Texaco Expl Prod Co v. AmClyde Eng Prod Co

United States Court of Appeals
Fifth Circuit
F I L E D
February 28, 2001

REVISED, MARCH 29, 2001 Charles R. Fulbruge III
Clerk
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________

No. 00-30799
_______________________

TEXACO EXPLORATION AND PRODUCTION COMPANY
AND MARATHON OIL COMPANY,

Plaintiffs-Appellants,

versus

AMCLYDE ENGINEERED PRODUCTS COMPANY, Inc., ET AL,

Defendants.

__________________________________________

AMCLYDE ENGINEERED PRODUCTS COMPANY, Inc.,

Third-Party Plaintiffs,

versus

J. RAY McDERMOTT, Inc.,

Third-Party Defendant-Appellee.

_________________________________________________________________

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

Before GOODWIN*, GARWOOD, and JONES, Circuit Judges.

*
Circuit Judge of the United States Court of Appeals of the Ninth
Circuit, sitting by designation.
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

2
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.

3
 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

1
At that hearing, Texaco urged that “[u]nder the Federal Arbitration
Act, any claim that we make . . . against McDermott, must be stayed pending that
arbitration.” The district court then stated that Rule 14(c) can not be
circumvented, impliedly denying Texaco’s motion to strike the Rule 14(c) tender.
Without further discussion of the stay from either Texaco or McDermott, the
district court announced its grant of partial summary judgment for McDermott.
Texaco requested a clarification of the court’s ruling, specifically asking if
the district court was “also denying our request that the matter be stayed
pending arbitration?” The district court responded “correct.” Texaco then

4
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

stated its desire to appeal the denial of the stay immediately and the district
court invited Texaco to prepare an appropriate order. The order stated that
Texaco’s “instanter motion in open court . . . to stay claims . . . [is denied].”
Taken together with Texaco’s extensive briefing on the stay issue in its
memorandum opposing McDermott’s motion for partial summary judgment, there is no
doubt that Texaco sufficiently presented a motion to stay. See Fed. R. Civ. P.
7(b)(1).
2
The FAA dictates that “[a] written provision in any maritime
transaction or a contract evidencing a transaction involving commerce to settle
by arbitration . . . shall be valid, irrevocable, and enforceable.” 9 U.S.C. §
2. The Act defines “maritime transaction” as “charter parties, bills of lading
of water carriers, agreements relating to wharfage, supplies furnished vessels
or repairs to vessels, collisions, or any other matters in foreign commerce
which, if the subject of controversy, would be embraced within admiralty
jurisdiction.” 9 U.S.C. § 1. So regardless of whether the Petronius

5
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 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

construction contract is treated as a maritime transaction or simply as
interstate commerce, the FAA applies.
3
McDermott’s request for a remand to determine the scope of
arbitration conflicts with these authorities that squarely allow the arbitrator
to initially make that decision where a clause is “broad.”

6
 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

7
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

8
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 Corp. of India v. American

Bureau of Shipping, No. 84 CIV. 1920, 1989 WL 97821 (S.D.N.Y. Aug.

17, 1989). 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 defendant.

The cases cited by McDermott in favor of carving out a

Rule 14(c) exception to section 3 of the FAA are either

unpersuasive or irrelevant. In General Marine Construction Corp.

v. United States, 738 F.Supp. 586 (D. Mass. 1990), the court held

that “once a case is properly commenced as an admiralty matter in

the District Court, Rule 14(c) governs related claims even if the

issues raised by those related claims, standing alone, would

otherwise be subject to the CDA [Contract Dispute Act] procedural

scheme.” Id. at 590. General Marine has no bearing on the instant

case for three reasons: 1) it involves the Contracts Disputes Act,

41 U.S.C. § 605(a), not the FAA; 2) it does not involve a motion to

stay proceedings, but rather a motion to dismiss claims resulting

from a Rule 14(c) tender; and 3) the claims for which dismissal was

9
sought were not covered by the CDA. General Marine makes no

mention of the FAA or the strong presumption in favor of

arbitration.

McDermott also invokes National Gypsum Co. v. NGC

Settlement Trust & Asbestos Management Corp., 118 F.3d 1056, 1069

(5th Cir. 1997), in which this court held that a bankruptcy court

may refuse one party’s demand to arbitrate if the cause of action

is “derived entirely from the federal rights conferred by the

Bankruptcy Code . . . .” McDermott cites National Gypsum for the

general proposition that the FAA is not absolute and can yield,

upon a proper showing, to other discrete bodies of federal law.

But McDermott ignores the fact that under the Supreme Court case

controlling National Gypsum, Shearson/American Express, Inc. v.

McMahon, 482 U.S. 220, 227 (1987), “[t]he burden is on the party

opposing arbitration . . . to show that Congress intended to

preclude a waiver of judicial remedies for the statutory rights at

issue.” McDermott does not even attempt to bear this burden and

has not made such a showing on behalf of Rule 14(c).

McDermott’s reliance on Zimmerman v. Int’l Companies &

Consulting, Inc., 107 F.3d 344, 345-46 (5th Cir. 1997) is also

misplaced. Zimmerman held that a defendant-insurer with the

contractual right to arbitrate with the insured cannot force a

plaintiff who is not a party to the contract to arbitrate. Here

10
Texaco seeks only to compel McDermott, the party to the contract

containing the arbitration clause, to arbitrate.

Nor does Pensacola Construction Co. v. St. Paul Fire and

Marine Insurance Co., 705 F.Supp. 306 (W.D. La. 1989), support

McDermott’s position. The plaintiff in Pensacola sued two

defendants, only one of which had an arbitration agreement with the

plaintiff. The Pensacola court allowed the defendant with the

contractual right to arbitration to stay the plaintiff’s action

against it, but the court refused to stay the proceeding between

the plaintiff and the other defendant. Id. at 308. Pensacola

would be relevant if Texaco had sought to stay the proceedings

involving AmClyde and the other defendants. As Texaco only wants

to stay the proceedings between itself and McDermott, the two

signatories to the relevant contract, Zimmerman and Pensacola

actually support Texaco’s position.4

For these reasons, we conclude that the district court

erred in refusing to stay the Texaco-McDermott aspect of this

controversy pending arbitration.5

McDermott alternatively contends that Texaco has waived

its right to arbitrate. Normally, waiver occurs when a party

4
McDermott’s reliance on Montauk Oil Transp. Corp. v. Steamship Mut.
Underwriting Ass’n., Ltd., 859 F.Supp 669 (S.D.N.Y. 1994), is similarly
misplaced.
5
It follows that the district court’s partial summary judgment in
favor of McDermott must be vitiated by this ruling.

11
initially pursues litigation and then reverses course and attempts

to arbitrate, but waiver can also result from “some overt act in

Court that evinces a desire to resolve the arbitrable dispute

through litigation rather than arbitration.” Subway Equipment

Leasing Corp. v. Forte, 169 F.3d 324, 329 (5th Cir. 1999). There

is a strong presumption against waiver, and any doubts thereabout

must be resolved in favor of arbitration. Id. at 326.

McDermott does not assert that Texaco attempted to

litigate any claims against it stemming from the crane line

collapse. To the contrary, Texaco did not sue McDermott for its

role in this accident and has tried to compel arbitration.

Instead, McDermott’s waiver argument is based on Texaco’s actions

in other litigation, Shell Offshore, Inc. Et. Al. v. Heerema

Offshore Construction Group, Inc. Et Al., Civil Action No. H-98-

1090, S.D. Texas.

In Shell, Texaco has alleged certain antitrust violations

against McDermott and other defendants relating to the Petronius

construction contract and other Gulf projects. However, Shell is

only tangentially related to the crane accident. On January 7,

2000 McDermott requested arbitration relating to the Petronius

contract and the crane accident, claiming that Texaco was

wrongfully withholding payment of some $23 million dollars.

Because Texaco wanted to use certain antitrust arguments in the

arbitration against McDermott and because those antitrust issues

12
were already before the district court in Shell, Texaco petitioned

the Shell court to stay the Petronius arbitration pending the

outcome in Shell. The district court declined to stay the

arbitration altogether, but it did limit the scope of arbitration

to the Petronius contract alone, thereby keeping Texaco’s antitrust

defenses out of the hands of the arbitrator and before the district

court.

McDermott contends that Texaco’s request for a stay

pending the outcome of the Shell antitrust litigation satisfies the

Subway test and constitutes a waiver of arbitration. While it is

true that Texaco’s actions delayed the arbitration proceeding and

narrowed its scope, Texaco never demonstrated the requisite desire

to resolve the arbitrable issues related to the crane accident

through litigation rather than arbitration. In order to waive

arbitration, a party must “do more than call upon unrelated

litigation to delay an arbitration proceeding.” Subway, 169 F.3d

at 328. This is precisely what Texaco has done by requesting a

stay of arbitration pending the outcome of the ongoing and largely

unrelated antitrust lawsuit. Moreover, mere delay falls far short

of the waiver requirements of Subway. See id. at 326. Texaco

never manifested any desire to litigate rather than to arbitrate

its claims against McDermott stemming from the December 3, 1998

incident.

13
 CONCLUSION

Given the broad and unequivocal language of section 3 of

the Federal Arbitration Act, this court refuses to create a Rule

14(c) exception that would allow third parties unilaterally to

nullify an arbitration clause. Enforcing the arbitration clause

does not conflict with Rule 14(c) on the facts before us, whereas

the rigid enforcement of Rule 14(c) would utterly thwart the policy

of the FAA. In light of our analysis, and because Texaco has not

waived its right to arbitrate, this case is remanded to the

district court for the issuance of an order staying this litigation

pending the outcome of the contractually mandated arbitration.

This stay is limited in scope to the proceedings between Texaco and

McDermott and should not affect Texaco’s actions against AmClyde or

the other defendants. REVERSED and REMANDED.

14