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The U.S. Court of Appeals for the 9th Circuit recently issued a
decision holding that a dispute pertaining to liability for damage
caused during the salvage of a vessel could proceed in court,
despite the inclusion of an arbitration provision in the salvage
contract. In light of this decision, it would be prudent to review
the language of arbitration clauses in contracts, particularly
those pertaining to work or services provided in jurisdictions
covered by the 9th Circuit (Alaska, Arizona, California, Hawaii,
Idaho, Montana, Nevada, Oregon, Washington, Guam, Northern Mariana
Islands), to ensure the wording of the arbitration clause reflects
the intent of the parties.
In Cape Flattery Limited v. Titan Maritime, LLC, a
shipowner (Cape Flattery) had contracted with a salvage company
(Titan) to remove a stranded vessel from a reef. The contract
contained a provision calling for disputes "arising out
of" the contract to be resolved by arbitration in England.
Titan removed the vessel from the reef, but apparently damaged
the reef in doing so. Pursuant to federal law, the U.S. government
sought to recover from Cape Flattery for damage to the reef. Cape
Flattery filed suit in federal court, seeking indemnification from
Titan for the damages sought by the government. Titan moved to
compel arbitration under the salvage contract, and the federal
district court denied its motion.
On appeal, the 9th Circuit held that the claim for
indemnification was collateral to the salvage contract and did not
"arise out of" that contract. As a result, the court held
that Cape Flattery's indemnification claim was not subject to
arbitration and could be pursued in a U.S. court. The court found
that if the parties had intended all disputes associated with the
contract to be resolved by arbitration, they would have used
broader language such as "arising out of or relating to."
Since they did not, arbitration was not required. Although the 9th
Circuit decision is not binding on all U.S. courts, and some other
courts have adopted a less restrictive reading of the phrase
"arising out of," this decision is a warning that
contract parties must be very clear in the wording of arbitration
clauses and should have an understanding of the law that will be
applied in determining the arbitrability of disputes.
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