Aquadrill US Gulf LLC v. BP Exploration & Production, Inc.

Background

Aquadrill US Gulf LLC, Aquadrill Gulf Operations Vela LLC, and Aquadrill Gulf Operations Auriga LLC entered into three seven-year contracts with BP Exploration & Production, Inc. Under the contracts, the Aquadrill companies provided deepwater drilling rigs and trained personnel for BP’s use in offshore drilling operations in the Gulf of Mexico.

The contracts included a provision requiring BP to issue a contract adjustment to compensate for increases or decreases in the contractor’s cost of performing the work caused by later changes in legislation, regulations, requirements, orders, or their enforcement or interpretation. Two of the contracts also included a provision addressing changes to the U.S. Tax Code, the Jones Act, or federal regulations that substantially affected Aquadrill’s costs.

After the contracts were signed, Aquadrill restructured ownership of its rigs in a way intended to minimize U.S. income-tax liability. Congress later enacted the Base Erosion Anti-Abuse Tax, or BEAT, which can apply when a U.S. taxpayer makes deductible payments to foreign related parties. Aquadrill estimated that BEAT would increase its annual tax liability by more than $50 million and demanded that BP pay those increased liabilities under the contracts’ cost-adjustment provision.

BP refused. Aquadrill then began arbitration, seeking an order requiring BP to pay the tax liabilities. After an evidentiary hearing, written submissions, and additional briefing, the arbitration tribunal decided that the phrase “cost for performance of the WORK” referred to Aquadrill’s operational responsibilities owed to BP after a rig was mobilized to the Gulf of Mexico. The tribunal therefore concluded that BP was not liable for Aquadrill’s increased BEAT-related tax liabilities and did not reach the other contractual issues submitted for resolution.

Aquadrill’s Requests to Overturn the Award

Aquadrill asked the court to vacate, or overturn, the arbitration award under Sections 10(a)(3) and 10(a)(4) of the Federal Arbitration Act. Section 10(a)(3) concerns arbitrator misconduct, including refusing to hear material evidence or otherwise conducting the proceeding in a way that prejudices a party. Section 10(a)(4) concerns arbitrators exceeding their authority.

Aquadrill argued under Section 10(a)(3) that the tribunal relied on at least seven arguments that neither party had presented. Aquadrill contended that this deprived it of an opportunity to respond and that the tribunal made repeated efforts to strengthen BP’s position.

The court rejected that argument. It found that Aquadrill had not shown that its right to be heard was fundamentally denied or that it was prevented from presenting evidence. The court also concluded that the award’s reasoning tracked arguments BP had made. Even if the tribunal’s reasoning had differed from the parties’ arguments, the court stated that applying ordinary contract-interpretation principles would not establish the type of misconduct required for vacatur.

Under Section 10(a)(4), Aquadrill argued that the tribunal inaccurately defined the dispute, used flawed and unlawful reasoning, ignored the parties’ negotiation history, added or removed contract terms, and failed to apply legal principles concerning unnecessary contract language.

The court again rejected Aquadrill’s arguments. It explained that review under Section 10(a)(4) is extremely narrow and does not permit a court to decide whether the arbitrators correctly interpreted the contract. The relevant question was whether the award was based on the parties’ arbitration agreement and had at least a minimally plausible justification. The court found that the tribunal decided an issue submitted to it and provided nearly forty pages of contract analysis, which was more than enough justification under that standard.

Disposition

The court held that Aquadrill had not met its high burden of showing grounds for vacatur under either Section 10(a)(3) or Section 10(a)(4). Because the Federal Arbitration Act generally requires confirmation unless an award is vacated, modified, or corrected under the statute, the court confirmed the arbitration award.

The petition to vacate the award was denied, and BP’s request to confirm the award was granted. Judge Alvin K. Hellerstein directed the Clerk to terminate the motion.