Texaco Exploration v. Amclyde Engineered Prod.

• Decision Date: 28 February 2001
• Docket Number: No. 00-30799,00-30799
• Citation: 243 F.3d 906
• Parties: (5th Cir. 2001) TEXACO EXPLORATION AND PRODUCTION COMPANY AND MARATHON OIL COMPANY, Plaintiffs-Appellants, v. AMCLYDE ENGINEERED PRODUCTS COMPANY, Inc., ET AL, Defendants. AMCLYDE ENGINEERED PRODUCTS COMPANY, Inc., Third-Party Plaintiffs, v. J. RAY McDERMOTT, Inc., Third-Party Defendant-Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

Page 906

243 F.3d 906 (5th Cir. 2001)

TEXACO EXPLORATION AND PRODUCTION COMPANY AND MARATHON OIL COMPANY, Plaintiffs-Appellants, v. AMCLYDE ENGINEERED PRODUCTS COMPANY, Inc., ET AL, Defendants.

AMCLYDE ENGINEERED PRODUCTS COMPANY, Inc., Third-Party Plaintiffs, v. J. RAY McDERMOTT, Inc., Third-Party Defendant-Appellee.

No. 00-30799

UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

February 28, 2001

Appeal from the United States District Court for the Eastern District of Louisiana

Before GOODWIN^*, 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 arbitration.

BACKGROUND

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 against McDermott.

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 stay.

DISCUSSION

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.¹ 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.² 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 of 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. 1985).³

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 Corporation of India v. American Bureau of Shipping, 1989 WL 97821 (S.D.N.Y.). 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...