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A Houston oil and gas consulting firm waived its right to compel arbitration in a long-standing dispute given its “persistent pursuit of litigation,” the Fifth Circuit held last month in&nbsp;<em>Int’l Energy Ventures Mgmt. L.L.C. v. United Energy Grp., Ltd.</em>, 2021 WL 2177062 (5th Cir. May 28, 2021). International Energy Ventures Management (IEVM) first sued United Energy Group (UEG) in Texas state court in 2013 over alleged nonpayment for consulting services. The agreement governing these services contained an arbitration clause, which IEVM initially ignored — until it became clear that its litigation strategy was failing. At that point, three months into the case, IEVM moved to compel arbitration. Since then, the dispute has worked its way through state court, federal court, two arbitrations and back again. Last month, the Fifth Circuit said, “Enough.”

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For nearly eight years, IEVM strategically ping-ponged between litigation and arbitration, prospecting for a more favorable forum. When the likelihood of proceeding in state court looked low, IEVM moved to compel arbitration; when the first arbitrator held that IEVM had waived its right to arbitration, it jumped back into pending litigation; when that pending litigation was resolved in favor of UEG, IEVM filed a second lawsuit in state court and simultaneously initiated a second arbitration.

This strategy, the Fifth Circuit held, forced UEG to incur significant expense and delay, causing sufficient prejudice to justify holding IEVM to its waiver of a right to compel arbitration. Importantly, though, the Fifth Circuit made clear that it is the courts, not arbitrators, who make that decision. Two arbitrators ruled on the issue of whether IEVM waived its right to arbitrate by going down the path of litigation — both were held to have exceeded their authority delineated by the agreement, and so the Fifth Circuit decided the issue for itself.

This case therefore provides a valuable lesson in arbitration clause drafting. The arbitration clause here required that “[a]ny controversies arising out of [the agreement] or its interpretation shall be settled by a[n] . . . arbitrator . . . in accordance with the rules of the American Arbitration Association.” This language, the Fifth Circuit held, was not sufficiently “clear and unmistakable” to rebut the general presumption that courts — not arbitrators — resolve the issue of litigation-conduct waiver. Because the AAA rules “do not expressly give arbitrators the power to resolve questions of waiver through litigation,” simply invoking the rules in an arbitration clause does not provide an arbitrator with the necessary authority to resolve the issue.

Therefore, an arbitration clause must contain an explicit, “clear indication” that parties have agreed to arbitrate the issue of waiver by conduct, lest an arbitrator who resolves the issue be held to have exceeded their authority.

No Takebacks: Consequences of Choosing the Path of Litigation