Texas SC directs judge to rule on arbitration motion

AUSTIN � The Texas Supreme Court reversed appeals judges in Corpus Christi who blocked binding arbitration so a natural gas seller could prove the truth of a news article.

The Supreme Court ruled on July 3 that justices from the 13th District Court of Appeals committed an error by allowing discovery against Houston Pipe Line before ruling on a motion to compel arbitration.

The high court directed Victoria County District Judge Joseph Kelly to vacate his discovery order and decide the arbitration motion.

Kelly had ruled that an article about price manipulation in the trade journal Gas Daily raised questions that needed answers before he could rule on arbitration.

For nine years Houston Pipe Line purchased gas from O'Connor & Hewitt Ltd.

Their contract set prices according to the Houston Ship Channel index in a monthly trade journal, Inside the Federal Energy Regulatory Commission.

The contract required arbitration of disputes and set a 60 day limit on discovery.

O'Connor & Hewitt sued Houston Pipe Line in 2007, alleging it manipulated the index from 2004 to 2006.

O'Connor & Hewitt based the suit on articles in Gas Daily, a trade publication, that questioned the timing and pricing of sales in the channel.

Houston Pipe Line moved to compel arbitration.

O'Connor & Hewitt resisted arbitration, claiming it couldn't identify all potential defendants and calculate damages in 60 days.

Rather than rule on the motion, Kelly ordered discovery to determine if other defendants could invoke the arbitration clause and whether O'Connor & Hewitt's claims fell within the scope of the clause.

Kelly wrote that O'Connor & Hewitt would probably prevail at trial if it proved the truth of the article.

He found it virtually impossible to complete discovery in 60 days.

He wrote that arbitration would tend to cloud or make ineffectual a judgment in favor of O'Connor & Hewitt. He wrote that arbitration would destroy his jurisdiction.

He enjoined Houston Pipe Line from altering or destroying documents.

On appeal the 13th District found that the evidence supported the injunction.

"It demonstrates the likelihood of a wrongful act and establishes that if documents were lost or altered, O'Connor would suffer irreparable harm," Chief Justice Rogelio Valdez wrote.

"The trial court cannot delay ruling on a motion to compel arbitration until discovery has been completed because this would defy the purpose of arbitration," he wrote.

"However, there is no rule mandating a strict deadline for the court to rule on a motion to compel arbitration," he wrote.

"The trial court is not deferring its ruling until the completion of discovery, but rather, in its discretion, is allowing circumscribed discovery needed to determine the merits of the motion to compel arbitration," he wrote.

"Whether the motion to compel arbitration should be granted or denied is a matter that remains within the trial court's discretion," he wrote.

At the state Supreme Court, Houston Pipe Line obtained a writ of mandamus.

"We disagree that the discovery ordered by the trial court was needed for it to rule on the motion to compel," the justices declared in an unsigned opinion.

The Texas Arbitration Act authorizes discovery before arbitration, they wrote, but it doesn't authorize discovery on the merits of the controversy.

"Motions to compel arbitration and any reasonably needed discovery should be resolved without delay," they wrote.

An inquiry into identities and liabilities of potential defendants is inappropriate, they wrote, because those determinations must be made during arbitration.

Charles Schwartz, Kelley Keller, Heather Hegefeld, John Lohmann and Daniel Bolia represented Houston Pipe Line.

Thomas Sims, Timothy Perkins, James Cole, William Seerden, Ronald Walker, Gilberto Hinojosa, Craig Enoch, Melissa Lorber, Neel Choudhury, Stanley Binion and Alex Valdes represented O'Connor & Hewitt.