Large container ship in the open sea

Iota Shipholding Ltd v. Starr Indem. & Liab. Co., 16 Civ. 4881 (S.D.N.Y. May 31, 2017)

Petitioners brought this action before the U.S. District Court for the Southern District of New York pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, and the Federal Arbitration Act, 9 U.S.C. §§ 1-16, in order to (1) enjoin an arbitration already commenced against them by Respondent; and (2) declare that there was no valid arbitration agreement between the parties. Petitioners, nonsignatories to the relevant charter agreement, disputed that they had entered into any valid agreement that would bind them to arbitrate with Respondent. The district court agreed.

In so doing, the court reasoned that the law generally treats arbitrability as an issue for judicial determination unless the parties clearly and unmistakably provide otherwise. However, even where the parties to a contract have committed the question of arbitrability to arbitration, a reviewing court must always ascertain whether the resisting party is subject to a valid arbitration agreement. The court noted that even the broadest arbitration clause cannot bind a party who never agreed to it.

The court explained that a party may be bound to an arbitration agreement as a nonsignatory (cf. GAN – US court confirms international arbitral award against non-signatory). In the charter context, in particular, when a charter party’s arbitration clause is expressly incorporated into a bill of lading, nonsignatories to the charter who are linked to the bill of lading through general principles of contract or agency law can be bound to the charter arbitration clause as well. To succeed on such an argument, Respondent would have to demonstrate that (1) the relevant voyage charter’s arbitration clause was expressly incorporated into the bill of lading and (2) the clause’s language was broad enough to encompass Respondent’s disputes with the nonsignatory Petitioners.

In the maritime context, as was the case here, the court reasoned that the quintessential broad arbitration clause applies by its terms to “all disputes arising under the charterparty” while the typical narrow clause refers specifically to disputes “between owners and charters” and only applies to disputes between the particular parties identified in the clause. Here, the court concluded that the relevant arbitration clause was expressly limited to disputes arising “between Owner and Charterer” and was thus restrictive in scope and not capable of extending to Petitioners, who were neither the “Owner” nor “Charterer” as defined by the contract. Because the court determined that Respondents had failed to meet the second requirement of the analysis, it declined to address the first.

Accordingly, the court held that the parties had not entered into a valid agreement to arbitrate and enjoined the underlying arbitration.