Originally from Dispute Resolution Journal

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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).