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Fifth Circuit reverses and remands district court's denial of a
motion to compel arbitration of a non-signatory to an arbitration agreement

In 2001, Anthony Todd commenced an action in Louisiana state court against Delta Queen, the owner of the M/V American Queen, for injuries sustained while serving as a chef onboard the vessel. The Louisiana state court ruled in favor of Todd, however, Delta Queen failed to satisfy the judgment against it. Pursuant to Louisiana's "direct action" statute, Todd proceeded against Delta Queen's insurer, Steamship Mutual Underwriting Association (Bermuda) Limited ("Steamship"). Steamship subsequently removed the suit to federal district court, and moved to stay the proceeding and compel arbitration of the claims. In support of its position, Steamship argued that Todd should be bound by the terms of Delta Queen's policy with Steamship, which require arbitration of certain disputes in accordance with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("the New York Convention). The district court concluded that the Fifth Circuit Court of Appeal's decision in Zimmerman v. International Companies & Consulting, Inc., 107 F.3d 344 (5th Cir. 1997) was binding, and accordingly, it denied the motion to stay and compel arbitration. Steamship appealed the district court's ruling.

In its opinion, the Fifth Circuit held that the recent Supreme Court case, Andersen LLP v. Carlisle, 129, S. Ct. 1896 (2009) overruled Zimmerman, and remanded the action to the district court for a decision on whether Todd can be compelled to arbitrate his claims. In Zimmerman, an injured seaman brought an action pursuant to Louisiana's "direct action" statute against his employer's foreign insurer. The foreign insurer moved to stay the action and compel arbitration with the seamen's employer, pursuant to the contractual agreement between the employer and the foreign insurer. The Fifth Circuit stated that "the FAA [Federal Arbitration Act]… has no application to require direct action plaintiffs to arbitrate or to stay their lawsuits during arbitration," and accordingly, denied a stay of the injured seaman's action.

The Supreme Court recently held in Carlisle that "background principles of state contract law" should apply to the interpretation of arbitration agreements, and that non-signatories to an arbitration agreement can be compelled to arbitrate. Accordingly, the Fifth Circuit held that Carlisle overruled its holding in Zimmerman that direct action plaintiffs (i.e. - non-signatories to an arbitration agreement) cannot be compelled to arbitrate under the FAA. Furthermore, the Fifth Circuit reasoned that since courts have relied on contract principles in both FAA and New York Convention cases when deciding whether a non-signatory can be compelled to arbitrate, that the holding of Carlisle applies to the instant matter, which is governed by the New York Convention.

The Fifth Circuit also reconsidered its conclusion in Zimmerman that direct action plaintiffs could not be compelled to arbitrate as third party beneficiaries of insurance contracts. In the instant matter, Steamship argued that Todd should be forced to arbitrate his claims because he is a third party beneficiary of the insurance policy of Delta Queen. The Fifth Circuit concluded that its reasoning in Zimmerman has now been "discredited" and that the district court is not bound by that decision when determining whether direct action plaintiffs can be compelled to arbitrate as third party beneficiaries. In summary, it appears that the Fifth Circuit believes that a claimant who is a non-signatory - but a third-party beneficiary of a contract containing an arbitration agreement - should, under certain circumstances be compelled to arbitrate.

Read a copy of the decision

For more information on the above article, the FAA and/or the New York Convention, please feel free to contact us at: info@chaloslaw.com

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International Law Firm
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