The Fourth Circuit last week affirmed a ruling that an injured plaintiff had to arbitrate his claims against his employers in the Philippines, but ruled that the District Court had improperly dismissed his claims for injunctive relief, in Aggarao v. MOL Ship Management Co.
Aggarao had suffered horrible injuries. They occurred when the ship on which he was a seaman was preparing to unload a cargo of cars near the Port of Baltimore. He was crushed between "a deck lifting machine and a pillar." He was airlifted to the University of Maryland Shock Trauma Center where he went through twelve surgeries.
Then there was a tug of war over the payment of Aggaro’s substantial medical bills. Aggarao, a citizen of the Philippines, had signed a Philippine Overseas Employment Administration of Employment contract (the "POEA") which said that his employers would be liable "for the full cost of . . . medical[,] surgical and hospital treatment as well as board and lodging until the seafarer is declared fit to work or to be repatriated."
Plaintiff’s Employers Refuse To Pay For Medical Care in the United States
Aggarao sued the parties to the POEA in June 2009, and settled the amount due to the Maryland hospital for nearly a million dollars. Then, the defendants said they would pay to repatriate Aggarao to the Phillipines and pay for additional medical care there, but that they would "have no further responsibility for, and [would] not pay for, any further medical care" in the United States.
Aggarao, who had been advised by the University of Maryland doctors that he would "need appropriate and diligent medical care for the rest of his life," refused to leave the United States. His doctors expressed concern that he would be unable to obtain the necessary level of care in the Phillipines.
The lawsuit, still pending, was transferred to Baltimore. Then, apparently for the first time, the defendants invoked a mandatory arbitration clause contained in the POEA, and moved to dismiss for improper venue. Aggarao argued that the arbitration clause was unenforceable, and sought an injunction requiring his employers to provide maintenance and cure for him in the United States until he attained "maximum medical cure." (That’s a term from the American statute known as the Jones Act, which covers injured American seamen. A shipowner from the U.S. is obligated to pay for an injured seaman’s maintenance and cure until he has attained "maximum medical cure.").
Enforcement of Foreign Arbitration Clauses is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards
Judge Beach of the District of Maryland ruled that the arbitration clause was enforceable, and she denied the motion for an injunction as moot and ordered the case to be closed. Judge King of the Fourth Circuit parsed through the claims and affirmed in part, vacated in part, and remanded the case.
Much of the Court’s opinion is a crash course in the law surrounding foreign arbitration clauses, so keep reading if you are interested in this area of law.
More than fifty years ago, UNESCO adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The goal of the Convention "was "was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries." Op. at 14 (quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974). The Convention was implemented by Congress in 1970 by its enactment of Chapter 2 of the Federal Arbitration Act.
When certain "jurisdictional prerequisites" have been met, a District Court is obligated to order arbitration, unless it finds the arbitration agreement to be "null and void, inoperative or incapable of being performed." The prerequisites are that
(1) there is an agreement in writing within the meaning of the Convention; (2) the agreement provides for arbitration in the territory of a signatory of the Convention; (3) the agreement arises out of a legal relationship, whether contractual or not, which is considered commercial; and (4) a party to the agreement is not an American citizen, or that the commercial relationship has some reasonable relation with one or more foreign states.
Balen v. Holland Am. Line Inc., 583 F.3d 647, 654–55 (9th Cir. 2009).
There were a few challenges by Agarrao to the prerequisites — one being that the arbitration clause had been superseded by a novation — but they failed in light of the "federal policy favoring arbitration." Op. at 17.
The Court then put to rest Agarrao’s argument that a claim he had under the Seaman’s Wage Act guaranteed him the right to sue in federal court, and that this trumped the arbitration clause. It joined the Ninth and Eleventh Circuits, which had ruled:
"[t]he Convention Act expressly compels the federal courts to enforce arbitration agreements," notwithstanding the jurisdiction conferred on such courts to adjudicate Seaman’s Wage Act claims.
Rogers v. Royal Caribbean Cruise Line, 547 F.3d 1148, 1156 (9th Cir. 2008); (citing Lobo v. Celebrity Cruises, Inc., 488 F.3d 891, 894-95 (11th Cir.2007)).
So the Convention Act "partly supplants" the Seaman’s Wage Act, "requiring a federal court to refer to arbitration seamen wage claims and any other claims subject to an enforceable arbitration agreement." Op. at 22.
The "Prospective Waiver Doctrine" Is A Valid Challenge To The Enforceability of a Foreign Arbitration Clause, If Raised After The Award is Issued
But Aggarao and his lawyers weren’t finished fighting to invoke American jurisdiction. Next, they argued that arbitration in the Phillipines would be against public policy because he would be deprived of his right to pursue his federal statutory claims under U.S. law. This is known as the "prospective waiver doctrine." The problem with this attack was that it was premature. It can’t be raised at the stage where enforcement of an arbitration clause is the issue. Instead, it is ripe only after an "arbitration award has been made and the court is ‘considering whether to recognize and enforce an arbitral award.’" Op. at 24 (citing Convention, art. V).
By now I was feeling really sorry for Aggarao, who looked like he was facing an involuntary return to the Phillipines and an arbitration there. He was thousands of miles from home, paralyzed in a wheelchair, on the hook for more than $100,000 for medical care, and at one point he was living in a homeless shelter.
There’s a ray of American sunshine for him, because the Fourth Circuit held that his case should not have been dismissed and that his injunction request should not have been denied as moot. Dismissal of a case headed to arbitration is appropriate only when "all of the issues presented in a lawsuit are arbitrable." If all the issues are not arbitrable — and the prospective waiver issue wasn’t — then a stay is appropriate as opposed to a dismissal.
The District Court Had The Authority To Enter An Injunction Even Though The Case was to be Arbitrated in the Phillipines
Here also came up something else I had never heard of: the "hollow formality" test. The Court said:
where a dispute is subject to mandatory arbitration under the [FAA], a district court has the discretion to grant a preliminary injunction to preserve the status quo pending the arbitration of the parties’ dispute if the enjoined conduct would render that process a ‘hollow formality.’ The arbitration process would be a hollow formality where ‘the arbitral award when rendered could not return the parties substantially to the status quo ante.
Op. at 31 (citing Merrill Lynch, Pierce, Fenner & Smith v. Bradley, 756 F.2d 1048, 1053-54 (4th Cir. 1985) (quoting Lever Bros. Co. v. Int’l Chem. Workers Union, Local 217, 554 F.2d 115, 123 (4th Cir. 1976)).
Judge King observed that Aggarao couldn’t be returned to the pre-lawsuit status quo if he died upon return to the Phillipines or if his medical condition deteriorated as a result of inadequate care there. He charged the District Court with determining whether Aggarao was fit to be repatriated and whether the medical care available in the Phillipines was adequate for Aggarao. There was conflicting testimony from physicians. A surgeon from the Phillipines said that his hospital was "world class" and that it had "state-of-the-art facilities." Op. at 11. He also opined that the Phillipine doctors could provide all the care necessary, and that Aggarao was fit to return to his homeland. Op. at 11. American doctors expressed doubt on these points. Judge Beach was told to consider additional evidence if she deemed it necessary.
The Case Should Have Been Stayed Pending Arbitration, Not Dismissed, So That The Plaintiff Could Have Judicial Review of his Challenge to the Validity of the Arbitration
Lastly, the Fourth Circuit ordered that the District Court stay (and not dismiss) the case to make sure that Aggarao would have an opportunity at the "award enforcement phase" to have judicial review of his public policy defense based on the prospective waiver doctrine. It said that the Convention "contemplates a court retaining jurisdiction to ensure that an arbitration award comports with the public policy of the forum country." Op. at 37.
Whew. Writing this post has made me tired. I hope it’s of use to the hundreds of lawyers reading this blog who represent foreign seamen in admiralty cases and and the couple of dozen practicing in the area of international arbitration. I think it’s a significant opinion for them. (Really, are there any of you out there?)