With increasing frequency, mandatory arbitration clauses are popping up in 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 go the arbitration route instead of formal litigation because it is typically viewed as less costly 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.
In the Fifth Circuit case of Todd v. Steamship Mutual Underwriting Association Ltd., the court found that a mandatory arbitration clause in an insurance agreement between Delta Queen Steamboat Co. and its liability insurer could be enforced against a Delta Queen employee. 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. He then filed a direct suit against Delta Queen’s insurer to recover the monetary award. Relying on a clause in its insurance policy, Steamship Mutual argued that it was not subject to the employee’s suit 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 the insurance contract.
Guided by the recent U.S. Supreme Court decision in 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. The district court concluded that the employee could be bound by the policy’s language because he was basically seeking to enforce and benefit from the contract between Delta Queen and Steamship Mutual. As a “third-party beneficiary,” the employee was bound by the terms of the contract, even though he was not a party to it.
When entering into contracts, you need to be aware that your rights and remedies may be influenced by other relationships of those with whom you are dealing.