Article

Topics: Use; Arbitration; Independence

Note: BHP Billiton Petroleum Inc. (Beneficiary) attempted to draw on a US$9,000,000 letter of credit that Atlantia Offshore Ltd. (Applicant/ Contractor) had furnished to secure its performance to engineer and construct an offshore platform for Beneficiary. Beneficiary alleged defects in the platform and claimed that it incurred US$28 million in damages as the result of breach of contract by Applicant. After failing to resolve the dispute by senior management negotiations, Beneficiary notified Applicant that it intended to draw upon the letter of credit in the full amount and commence arbitration proceedings according to the dispute resolution provisions of the contract to resolve Beneficiary's breach of contract claim.

Applicant/Contractor filed for a temporary restraining order and temporary injunction in the court to prevent Beneficiary from drawing upon the LC prior to a decision by the arbitration panel on the merits of the contractual dispute. The trial court entered an Agreed Standstill Order, signed by both parties, by which they were to conduct arbitration according to the dispute resolution provisions of their contract and the Standstill Order to "determine the issue of whether [Beneficiary] may draw on the letter of credit." Beneficiary agreed not to draw upon the LC until this issue was determined. The ad hoc arbitration panel denied Applicant's application for a temporary restraining order, ruled that it had jurisdiction over the entire contract dispute, and said it would expeditiously arbitrate the breach of contract issue.

Beneficiary opposed having the issue arbitrated by the ad hoc panel, and sought to convene a second arbitration panel through the American Arbitration Association as provided in the contract. Applicant/ Contractor moved for another temporary restraining order, as well as a temporary injunction to stay the second arbitration panel and enjoin Beneficiary from pursuing it further. The original arbitration panel had previously declared, in a binding decision, that its jurisdiction was not limited to the LC issue, but rather encompassed all disputes related to the contract. The 215th District Court, Harris County, Texas, Kirkland, J., issued the temporary injunction requested by Applicant, staying the American Arbitration Association panel. In an appeal from the decision of the Court of Appeals of Texas, First District, Houston, Terry Jennings, J., dismissed Beneficiary's appeal of the injunction.

The Texas appellate court agreed with Applicant that the letter of credit and breach of contract disputes were inseparable. The court ruled that at the time that the original arbitration panel was constituted, both issues were already in dispute, and the dispute resolution provisions of the contract did not contemplate a limited purpose arbitration panel that would terminate immediately after determining the letter of credit issue. It concluded that the trial court did not abuse its discretion in staying the competing arbitration because if the two panels reached different conclusions, Applicant may have been irreparably harmed. Reciting the 'first-filed' principle, the court held that after the first arbitration proceeding is in place, additional arbitration panels are not authorized by the contract.

Comment:

1. Independence. It is troubling that the intermediate appellate court regards determination of the LC dispute as "inseparable" from the decision regarding rights under the LC. Unless the beneficiary agreed to arbitration in the Agreed Standstill Order, an arbitration clause in the underlying contract with the Contractor would not affect its rights against the issuer under the LC. While there may be mutual relevant factual determinations, the LC issue is whether there is material fraud warranting an injunction and not whether there was a breach of contract.

[JEB/gdb]

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