Morewitz v. West of England Ship Owners Mutual Protection & Indemnity Ass'n (Luxembourg)

United States Court of Appeals,

Eleventh Circuit.

No. 94-6650.

Stephen J. MOREWITZ, as Administrator of the Estates of Chrisos
Passalis; Constantinos Stamatis; Gerassimos Markatos; George
Marangos; Jesus Ramos Mayorquin; Efran Alvarado Martinez; and
Mukhtar Ahmed, deceased, Plaintiffs-Appellants,

v.

The WEST OF ENGLAND SHIP OWNERS MUTUAL PROTECTION AND INDEMNITY
ASSOCIATION (LUXEMBOURG), Defendant-Appellee.

Sept. 6, 1995.

Appeal from the United States District Court for the Southern
District of Alabama. (No. 85-0855-T-C), Daniel Holcombe Thomas,
Judge.

Before CARNES and BARKETT, Circuit Judges, and GIBSON*, Senior
Circuit Judge.

FLOYD R. GIBSON, Senior Circuit Judge:

Stephen Morewitz,1 as administrator for the estates of several

of the crew members who were aboard the M/V IMBROS when it

disappeared at sea, brought wrongful death actions against the

vessel's owner and managing agent in the United States District

Court for the Eastern District of Virginia. After obtaining a

favorable judgment, Morewitz brought this action in the United

States District Court for the Southern District of Alabama, seeking

to enforce the judgment and recover on a marine protection and

indemnity policy issued by West of England Ship Owners Mutual

Protection and Indemnity Association ("West of England").

*
Honorable Floyd R. Gibson, Senior U.S. Circuit Judge for
the Eighth Circuit Court of Appeals, sitting by designation.
1
Stephen Morewitz succeeded Ruth Morewitz as the
administrator for these estates.
 The district court dismissed Morewitz's lawsuit for lack of

subject matter jurisdiction, concluding that this action was not

based on a marine insurance contract, but rather, on English

bankruptcy statutes. We reversed and held that this case fell

within the federal court's admiralty and maritime jurisdiction

pursuant to 28 U.S.C. § 1333. 2 Morewitz v. The West of Eng. Ship

Owners Mut. Protection and Indemnity Ass'n (Lux.), 896 F.2d 495,

496 (11th Cir.1990) ("Morewitz I ").

On remand, the district court granted West of England's motion

to stay the proceedings pending arbitration. Morewitz appealed,

and we dismissed for lack of jurisdiction because the district

court's order was interlocutory and not subject to appeal.

Morewitz v. The West of Eng. Ship Owners Mut. Protection and

Indemnity Ass'n (Lux.), 5 F.3d 1498 (11th Cir.1993) (unpublished)

("Morewitz II ").

On remand again, Morewitz argued that the deceased crew

members were not bound by the arbitration agreement and,

alternatively, that West of England had waived its right to compel

arbitration. Unpersuaded by Morewitz's arguments, the district

court ordered that the parties had six months in which to

demonstrate that they were proceeding with arbitration. Morewitz

requested that the district court reconsider its stay order or

certify the question for immediate appeal. The district court

denied both of these motions. As a result of Morewitz's continued

2
"The district courts shall have original jurisdiction,
exclusive of the courts of the States, of ... [a]ny civil case of
admiralty or maritime jurisdiction, saving to suitors in all
cases all other remedies to which they are otherwise entitled."
28 U.S.C. § 1333(1) (1988).
refusal to comply with the arbitration order, the district court

dismissed this case with prejudice for want of prosecution.

Upon Morewitz's third appeal to this Court, the issues before

us are whether the district court erred in ordering arbitration,

and, if so, whether it was an abuse of discretion to dismiss

Morewitz's case with prejudice for failure to comply with the

arbitration order. Because we conclude that the district court

erred in compelling arbitration, we VACATE the district court's

order dismissing this action and REMAND for further proceedings

consistent with this opinion.

I. BACKGROUND

A. Facts

On December 13, 1975, the M/V IMBROS loaded with cargo in

Mobile, Alabama, and departed for Quebec, Canada. Three days into

its voyage, the crew notified the vessel's managing agent about

leakage in the salt water cooling system for the main engine gears.

On December 18, the crew broadcast an SOS or "Mayday message" from

international waters in the region known as the Bermuda Triangle.

The M/V IMBROS disappeared at sea, and no trace of the ship, its

cargo, or its eighteen crew members was ever found.

The M/V IMBROS was registered to Imbros Shipping Company,

Limited, ("Imbros Shipping") and managed by General Development &

Shipping Enterprises Company, Limited, ("General Development").

Both Imbros Shipping and General Development were Cypriot

corporations owned by George Tsourinakis and his wife. West of

England had issued a marine protection and indemnity policy

covering the M/V IMBROS, which was in force and effect at the time
of the vessel's disappearance.

As part of the risks insured against, the West of England

policy provided compensation for the loss of life of any person on

board an insured vessel. Furthermore, according to Rule 64 of the

West of England Ship Owners Mutual Protection and Indemnity

Association:

If any difference or dispute shall arise between an
insured Owner ... and the Association out of or in connection
with these Rules or arising out of any contract between an
insured Owner and the Association or as to the rights or
obligations of the Association or the insured Owner thereunder
or in connection therewith or as to any other matter
whatsoever, such difference or dispute shall be referred to
the arbitration in London of a sole legal Arbitrator.... The
obtaining of an Arbitration Award as hereinbefore provided
shall be a condition precedent to the right of any insured
Owner to bring or maintain any action, suit or other legal
proceedings against the Association in respect of any such
difference or dispute.

The record indicates that during 1976 and 1977, West of

England paid settlements in Greece to the families of at least

seven of the M/V IMBROS crew members. In addition, Morewitz

alleged that West of England reimbursed General Development for the

loss of vessel and cargo by giving the company credits against its

unpaid premiums or "calls."

Between 1976 and 1978, Morewitz brought wrongful death actions

on behalf of seven of the deceased crew members against Imbros

Shipping and General Development. The United States District Court

for the Eastern District of Virginia dismissed Imbros Shipping for

lack of personal jurisdiction, but determined that it had personal

jurisdiction over General Development. West of England retained

counsel to defend this action both before and after the district

court dismissed Imbros Shipping from the litigation.
 Morewitz then argued that General Development was an alter ego

for Imbros Shipping and that General Development had procured the

West of England policy and was responsible for the premiums.

Morewitz also claimed that, according to George Tsourinakis'

deposition testimony, General Development exercised all incidents

of ownership over the M/V IMBROS, effectively making General

Development a "demise charter party."3

In attempts to establish the party responsible for the M/V

IMBROS at the time of its disappearance, Morewitz submitted

interrogatories to General Development, but the company refused to

respond. As a sanction for General Development's failure to comply

with the district court's discovery order, the court found General

Development to be the owner pro hac vice of the M/V IMBROS at the

time of the loss.4

The district court then determined that the M/V IMBROS was

inadequately staffed and unseaworthy when it disappeared and that

General Development was liable for the deaths of the vessel's crew

members. On April 3, 1980, the district court entered judgment in

favor of the decedents for a total of $459,456.36 in damages.

General Development appealed, and the judgment was summarily

3
"To create a demise the owner of the vessel must completely
and exclusively relinquish "possession, command, and navigation'
thereof to the demisee.... It is therefore tantamount to, though
just short of, an outright transfer of ownership." Guzman v.
Pichirilo, 369 U.S. 698, 699-700, 82 S.Ct. 1095, 1096, 8 L.Ed.2d
205 (1962) (citations omitted).
4
"If a party ... fails ... to serve answers or objections to
interrogatories ... the court in which the action is pending on
motion may make such orders in regard to the failure as are just
..." including an order preventing a disobedient party from
opposing a designated claim. Fed.R.Civ.P. 37(b) and (d).
affirmed by the Fourth Circuit Court of Appeals. Morewitz v.

General Dev. & Shipping Enters. Co., Ltd., 660 F.2d 491 (4th Cir.),

cert. denied, 454 U.S. 939, 102 S.Ct. 474, 70 L.Ed.2d 246 (1981).

At some point during the litigation in Virginia, General

Development became insolvent and is now defunct. The judgment

remains unpaid.

B. Procedural History

Morewitz registered the Virginia judgment in the United States

District Court for the Southern District of Alabama.5 On June 26,

1985, Morewitz filed the present lawsuit to enforce the judgment

and recover proceeds under West of England's marine protection and

indemnity policy that covered the M/V IMBROS at the time of its

disappearance.

In the first incarnation of this litigation, Morewitz alleged
6
that this suit was based on: (1) English bankruptcy statutes,

which created third party rights in favor of the decedents; and

(2) a marine insurance contract, which fell within federal

admiralty and maritime jurisdiction. West of England filed a

motion to dismiss, arguing that the district court lacked subject

matter jurisdiction.

Erroneously believing that it was constrained to characterize

these proceedings either as a foreign bankruptcy or an admiralty

action, the district court determined that this suit was based on

5
"A judgment so registered shall have the same effect as a
judgment of the district court of the district where registered
and may be enforced in like manner." 28 U.S.C. § 1963 (1988).
6
For the text of The Third Parties (Rights Against Insurers)
Act of 1930, see Morewitz I, 896 F.2d at 498 n. 3.
the English bankruptcy statutes. Consequently, the district court

dismissed for lack of subject matter jurisdiction. Morewitz I, 896

F.2d at 498. This Court reversed, holding that "the subject matter

of the suit is liability under a marine insurance policy, so the

basis of [Morewitz's] case also is admiralty subject matter." Id.

at 500.

On remand, Morewitz abandoned his argument that the English

bankruptcy statutes applied, and instead, relied solely on the

Alabama direct action statutes. Ala.Code §§ 27-23-1 and 27-23-2

(1975). As we stated in Morewitz I, direct action statutes "give

a group of persons—those whose possible injury was the risk insured

by the contract—direct standing to sue an insurer by putting them

"in the shoes' of the assured." 896 F.2d at 499.

On October 17, 1990, West of England filed a motion to stay

the proceedings pending arbitration,7 and on January 31, 1991, the

district court granted West of England's motion. Morewitz then

filed a motion for reconsideration and argued that West of England

had waived any right that it may have had to compel arbitration.

The district court denied Morewitz's motion, concluding that West

of England was not in default for failing to make a pre-litigation

demand for arbitration. After Morewitz's unsuccessful attempt to

7
9 U.S.C. § 3 (1988) provides:

If any suit or proceeding be brought in any of the
courts of the United States upon any issue referable to
arbitration under an agreement in writing for such
arbitration, the court in which such suit is pending
... 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,
providing the applicant for the stay is not in default
in proceeding with such arbitration.
appeal the district court's order and his continued refusal to

arbitrate, the district court dismissed this case with prejudice

for want of prosecution. Morewitz appeals.

II. DISCUSSION

A. Jurisdiction

As a threshold matter, we address West of England's argument

that this Court lacks jurisdiction to consider this appeal. Citing

our decision in Morewitz II, West of England argues that "an appeal

may not be taken from an interlocutory order ... granting a stay of

any action under section 3 of this title." 9 U.S.C. § 16(b)(1)

(Supp. III 1991).

Pursuant to 28 U.S.C. § 1291 (1988), "[t]he court of appeals

... shall have jurisdiction of appeals from all final decisions of

the district courts of the United States ... except where a direct

review may be had in the Supreme Court." Decisions of the district

court are final if they "end the litigation on the merits and leave

nothing for the district court to do but execute the judgment."

Thomson McKinnon Sec., Inc. v. Salter, 873 F.2d 1397, 1399 (11th

Cir.1989) (quotation omitted). "A dismissal with prejudice clearly

is a decision that ends the litigation on the merits and leaves

nothing for the court to do but execute a judgment." Nichols v.

Mobile Bd. of Realtors, Inc., 675 F.2d 671, 673 (5th Cir. Unit B

1982) (quotations omitted).8 We conclude that we have jurisdiction
to hear this appeal.

Furthermore, we are guided by our decision in a case that was

8
Former Fifth Circuit case, Public Law 96-452 § 9(1)—October
14, 1980.
presented in the same procedural posture as the case at hand.

State Establishment, the owner of the cargo that was destroyed

during shipping, instituted a lawsuit against the vessel, the

various corporations that managed the vessel and cargo, and the

defendants' liability underwriter. State Establishment for Agric.

Prod. Trading v. M/V Wesermunde, 838 F.2d 1576 (11th Cir.), cert.

denied, 488 U.S. 916, 109 S.Ct. 273, 102 L.Ed.2d 262 (1988).9 Upon

the defendants' motion to have the dispute referred to arbitration,

the district court stayed the proceedings. Id. at 1579. State

Establishment refused to arbitrate, and the district court

dismissed the case with prejudice for failure to comply with the

arbitration order. Id. at 1577.

Although we acknowledged the antiquated but viable admiralty

law doctrine that there is no jurisdiction to hear an appeal from

a district court's stay of admiralty proceedings pending

arbitration, Schoenamsgruber v. Hamburg Am. Line, 294 U.S. 454,

457-58, 55 S.Ct. 475, 476-77, 79 L.Ed. 989 (1935), we concluded

this predicament created a "Catch 22." State Establishment, 838

F.2d at 1579. State Establishment was being forced to expend

substantial time, effort, and funds to comply with what was likely

an erroneous arbitration order; yet, because of the

Schoenamsgruber doctrine,10 it was necessary to complete the

9
The Supreme Court recently resolved a conflict between the
Circuit Courts and held that foreign arbitration clauses in bills
of lading are not invalid under the Carriage of Goods by Sea Act.
Vimar Seguros Y Reaseguros, S.A., v. M/V SKY REEFER, --- U.S. ---
-, 115 S.Ct. 2322, 132 L.Ed.2d 462 (1995).
10
See Coastal (Bermuda) Ltd. v. E.W. Saybolt & Co., 761 F.2d
198, 202-03 (11th Cir.1985) (discussing the origins of the
Schoenamsgruber doctrine).
arbitration process before the validity of the arbitration

proceeding could be tested on appeal.

Faced with this dilemma, State Establishment, like Morewitz,

believed that is was better to forego any damages it might

potentially recover from the arbitration process in exchange for

appealing the chance that the district court erred in ordering

arbitration. Id. We noted, "[t]he inherent risk in taking such a

position was, of course, that if the district court was correct in

ordering arbitration, the dismissal with prejudice for failure to

comply with that order would be affirmed by this court." Id.

Fortunately for Morewitz, he has avoided this "inherent risk"

because we disagree with the district court's order requiring the

parties to arbitrate this dispute.

B. Direct Actions

1. English Law

On appeal, Morewitz concedes that attempting to arbitrate

this dispute in England would be futile. In 1990, the House of

Lords held that when the terms of an insurance policy require the

insured to pay its obligation before it may collect against the

insurer, the insured must pay before any other party can sue on the

contract.11 Firma C-Trade S.A. v. Newcastle Protection and Indem.

Ass'n, 2 Lloyd's Rep. 191 (H.L.1990). "Because under English law,

such payment is a "condition precedent' to a direct suit against

11
According to Rule 18 of the West of England Ship Owners
Mutual Protection and Indemnity Association, "it shall be a
condition precedent of an insured Owner's right to recover from
the funds of the Association in respect of any liabilities, costs
or expenses that he shall first have discharged or paid the
same."
the insurer, plaintiffs cannot proceed under English law."

Psarinos v. Standard Marine Ltd., 12 F.3d 461, 464 (5th Cir.)

(footnote omitted), cert. denied, --- U.S. ----, 114 S.Ct. 2164,

128 L.Ed.2d 887 (1994).

2. Alabama Statutes

As we have noted, however, Morewitz is not seeking recourse

under the English bankruptcy law, but rather, under the Alabama

direct action statutes.12 The Alabama direct action statutes state

that recovery "shall not depend upon the satisfaction by the

insured of a final judgment against him for loss." Ala.Code § 27-

23-1.

3. The Conflict

Federal admiralty law neither authorizes nor forecloses a

12
Ala.Code §§ 27-23-1 and 27-23-2 (1975) provide:

As to every contract of insurance made between an
insurer and any insured by which such insured is
insured against loss or damage on account of ... death
by accident of any person for which loss or damage such
insured is responsible, whenever a loss occurs on
account of a casualty covered by such contract of
insurance, the liability of the insurer shall become
absolute and the payment of the loss shall not depend
upon the satisfaction by the insured of a final
judgment against him for loss, or damage or death
occasioned by the casualty....

Upon the recovery of a final judgment against any
person, firm or corporation by any person, including
administrators or executors, for loss or damage on
account of bodily injury, or death ... if the defendant
in such action was insured against the loss ... at the
time when the right of action arose, the judgment
creditor shall be entitled to have the insurance money
provided for in the contract of insurance between the
insurer and the defendant applied to the satisfaction
of the judgment, and ... the judgment creditor may
proceed against the defendant and the insurer to reach
and apply the insurance money to the satisfaction of
the judgment.
third party's right to directly sue an insurance company.

Steelmet, Inc. v. Caribe Towing Corp., 779 F.2d 1485, 1487 (11th

Cir.1986), modifying 747 F.2d 689 (1984). "A state may, however,

create a direct action against a maritime insurer, at least where

the state action is not in conflict with any feature of substantive

admiralty law or any remedy peculiar to admiralty jurisdiction."

Steelmet, 779 F.2d at 1487; see Wilburn Boat Co. v. Fireman's Fund

Ins. Co., 348 U.S. 310, 320-21, 75 S.Ct. 368, 374, 99 L.Ed. 337

(1955) (in the absence of a controlling federal admiralty

principle, state law can be applied in an admiralty case). The

conflict in the present case lies not with federal admiralty law,

but with whether the English bankruptcy statutes or the Alabama

direct action statutes apply.

We recognize that characterizing direct action statutes as

either procedural or substantive is problematic, particularly in

the context of admiralty jurisdiction.13 See State Trading Corp.

of India v. Assuranceforeningen Skuld, 921 F.2d 409, 414-15 (2d

Cir.1990). "However, in order to promote orderly administration of

justice and the integrity of courts' local rules, some laws are

deemed procedural and not subject to choice of law rules." Id. at

416; see also Restatement (Second) of Conflict of Laws § 122 cmt.

a (1971) (discussing a state's right to apply its own procedural

law). Therefore, "[b]efore engaging in choice of law analysis, we

13
The Restatement (Second) of Conflict of Laws § 122 cmt. b
(1971), suggests that rather than classifying issues as
"procedural" or "substantive," courts should directly face
whether the forum's rule should be applied. See Schoenberg v.
Exportadora de Sal, S.A. de C.V., 930 F.2d 777, 782 (9th
Cir.1991) (noting that federal common law follows the approach of
the Restatement (Second) of Conflict of Laws).
first address [the] argument that [Alabama's] direct action statute

is procedural and therefore not subject to choice of law rules."

State Trading, 921 F.2d at 414.

In Morewitz I, we described direct action statutes as

"remedial in character, rather than substantive." 896 F.2d at 499

(quotations omitted); see also id. at 501 (Tjoflat, J.,

concurring) (distinguishing that rather than mandating a direct

action provision in every insurance contract, the English

bankruptcy statute itself provided the right of action). We also

noted that:

Although it seems clear that English law would govern in
construing the existence and amount of defendant's liability
under the marine insurance contract, it is not as clear, when
the suit is being brought in Alabama, that English procedural
law would apply. The cases we have reviewed, although not
addressing the choice of law issue directly, indicate that the
forum state's law may be the applicable law for purposes of
applying any direct action statute. See e.g., Maryland
Casualty Co. v. Cushing, 347 U.S. 409, 74 S.Ct. 608, 98 L.Ed.
806 (1954); Steelmet, Inc. v. Caribe Towing Corp., 779 F.2d
1485 (11th Cir.1986), modifying 747 F.2d 689 (1984).

896 F.2d at 499 n. 5 (additional citations omitted).

Moreover, in Macey v. Crum, 249 Ala. 249, 30 So.2d 666 (1947),

the Supreme Court of Alabama held that its direct action statute

"merely enables the person suffering the initial damages, out of

which grows the loss to the insured, to acquire a lien against the

loss and the right to damages or indemnity arising under the

policy, and to enforce it in his own name." Id. 30 So.2d at 668

(quotation omitted); see also Fleming v. Pan American Fire & Cas.
14
Co. 495 F.2d 535, 539 (5th Cir.1974) (stating that Alabama's

14
Pursuant to Bonner v. City of Prichard, Ala., 661 F.2d
1206 (11th Cir.1981) (en banc), decisions of the former Fifth
Circuit entered prior to the split establishing the Eleventh
direct action statutes applied in a diversity case without regard

to whether the insurance contract was made in Alabama or whether

the named parties to the contract of insurance were residents or

nonresidents of Alabama); but see State Trading, 921 F.2d at 416

(concluding that the application of Connecticut's direct action

statute would be inappropriate under the circumstances).

In summary, the Alabama direct action statutes mandate a

direct action provision into every insurance contract and create a

method of executing upon the proceeds of the insurance policy.

Accordingly, we look to Alabama law in determining the manner in

which this suit by Morewitz, the judgment creditor, against West of

England, the judgment debtor's insurer, should proceed.

C. Arbitration

1. Alabama Law

" "Under Alabama law, the injured party acquires a vested

interest (secondary) in the nature of a hypothecation of the

insured's rights under the policy.' " Haston v. Transamerica Ins.

Servs., No. 1930872, 1995 WL 217854, at *2, --- So.2d ----, ----

(Ala. Apr. 14, 1995) (quoting Maness v. Alabama Farm Bureau Mut.

Casualty Ins. Co., 416 So.2d 979, 981-82 (Ala.1982)). The injured

party, however, cannot bring an action against the insurer until he

has recovered a judgment against the insured. Id. Furthermore,

the injured party's "vested interest' is subject to the

qualification that " "the terms of the policy imposing obligations

on the insured are effective as against the injured party.' " Id.
(quoting George v. Employers' Liab. Assurance Corp., 219 Ala. 307,

Circuit are binding on the Eleventh Circuit.
122 So. 175, 177 (1929). In other words, any defenses that are

available to the insurer in an action brought by the insured would

also be available to the insurer in a direct action brought by the

injured party. Id.

Consequently, under Alabama law, West of England is able to

assert any defenses that would have been available to it as if the

present action had been brought by General Development.

Arbitration is clearly an affirmative defense that would have been

available to West of England in an action brought by General

Development. See American Sugar Refining Co. v. The Anaconda, 138

F.2d 765, 767 (5th Cir.) (the Federal Arbitration Act recognizes

arbitration agreements as affirmative defenses), cert. granted, 321

U.S. 758, 64 S.Ct. 620, 88 L.Ed. 1057 (1943), aff'd, 322 U.S. 42,

64 S.Ct. 863, 88 L.Ed. 1117 (1944). Therefore, unless the

arbitration provision does not apply to these claimants or West of

England has waived its right to compel arbitration, Morewitz is

bound by the terms of the arbitration agreement between General

Development and West of England.

2. The Federal Arbitration Act

As we have noted, a dispute arising under a contract of

maritime insurance, such as the one involved here, is within the

admiralty and maritime jurisdiction of the district court. The

fact that Morewitz derives his standing to proceed with this case

from the Alabama direct action statutes does not vitiate that

jurisdiction. See Morewitz I, 896 F.2d 499-500 and n. 5.

The issue of arbitrability under the United States

Arbitration Act is a matter of federal substantive law. Prima
Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-05, 87

S.Ct. 1801, 1806-07, 18 L.Ed.2d 1270 (1967); Miller Brewing Co. v.

Fort Worth Distributing Co., 781 F.2d 494, 497 n. 4 (5th Cir.1986)

(rejecting the appellee's citation to Texas law on the issue of

whether it had waived the right to compel arbitration). Therefore,

federal law comprising generally accepted principles of contract

law controls the question of arbitrability.

According to the Federal Arbitration Act of 1952, 9 U.S.C. §

2 (1988), "[a] written provision in any maritime transaction ... to

settle by arbitration a controversy thereafter arising out of such

contract or transaction" is an enforceable arbitration agreement.

Nevertheless, the Act does not require parties to arbitrate when

they have not agreed to do so. "It simply requires courts to

enforce privately negotiated agreements to arbitrate, like other

contracts, in accordance with their terms." Volt Info. Sciences,

Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S.

468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989). We have

acknowledged that "[t]he purpose of the Federal Arbitration Act was

to relieve congestion in the courts and to provide parties with an

alternative method for dispute resolution that would be speedier

and less costly than litigation." Ultracashmere House, Ltd. v.

Meyer, 664 F.2d 1176, 1179 (11th Cir.1981).

3. Application

The arbitration agreement in Rule 64 of the West of England

Ship Owners Mutual Protection and Indemnity Association applies

between "owners" and the "association." Relying on the specific

terms of this provision, Morewitz argues that the deceased crew
members were not "owners." Morewitz also argues that the deceased

crew members were not parties to the arbitration agreement and that

they should not be bound by it. Notwithstanding our prior

discussion that any defenses that would have been available to West

of England in an action brought by General Development would also

be available to West of England in a direct action brought by the

deceased crew members, the cases discussed below favor both of

Morewitz's arguments.

First, in Ocean Eagle-Limitations Proceedings, 1974 AMC 1629

(D.P.R.), a tanker sank and spilled crude oil into the waters of

San Juan Harbor. Numerous claimants brought direct actions suits

against the vessel, the owners, and the insurance association.

Upon the insurance association's motion for a stay pending

arbitration in London, the court noted that "the injured

third-party beneficiary of the contract is not a party to the

contract ... this is recognized by the limiting language of the

arbitration clause which applies to a dispute between a "member'

and the "association.' " Id. at 1633. Moreover, the court found

that the right of action conferred by the Puerto Rico direct action

statute was totally independent of the contractual terms binding

the insured and the insurer, which the insurer could not abrogate

by private agreement.

Second, in the case In re Talbott Big Foot, Inc., 887 F.2d 611

(5th Cir.1989), workers who were injured on a drilling barge filed

claims against the drilling company's protection and indemnity
insurer under Louisiana's direct action statute.15 Based on the

policy provision requiring the insurer and insured to arbitrate

coverage disputes, the insurer filed a motion to stay the

proceedings pending arbitration, and the district court dismissed

the action. Id. at 612. On appeal, the Fifth Circuit recognized

that despite a strong federal policy favoring arbitration, the Act

does not require arbitration unless the parties to a dispute have

agreed to refer it to arbitration. Id. at 614. As the Fifth

Circuit aptly stated, "[w]e are unaware of any federal policy that

favors arbitration for parties who have not contractually bound

themselves to arbitrate their disputes." Id.

Although we recognize that Morewitz now "stands in the shoes"

of General Development, we are reluctant to mandate arbitration

where the claimants clearly did not bargain to do so. Cf. AT & T

Technologies v. Communications Workers of Am., 475 U.S. 643, 648-

49, 106 S.Ct. 1415, 1418-19, 89 L.Ed.2d 648 (1986) (stating that

"arbitration is a matter of contract and a party cannot be required

to submit to arbitration any dispute which he has not agreed so to

submit.... [A]rbitrators derive their authority to resolve

disputes only because the parties have agreed in advance to submit

such grievances to arbitration.") (emphasis added and quotation

omitted)); Wheat, First Securities, Inc. v. Green, 993 F.2d 814,

15
Analogous to the Alabama direct action statutes,
Louisiana's direct action statute provides that actions are
subject to all of the lawful conditions of the policy or contract
and the defenses that could be urged by the insurer in a direct
action brought by the insured. Talbott, 887 F.2d at 612-13.
However, unlike the Alabama statutes, the recovery of a judgment
against the insured is not a condition precedent to the bringing
of a direct action under Louisiana law. Id.
821 (11th Cir.1993) (affirming the district court's holding that a

securities broker-dealer that purchased another company's assets

was not an assignee of or successor to the customer agreements that

contained an arbitration provision); Goldberg v. Bear, Stearns &

Co., 912 F.2d 1418, 1419 (11th Cir.1990) (stating that despite a

presumption in favor of arbitration, the parties will not be

required to arbitrate when they have not agreed to do so).

In light of the cases discussed above, we question whether the

arbitration clause in the policy between West of England and

General Development applies to the deceased crew members.

Moreover, even assuming that the arbitration clause applies, we

conclude that West of England has waived any right that it may have

had to compel arbitration.

4. Waiver

Morewitz bases his waiver argument on West of England's

participation in the litigation in the United States District Court

for the Eastern District of Virginia. Although Morewitz concedes

that West of England was not a party to the Virginia litigation, he

argues that rather than challenging coverage when this litigation

was commenced, West of England unsuccessfully defended General

Development's liability. Essentially, Morewitz argues that West of

England should be bound by its failure to arbitrate with General

Development when this dispute arose.

Arbitration should not be compelled when the party who seeks

to compel arbitration has waived that right.16 In considering the

16
Although the Arbitration Act uses the term "default," 9
U.S.C. § 3, the case law on this subject employs the term
"waiver." See generally 3 Fed.Proc., L.Ed. Arbitration § 4:24
issue of waiver, we are mindful of the Supreme Court's admonition

that "questions of arbitrability must be addressed with a healthy

regard for the federal policy favoring arbitration." Moses H. Cone

Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct.

927, 941, 74 L.Ed.2d 765 (1983).

Nevertheless, the doctrine of waiver is not an empty shell.

Waiver occurs when a party seeking arbitration substantially

participates in litigation to a point inconsistent with an intent

to arbitrate and this participation results in prejudice to the

opposing party. Price v. Drexel Burnham Lambert, Inc., 791 F.2d

1156, 1158 (5th Cir.1986). Prejudice has been found in situations

where the party seeking arbitration allows the opposing party to

undergo the types of litigation expenses that arbitration was

designed to alleviate. E.C. Ernst, Inc. v. Manhattan Constr. Co.,

559 F.2d 268, 269 (5th Cir.1977), cert. denied, 434 U.S. 1067, 98

S.Ct. 1246, 55 L.Ed.2d 769 (1978).

Applying these considerations to the facts in this case, it

is apparent to this Court that West of England has waived its right

to compel arbitration. During the Virginia litigation, there were

disputes between West of England and General Development over the

ownership of the M/V IMBROS and over General Development's failure

to assist with its defense. West of England was apprised of the

significant monetary claims that were being pursued against General

Development both in the United States and abroad, but never made a

demand to arbitrate its coverage of the M/V IMBROS. Although the

(1981) ("the term "default' has been construed as analogous in
meaning to the common-law term "waiver' ").
court in Tenneco Resins, Inc. v. Davy Intern., AG, 770 F.2d 416,

419 (5th Cir.1985), noted that a party is not obligated to make a

presuit demand for arbitration, we do not believe that an insurer

should be permitted to collude with its insured to the detriment of

the injured third-party.

In light of the strong federal policy favoring arbitration,

we also must examine whether Morewitz has been prejudiced by West

of England's delay in demanding arbitration. The House of Lords

decision affecting Morewitz's right to arbitrate this dispute in

England was not announced until nearly a decade after the Fourth

Circuit affirmed General Development's liability for the crew

members' deaths. Firma C-Trade S.A. v. Newcastle Protection and

Indem. Ass'n, 2 Lloyd's Rep. 191 (H.L.1990). Moreover, Morewitz

instituted the present lawsuit in 1985, five years before the

decision from the House of Lords. We conclude that West of England

had ample opportunity to demand arbitration well in advance of the

decision that significantly changed the legal position of the

parties to the prejudice of Morewitz.

In short, the appropriate time for West of England to contest

coverage and demand arbitration with General Development was during

the proceedings in the United States District Court for the Eastern

District of Virginia. Because West of England has waived its right

to arbitrate with General Development, it has also waived its right

to demand arbitration with Morewitz.

D. Dismissal with Prejudice

We review the district court's decision to dismiss a case for

want of prosecution for abuse of discretion. See State
Establishment, 838 F.2d at 1582. "The severe sanction of dismissal

with prejudice, however, can be imposed only in the face of a clear

record of delay or contumacious conduct by the plaintiff." Id.

(quotation omitted). Dismissal with prejudice is a sanction of

last resort that is to be utilized only in extreme situations. Id.

As in the State Establishment case, Morewitz made a conscious

decision that an unsuccessful appeal would mean that the merits of

this claim would never be reached. Id. at 1582-83 and n. 3.

Morewitz requested that the district court certify the arbitration

question to this Court prior to dismissing the action, and the

district court denied this motion. In State Establishment, we

found that the district court abused its discretion by dismissing

a lawsuit with prejudice under the same circumstances. Id.

Likewise, we conclude that the district court abused its discretion

by dismissing this action with prejudice.17

III. CONCLUSION

Therefore, we REVERSE the decision of the district court

requiring arbitration, VACATE the order dismissing Morewitz's

action with prejudice, and REMAND the case to the district court

for further proceedings.

CARNES, Circuit Judge, concurring:

I concur in the result and in all of the majority opinion

except Part II.C.3, on pp. ---- - ----. As to that particular part

of the opinion, I join only the last sentence, which concludes that

West of England waived any right it may have had to compel

17
In light of our decision, West of England's motion for
double costs and attorney's fees is denied.
arbitration. Because of that waiver, there is no need to speculate

as to whether the arbitration provision would have applied had

there been no waiver; all such speculation is merely dicta, better

left to the law reviews.