Marc J. Goldstein Arbitrator & Mediator NYC
March 24, 2010

Arbitration With Nonsignatories: A New Dimension

Shipowners typically agree with their typically-offshore insurers to arbitrate disputes over coverage, and those arbitration agreements are governed by the New York Convention.

And the laws of some U.S. states, including Louisiana, allow injured ship workers to bring claims in court against those insurers directly when their employers are bankrupt.

Could this mean that the injured worker must arbitrate his direct action claim against the insurer, as a third-party beneficiary of the employer-insurer agreement to arbitrate? Could this mean that such direct action statutes violate the FAA to the extent they require the direct action to proceed in court?

The U.S. Fifth Circuit Court of Appeals has held that these outcomes are legally possible, and returned the case to the District Court to decide the issues. This holding, the Court stated, is required by the U.S. Supreme Court’s decision in 2009 that nonsignatories may be compelled to arbitrate and have their court actions stayed if applicable state contract law makes the agreement to arbitrate enforceable against them.
(Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896).

The Carlisle decision, according to the new Fifth Circuit case, overrules prior Fifth Circuit precedent permitting only lawsuits commenced by signatories to be stayed pending arbitration under FAA Section 3. A District Court must determine, the Court held, whether the arbitration agreement is binding upon the injured employees, under one of the various state law theories of enforceability against nonsignatories — notably third-party bebeficiary –such that they would be required to arbitrate their direct-action claims against the insurer. (Todd v. Steamship Mutual Underwriting Ass’n (Bermuda) Ltd., 2010 U.S. App. LEXIS 5637 (5th Cir. Mar. 18, 2010)).

In this case, the workers had already obtained a money judgment against their employer, and brought the direct action to collect the judgment from the insurer. The Court stated that “the district court may wish to consider whether the existence of [the] judgment has any bearing on whether [plaintiff] must arbitrate… to collect on this judgment.”. It seems possible the Court means to suggest, elliptically, that it may be sensible to view the worker as a third-party beneficiary of the employer-insurer contract on a claim to enforce a judgment against the employer, but not on an unliquidated direct claim.

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