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Ario, Insurance Commissioner of the Commonwealth of PA v. Underwriting Members of Syndicate 53 at Lloyds for 1998 Year of Account

Issue Discussed: Other

Submitted by Natasha C. Lisman

Date Promulgated: August 18, 2010

Issues Decided: Opting Out of the Federal Arbitration Act

In this case, the Third Circuit decided that a provision in an arbitration clause of a reinsurance treaty requiring arbitration to be conducted in accordance with the rules and procedures established by a state arbitration statute does not operate as a means to opt out of the Federal Arbitration Act, either in its entirety or, more narrowly, as to (1) the removal of an action to confirm/vacate an arbitral award from state to federal court, and (2) the standards for vacatur.


Background

The case arose out of a dispute between the statutory Liquidator of two insolvent Pennsylvania insurers and their foreign reinsurers over the propriety of the insurers’ underwriting of the business ceded under four treaties. The dispute was submitted to arbitration, which resulted in an award rescinding all but one of the treaties.

Each of the treaties at issue contained an arbitration clause providing that “the arbitration shall be in accordance with the rules and procedures established by the Uniform Arbitration Act as enacted in Pennsylvania.” Each treaty also included a service-of-suit clause providing, among other things, that “[n]othing in this Clause constitutes or should be understood to constitute a waiver of Reinsurers’ rights . . . to remove an action to a United States District Court.”


Proceedings in the US District Court

Judicial review of the award began in state court, where the Liquidator filed a motion to confirm the award in part and vacate in part. However, the reinsurers removed the case to federal court under 9 U.S.C. § 205, the removal provision of Chapter 2 of the FAA, which implements the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In response, the Liquidator moved to remand the case to state court, arguing that federal court lacked subject matter jurisdiction because, by selecting the Pennsylvania Uniform Arbitration Act (“PUUA”) to govern the arbitration, the parties had opted out of the FAA in its entirety, or, at least with respect to the removal provision. The district court disagreed with the Liquidator and declined to remand.

The Liquidator then proceeded with his motion to vacate. With respect to the standards to be applied in the court’s review of the award, the Liquidator again invoked the contractual choice of the PUAA to assert that the parties had opted out of the FAA vacatur standards in favor of those under the PUAA (which, according to the Liquidator, allowed for a broader scope of judicial review). The district court rejected this contention as well, and, applying the FAA, not the PUAA, standards, denied the Liquidator’s motion to vacate and confirmed the arbitration award. The Liquidator appealed.


The Third Circuit’s Ruling

On appeal, the Third Circuit Court of Appeals affirmed both of the district court’s rulings, albeit with partial dissent. With respect to the Liquidator’s global opt-out theory, the Court held that parties may not opt out of FAA coverage in its entirety, because an arbitration agreement does not cease being subject to the FAA merely because the FAA permits parties to specify the rules for the conduct of arbitrations, including rules borrowed from state law. Citing Supreme Court and its own precedent establishing these principles with respect to Chapter 1 of the FAA, governing domestic arbitrations, the Third Circuit concluded that they apply with equal force to Chapter 2 of the FAA, implementing the Convention with respect to cross-border arbitrations.

At the same time, the Third Circuit acknowledged that the right of removal under Chapter 2 can validly be waived by agreement of the parties. However, reiterating its prior holding that, consistent with the “strong and clear preference for a federal forum,’” waiver of the right to remove may be effected only by “clear and unambiguous language,” the Court found that the parties’ choice of PUAA did not constitute sufficiently clear and unambiguous language, particularly when read in conjunction with the express preservation of the right to remove in the service-of-suit clause.

Turning to the applicable standards for vacatur, the Third Circuit began its analysis by expressing agreement with the Second Circuit’s holding that even an award falling under the Convention is subject to the FAA standards for vacating domestic awards when the award is rendered in the United States, as opposed to a foreign jurisdiction. The Court then reaffirmed its prior holding that, while the FAA allows parties to agree to supplant the FAA vacatur standards with state law standards, they must express “clear intent” to do so and doubts must be resolved in favor of the FAA standards. Applying this test, the majority of the Third Circuit panel found that the parties’ choice of the PUAA rules and procedures for arbitrations under the reinsurance treaties was not an expression of clear intent to opt out of the FAA vacatur standards because it addressed only the conduct of arbitrations and not the judicial enforcement of resulting awards. However, one member of the panel dissented from this part of the Court’s opinion because, in his view, the reinsurance treaties did evince a clear intent to adopt the vacatur standards of the PUAA.


Conclusion

For domestic or cross-border arbitrations subject to the FAA, the principle of party autonomy does not encompass the right to opt out of the FAA altogether. As to those provisions of the FAA that are subject to waiver or substitution by agreement, such as the right to remove to federal court and standards for vacatur, the intent to effectuate such waiver or substitution must be expressed in language that is specific, crystal clear, and not inconsistent with any other provision in the parties’ agreement.

*Natasha C. Lisman is a partner at the Boston law firm of Sugarman, Rogers, Barshak & Cohen, P.C. and Co-Chair of its Insurance and Reinsurance Practice Group. She gratefully acknowledges the assistance of Robert M. Kaitz, a Northeastern University law student interning at the firm, in the preparation of this report.