VT Halter Marine, Inc. v. Wartsila North America, Inc.

Case: 12-60051 Document: 00512139208 Page: 1 Date Filed: 02/08/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 8, 2013
No. 12-60051 Lyle W. Cayce
Clerk
VT HALTER MARINE, INCORPORATED,
Plaintiff–Appellant
v.
WARTSILA NORTH AMERICA, INCORPORATED,
Defendant–Appellee
Appeal from the United States District Court
for the Southern District of Mississippi
1:11-CV-250
Before WIENER, CLEMENT, and PRADO, Circuit Judges.
PER CURIAM:*
VT Halter Marine, Inc. (“VTHM”) appeals the district court’s grant of
Wartsila North America, Inc.’s (“Wartsila”) motion to compel arbitration.
Because we hold that VTHM did not agree to arbitrate disputes with Wartsila,
we REVERSE and REMAND to the district court for a determination of whether
one of the exceptions that bind non-signatories to arbitration agreements applies
here.
I. FACTUAL AND PROCEDURAL BACKGROUND
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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A. Factual Background
This case concerns three parties, two contracts, and one arbitration clause.
Third-party ship operator Vessel Management Services, Inc. (“Vessel
Management”) contracted with Plaintiff–Appellant VTHM (the “Construction
Contract”) to construct several vessels, including the M/V Pride (the “Pride”).
Under the Construction Contract, Vessel Management would supply VTHM with
various components for the vessels, including the main engines, shaft, hub, and
blades. VTHM would receive and store those parts at its shipyard pending
installation in a vessel for Vessel Management.
Vessel Management also entered into a contract with Defendant–Appellee
Wartsila (the “Sales Contract”), under which Wartsila would provide components
for Vessel Management’s vessels. The Sales Contract between Wartsila and
Vessel Management includes a mandatory arbitration clause, which states,
This Agreement shall be construed in accordance with the laws of
the State of New York, without reference to its conflict of laws
provisions. Any dispute between the parties arising out of or in
connection with this Agreement shall be finally settled under the
Rules of Arbitration of the American Arbitration Association by one
or more arbitrators appointed in accordance with the said rules, in
New York, New York.
To be clear, VTHM is not a party to the Sales Contract, and is thus a “non-
signatory” with respect to it; VTHM and Wartsila have not entered into any
contract with each other.
Pursuant to the Sales Contract, Vessel Management bought propulsion
systems (a/k/a shaft/hub assemblies) from Wartsila for the vessels VTHM was
building, including the Pride. Wartsila delivered the propulsion systems directly
to VTHM at its shipyard for storage until they could be installed. VTHM later
installed a propulsion system in the Pride. Thereafter, the Pride’s propulsion
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No. 12-60051
system failed inspection. VTHM claims that Wartsila represented to Vessel
Management that VTHM’s poor workmanship caused the failure. Based on
Wartsila’s representation, Vessel Management demanded that VTHM purchase
a replacement propulsion system for the Pride. VTHM states that although it
believed that Wartsila’s representation about VTHM’s workmanship was false,
it purchased a new propulsion system to avoid liquidated damages under the
Construction Contract.
B. Procedural Background
VTHM sued Wartsila, seeking to recover damages that it alleges it
sustained through having to replace Wartsila’s defective propulsion system and
through Wartsila’s representation that VTHM was responsible for the Pride’s
failure. VTHM alleges two causes of action: (1) breach of warranty and (2)
tortious interference with contractual relations. First, as to the breach of
warranty claim, VTHM contends that although it is not a party to the Sales
Contract, it has the right, as an “equitable subrogee,” to stand in the shoes of
Vessel Management to enforce Wartsila’s obligation to replace the failed
propulsion system under the Sales Contract’s warranty. As to the second claim,
VTHM asserted that Wartsila tortiously interfered with VTHM’s contractual
relationship with Vessel Management (viz., the Construction Contract) by falsely
telling Vessel Management that VTHM incorrectly installed the propulsion
system.
Wartsila moved to compel arbitration as to both claims. VTHM conceded
that its first claim, breach of warranty, was subject to mandatory arbitration
because the breach of warranty claim was derived from Vessel Management’s
rights under its Sales Contract with Wartsila, which had a mandatory
arbitration clause. VTHM made no such concession, however, as to its tortious
interference claim. The district court granted Wartsila’s motion, ordering both
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claims to arbitration and dismissing both. VTHM appealed to this Court,
arguing that, as a non-signatory to the arbitration agreement between Wartsila
and Vessel Management, it is not bound by it. VTHM argues, further, that none
of the exceptions that bind non-signatories to arbitration agreements applies in
this case.
II. JURISDICTION AND STANDARD OF REVIEW
The district court entered final judgment on this matter on December 14,
2011. This Court has jurisdiction pursuant to 28 U.S.C. § 1291.
Generally, the Fifth Circuit reviews the grant or denial of a motion to
compel arbitration de novo. Noble Drilling Servs., Inc. v. Certex USA, Inc., 620
F.3d 469, 472 n.4 (5th Cir. 2010). But, when a district court applies equitable
estoppel to compel arbitration, this Court determines only whether the district
court has abused its discretion. Id.; see also Grigson v. Creative Artists Agency
L.L.C., 210 F.3d 524, 528 (5th Cir. 2000). VTHM argues that the district court
did not rely on equitable estoppel, and so de novo review must be applied.
Wartsila seeks to avoid de novo review by contending that although the
district court did not expressly refer to equitable estoppel, it nevertheless relied
on it. For Wartsila, because “[equitable] estoppel doctrine is the only basis by
which VTHM could have been compelled to arbitrate its claims,” the district
court must have relied on it without stating so. Wartsila fails to consider,
however, that the district court may simply have erred in compelling arbitration
on the tortious interference claim. The district court, in a three-page opinion,
never refers to equitable estoppel or appeals to the policy justifications behind
equitable estoppel.
Wartsila provides no case, and we can find none, where this Court
reviewed for abuse of discretion a district court order compelling arbitration that
did not clearly apply equitable estoppel. Because there is no indication from the
district court’s order that it applied equitable estoppel, we assume that it did
not.
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III. DISCUSSION
Arbitration is a contract matter between parties, and a court generally
cannot compel a party to arbitrate a dispute unless the parties agreed to
arbitrate the dispute in question. Pennzoil Exploration & Prod. Co. v. Ramco
Energy Ltd., 139 F.3d 1061, 1064 (5th Cir. 1998) (citing AT&T Techs., Inc. v.
Commc’ns Workers, 475 U.S. 643, 648 (1986)); see also Stolt–Nielsen S.A. v.
AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1774 (2010) (“We think it is also clear
from our precedents and the contractual nature of arbitration that parties may
specify with whom they choose to arbitrate their disputes . . . . Nothing in the
FAA authorizes a court to compel arbitration of any issues, or by any parties,
that are not already covered in the agreement.” (internal quotation marks,
citations, and alterations omitted)). This Court in Pennzoil articulated the two
general requirements for compelling a party to arbitrate a particular dispute: the
court must determine both that (1) the two parties have a valid agreement to
arbitrate, and (2) the dispute in question falls within the scope of that
arbitration agreement. 139 F.3d at 1065. The district court most likely
overlooked that VTHM is not a party to the Sales Contract containing the
arbitration clause. The district court cited Pennzoil as the basis for its analysis,
suggesting that it would evaluate first, whether the two parties had a valid
agreement to arbitrate, and second, whether the dispute in question fell within
the scope of that arbitration agreement. See id. However, the district court
appears to have skipped the first requirement (did the parties have a valid
agreement to arbitrate?) and instead jumped straight to the second (did the
dispute in question fall within the scope of the agreement?).
There are two indications that the district court overlooked the first
requirement. First, the court’s order cited the part of Pennzoil that addresses
the second requirement. See Pennzoil, 139 F.3d at 1067. Moreover, the district
court’s discussion includes references to two cases that addressed Pennzoil’s
second step. The first case, Brandom v. Gulf Coast Bank & Trust Co., No. 00-
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11119, 2001 WL 498720 (5th Cir. Apr. 16, 2001) (unpublished), concerns the
“scope of the arbitration clause.” Id. at *1. The second case, Prima Paint Corp.
v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 396–98 (1967), deals with
whether fraud was within the scope of an arbitration agreement. In both cases
cited by the district court, the threshold inquiry of whether the parties agreed
to arbitrate in the first place was undisputed.
Second, the order’s language focuses only on the broad scope of the
arbitration agreement: “[t]his Court must resolve any doubts concerning the
scope of coverage of a contractual arbitration clause in favor of arbitration”;
“[t]he arbitration clause in this case encompasses ‘any dispute’ between the
parties ‘arising out of’ or ‘in connection with’ the Agreement.” This focus on
scope suggests the court evaluated only the second step. The district court never
determined whether VTHM and Wartsila had a valid agreement to arbitrate in
the first place. If the district court had undertaken that determination it would
have concluded that they did not, ending the inquiry at requirement one; the
district court should not have reached requirement two.
The district court seems to have overlooked that there were two separate
contracts mentioned in VTHM’s claims. The Sales Contract between Vessel
Management and Wartsila contained a presumably valid agreement to arbitrate.
VTHM acknowledges that because its breach of warranty claim is derived from
the Sales Contract between Vessel Management and Wartsila, it must arbitrate
that claim. But there is no contract between VTHM and Wartsila that would
compel VTHM to arbitrate its tortious interference claim. The district court’s
order never articulates a distinction between the two contracts. In fact, the
district court references “the Arbitration Agreement at issue [10-1],” but that
agreement is not between the two parties to the suit, Wartsila and VTHM.
Rather, it is between Wartsila and third-party Vessel Management. This
reference suggests that the district did not contemplate that there were two
separate contracts at issue. The citation evidence, coupled with the order’s
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language, indicates that the court incorrectly assumed VTHM was the second
party to the arbitration agreement, not Vessel Management.**
Ultimately, regardless of whether the district court correctly understood
the nature of the contracts between the parties, Wartsila concedes that it has no
valid agreement to arbitrate with VTHM. Thus, the first requirement of
Pennzoil cannot be satisfied; VTHM cannot be compelled to arbitrate under
general arbitration principles and the district court erred in so holding.
We decline to determine whether equitable estoppel compels arbitration
at this point. Instead, we remand this case to the district court to determine
whether direct benefits equitable estoppel applies, as Wartsila urges.
For the foregoing reasons, we REVERSE the district court’s order and
REMAND for further determination of whether equitable estoppel compels
arbitration.
**
There was one part of the district court’s order that could be read to indicate that the
court realized there were two separate contracts. The final page of the order states “the
[c]ourt is of the view that Plaintiff’s tortious interference claim ‘arose out of or in connection
with’ the contract between Wartsila and Vessel Management.” The district court correctly
identifies the two parties to the Sales Contract containing the arbitration agreement. It is not
clear, however, that the court realized that “the Plaintiff”—as it is referred throughout the
order—is VTHM.
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