Review of Court Decisions

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MARITIME

Contracting Out of Federal Arbitrability Law

The 9th Circuit, in a case of first impression, held that parties can provide in their contract that a non-federal law will apply to determine whether disputes that arise are arbitrable.

The M/V Cape Flattery ran aground on a submerged coral reef off the coast of Hawaii. Under federal law, the owner of the vessel, Cape Flattery Ltd., would be liable to the U.S. government for any damage to natural resources that resulted from the grounding. Cape Flattery entered an agreement with Titan Maritime to salvage the vessel. Their agreement provided that any dispute "arising under this agreement" should be arbitrated in London in accordance with the English Arbitration Act 1996 and English law. Titan removed the vessel from the reef and eliminated the threat of an oil discharge. However, at some point, either as a result of the grounding or removal of the vessel, the reef suffered serious damage. Three years later, the government in formed Cape Flattery that it would likely be liable for damages in excess of $15 million. This potential liability led the vessel owner to file of a lawsuit against Titan Maritime in federal court in Hawaii. The complaint al leged gross negligence in the salvage of the vessel, and sought indemnity and contribution, as well as an injunction precluding Titan from requesting arbitration. Titan filed a motion to compel arbitration based on the arbitration clause in the agreement.

The district court denied this motion, concluding that Cape Flattery's tort claims were not arbitrable. First, it rejected Titan Maritime's argument that English law applied to determine arbitrability and decided that Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth (473 U.S. 614, 626, 1985) required the use of federal arbitrability law. Next it held that, under U.S. case law, the parties' dispute did not "aris[e] under" their agreement. It explained that the use of the phrase "arising under" connoted a narrow arbitration agreement under which claims that relate "only peripherally" to the agreement were not arbitrable. And since Titan Maritime's duty to prevent foreseeable damage to the coral reef was based on a federal statute, it was "separate from and above and beyond" Titan Maritime's duties under the agreement.

On appeal to the 9th Circuit, Titan Maritime contended that the district court erred in applying federal arbitrability law to determine arbitrability of the parties' dispute, given the parties' choice-of-law provision. Relying primarily on Volt Information Sciences v. Board of Trustees of Leland Stanford Jr. University (489 U.S. 468, 1989), it argued that since federal arbitrability law requires courts to enforce an agreement to arbitrate pursuant to non-federal rules of arbitration, they should enforce contracting parties' agreement to apply non-federal arbitrability law.

The 9th Circuit "agree[d] with Titan that, based on Volt, contracting parties have the power to agree to apply non-federal arbitrability law." The court found the decision in Mitsubishi Motors inapplicable because neither party in that case argued that anything other than federal arbitrability law applied to the dispute. "Thus, although Mitsu bishi states that federal arbitrability law applies to disputes under the FAA, it does not address whether federal arbitrability law allows the parties to agree to a non-federal arbitrability law," the appeals court said.

The court observed that the conclusion that parties may contract out of federal law to determine arbitrability is consistent with the decision and reasoning of the 5th Circuit (applying Texas arbitrability law), as well as decisions by the 2nd Circuit (applying Swiss arbitrability law) and the 7th Circuit (applying English arbitrability law).

Cape Flattery Ltd. v. Titan Maritime LLC, 47 F.3d 914 (9th Cir. 2011).

CONSUMER

Effect of Amended Complaint on Waiver

In a decision of first impression, the 11th Circuit ruled that a defendant's waiver of the right to compel arbitration by nine months of participation in litigation is rescinded by the plaintiff's filing of an amended complaint that unexpectedly changed the scope of the plaintiff's claims. …