Maritime Proctor Blog

An arbitration clause is, essentially, a forum selection clause on steroids.  While the latter merely selects the court or forum ( EX: …” any claims arising out of this contract shall be brought in the United States District Court for the Southern District of Texas, Houston Division …”), the former replaces the existing public judicial system for, in essence, a private one.  

This post provides a basic overview of the legality and applicability of arbitration clauses in Admiralty law, and is relevant because of a Supreme Court of the United States (“SCOTUS”) decision, Epic Systems Corp. v. Lewis, issued about a month ago.

Epic Systems

On May 21, 2018, SCOTUS issued a 5-4 decision in Epic Systems Corp. v. Lewis, 584 U.S. _____, No. 16-285 (2018), a case wherein several employers and employees entered into employment contracts providing for an individual arbitration in the event of any employment disputes between them.

To generalize, the contracts at issue in Lewis prohibited class action lawsuits, juries, or even the use of the state or federal court system as the primary mechanism for resolving a dispute. Rather, any employment-related dispute (including over wage/hour claims under the Fair Labor Standards Act [“FLSA”]) would be resolved by a neutral arbitrator under pre-determined rules.  The employees had to sign these contracts to begin working for their employers.

Leading up to this decision, the National Labor Relations Board (“NLRB”) determined in 2012 that the National Labor Relations Act (“NLRA”) nullified any such arbitration agreements. As SCOTUS noted in its syllabus of the Lewis decision, “since then other courts have either agreed with or deferred to the [NLRB’s] position.”

The majority in Lewis held the arbitration agreements were enforceable, and the NLRA did not nullify them as the NLRB previously held. Moreover, the Lewis Court held the Federal Arbitration Act (“FAA”) does not preclude arbitration agreements between an individual employee and their employer, but rather the FAA actually mandates that such agreements be enforced.

Many labor and employment attorneys already provided commentary on Lewis. That is not the purpose of this post. Instead, Lewis provides an excellent transition into the applicability of arbitration clauses in a saltier context. There are several different scenarios under Admiralty law in which arbitration agreements/forum selection clauses are permissible to limit the options of an aggrieved or injured party, should that party wish to institute litigation.

Scenario 1 – Maritime Breach of Contract

It is routine for any maritime commercial contract (i.e., a charter party or contract to provide food/water to a vessel) to now contain either a forum selection clause or an arbitration clause. These clauses are normally enforced, as there is a triumvirate of SCOTUS cases supporting the general enforceability of such clauses:

-a-        M/V Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) (forum selection clause between Texas company and German company is enforceable because, inter alia, the parties were sophisticated and negotiated at arm’s length);

-b-       Carnival Cruise Lines v. Shute, 499 U.S. 585 (1991)(forum selection clause mandating a Washington resident must sue in Florida courts is enforceable, even though the clause was part of a form contract);

-c-        Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995)(a forum selection/arbitration clause in a bill of lading does not necessarily offend or violate the Carriage of Goods by Sea Act [“COGSA”], allowing for arbitration of a dispute in Japan as opposed to a federal lawsuit in Massachusetts).

If the clauses are worded appropriately to each particular transaction, it is likely the clause will be enforced by a court in the United States, given that the SCOTUS views the FAA as a Congressional instruction “that arbitration agreements … must be enforced as written.” See Lewis, 584 U.S. ____, No. 16-285, p. 25 (2018).

Scenario 2 – Personal Injury or Death involving a passenger

The second case mentioned above, Carnival Cruise Lines v. Shute, allows for limitation of the available forum to passenger claims for personal injury or death. This is so even though the contract terms usually arrive after the customer books the voyage (i.e., has paid for the cruise), and in most instances can only recover some of their money in a refund.

For example, the 57 Americans injured or killed in the Costa Concordia disaster off the coast of Italy in 2012 were required to sue in Italy, as opposed to Florida.

Given the strong SCOTUS precedent on this issue, I do not anticipate much changing with the validity of forum selection clauses and/or arbitration agreements as it relates to passengers.

Scenarios 3 and 4 – Personal Injury or Death Involving Seamen

The next two scenarios involve seamen, as that term is understood under the General Maritime Law (“GML”) of the United States. There is no statutory definition of “seaman” in the Jones Act (although there is such a definition in other U.S. Statutes). Instead, one must look to the SCOTUS decision of Chandris, Inc. v. Latsis, 515 U.S. 347, 368 (1995), which contains a two-part test holding a person is a seaman if:

-a-        Their duties at the time of the incident contributed to the function of the vessel or accomplishment of its mission; and

-b-       Their connection, if any, to the vessel (or fleet of vessels) at the time of the incident was substantial in terms of both its duration and nature.

Foreign seamen for the purposes of this analysis are those who are not U.S. citizens or legal U.S. residents.

Scenario 3 – Injury or Death to a U.S. Seaman

U.S. seamen receive greater protection than their foreign counterparts as to arbitration clause in employment contracts. The FAA, specifically 9 U.S.C. § 1, carves out the employment contracts of seamen and railroad employees from the auspices of the FAA. Thus, if an employer tries to insert an arbitration clause into the seaman’s articles (or an employment contract or other documents used as part of a hiring package), it likely would be found void. Thus, the holding of Epic Systems wouldn’t apply to a U.S. seaman’s employment contract if the U.S. seaman worked for a U.S. company primarily in U.S. waters.

However, the FAA does allow for seamen to enter into post-injury arbitration agreements, meaning a seaman agrees to arbitrate his dispute with his employer and/or a vessel owner after the seaman is injured in the course and scope of their employment. The ability to engage in such a transaction is not absolute, instead depending on the language used and the consideration given in return for the seaman waiving his right to file litigation. An example of a post-injury arbitration agreement surviving court scrutiny is Terrebonne v. K-Sea Transportation Co., 477 F.3d 271 (5^th Cir. 2007).

Scenario 4 – Injury or Death to a Foreign Seaman

In 1970, Congress incorporated the Convention on the Recognition and Enforcement of Foreign Arbitral Agreements (commonly referred to as “the Convention” or “the New York Convention”) to United States statutory law as Chapter 2 of Title 9 of the U.S. Code (the same locale as the FAA). See 9 U.S.C. § 201. The important text of this Chapter is found in 9 U.S.C. § 202, which reads as follows:

An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title, falls under the Convention. An agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states. For the purpose of this section a corporation is a citizen of the United States if it is incorporated or has its principal place of business in the United States.

Since 1970, various appellate courts held the Convention applies not only to foreign seamen contracted to work for foreign employers or foreign flagged vessels, but also to U.S. citizens contracted to work as a seaman for a U.S. based company when the work was to be performed outside U.S. territorial waters.

Examples of the application of the Convention to allow arbitration or forum selection clause agreements in foreign seaman contracts of employment are:

Marine Chance Shipping v. Sebastian, 143 F.3d 216 (5^th Cir. 1998) – forum selection clause mandating personal injury claims of Filipino seaman must be enforced even when injuries occurred in the United States.

Francisco v. Stolt Achievement MT, 293 F.3d 270 (5^th Cir. 2002) – The Convention required arbitration of any claims made by Filipino seaman injured on the Mississippi River due to the language of his employment contract.

Freudensprung v. Offshore Technical Services, Inc., 379 F.3d 327 (5^th Cir. 2004) – The Convention and employment contract language mandated arbitration of any personal injury claims made by U.S. seaman hired by U.S. company to work offshore in Nigeran waters.

Thus, there are options for the use of arbitration agreements in Admiralty law, even in the context of personal injury claims. If you wish to learn more about options in this regard, please feel free to contact me.