Texas District Court stays non-signatories' claims pending arbitration

Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel), Lauren Mandell (Associate), White & Case LLP

The District Court for the Southern District of Texas has stayed a civil action pending the outcome of a related international arbitration, even though several of the plaintiffs were not signatories to the arbitration agreement. 

In Suzlon Infrastructure, Ltd. v Pulk, 2010 WL 3540951 (S.D. Tex. Sept. 10, 2010), Suzlon Infrastructure, an Indian shipping company, filed claims against E-P Team related to its conduct after the termination of an agreement under which E-P Team served as Suzlon's shipping agent. Suzlon also named three non-signatories to the agency contract as co-defendants: an E-P Team executive, an alleged wholly owned subsidiary of E-P Team, and an officer of the subsidiary.

Suzlon alleged, inter alia, that the defendants improperly continued to collect cargo freights on Suzlon's behalf after the termination of their contract and have refused to transfer the funds.

The defendants moved to stay the litigation pending the outcome of an arbitration Suzlon filed in Singapore against E-P Team pursuant to the terms of the arbitration clause in their agreement. Suzlon countered with three arguments:

  • The claims in the litigation were beyond the scope of the arbitration agreement because they were based on events after the termination of the agreement.

  • Under the governing law of the arbitration, English law, its RICO claim could not be adjudicated.

  • Most importantly, the claims against the non-signatories to the arbitration agreement were not arbitrable.

The district court granted the motion to stay the litigation. In response to Suzlon's first argument, the court held that Suzlon could in fact assert claims in the arbitration related to post-termination conduct because English law allows parties to a broad arbitration clause to assert all claims related to or arising out of the contractual relationship. In response to the second argument, the court held that the agreement to arbitrate had to be enforced even if it resulted in the loss of potential claims.

That several parties to the litigation were non-signatories to the arbitration agreement was more troubling: section 3 of the Federal Arbitration Act calls for a mandatory stay only where the litigation involves an issue "referable to arbitration under an agreement in writing for such arbitration." But the court noted that in the Fifth Circuit, a mandatory stay is appropriate if three factors are satisfied:

  • The arbitrated and litigated disputes involve the same operative facts.

  • The claims asserted in the arbitration and litigation are inherently inseparable.

  • The litigation has a critical impact on the arbitration.

In the alternative, the court could exercise its discretion to stay the litigation.

Here, the court held that the first two factors, namely the similarity of the facts and claims, at a minimum called for a discretionary stay.

The court added that the litigation could benefit from the outcome of the arbitration, which supported its exercise of discretion. Thus, interestingly, the court was concerned about the impact of the litigation on the arbitration, but viewed any impact the arbitration might have on the litigation to be favourable. This demonstrates the court's dual interests in promoting judicial economy and respecting the arbitration agreement, which are hallmarks of federal judicial consideration of matters involving arbitration.

 
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