Cape Flattery Ltd v. Titan Maritime, LLC, 647 F.3d 914 (9th Cir. 2011) [click for opinion]
Plaintiff's ship ran aground on a submerged coral reef off the coast of Hawaii. Plaintiff entered into an agreement with Defendant to salvage the vessel. The Agreement contained an arbitration clause providing that "Any dispute arising under this Agreement shall be settled by arbitration in London, England, in accordance with the English Arbitration Act of 1996 and any amendments thereto, English laws and practice apply."
During either the grounding of the vessel, or the salvage operation, the coral reef was severely damaged. As the owner of the vessel, Plaintiff was held liable to the United States government in excess of $15 million for the damage. Plaintiff filed suit against Defendant, alleging that Defendant's gross negligence in the salvage operation caused the damage to the reef, and suing for indemnity and contribution. Defendant filed a motion to compel arbitration based on the arbitration clause in the parties' contract. The district court denied the motion and the Ninth Circuit affirmed. The Ninth Circuit held that: (1) parties can contract to apply non-federal arbitrability law, although it requires clear and unmistakable evidence of an intent to do so; (2) the parties in this case did not contract to apply non-federal arbitrability law; and (3) under federal arbitrability rules, the dispute was not subject to arbitration.
First, the Ninth Circuit held that parties can contract to apply non-federal arbitrability rules. The Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., creates a federal policy "to ensure the enforceability, according to their terms, of private agreements to arbitrate." The Supreme Court has previously allowed parties to contract to arbitrate pursuant to non-federal rules of arbitration, thus the parties can similarly contract to apply non-federal rules to determine whether a dispute is subject to arbitration.
However, the Ninth Circuit held that the parties here had not contracted to apply non-federal arbitrability rules. The court noted that the question of what law governs arbitrability is "rather arcane," and thus not likely in the minds of the persons negotiating the arbitration agreement. "Thus, if the court were to interpret silence or ambiguity concerning the applicable arbitrability law as providing for a non-federal arbitrability law, parties could be subjected to a foreign arbitrability law when they reasonably thought that federal arbitrability law would apply." Instead, the court concluded, that courts must apply federal arbitrability rules unless there is "clear and unmistakable evidence that the parties agreed to apply non-federal arbitrability law." Here, the arbitration clause only clearly and unmistakably selected English arbitration law to apply to suits subject to arbitration. The clause was "ambiguous concerning whether English law also applies to determine whether a given dispute is arbitrable in the first place." Accordingly, the Ninth Circuit held that federal arbitrability rules applied.
With that settled, the Ninth Circuit then held that applying federal arbitrability law, the dispute was not subject to arbitration. The term "arising under" in the agreement was to be construed narrowly, meaning that only disputes concerning contract interpretation and performance were subject to arbitration. Because this was a negligence action and not a breach of contract claim, the suit was not arbitrable.
