Kaplan, 115 S.Ct. 1920, 1924 (1995)).
1. The Governing Law
The BSA contains a Texas choice-of-law provision. The Alliance Agreement, although it states that arbitration under that agreement is to take place in Houston, Texas, does not specify which state's law is to govern matters not addressed by the FAA. Under Texas choice of law principles, "the law of the state with the most significant relationship to the particular substantive issue will be applied to resolve that issue." Fleetwood Enterprises, Inc. v. Gaskamp, 280 F.3d 1069, 1073 n. 4 (5th Cir. 2002), (quoting Duncan v. Cessna Aircraft, 665 S.W.2d 414, 421 (Tex. 1984)). Texas is the state with the most significant relationship to both arbitration clauses since both clauses designate Texas as the forum for arbitration and the work that is the subject of the parties' underlying dispute was performed in Texas.
See BSA, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit A at Article 29.
2. Application of Texas Law
The court must apply Texas law to determine which contract, and thus which arbitration clause, the parties intended to govern the underlying dispute. The Alliance Agreement and the BSA/EPC do not together further a single goal as in Hawk v. Spaghetti Warehouse Restaurants, Inc., 2003 WL 21246138, *3 (N.D. Tex. 2003) (holding that various agreements between the parties were together intended to effect and elucidate the terms and conditions of the plaintiff's employment with the defendant). Instead, the two agreements govern two distinct aspects of their commercial relationship: (1) the Alliance Agreement established the parties' joint commitment to pursue projects at a certain facility and to market themselves; and (2) the BSA/EPC established a specific contractor/subcontractor relationship to further the construction of the Devil's Tower project.
The arbitration clause in the EPC is a broad clause. Broad arbitration agreements "embrace all disputes between the parties having a significant relationship to the contract regardless of the label attached to the dispute." Pennzoil Exploration and Production Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998). The arbitration clause in the Alliance Agreement is also broad. The issue then is whether the underlying dispute arose in connection with the Alliance Agreement or the BSA/EPC. The nature of the dispute itself thus determines which arbitration clause applies.
Texas courts follow federal law, focusing on the factual allegations of the complaint rather than on the legal cause of action asserted in assessing the nature of a given dispute. See Prudential Securities, Inc. v. Marshall, 909 S.W.2d 896, 900 (Tex. 1995) citing Genesco, Inc. v. T. Kakiuchi Co., Ltd., 815 F.2d 840, 846 (2d Cir. 1987)). The factual allegations in both JRM's complaint (Docket Entry No. 1) and Bay's counterclaim (Docket Entry No. 4) demonstrate that the parties' dispute arose out of or relates to the Devil's Tower project. Even Bay's Memorandum in Opposition to JRM's Motion to Compel Arbitration states that "[t]he claims asserted in Bay's AAA demand relate to its work performed on the Devil's Tower Facility." The question is which agreement most clearly governs the Devil's Tower project.
See, e.g., Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1 at ¶¶ 11, 13, 15; Bay's Demand for Arbitration, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit B; and Defendant's Original Answer and Counterclaim at ¶¶ 51, 63.
Docket Entry No. 6 at p. 6.
The terms of the Alliance Agreement are more general than those of the BSA/EPC and show that the Alliance Agreement encompassed the goals of pursuing potential work together, only cursorily listing the kind of work that Bay would perform for JRM on an exclusive and on a preferred supplier basis. The Alliance Agreement does not mention the fabrication of topsides for the Devil's Tower project or for any other project. Indeed, the Alliance Agreement states that any fabrication and construction services that Bay will provide for JRM will come under "the existing Blanket Subcontractor's Agreement [BSA]." Although the parties' BSA was not executed until June 5, 2001, after the Alliance Agreement was executed on January 16, 2001, the Alliance Agreement's plain language anticipates that the BSA would govern the actual fabrication and construction services that Bay would provide for JRM. Furthermore, the BSA's terms show that it covers the specific dynamics of the contractor-subcontractor relationship. The Alliance Agreement was terminated before the underlying dispute at issue here erupted. The court agrees with JRM that the plain language of the termination letter illustrates that the Alliance Agreement was limited in scope and its termination did not affect the parties' actual performance of the Devil's Tower project. The BSA clearly remained in effect in the wake of the Alliance Agreement's termination.
See Alliance Agreement, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit D.
Id. at p. 2.
Letter terminating the Alliance Agreement, Exhibits to Plaintiff's Response Brief in Opposition to Defendant's Cross-Motion to Abate and Compel Arbitration, Docket Entry No. 11, Exhibit 11.
The parties' course of conduct and the plain language of the two agreements show that the parties intended the BSA, which is both more specific and later-in-time, to supersede the Alliance Agreement with regard to Bay's work for JRM on the Devil's Tower project. Under Texas contract law the court determines the intent of the parties by interpreting the contract language "in its plain grammatical meaning. . . ." Coffman v. Provost*Umphrey Law Firm, 161 F. Supp.2d 720, 724 (E.D. Tex. 2001) (citing R P Enters. v. LaGuarta, Gavrel Kirk, Inc., 596 S.W.2d 517, 518-19 (Tex. 1980) and Ikon Office Solutions, Inc. v. Eifert, 2 S.W.3d 688, 694 (Tex.App.-Houston [14th Dist.] 1999, no pet.)).
The underlying dispute, which arose after the termination of the Alliance Agreement, is a dispute "arising out of, in relation to or in connection with" the Devil's Tower project, the subject of the BSA by way of the EPC. Under Texas law "an unsigned paper may be incorporated by reference into a paper signed by the person sought to be charged. The language used is not important provided the document signed by the . . . [party sought to be charged] plainly refers to another writing."Trico Marine v. Stewart Stevenson Technical Services, Inc., 73 S.W.3d 545, 549 (Tex.App.-Houston [1st Dist.] 2002, mandamus denied) (quoting Owen v. Hendricks, 433 S.W.2d 164, 166 (Tex. 1968)). "An arbitration agreement is not invalid or unenforceable merely because it is contained in a document incorporated into a contract by reference." Teal Constr. Co./Hillside Villas Ltd, v. Darren Casey Interests, Inc., 46 S.W.3d 417, 420 (Tex.App. — Austin 2001, pet. denied) (citing D. Wilson Constr. Co. v. McAllen Indep. Sch. Dist., 848 S.W.2d 226, 230 (Tex.App. — Corpus Christi 1992, writ dism'd w.o.j.).
EPC, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit C at Article 33.5.
The BSA that Bay signed expressly states that Bay
agrees to be bound to the Prime Contract . . . in the same manner and to the same extent as JRM is bound to the Customer under the Prime Contract. To the extent that Prime Contract relates to SUBCONTRACTOR'S WORK, the SUBCONTRACTOR shall assume towards JRM and the relevant Customer all obligations and responsibilities of JRM under the Prime Contract and JRM shall have all of the rights, remedies, and redress against the SUBCONTRACTOR which the Customer has against JRM under the Prime Contract.
BSA, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit A at p. 13.
This provision plainly refers to an external document, a prime contract that was subsequently identified as the EPC, and plainly states that both parties agreed to be bound by the terms of the prime contract. Bay does not dispute that it was bound by the BSA; yet Bay insists that the EPC "does not control a dispute between JRM and Bay" because Bay was not a party to the EPC, which is an agreement between JRM and two JRM customers. Were the court to endorse this argument, it would have to ignore the plain language of the BSA. The BSA binds Bay to the prime contract and states that "JRM shall have all of the rights, remedies, and redress against [Bay] which the Customer has against JRM under the Prime Contract." Because the BSA incorporates the EPC by reference to a "prime contract," one of the rights that the BSA gives to JRM is the right to compel arbitration of "[a]ny dispute, controversy or claim arising out of, in relation to or in connection with this [EPC]. . . ."
Memorandum in Opposition to Motion to Compel Arbitration, Docket Entry No. 6 at ¶¶ 2, 8.
BSA, Plaintiff's Original Complaint and Motion to Compel Arbitration, Exhibit A at Article 14.1.
EPC, Plaintiff's Original Complaint and Motion to Compel Arbitration, Exhibit C at Article 33.5
Bay is correct that the EPC outlines a process for attempting the informal resolution of disputes before proceeding to a final and binding arbitration proceeding. Bay suggests in a footnote that JRM has waived its right to pursue arbitration under the EPC because it failed to follow the prescribed informal dispute resolution process before submitting a demand for arbitration. That argument fails because it was Bay, not JRM, who first acted to render obsolete the prescribed informal process that was to precede the filing of a formal demand for arbitration. JRM did not initiate this action or submit a demand for arbitration until after Bay had: (1) sought to assert liens on the Devil's Tower facility, (2) submitted a demand for arbitration under the Alliance Agreement, and (3) filed a lawsuit in federal court in Louisiana.
Id. at Article 33.4.
Memorandum in Opposition to Motion to Compel Arbitration, Docket Entry No. 6 at ¶ 2, n. 1.
Bay's recourse to this argument is analogous to the parricide who argues for mercy because he is an orphan.
Bay has not substantiated its position that the Alliance Agreement governs the work that provides the factual predicate for this dispute. Instead, Bay simply asserts that JRM is inaccurate in claiming that the Alliance Agreement was superseded by the BSA/EPC. In fact, JRM contends that the Alliance Agreement was only partially superseded, a position that is consistent with its argument that the BSA/EPC arbitration provisions govern the parties' underlying dispute.
For this reason, the court finds JRM's reliance on the merger doctrine misplaced. Merger entails the extinguishment of one contract by its absorption into another and is largely a matter of the parties' intent. Perlstein v. D. Steller 3, Ltd., 109 S.W.3d 36, 41 (Tex.App.-Corpus Christi 2003, reh'g overruled). Here, as inPerlstein, the parties clearly did not intend to extinguish the Alliance Agreement when they entered into the BSA. Both parties course of conduct suggests that these agreements governed distinct aspects of their commercial relationship. Although the BSA did not entirely "supersede" the Alliance Agreement in a legal sense, the court concludes that the BSA governs the work that gave rise to the present dispute.
The court concludes that JRM has satisfied its burden of establishing that the underlying dispute arise out of, in relation to or in connection with the BSA and thus falls within the scope of the arbitration provisions in the EPC, which was incorporated into the BSA by way of the "Pass Through Provision." The court further concludes that Bay has failed to establish any grounds for revoking that arbitration agreement.
C. The Availability of Injunctive Relief
JRM also asks this court to issue a preliminary injunction pending the arbitration proceeding between the parties. The Fifth Circuit has upheld a grant of injunctive relief pending arbitration when the contractual language contemplates such relief. See RGI Inc. v. Tucker Assocs., Inc., 858 F.2d 227, 228-30 (5th Cir. 1988) (concluding that "it was appropriate for the district court to issue the preliminary injunction to insure that the arbitration clause of the contract will be carried out as written"). The EPC explicitly contemplates injunctive relief pending arbitration: "during the pendency of the resolution of any dispute, the PARTIES shall continue their performance and no PARTY shall be excused from any of its obligations under this AGREEMENT." Therefore, the court concludes that the contract between JRM and Bay permits the issuance of injunctive relief pending arbitration.
EPC, Plaintiff's Original Complaint and Motion to Compel Arbitration, Docket Entry No. 1, Exhibit C at Article 33.5.
However, because the court has been informed that the parties may have settled a related action, Cause No. H-03-433, in the Corpus Christi Division, the court will refrain from considering the merits of JRM's application for a preliminary injunction. Both actions allegedly involve the dispute over work on the Devil's Tower project. Settlement of the Corpus Christi action could thus resolve the issues that gave rise to JRM's claim of pending irreparable harm.
See JRM's Motion to Consolidate, Docket Entry No. 17 at p. 2.