Texas Supreme Court Finds that Court Abused Its Discretion by Allowing Pre-Arbitration Discovery

The Supreme Court of Texas held that a court abused its discretion by permitting discovery instead of deciding a motion to compel arbitration.

In re Houston Pipe Line Co., __S.W.3d __ (Texas 2009) (No. 08-0800) involves a gas purchase agreement between Houston Pipe Line Company, L.P. and O’Connor & Hewitt, Ltd. The agreement was based on the Houston Ship Channel Price Index (the “Index”) and contained the following arbitration clause:

Except for matters within the jurisdiction of the Railroad Commission of Texas, any and all claims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, any of its provisions, or the relationship between the Parties created by this Agreement . . . shall be resolved by binding arbitration pursuant to the Federal Arbitration Act. . . .If a Party refuses to . . . arbitrate, the other Party may seek to compel arbitration in either federal or state court. . . .The final hearing shall be conducted within 60 days of the selection of the third arbitrator. . . [and] shall not exceed 10 business days.

A few years later, O’Connor sued Houston Pipe Line claiming manipulation of the Index, which, according to O’Connor, caused the company to receive lower payments for the gas purchased under the contract. Houston Pipe Line moved to compel arbitration. O’Connor challenged the motion arguing that “it would be impossible to identify all potential defendants and to complete damages calculations within the sixty days allotted for discovery as set out in the arbitration provision.”

Instead of ruling on the motion, the trial court ordered discovery to determine: (1) if additional defendants could invoke the arbitration clause, (2) whether the claims fell within the scope of the arbitration clause, and (3) if the discovered time limits on the agreement where jurisdictional. Houston Pipe Line appealed and the Court of Appeals refused to issue writ.

The Texas Supreme Court now decides whether the trial court abused its discretion by permitting discovery on damage calculations and other potential defendants, instead of ruling on the motion to compel arbitration.

Citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), the court stated that “[w]hen a party disputes the scope of the arbitration provision or raises a defense to the provision, the trial court, not the arbitrator must decide the issues.” Pre-arbitration discovery is authorized under the Texas Arbitration Act, the court noted, when a court lacks sufficient information on the scope of the arbitration provision, and therefore, cannot make a decision on the motion to compel arbitration.

However, the court concluded that this is not the case because determinations of liability must be answered by the arbitrator. The court pointed out that a party cannot avoid arbitration by merely alleging that there may be other potential defendants. Accordingly, the court directed the trial court to vacate the discovery order and rule on the motion to compel arbitration.

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