Baker Hughes Saudi Arabia Company Limited v Dynamic Industries & Others No 23-30827 (5th Cir, 27 January 2025) [1] (“Baker Hughes“) is of tangible importance to entities operating in the GCC Region. This is because the US Court of Appeals for the Fifth Circuit shows how merely referring to specific arbitral rules in an arbitration agreement does not mean that an institution is automatically implied. Put another way, Baker Hughes held that reference in the arbitration agreement to “Arbitration Rules of the DIFC-LCIA” did not mean that the arbitration had to be administered by the DIFC-LCIA Arbitration Centre but that another institution could happily administer the arbitration.
The jurisprudence in Baker Hughes does not create new law. The US Court of Appeals for the Fifth Circuit based its decision on the proper interpretation of the arbitration agreement but did clarify that dismissal for forum non conveniens is the wrong vehicle where a party invokes The Federal Arbitration Act (FAA) to compel arbitration of a dispute in U.S. court. The dispute, properly conceived, was about a motion to compel arbitration [2].
Key Facts
In September 2021, the government of Dubai issued Decree No. 34 (Decree 34) which abolished the Dubai International Financial Centre Arbitration Institute (DAI) which administered DIFC-LCIA arbitrations [3], and created in its place a revamped arbitral institution (DIAC) that is functionally identical to its predecessor in many key respects. Later, a contract dispute arose, and Baker Hughes sued in state court. The case was removed to federal court.
Dynamic moved to dismiss for forum non conveniens or alternatively to compel arbitration. The court denied Dynamic’s motion on the grounds that the parties’ designated forum, the DIFC-LCIA Arbitration Centre, no longer existed, making the “forum-selection clause” unenforceable. The Louisiana Court said the court was powerless to compel arbitration or to dismiss the case on the grounds of forum non conveniens, stating: [4]
“Whatever similarity the DIAC may have with the DIFC LCIA, it is not the same forum in which the parties agreed to arbitrate. That forum is no longer available, and this Court thus cannot compel Plaintiff to arbitrate. Accordingly, no enforceable forum selection clause compels the dismissal of this case on the ground of forum non conveniens.”
The contract contained two arbitration agreements: one at Schedule A of the contract -which empowered Dynamic to elect to arbitrate in Saudi Arabia any dispute arising out of the contract; and one at Schedule E should Dynamic not pursue Saudi arbitration. It was the latter arbitration agreement at the focal point of the Courts’ analysis. For present purposes, the arbitration agreement stated:
“[I]f the dispute is not settled by mediation within thirty (30) days of the commencement of the mediation, or such further period as the Parties shall agree in writing, the dispute shall be referred by either Party to and finally resolved by arbitration under the Arbitration Rules of the DIFC LCIA (the “Rules”) from time to time in force, which Rules are deemed to be incorporated by reference herein (save for Article 5.6 which is hereby expressly excluded). The Seat, or legal place, of the arbitration shall be the DIFC, Dubai, United Arab Emirates.” [our emphasis]
Analysis
On Dynamic’s appeal, the United States Court of Appeals for the Fifth Circuit (“Court of Appeals”) held that the district court erred by refusing to compel arbitration consistent with the terms of the subcontract and so reversed the decision and remanded the case for further proceedings at the lower court, namely, to compel arbitration using DIAC. The Court of Appeals’ reasoning is simple and sought to answer: does the text of the arbitration agreement stipulate an arbitral forum or only the arbitral rules? And even if the text of the arbitration agreement at Schedule E only stipulates the rules applicable to arbitration, does the parties’ selection of rules associated with a particular institution impliedly select that institution as the forum?
The Court of Appeals applied “the rules of contract construction” and determined that the arbitration agreement “designates only a set of rules and not a particular arbitral forum”. It found that the Baker Hughes’ reading was “too clever by half” and that it had failed to engage in the “syntactical analysis” to explain why certain commas and words should be read into the arbitration agreement. The Court thus concluded that the parties had agreed to arbitrate in accordance with the “the Arbitration Rules of the DIFC LCIA”, and not necessarily to administration only by the DIFC-LCIA Arbitration Centre. To some extent, an efficient reader could stop here.
However, the Court’s answer to the next question is of wider importance for entities involved with DIFC- LCIA Rules, i.e. whether parties implicitly have selected a forum by designating that forum’s rules? Here, whilst caselaw went in both directions, the Court of Appeals held that citing rules in an arbitration agreement does not mean that the related arbitral centre should be the administrative entity. It said:
“… we—like the Ninth Circuit—have lingering doubts about adopting a blanket rule that any designation of arbitral rules necessarily means selection of a forum. After all, depending on the content of the rules in question, a rules selection clause may be more properly conceived of as a choice-of-law provision rather than a forum-selection clause.”
Without deciding the point, the Court of Appeals looked at what ought to happen if it assumed that the DIFC-LCIA Arbitration Centre had been written in the arbitration agreement. The Court looked at two scenarios: cases where an arbitral forum went defunct but left affiliates to administer arbitrations, and cases where a functionally identical successor exists. The present debate fell into the second scenario, giving rise to the question of “whether a designated forum remains available where a functionally identical successor forum exists”. In short, the Court supported the notion that DIAC was the identical successor:
“Recall that Decree 34, by its very terms, “abolished” the DAI, which administered the DIFC-LCIA. That seems like strong evidence that the forum no longer exists. But the counter-argument is far from frivolous. The DIFC-LCIA’s successor institution, the DIAC, is functionally identical to its predecessor in many key respects. The DIAC’s rules, for instance, mirror those of the DIFC-LCIA: They reflect nearly identical requirements for the claim-and-defense process, the nominating and challenging of arbitrator appointments, and the rendering of awards—basically any issue of import when prosecuting an arbitration…”
To close the issues, the Court of Appeals considered assuming that the parties impliedly designated the DIFC-LCIA as the proper arbitral forum, and that said forum is unavailable, the district court should have considered whether the parties’ intent was to arbitrate generally or instead set an exclusive forum. The Court of Appeals’ thinking was that the DIFC-LCIA Arbitration Centre was not capable of being the exclusive forum such that the dominant purpose was to arbitrate generally. It concluded:
“In sum, even if the subcontract designated the DIFC-LCIA as a forum for dispute resolution, it is not the exclusive forum contemplated by the agreement as a whole, and the forum-selection clause (if it is one) is not integral to the subcontract and can be severed. Because the parties’ primary intent was to arbitrate generally, the district court is empowered to compel arbitration and to appoint a substitute arbitrator consistent with the parties’ intent as manifested in the subcontract.”
[1] Baker Hughes Saudi Arabia Company Limited v Dynamic Industries, Incorporated; Dynamic Industries International, L.L.C.; Dynamic Industries International Holdings, Incorporated, Case: 23-30827, Filed 27 January 2025.
[2] The FAA provides that U.S. courts with jurisdiction under the FAA “may direct that arbitration be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States.
[3] Even though Decree 34 does not explicitly mention the DIFC-LCIA—and instead only refers to abolishing the DAI—the decree effectively closed the DIFC-LCIA. The DIFC-LCIA no longer commences and registers arbitrations.
[4] Baker Hughes Saudi Arabia Co. v. Dynamic Indus., Civil Action 2:23-cv-1396 (E.D. La. Nov. 6, 2023).
