- March 24, 2015
The U.S. Court of Appeals for the Fifth Circuit finalized an important decision regarding the enforcement of clauses under which parties to commercial contracts choose in advance a forum for any disputes. In its decision, the court granted final relief to Lloyd’s Register North America, Inc. (“LRNA”) in a dispute with a Connecticut-based cruise line company that purchased a ship from a shipbuilder to whom LRNA had provided ship classification services. The appellate court confirmed that when parties to a contract agree on a forum to resolve their disputes – in this case the forum that LRNA and the shipbuilder chose, the courts of England – that this choice of a forum binds anyone, including non-signatories to a contract, seeking to claim benefits under that contract.
LRNA is a Houston-based company that provides global engineering, technical, and marine classification services around the globe. LRNA is a member of the family of companies affiliated with Lloyd’s Register, an English classification society founded in 1760. As a classification society, Lloyd’s Register promulgates rules and regulations for the classification of ships. The classification society’s rules, which were also invoked in the lawsuit against LRNA, include a forum-selection clause requiring that all disputes about services performed by Lloyd’s Register entities, including LRNA, be brought in the courts of England under English law.
In resolving the mandamus proceeding in LRNA’s favor, the Fifth Circuit applied a recent U.S. Supreme Court precedent: Atlantic Marine Construction Company v. United States District Court, 134 S. Ct. 568 (2013). In Atlantic Marine, the Supreme Court established the standard relevant for motions to dismiss based on forum-selection clauses designating a foreign forum. Under Atlantic Marine, once a court finds that a party is subject to a valid forum-selection clause, the clause must be enforced absent “exceptional circumstances.” The Fifth Circuit found that this case did not involve “exceptional circumstances” that would override the contractual forum-selection clause in place between LRNA and the shipbuilder.
Those forum-selection clauses were applied against the plaintiff under the Fifth Circuit’s doctrine of “direct-benefit estoppel,” which, as the Fifth Circuit noted in its opinion, was already settled law before Atlantic Marine was decided. Under the “direct-benefit estoppel” doctrine, any party who seeks or obtains “direct benefits” from a contract, either by seeking to enforce it or by “asserting claims that must be determined by reference to that contract,” is bound by a forum-selection clause in that contract – even if the party suing was not a signatory.
In the case, the plaintiff had contracted with a shipyard to build a cruise ship. Well before filing suit, the plaintiff knew that the shipyard had in turn contracted with LRNA for classification services. LRNA’s contract with the shipyard and the rules that permitted it to provide classification services both contained forum-selection clauses. Because the claims that the plaintiff asserted all necessarily involved LRNA’s classification services, the Fifth Circuit found that, in bringing those claims, the plaintiff necessarily was seeking the benefits of the contract between LRNA and the shipyard. In such circumstances, the court held that the plaintiff was bound by the forum-selection clause in the contract on which its claims were based – even though the plaintiff was not a signatory to that contract.
Before granting relief, the Fifth Circuit heard oral argument and a panel of the court issued an opinion, which Pearl Seas subsequently asked the Court to rehear en banc. That request for reconsideration by the entire Fifth Circuit was denied in a March 23 order. The Fifth Circuit’s opinion will now provide guidance to future courts and litigants seeking clarification regarding the enforceability of forum-selection clauses in contracts that must be referred to in resolving a legal dispute between parties – even when those parties were not all signatories to the relevant contracts.
Partner Eric J.R. Nichols and of counsel Gretchen Sween assisted LRNA in obtaining the relief from the Fifth Circuit Court of Appeals. Assisting Nichols and Sween in representing LRNA were associates Chris Cowan and Karson Thompson of Beck Redden’s Austin office, and Ken Gordon and Elliot Schnapp of Gordon, Gordon and Schnapp, P.C. in New York City. The Fifth Circuit’s decision has attracted media attention in both the United States and England.
A copy of the Fifth Circuit’s decision, its order denying the motion for rehearing, and an article that appeared in Bloomberg’s Law Week are attached.