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Marine & Energy News Alert: English Forum Selection Clause Between Lloyd's Classification Society and Shipbuilder Enforced Against Third-Party Vessel Owner

March 02, 2015

On February 18, 2015, the Fifth Circuit issued a ruling of interest to the marine industry in which it granted a writ of mandamus ordering the U.S. District Court for the Southern District of Texas to enforce a forum selection clause requiring London disposition of a dispute between a classification society and a ship purchaser.

Pearl Seas Cruises, LLC (“Pearl Seas”) contracted with Irving Shipbuilding, Inc. (“Irving”) for the construction of a ship. Classification society Lloyd’s Register North America, Inc. (“LRNA”) was responsible for certifying the ship. Pearl Seas was dissatisfied with the ship and engaged in several years of arbitration and litigation with Irving. Upon the conclusion of those proceedings, Pearl Seas brought suit against LRNA in the Southern District of Texas under various tort theories for LRNA’s alleged inadequate performance in certifying the ship and its alleged misdeeds during Pearl Seas’ arbitration with Irving. LRNA moved to dismiss the suit for forum non conveniens, alleging that a forum-selection clause in the Lloyd’s Register Rules and Regulations for the Classification of Ships and in the contract between LRNA and Irving required Pearl Seas to bring its claims in England. The District Court denied the motion to dismiss without explanation, and LRNA petitioned the Fifth Circuit for a writ of mandamus to order the District Court to vacate its ruling.

The Fifth Circuit held the forum selection clause in the contract between Irving and LRNA applied to non-signatory Pearl Seas through the doctrine of direct-benefits estoppel, because Pearl Seas had knowingly exploited the agreement by seeking to enforce the terms of the contract or asserting claims that must be determined by reference to the contract. Citing Hellenic Inv. Fund, Inc. v. Det Norske Veritas, 464 F.3d 514 (5th Cir. 2006), the Court noted that in order for direct-benefits estoppel to exist under this theory the party must have “embraced the contract despite [its] non-signatory status but then, during litigation, attempt to repudiate the . . . clause in the contract.” To satisfy such a finding the non-signatory has to have obtained some benefit under the contract while it was in effect and the non-signatory’s suit has to be at least “premised in part” on the agreement. The Fifth Circuit explained, “this Court made clear in Hellenic that the value a classification society offers to the ultimate purchaser is sufficient to satisfy” the value requirement. Observing that Pearl Seas had alleged violations of duties based in the contract between LRNA and Irving, the Court held that the forum selection clause contained in the LRNA and Irving contract applied to and controlled the claims of Pearl Seas.

Having established the applicability of the forum section clause, the Fifth Circuit next determined that the District Court erred in denying LRNA’s motion to dismiss in light of the Supreme Court’s instructions in Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court, 134 S. Ct. 568 (2013). The Fifth Circuit noted:

Atlantic Marine laid out the process courts must follow in ruling on an FNC [forum non conveniens] motion that seeks to enforce a valid forum-selection clause. Instead of independently weighing the private interests of the parties, the court should ‘deem the private-interest factors to weigh entirely in favor of the preselected forum.’ The Court should then weigh the public interest factors . . . The plaintiff’s choice of forum will not be given any weight, unlike in the ordinary FNC context . . . the forum selection clause will prevail except in ‘unusual cases.’

Noting that Pearl Seas had failed to demonstrate it presented an exceptional case in which a valid forum selection clause should not be enforced, Judges Smith and Higginson held the District Court had reached “a patently erroneous result,” and granted LRNA’s petition for writ of mandamus.

Judge Elrod dissented, finding the outcome reached by the majority was not required by precedent and would effectively deprive Pearl Seas of any forum for its grievances.

The case is In re: Lloyd’s Register North America, Incorporated, No. 14-20554.

A link to the decision can be found here.