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Exxon Mobil Corp. v. Saudi Basic Industries Corp.

United States District Court for the District of New Jersey · Civil Procedure

Civil ProcedureArbitrationFederal Arbitration ActMagistrate Judge AuthorityDiscoveryFAAnon-binding arbitrationreasonable commercial expectations

Facts

ExxonMobil sued SABIC for several contract- and fraud-based claims arising from an alleged violation of a March 10, 2000 stipulation concerning use of certain technology. SABIC relied on materially similar arbitration provisions in a 1980 Joint Venture Agreement and a 1980 Service Agreement, both calling for a non-binding recommendation by three arbitrators in Saudi Arabia. The provisions required a party to request arbitration within sixty days after notice of a dispute, but did not expressly make arbitration a condition precedent to litigation. The parties had a long history of contentious litigation, and the magistrate judge later ordered that all depositions be taken in the United States.

Issue

Do the parties' non-binding arbitration provisions fall within the Federal Arbitration Act so that the court must compel arbitration and stay the litigation? Separately, did the magistrate judge have authority to enter a scheduling order while the motion to compel arbitration was pending, and was it proper to require all depositions to occur in the United States?

Rule

Under the Third Circuit approach adopted by the court, the FAA applies only where the parties have agreed to submit disputes to a process that would settle the controversy in light of reasonable commercial expectations, meaning the parties must arbitrate through completion to a third-party decision and must not pursue litigation before that process is completed. A non-binding dispute-resolution provision that does not realistically settle the dispute and does not make arbitration a condition precedent to litigation falls outside the FAA. A magistrate judge may issue scheduling orders in proceedings to compel arbitration, but discovery-location rulings may be modified if clearly erroneous or contrary to law.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Cascade Harbor Plastics, based in Portland, Oregon, contracted with Blue Mesa Polymers, based in Albuquerque, New Mexico. Their contract states that any dispute may be submitted to a three-member panel for a non-binding recommendation, but either party may file suit at any time before the panel issues its recommendation.

Blue Mesa files in federal court to compel the panel process under the FAA and to stay Cascade Harbor's contract action. How should the court rule?

Explanation. Under the majority opinion, the FAA applies only if the agreed process is one that would settle the controversy in light of reasonable commercial expectations, which requires arbitration through completion to a third-party decision and no resort to litigation before completion. A non-binding recommendation coupled with freedom to litigate at any time falls outside the FAA.