All the defendants, expect for NOV Norway, which had not yet been served, removed the suit to federal court in September 2011. NOV Norway was served in August 2012 and filed a motion to compel arbitration in November 2012. In the meantime, its codefendants had been engaged in extensive federal court discovery practice and substantial motion practice.
The district court denied NOV Norway's motion to compel arbitration on two grounds: (1) the parties did not agree to arbitrate the dispute; and (2) any agreement to arbitrate was unenforceable because NOV Norway had waived it by substantially invoking the judicial process. As to the first ground, the district court held that the arbitration clause was not incorporated into the contract between ARPD and NOV Norway, because the term "based on" in the price quotation was insufficient to incorporate the standard terms and conditions. The district court further determined that there was an overlap of terms between the price quotation and the standard terms and conditions, which would militate against incorporation. The court held that NOV Norway had initially resisted service and ARPD had to serve the complaint under the Hague Convention. Meanwhile, the case had moved forward and the defendants had served over 400 separate document requests and 129 interrogatories, and ARPD had produced 130,000 pages of documents. In these circumstances, NOV Norway had substantially invoked the litigation process and benefited from discovery; the district court accordingly held that NOV Norway waived its right to compel arbitration.
The Fifth Circuit Court of Appeals vacated the district's court denial of NOV Norway's motion to compel arbitration and remanded to the district court to decide whether to stay court proceedings with the other parties pending the outcome of the arbitration under the doctrine of equitable estoppel.
Incorporation of Standard Terms and Conditions, Including the Arbitration Agreement
The first issue addressed by the Firth Circuit was whether the reference to ORGALIME in NOV Norway's price quotation was sufficient to incorporate ORGALIME's standard terms and conditions. Applying Texas law, the Fifth Circuit cited the Supreme Court of Texas holding that the language used for incorporation need not be of a specific type, provided that the document signed by the parties referred to another writing. Al Rushaid, 757 F.3d at 420 n.9 (quoting In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135 (Tex. 2004)). However, mere reference does not equate to incorporation when the circumstances surrounding the agreement show that incorporation was not agreed upon.
The Fifth Circuit explained that when the reference to the other document is clear and the circumstances indicate that the intent of the parties was incorporation, standard terms and conditions are incorporated even in the absence of specific language of incorporation. In the present case, the price quotation provided that the terms and conditions were "based on" the general conditions listed in the attached ORGALIME S2000. In finding the term "based on" to be sufficient for incorporation, the court took into account that the price quotation was a short document with 300 words, and the ORGALIME document was much longer and detailed with 3,500 words. In a contract for a multimillion dollar purchase agreement for oil rig equipment, an interpretation that incorporated ORGALIME into the short price quotation would be favored. Moreover, the inconsistency between certain price quotation terms and the standard terms and conditions was justified as common occurrence, whereby the standard terms and conditions set out the general conditions that may be modified in the specific transaction to tailor the contract to the parties' needs.
Thus, the Fifth Circuit concluded that the agreement to arbitrate in the ORGALIME was incorporated into the price quotation contract.
Waiver of the Right to Arbitrate
The second issue that the Fifth Circuit addressed was whether NOV Norway had waived its right to arbitrate by having substantially invoked the judicial process. The court's starting point was that in light of the federal policy favoring arbitration, a strong presumption existed against finding a waiver of arbitration. The court then considered the district court's finding that because NOV Norway's codefendants invoked the judicial process to the detriment of ARPD by making extensive discovery requests and engaging in substantial motion practice, NOV Norway had waived arbitration because the defendants were jointly owned and one counsel represented them. The Fifth Circuit noted that NOV Norway sought to arbitrate the dispute as soon as it was served, and that NOV Norway should not be regarded as "invoking the judicial process" and waiving its right to arbitrate because the actions of the other codefendants—separate corporate entities—were not attributable to it.
The Fifth Circuit noted two precedents in different circuits, Doctor's Associates, Inc. v. Distajo, 66 F.3d 438 (2d Cir. 1995), and Yates v. Doctor's Associates, Inc., 549 N.E.2d 1010 (Ill. App. Ct. 1990), which held that actions of an arbitration proponent's affiliates may be imputed to the proponent for the purposes of determining waiver when principles of agency or corporate law (alter ego doctrine) are applicable. The court commented that it had previously held that a corporation can be bound by its affiliate's waiver of personal jurisdiction if the alter-ego or successor-corporation doctrine would impute the affiliate's action to the corporation. Al Rushaid, 757 F.3d at 423 n.21 (citing Patin v. Thoroughbred Power Boats, Inc., 294 F.3d 640, 654 (5th Cir. 2002)).
The Fifth Circuit in this case concluded that the shared ownership and counsel, as well as benefiting from discovery and resisting service, were not determinative to the issue of waiver. There was no showing of alter ego or that NOV Norway had abused the corporate form. Thus, NOV Norway had not waived its right to arbitrate. However, in vacating the district court's denial of NOV Norway's motion to compel arbitration, the Fifth Circuit declined to require the district court to compel any of the other parties to arbitrate their dispute or to stay the district court proceedings. Instead, the Fifth Circuit remanded to the district court to determine whether a stay would be appropriate under the doctrine of equitable estoppel, pending the outcome of the NOV Norway vs. ARPD ICC arbitration.
This appellate decision places a marker in favor of arbitration in terms of incorporation of an arbitration clause, and clarifies when an act of a codefendant can be attributed to another defendant that has recourse to arbitration. A potential downside to this decision is that, in this particular case, the Fifth Circuit left to the district court's discretion whether to stay the court proceedings pending the outcome of the arbitration. However, the possibility of parallel proceedings is the fruit of an arbitration clause that was not included in all of the contracts between the parties.
Keywords: litigation, ADR, arbitration agreement, incorporation by reference, waiver by invoking judicial process