REVISED, MARCH 29, 2001
UNITED STATES COURT OF
FOR THE FIFTH CIRCUIT
TEXACO EXPLORATION AND
AND MARATHON OIL COMPANY,
AMCLYDE ENGINEERED PRODUCTS
COMPANY, Inc., ET AL,
AMCLYDE ENGINEERED PRODUCTS
J. RAY McDERMOTT, Inc.,
Appeal from the United
States District Court
for the Eastern District
February 28, 2001
GARWOOD, and JONES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
At issue in this appeal is whether
to carve out an exception to the Federal Arbitration Act (FAA),
9 U.S.C. § 3, where, in admiralty cases, its enforcement
would deny a party the ability to implead a third-party defendant
pursuant to Federal Rule of Civil Procedure 14(c). We conclude
that the policy of liberal joinder in maritime cases embodied
in Rule 14(c) does not supersede the statutory right to enforce
contractual arbitration guaranteed by the FAA. The district court's
decision to the contrary must be reversed and remanded for the
entry of a stay of litigation between Texaco and McDermott, pending
This case arises from an accident
during the construction of Texaco's Petronius oil and
gas production facility in the Gulf of Mexico off the coast of
Alabama. A barge-mounted crane failed, causing a deck module
to fall into the sea. The crane involved in this incident was
owned and operated by J. Ray McDermott, Inc. ("McDermott")
and had been designed and manufactured by AmClyde Engineered
Products Company, Inc. ("AmClyde").
In the wake of the accident, Texaco
sued AmClyde, Williamsport Wirerope Works, Inc., the manufacturer
of the failed wire rope line, Lowrey Brothers Rigging Center,
Inc., the seller of the failed line, and Lloyd's Register of
Shipping, the classification society that inspected and certified
the crane and line. Because of a mandatory arbitration clause
in its contract with McDermott, Texaco did not file a complaint
The Texaco-McDermott contract includes
a dispute resolution clause stating that "[t]he Parties
shall reserve any controversy or claim, whether based in contract,
tort or otherwise, arising out of, relating to or in connection
with the Agreement" pursuant to a mandatory three-step process
consisting of negotiation, mediation, and binding arbitration.
This provision is mandatory.
Texaco attempted to avail itself
of this alternative dispute resolution provision, but was frustrated
when AmClyde tendered McDermott as a third-party defendant under
Federal Rule of Civil Procedure 14(c). The rule provides for
liberal joinder in admiralty actions. Texaco moved to strike
the joinder. Before the district court ruled on the motion to
strike, McDermott moved for partial summary judgment against
Texaco. Texaco opposed this motion, asserting that the district
court was obliged by section 3 of the FAA to stay the proceedings
between Texaco and McDermott pending their arbitration. After
hearing argument, the district court denied Texaco's motion to
strike, denied its request for stay and granted McDermott's motion.
Texaco now appeals the district court's denial of the requested
Appellate review of the district
court's refusal to stay litigation pending arbitration is de
novo. See Hornbeck Offshore Corp. v. Coastal Carriers
Corp., 981 F.2d 752, 754 (5th Cir. 1993); Neal v. Hardee's
Food Systems, Inc., 918 F.2d 34, 37 (5th Cir. 1990).
As an initial matter, McDermott
argues that Texaco's appeal is not properly before this court.
McDermott contends that Texaco never formally moved for a stay
and that it never had a chance to oppose Texaco's informal "request"
for a stay. We disagree. While Texaco did not file any document
captioned "Motion to Stay," Texaco gave both written
and oral notice adequate to apprise both McDermott and the district
court that it was requesting a stay and of its supporting arguments.
Five pages of Texaco's memorandum in opposition to McDermott's
motion for partial summary judgment are dedicated to the stay
issue. Additionally, the record indicates that Texaco moved for
a stay at the June 21, 2000 oral argument before the district
court and that this motion was promptly denied without discussion.(2) McDermott did not contest the stay
issue during the hearing because the district court had already
denied relief. Procedurally, the issue is properly preserved
and fully briefed for this court.
Moving to the merits, the Supreme
Court has observed that the FAA "is a congressional declaration
of a liberal policy favoring arbitration." Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S.
1, 24 (1983). Further, there is a "strong federal policy
in favor of enforcing arbitration agreements." Dean Witter
Reynolds Inc. v. Byrd, 470 U.S. 213, 217 (1985). The language
of the FAA is unambiguous:
If any suit or proceeding be brought
in any of the courts of the United States upon any issue referable
to arbitration . . . the court . . . shall on application of
one of the parties stay the trial of the action until such arbitration
has been had in accordance with the terms of the agreement .
. . .
9 U.S.C. § 3. The FAA specifically
applies to both maritime transactions and interstate commerce.(3) An application for arbitration by
either party under section 3 "requests the district court
to refrain from further action in a suit pending arbitration,
and requires the court to first determine whether there is a
written agreement to arbitrate between the parties, and then
whether any of the issues raised are within the reach of the
agreement." Midwest Mechanical Contractors, Inc. v. Commonwealth
Construction Co., 801 F.2d 748, 750 (5th Cir. 1986). "[I]f
the issues in a case are within the reach of that [arbitration]
agreement, the district court has no discretion under section
3 to deny the stay." Hornbeck, 981 F.2d at 754.
Here, an arbitration agreement governed
by section 3 of the FAA exists between Texaco and McDermott.
The arbitration clause is one this court has termed a "broad"
agreement because it covers "any dispute" between the
parties. As a result, any litigation arguably arising under such
a clause should be stayed pending the arbitrator's decision as
to whether the dispute is covered. Id. at 754-55. See
also Sedco, Inc. v. Petroleos Mexicanos Mexican Nat'l
Oil, 767 F.2d 1140, 1145 n. 10 (5th Cir. 1985); Mar-Len
of La., Inc. v. Parsons-Gilbane, 773 F.2d 633, 635 (5th Cir.
In the absence of the Rule 14(c)
exception carved out by the district court, the Texaco-McDermott
dispute would have been subject to arbitration. However, the
smooth operation of the arbitration process was disrupted by
AmClyde's Rule 14(c) tender of McDermott as a third-party defendant
to Texaco. McDermott contends, and the district court accepted,
that Rule 14(c) "trumps" section 3 of the FAA, preventing
enforcement of the arbitration clause.
The logical basis for the district
court's conclusion is unclear. There seems upon analysis to be
no real conflict between Rule 14(c) and the FAA.
Rule 14(c) was designed to expedite
and consolidate admiralty actions by permitting a third-party
plaintiff to demand judgment against a third-party defendant
in favor of the plaintiff. As a consequence, the plaintiff is
then required to assert his claims directly against the third-party
defendant. See 6 Charles Alan Wright & Arthur R. Miller,
Federal Practice and Procedure § 1465 (2d. ed. 1990). This
unique liberal joinder policy served to reduce the possibility
of inconsistent results in separate actions, eliminate redundant
litigation, and prevent a third party's disappearing if jurisdiction
and control over the party and his assets were not immediately
established. See id. at 481.
The FAA's purpose, as has been noted,
is to enforce private arbitration agreements "even if the
result is 'piecemeal litigation,' at least absent a countervailing
policy manifested in another federal statute." Dean Witter
Reynolds Inc. v. Byrd, 470 U.S. 213, 219-20 (1985). As a
tangential benefit, however, arbitration usually provides a speedier,
more economical form of dispute resolution.
These two policies do not necessarily
conflict. If arbitration goes forward between Texaco and McDermott,
it need not hold up or interfere with the admiralty litigation
between Texaco and the other defendants. Apportionment of liability
exists whether or not McDermott is impleaded under Rule 14(c).
Moreover, the essential functions of Rule 14(c) are accomplished
because McDermott will have to face Texaco directly as a defendant,
albeit in arbitration.
A conflict arises only if Rule 14(c)
is held to thwart enforcement of the arbitration agreement pursuant
to the district court's order. That result allows AmClyde, though
not a party to the arbitration agreement, to override the Texaco-McDermott
contract and fundamentally thwart the purposes of the FAA. Further,
to carve out a Rule 14(c) exception to the FAA could severely
undermine maritime arbitration clauses, inspiring abuse and opportunistic
behavior, as third parties are allowed or encouraged to do what
the parties to a contract themselves are not: to put aside a
mandatory arbitration provision and force litigation. It is perhaps
no accident that AmClyde did not even file a brief in this appeal
and by its silence rests on McDermott's arguments against enforcing
the Texaco-McDermott arbitration clause.
There is little caselaw to guide
our analysis. However, in the only previous decision to analyze
this precise issue, the court refused to create a Rule 14(c)
exception to the FAA on essentially similar facts. Shipping
Corp. of India v. American Bureau of Shipping, No. 84 CIV.
1920, 1989 WL 97821 (S.D.N.Y. Aug. 17, 1989). The India
court concluded that an outside party cannot use Rule 14(c) to
override an arbitration agreement previously reached between
a plaintiff and a third-party defendant.
The cases cited by McDermott in
favor of carving out a Rule 14(c) exception to section 3 of the
FAA are either unpersuasive or irrelevant. In General Marine
Construction Corp. v. United States, 738 F.Supp. 586 (D.
Mass. 1990), the court held that "once a case is properly
commenced as an admiralty matter in the District Court, Rule
14(c) governs related claims even if the issues raised by those
related claims, standing alone, would otherwise be subject to
the CDA [Contract Dispute Act] procedural scheme." Id.
at 590. General Marine has no bearing on the instant case
for three reasons: 1) it involves the Contracts Disputes Act,
41 U.S.C. § 605(a), not the FAA; 2) it does not involve
a motion to stay proceedings, but rather a motion to dismiss
claims resulting from a Rule 14(c) tender; and 3) the claims
for which dismissal was sought were not covered by the CDA. General
Marine makes no mention of the FAA or the strong presumption
in favor of arbitration.
McDermott also invokes National
Gypsum Co. v. NGC Settlement Trust & Asbestos Management
Corp., 118 F.3d 1056, 1069 (5th Cir. 1997), in which this
court held that a bankruptcy court may refuse one party's demand
to arbitrate if the cause of action is "derived entirely
from the federal rights conferred by the Bankruptcy Code . .
. ." McDermott cites National Gypsum for the general
proposition that the FAA is not absolute and can yield, upon
a proper showing, to other discrete bodies of federal law. But
McDermott ignores the fact that under the Supreme Court case
controlling National Gypsum, Shearson/American Express,
Inc. v. McMahon, 482 U.S. 220, 227 (1987), "[t]he burden
is on the party opposing arbitration . . . to show that Congress
intended to preclude a waiver of judicial remedies for the statutory
rights at issue." McDermott does not even attempt to bear
this burden and has not made such a showing on behalf of Rule
McDermott's reliance on Zimmerman
v. Int'l Companies & Consulting, Inc., 107 F.3d 344,
345-46 (5th Cir. 1997) is also misplaced. Zimmerman held
that a defendant-insurer with the contractual right to arbitrate
with the insured cannot force a plaintiff who is not a party
to the contract to arbitrate. Here Texaco seeks only to compel
McDermott, the party to the contract containing the arbitration
clause, to arbitrate.
Nor does Pensacola Construction
Co. v. St. Paul Fire and Marine Insurance Co., 705 F.Supp.
306 (W.D. La. 1989), support McDermott's position. The plaintiff
in Pensacola sued two defendants, only one of which had
an arbitration agreement with the plaintiff. The Pensacola
court allowed the defendant with the contractual right to arbitration
to stay the plaintiff's action against it, but the court refused
to stay the proceeding between the plaintiff and the other defendant.
Id. at 308. Pensacola would be relevant if Texaco
had sought to stay the proceedings involving AmClyde and the
other defendants. As Texaco only wants to stay the proceedings
between itself and McDermott, the two signatories to the relevant
contract, Zimmerman and Pensacola actually support
For these reasons, we conclude that
the district court erred in refusing to stay the Texaco-McDermott
aspect of this controversy pending arbitration.(6)
McDermott alternatively contends
that Texaco has waived its right to arbitrate. Normally, waiver
occurs when a party initially pursues litigation and then reverses
course and attempts to arbitrate, but waiver can also result
from "some overt act in Court that evinces a desire to resolve
the arbitrable dispute through litigation rather than arbitration."
Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324,
329 (5th Cir. 1999). There is a strong presumption against waiver,
and any doubts thereabout must be resolved in favor of arbitration.
Id. at 326.
McDermott does not assert that Texaco
attempted to litigate any claims against it stemming from the
crane line collapse. To the contrary, Texaco did not sue McDermott
for its role in this accident and has tried to compel arbitration.
Instead, McDermott's waiver argument is based on Texaco's actions
in other litigation, Shell Offshore, Inc. Et. Al. v. Heerema
Offshore Construction Group, Inc. Et Al., Civil Action No.
H-98-1090, S.D. Texas.
In Shell, Texaco has alleged
certain antitrust violations against McDermott and other defendants
relating to the Petronius construction contract and other
Gulf projects. However, Shell is only tangentially related
to the crane accident. On January 7, 2000 McDermott requested
arbitration relating to the Petronius contract and the
crane accident, claiming that Texaco was wrongfully withholding
payment of some $23 million dollars. Because Texaco wanted to
use certain antitrust arguments in the arbitration against McDermott
and because those antitrust issues were already before the district
court in Shell, Texaco petitioned the Shell court
to stay the Petronius arbitration pending the outcome
in Shell. The district court declined to stay the arbitration
altogether, but it did limit the scope of arbitration to the
Petronius contract alone, thereby keeping Texaco's antitrust
defenses out of the hands of the arbitrator and before the district
McDermott contends that Texaco's
request for a stay pending the outcome of the Shell antitrust
litigation satisfies the Subway test and constitutes a
waiver of arbitration. While it is true that Texaco's actions
delayed the arbitration proceeding and narrowed its scope, Texaco
never demonstrated the requisite desire to resolve the arbitrable
issues related to the crane accident through litigation rather
than arbitration. In order to waive arbitration, a party must
"do more than call upon unrelated litigation to delay an
arbitration proceeding." Subway, 169 F.3d at 328.
This is precisely what Texaco has done by requesting a stay of
arbitration pending the outcome of the ongoing and largely unrelated
antitrust lawsuit. Moreover, mere delay falls far short of the
waiver requirements of Subway. See id. at
326. Texaco never manifested any desire to litigate rather than
to arbitrate its claims against McDermott stemming from the December
3, 1998 incident.
Given the broad and unequivocal
language of section 3 of the Federal Arbitration Act, this court
refuses to create a Rule 14(c) exception that would allow third
parties unilaterally to nullify an arbitration clause. Enforcing
the arbitration clause does not conflict with Rule 14(c) on the
facts before us, whereas the rigid enforcement of Rule 14(c)
would utterly thwart the policy of the FAA. In light of our analysis,
and because Texaco has not waived its right to arbitrate, this
case is remanded to the district court for the issuance of an
order staying this litigation pending the outcome of the contractually
mandated arbitration. This stay is limited in scope to the proceedings
between Texaco and McDermott and should not affect Texaco's actions
against AmClyde or the other defendants. REVERSED and
1. Circuit Judge
of the United States Court of Appeals of the Ninth Circuit, sitting
2. At that hearing,
Texaco urged that "[u]nder the Federal Arbitration Act,
any claim that we make . . . against McDermott, must be stayed
pending that arbitration." The district court then stated
that Rule 14(c) can not be circumvented, impliedly denying Texaco's
motion to strike the Rule 14(c) tender. Without further discussion
of the stay from either Texaco or McDermott, the district court
announced its grant of partial summary judgment for McDermott.
Texaco requested a clarification of the court's ruling, specifically
asking if the district court was "also denying our request
that the matter be stayed pending arbitration?" The district
court responded "correct." Texaco then stated its desire
to appeal the denial of the stay immediately and the district
court invited Texaco to prepare an appropriate order. The order
stated that Texaco's "instanter motion in open court . .
. to stay claims . . . [is denied]." Taken together with
Texaco's extensive briefing on the stay issue in its memorandum
opposing McDermott's motion for partial summary judgment, there
is no doubt that Texaco sufficiently presented a motion to stay.
See Fed. R. Civ. P. 7(b)(1).
3. The FAA dictates
that "[a] written provision in any maritime transaction
or a contract evidencing a transaction involving commerce to
settle by arbitration . . . shall be valid, irrevocable, and
enforceable." 9 U.S.C. § 2. The Act defines "maritime
transaction" as "charter parties, bills of lading of
water carriers, agreements relating to wharfage, supplies furnished
vessels or repairs to vessels, collisions, or any other matters
in foreign commerce which, if the subject of controversy, would
be embraced within admiralty jurisdiction." 9 U.S.C. §
1. So regardless of whether the Petronius construction
contract is treated as a maritime transaction or simply as interstate
commerce, the FAA applies.
request for a remand to determine the scope of arbitration conflicts
with these authorities that squarely allow the arbitrator to
initially make that decision where a clause is "broad."
reliance on Montauk Oil Transp. Corp. v. Steamship Mut. Underwriting
Ass'n., Ltd., 859 F.Supp 669 (S.D.N.Y. 1994), is similarly
6. It follows
that the district court's partial summary judgment in favor of
McDermott must be vitiated by this ruling.