Choice of Law Determines Arbitrability; “Clear and Unmistakable” Standard Adopted; “Arising Under” Deemed a Narrow Arbitration Clause

By  Louis M. Solomon

The recent decision by the Ninth Circuit in Cape Flattery Limited (Cape) v. Titan Maritime, LLC, et al. (Titan), No. 09-15682 (9th Cir. July 2011) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], discusses several important issues in international litigation practice.  The suit involves claims by Cape against Titan for gross negligence in connection with the salvage operation done on Cape's vessel, the M/V Cape Flattery.   The salvage operation was done pursuant to a contract providing that

"Any dispute arising under this Agreement shall be settled by arbitration in London, England, in accordance with the English Arbitration Act 1996 and any amendments thereto, English law and practice to apply"

Reviewing the question of whether to compel arbitration de novo, the Ninth Circuit held:

First, the Court of Appeals addressed the question of what law applied to determine the arbitrability of the dispute.  The Circuit followed the holding in Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468 (1989) [enhanced version  / unenhanced version ], holding that there was no "federal policy favoring arbitration under a certain set of procedural rules" but rather that the federal policy favoring arbitration "is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate".  As a result, the Court ruled that "contracting parties have the power to agree to apply non-federal arbitrability law" and that courts should enforce them.

Second, the Circuit observed that First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) [enhanced version / unenhanced version], required the application of ordinary state-law principles that govern the formation of contracts but that, in determining whether parties agreed to arbitrate, "[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so".   Applying and extending that rule, the Circuit ruled that "a general choice-of-law provision does not constitute an agreement to apply non-federal arbitrability law".  Said the Court:

Like the question of who should decide arbitrability, the question of what law governs arbitrability is 'rather arcane'.   . . . We therefore conclude, following Kaplan, that courts should apply federal arbitrability law absent 'clear and unmistakable evidence' that the parties agreed to apply non-federal arbitrability law"

As a result, the Circuit found the language of the agreement here, "English law and practice to apply", to be ambiguous to answer the question whether English law should govern the issue of arbitrability in the first place.   The Circuit therefore applied federal arbitrability law.

Third, in doing so, the Court ruled that the phrase, "any disputes arising hereunder", was a narrow clause.  Following In re Kinoshita & Co., 287 F.2d 951 (2d Cir. 1961) [enhanced version], the Court found that the narrow clause applied only to those disputes relating to the interpretation and performance of the contract itself".  (See generally our discussion of the issue of who decides what in the arbitration-litigation context in our e-book, International Practice: Topics and Trends).  Recognizing that the Second Circuit itself has "significantly narrowed" Kinoshita, the Circuit was unwilling to ignore it altogether, went on to apply it, and held that the dispute at issue was not arbitrable.

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