Non-Signatory to Contract Bound By Arbitration Clause

With increasing frequency, mandatory arbitration clauses are being written into maritime contracts.  You may have run across them in charter parties, towage and salvage agreements, articles of employment and even cruise line tickets.  Nowadays, people are more willing to embrace arbitration over formal litigation for dispute resolution because it is typically perceived as less expensive and more “user friendly.”  Recently, however, cases out of the Supreme Court and the Fifth Circuit have broadened the potential reach of mandatory arbitration clauses contained in contracts.

In the Fifth Circuit case of Todd v. Steamship Mutual Underwriting Association, Ltd., the court found that a mandatory arbitration clause contained in an insurance agreement between Delta Queen Steamboat Co. and its liability insurer could be enforced against a Delta Queen employee.  The significance of that holding is that the court concluded that the arbitration agreement was enforceable against the employee who was not even a party to the contract that contained the arbitration requirement.  In that case, the employee had successfully sued Delta Queen, but was unable to recover his monetary award because of Delta Queen’s bankruptcy.  Therefore, he filed a direct suit against Delta Queen’s insurer to recover the sums to which he was found to be entitled.  Relying on a clause in its insurance policy, Steamship Mutual argued that it was not subject to suit by the employee because of the mandatory arbitration requirement.  The employee countered that the arbitration clause was not applicable to him because he was not a party to that insurance contract.

Guided by the U. S. Supreme Court decision Arthur Anderson LLP v. Carlisle, the Fifth Circuit concluded that under some circumstances, a third party can, in fact, be bound by the contractual obligations created between other parties.  On instruction from the Fifth Circuit, the district court painstakingly considered the applicable state and English laws that were applicable to the insurance policy and concluded that the employee could be bound by the policy language because he was basically seeking to enforce and benefit from that contract between Delta Queen and the insurer.  As a “third party beneficiary”, the employee was bound by the terms of the contract, even though he was not a party to that contract.

While the Todd and Carlisle cases do not stand for the enforcement of arbitration clauses against third parties in all situations, they signal a trend toward compelling alternative dispute resolution in cases where there is a significantly close relationship between the parties to the contract and a third party against whom the arbitration is sought to be enforced.  Thus, when entering into contracts, be aware that your own rights and remedies may be influenced by other relationships of those with whom you are dealing.

Note: this article first appeared in WorkBoat magazine, and the electronic version of the article is also available on WorkBoat‘s website.