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Banco de Seguros del Estado v. Mutual Marine Office, Inc.

Issue Discussed: Security

Submitted by Sehar Sabir, Michael T. Carolan*

Date Promulgated: September 18, 2003

 

Banco de Seguros del Estado v. Mutual Marine Office, Inc. 344 F.3d 255 (2d. Cir. 2003)

Court: United States Court of Appeals, Second Circuit

Issues Decided: Whether a foreign reinsurer explicitly waived its immunity to an arbitration panel’s award of pre-hearing security where the arbitration clause at issue allows the arbitrators to abstain from following the strict rules of law and relieves them of all judicial formality.

 

In Banco de Seguros del Estado v. Mutual Marine Office, the U.S. Court of Appeals for the Second Circuit confirmed arbitration awards requiring Banco de Seguros del Estado (“Banco”) to post pre-hearing security in two proceedings because the court found that Banco had expressly waived its immunity to an award of pre-hearing security. In doing so, the court held that where an arbitration clause relieves a panel of all judicial formality and allows them to abstain from following the strict rules of law, arbitrators have wide discretion to order the remedies they deem appropriate, including the power to award pre-hearing security.

The Arbitration

Mutual Marine Offices, Inc. (“MMO”) and Mount Mckinley Insurance Co. (“McKinley”) demanded arbitration against Banco under two separate reinsurance agreements. In each of the arbitration proceedings, the arbitration panel granted the defendants’ motions to require Banco to post pre-hearing security.

Banco moved to vacate these interim orders at the U.S. District Court for the Southern District of New York, but the district court affirmed the panel’s order in both cases.  Banco then appealed to the U.S. Court of Appeals for the Second Circuit, arguing that, as a coporation wholly-owned by a foreign state, Banco was protected from a pre-hearing security order by the Foreign Sovereign Immunities Act (“FSIA”).

The Second Circuit Opinion

The Second Circuit began its analysis by noting that, under FSIA, foreign states are immune from pre-judgment attachment of their assets used for commercial activity in the United States, unless the foreign state explicitly waives such immunity from attachment.  The court explained that in order to be explicit, the waiver must “demonstrate unambiguously the foreign state’s intention to waive its immunity from prejudgment attachment” in the United States.

The court then examined the arbitration clause in each of the reinsurance agreements to see if Banco explicitly waived its immunity.  Both clauses provided that “the arbitrators shall consider this Treaty an honourable engagement rather than merely a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law.”  Noting that several courts have found that such a clause allows arbitrators wide discretion to order remedies they deem appropriate, including the power to award pre-hearing security, the Circuit Court held that it was perfectly reasonable for the arbitration panels to require Banco to post pre-hearing security.

The court then considered whether the panel had specific authority to order a letter of credit as security against a possible final award.  While the court noted that the arbitration clause did not explicitly grant the panel such authority, it pointed out that the “Unearned Premium and Loss Reserves” provision required Banco to provide MMO with “a clean irrevocable Letter of Credit issued by a bank acceptable to such Insurance Department in an amount equal to Banco’s proportion of said reserves.”  The court thus found that the parties considered letters of credit as a means of securing their rights and obligations and as a means of facilitating the transaction generally.  Therefore, the court affirmed the panel’s discretion to award MMO and McKinley pre-hearing security in the form of letters of credit.

 

* Sehar Sabir and Michael T. Carolan are associate and partner, respectively, in the Insurance & Reinsurance group of Crowell & Moring LLP. They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.