Flexport, Inc v. Western Global Airlines, LLC

Background

Flexport provides logistics services for freight transportation. In January 2018, Flexport and Western Global Airlines, LLC ("WGA") entered an Aircraft Services Agreement concerning use of an aircraft to transport cargo between Hong Kong and Los Angeles weekly from April 1, 2018, through March 31, 2021.

According to the allegations summarized in the opinion, the aircraft WGA initially provided experienced mechanical and other service failures and was inoperable for more than three months. WGA provided an MD-11 aircraft as a replacement, but Flexport alleged that the replacement was older, smaller, unsuitable for some of its customers’ shipments, and also suffered mechanical failures and delays.

The Agreement allowed Flexport to terminate without indemnities or penalties if WGA failed to provide the agreed operational performance. The Agreement defined that failure as a schedule reliability rate below 80 percent during any two-month rolling period. Flexport alleged that WGA’s performance fell below that threshold in March and April 2019. Flexport sent WGA a termination notice on May 5, 2019, although WGA stated that the notice was sent on May 7. Flexport later sued for a declaration that it properly terminated the Agreement and for defamation based on statements by a WGA representative in an online article.

WGA moved under the Federal Arbitration Act to compel arbitration of Flexport’s claims and to stay the federal case while arbitration proceeded. WGA had separately initiated an arbitration proceeding, which the arbitrator stayed pending resolution of the motion to compel.

Agreement’s Dispute-Resolution Terms

The Agreement’s dispute-resolution section contained both a court-forum provision and arbitration provisions. Section O.1 stated that the United States District Court for the Southern District of New York and the appeals courts originating therefrom had exclusive jurisdiction to resolve any dispute arising from or related to the Agreement.

Other provisions required negotiation and mediation before arbitration and stated that all disputes, claims, or causes of action arising out of or relating to the Agreement—including disputes about its validity, interpretation, breach, violation, or termination—not resolved through mediation would be finally and solely determined by arbitration in New York under the American Arbitration Association’s Commercial Arbitration Rules.

Court’s Analysis

The court explained that whether the parties agreed to arbitrate is ordinarily a question for the court unless the parties clearly and unmistakably assigned that question to an arbitrator. The court found that the Agreement did not clearly and unmistakably make an arbitrator the decision-maker on whether an arbitration agreement had been formed.

The court found the Agreement ambiguous. The arbitration language strongly suggested that the parties intended to arbitrate disputes, and the Agreement also addressed selecting an arbitrator, serving notices, paying arbitration costs, and enforcing the arbitrator’s decision. But the provision giving the Southern District of New York “exclusive jurisdiction to resolve any dispute” suggested that disputes were to be decided exclusively by a judge in that court.

Because both provisions referred broadly to all disputes and made different forums exclusive, the court concluded that neither provision allowed for the other. The court therefore could not determine from the contract’s language alone whether the parties had agreed to arbitration.

The court considered evidence outside the written Agreement because of the ambiguity. Flexport submitted a declaration from Neel Jones Shah, who stated that WGA had preferred arbitration but ultimately agreed that the Southern District of New York would have jurisdiction over all disputes, with arbitration available only in limited circumstances after negotiation and mediation. WGA submitted an affidavit from its chief executive officer, James K. Neff, who stated that the parties intended all disputes to be resolved through arbitration and that the court-jurisdiction language was a drafting error.

The court found this evidence contradictory and insufficient to resolve the issue as a matter of law. The court also rejected WGA’s argument that the Agreement’s incorporation of the American Arbitration Association rules delegated arbitrability questions to the arbitrator. Because the ambiguity concerned whether the parties formed an arbitration agreement at all, the court held that the court—not an arbitrator—had to decide that foundational question.

Disposition

The court denied WGA’s motion to compel arbitration and directed the Clerk of Court to terminate the motion. The opinion does not separately state a disposition for WGA’s request to stay the federal action.

Effect of the Ruling

The ruling did not decide whether Flexport properly terminated the Aircraft Services Agreement or whether WGA defamed Flexport. It decided only that WGA had not established, on the record presented, that the parties’ dispute was subject to compelled arbitration.