In re Arbitration Between General Security National Insurance Co. & AequiCap Program Administrators

Issue Discussed: Power of Arbitrators

Submitted by Andrew D. Shapiro, Thomas J. Kennedy

Date Promulgated: April 29, 2011

Issues Decided: Whether an arbitration panel exceeded its authority or acted in manifest disregard of the law by awarding attorney’s fees to the prevailing party.

In In re Arbitration Between General Security National Insurance Co. & AequiCap Program Administrators, the District Court for the Southern District of New York rejected AequiCap’s motion to vacate an arbitration award on the grounds that the panel acted beyond its authority or in manifest disregard of the law by awarding General Security its attorney’s fees.

Background

General Security National Insurance Co. (“General Security”), an insurance company, and AequiCap Program Administrators (“AequiCap”), a managing general agency, entered into a contract under which AequiCap agreed to reinsure General Security’s losses. That contract provided that any disputes would be subject to an arbitration clause contained in a pre-existing underwriting agreement between the parties. That arbitration clause included the following language: “[i]n the event that any disagreement or dispute shall arise as to the effect or interpretation of any of the terms, provisions or conditions of this Agreement, the parties hereto shall submit such disagreement or dispute for resolution to a panel of three disinterested arbitrators . . . .”

In November 2009, General Security demanded arbitration, seeking reimbursement of $426,802 from AequiCap. The panel subsequently granted General Security’s motion for summary judgment, awarding General Security damages of $426,802 plus interest and attorney’s fees and disbursements of $239,946. Prior to the award, both parties expressly requested that the panel award attorney’s fees.

After the panel issued the award, General Security petitioned the District Court of the Southern District of New York to confirm the arbitration award. AequiCap opposed the petition and sought to vacate the panel’s attorney’s fee award claiming that: (1) the panel exceeded its authority under § 10(a)(4) by awarding attorney’s fees; and (2) the panel acted in manifest disregard of the law when it awarded attorney’s fees to General Security.

Holding

I. The Panel’s Authority to Award Attorney’s Fees

The court rejected AequiCap’s contention that the panel lacked authority to award attorney’s fees. Specifically, the court disagreed with AequiCap’s assertion that the arbitration clause was not broad, and thus, that the parties had not conferred authority upon the panel to award attorney’s fees. To the contrary, the court found that the parties’ arbitration clause used expansive language to define the types of disputes to be submitted to arbitration and that the parties’ arbitration clause failed to signal an intention to limit the authority conferred upon the panel by restricting the types of relief that the panel could award. As a result, the court concluded that the arbitration clause was indeed a broad provision. Accordingly, the court found that the panel had inherent authority to award attorney’s fees.

II. The Panel’s Alleged Manifest Disregard of the Law

The Court similarly rejected AequiCap’s assertion that the panel’s award evidenced a manifest disregard for the law. At the outset, the court noted that AequiCap bore a heavy burden in its attempt to vacate the panel’s award based on manifest disregard of the law because “a federal court cannot vacate an arbitral award merely because it is convinced that the arbitration panel made the wrong call on the law. On the contrary, the award should be enforced, despite a court’s disagreement with it on the merits, if there is a barely colourable justification for the outcome reached.” In the Second Circuit, courts employ a three-step inquiry to determine whether an arbitration award should be vacated based on manifest disregard of the law: (1) whether the law that was allegedly ignored was clear and explicitly applicable to the matter before the arbitrators; (2) whether the law was improperly applied, leading to an erroneous outcome; and (3) whether the arbitrators actually knew of the law’s existence and its applicability to the problem before them.

The court found that AequiCap failed to establish the first of the three elements. In support of its argument, AequiCap cited to section 7513 of New York’s Civil Procedure Law and Rules, which states that attorney’s fees may not be awarded by arbitrators unless the parties expressly agree that such an award is proper. But the court found that the panel could have concluded that the choice of law provision was broad enough on its face to contemplate a fee award and that C.P.L.R. 7513 did not apply because the choice of law provision only incorporated substantive principles of New York law. Thus, the panel could have reasonably reached the conclusion that a fee award was proper. Alternatively, the panel could also have accepted General Security’s argument that the parties authorized the fee award when they both requested such an award during the pendency of the arbitration.

Accordingly, the Court granted General Security’s motion to confirm the arbitration award and denied AequiCap’s motion to vacate the award.

* Andrew D. Shapiro is a Partner and Thomas J. Kennedy is an Associate at Butler Rubin Saltarelli & Boyd LLP, where they specialize in reinsurance litigation and arbitration.