The Federal Arbitration Act (FAA) was enacted to encourage the use of private arbitration agreements. Under the FAA, arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. “The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. §§ 201–208, an amendment to the Federal Arbitration Act, requires enforcement of arbitration clauses in international contracts unless the clause is null and void.” Aasma v. Am. S.S. Owners Mut. Prot. & Indem. Ass'n, Inc., 95 F.3d 400, 405 (6th Cir. 1996). To the extent there is any ambiguity as to the scope of an arbitration clause, a court interpreting an arbitration agreement must resolve ambiguities in favor of arbitration. See United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 584-85 (1960) (“In the absence of any express provision excluding a particular grievance from arbitration, we think only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail . . . .”).
On October 3, 2019, Judge Susan Oki Mollway of the U.S. District Court for the District of Hawaii held that defendant GL Engineering & Construction, Pte., Ltd. (GLEC), a Singaporean company could not compel plaintiff Marisco, Ltd. (Marisco), a U.S. marine services company to arbitrate its dispute because the claims asserted by the U.S. company were not governed by the applicable arbitration language.
In this case, Marisco contracted with GLEC for the purchase and delivery of a floating dry dock with certain specifications and warranties by September 30, 2016. Marsico claimed that GLEC in fact delivered an unfinished and defective floating dry dock well after the required deadline. In particular, Marisco alleged GLEC breached certain warranty provisions in the dry dock agreement, as well as misrepresented their technical skill in delivering the product with the required specifications, and the current experience in constructing the type of dry dock sought by plaintiff.
The involved contract contained the following arbitration clause:
16.1 Reference to a Surveyor. The Parties must use the procedure set forth in Section 2. for arbitration by an agreed surveyor to resolve disputes over contract administration, materials, and workmanship. The disputes referable to the agreed surveyor under the procedure outlined in Section 2.5 are: (a) status of work for progress payments under Section 2.5; (b) impact of Force Majeure on contract performance under Section 3.5; and (c) impact of any change orders on contract Sum and Delivery under Section 6.
GLEC argued that Marisco’s claims for breach of warranty and misrepresentation were nothing more than “disputes over contract administration, materials and workmanship.” GLEC further argued that since Marisco withheld the final progress payment that arbitration was required since the arbitration clause specifically referred to progress payments.
The district judge disagreed since Marisco was not suing simply to keep the final progress payment. Rather, Marisco was arguing that GLEC’s actions were in breach of its warranties under the contract and further misrepresented their experience and capabilities in order to induce plaintiff to purchase the dry dock. Under these circumstances, the district judge found that Marisco’s claims were not governed by the arbitration clause.
GLEC further argued that the complaint should be dismissed because Marisco was required to mediate before it could commence litigation. The district court dismissed this argument, finding that there was an issue of fact to be resolved by a jury in the event there was a trial. The relevant contract language provided as follows:
16.2 Negotiation; Mediation; Litigation.
For any dispute that may arise out of this Agreement, the Parties are to meet and use their best efforts to resolve the dispute by agreement. The Parties are to meet to discuss the possibility of a mutually agreed upon procedure to resolve any specific dispute that has arisen. The procedure may be streamlined or simplified in any manner the parties determine. If no mutual agreement of the Parties is affected, then the dispute resolution will proceed as follows. Any dispute that may be referred to a surveyor as provided in Section 16.1 but cannot be resolved by such reference and good faith efforts of the Parties to resolve such dispute, and any other dispute, controversy, or claim arising out of or relating to this Agreement, including any question regarding breach, termination, or invalidity thereof, is to be resolved by litigation under Section 18.6[, which requires litigation in the state or federal courts in Hawaii].
As mentioned previously, the dry dock was delivered on June 4, 2017. On June 9, 2017, Marisco wrote to GLEC demanding that they send representatives to Honolulu immediately to discuss how best to bring the dry dock into compliance with its contractual warranties. Marisco and GLEC met in July 2017 to discuss construction defects. On August 11, 2017, Marisco wrote to GLEC again demanding that GLEC agree to pay for all labor and materials necessary to bring the dry dock into compliance the contract’s warranties, failing which, Marisco would litigate.
On August 27 and 30, 2017, GLEC responded by stating that since the final inspection had not occurred, then its 30-day period to cure any deficiencies had not occurred.
On January 22, 2018, GLEC advised Marisco that it was willing to mediate its dispute with Marisco, but stated that some of the alleged defects were denied by GLEC and that GLEC will require a detailed breakdown of all expenses incurred in rectifying any alleged defects.
The parties planned on conducting an inspection on May 9 to 11, 2018, but that was postponed to May 30 to June 1, 2018. GLEC pushed the inspection back further to June 4 to 6, 2018 due to the hospitalization of one of its engineers.
Marisco filed suit on June 4, 2018.
Based on this record, the district judge concluded that “[it] could not say that Marisco failed to use its ‘best efforts’ to resolve the issues before filing the present complaint.” Although Clause 16.2 was entitled “Mediation,” the district judge found this language did not include a mandatory mediation. Instead, the clause directed the parties to meet and “discuss the possibility of a mutually agreed upon procedure,” but did not require the parties to mediate. As such, the district judge found that it would be up to a jury to decide whether Marisco used “best efforts” to resolve the dispute before commencing suit.
Under the circumstances, the district court denied GLEC’s motion to compel arbitration.
David Y. Loh is a member with Cozen O'Connor in New York City, New York.
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