KX Reinsurance Co. v. General Reinsurance Co.
Issue Discussed: Power of Arbitrators
Submitted by Michele L. Jacobson, Esq., Andrew S. Lewner, Esq
Date Promulgated: November 14, 2008
Issue Decided: Whether An Arbitration Panel May Retain Jurisdiction Over The Parties After Issuing Its Final Award
In KX Reinsurance Co. v. General Reinsurance Co., the United States District Court for the Southern District of New York held that an arbitration panel is not permitted to retain jurisdiction over a dispute once it has issued its final award. In so holding, the Court vacated a portion of an arbitration award that provided that the panel would remain constituted until both parties expressly requested that it desist. The Court confirmed the remainder of the award.
Between 1975 and 1979, General Reinsurance Company (“Gen Re”) and North Star Reinsurance Corporation (“North Star” and together with Gen Re, “Respondents”) separately entered into several reinsurance treaties with KX Reinsurance Company (“KX”). Id. at *1. Pursuant to these treaties, KX agreed to provide excess of loss reinsurance to both Gen Re and North Star. Each of these reinsurance treaties contained an identical arbitration clause, which required arbitration for “any dispute arising between the parties with respect to the interpretation of this Agreement or the rights of the parties in connection with any transaction hereunder.” Id. The arbitration clause further provided that the arbitrators “are relieved from all judicial formalities and may abstain from following the strict rules of law.” Id.
On April 19, 2007, Gen Re and North Star separately initiated arbitration proceedings against KX seeking to collect money that KX allegedly owed under the various excess of loss reinsurance treaties, and seeking to force KX to comply with a “letter of credit” clause that required KX to collateralize outstanding balances and reserves.1 In their arbitration demands, both Gen Re and North Star sought:
a) “An Interim Award requiring [KX] to post security for . . . the full amount of its outstanding balances and current outstanding reserves for the treaties;”
b) “A Final Award requiring [KX] to pay the outstanding balances . . . plus additional balances that may thereafter become due;”
c) “A Final Award requiring [KX] to post acceptable security for its share of the outstanding balance;”
d) “A Final Award requiring [KX] to post acceptable security for its share of [Gen Re and North Star]’s reserves on a going forward basis;” and
e) “An award of interest, attorney’s fees, and other appropriate relief.”
On November 7, 2007, the Panel issued an interim order granting Respondents’ request for security. Id. at *2. In its interim order, the Panel stated that Respondents were permitted to “request additional security” after February 15, 2008. KX subsequently settled a portion of the claims involved in the arbitration, and applied to the panel to reduce the amount of its posted security. Id. The Panel granted this request, and in so doing stated that KX was also permitted “to request further deductions . . . based on future payments made” after February 15, 2008. Id.
On March 25, 2008, KX informed Respondents and the Panel that it would withdraw its defense with respect to the letter of credit clause. Id.Respondents, in turn, drafted a stipulation which provided that KX could withdraw its defense to the letter of credit clause, with prejudice, and that the security that KX had posted pursuant to the Panel’s interim order would remain in force after the conclusion of the arbitration. KX never signed the proposed stipulation. Id.
The Panel issued its Award on June 5, 2008 (the “Award”), requiring KX to pay on all claims remaining at issue in the arbitration, and to further pay interest to Respondents, as well as Respondents’ fees, costs and expenses. Id. The Panel denied Respondents’ request for bad faith damages, as well as Respondents’ request for a claims protocol governing all future claims. In recognition of KX’s decision to withdraw its defense to the letter of credit provisions, the Award incorporated the Panel’s prior November 7, 2007 interim order requiring KX to post security. Finally, while the Award stated that all “other requests put forward by the parties that have not already been addressed by this Award are denied,” the Award further provided that “the Panel will remain duly constituted until such time as all parties request that we stepdown (sic).” Id.
Following KX’s payment of all damages required by the Award, KX requested that the Panel confirm that it had been disbanded. Id. at *3. Respondents opposed disbandment of the Panel on two grounds: First, Respondents maintained that KX had yet to pay balances due on certain claims that were not addressed by the Panel’s Award. Second, Respondents argued that KX should be forced to post additional collateral to avoid a future collateral shortfall. After the Panel rejected KX’s request that it disband, KX sought confirmation of all parts of the Award, with the exception of the Panel’s retention of jurisdiction, which it sought to vacate. Id.
Confirmation of Arbitral Awards
The Court initially discussed the policy in favor of confirming arbitration awards. Id. As the Court noted, “the confirmation of an arbitration award is a summary proceeding that converts a final arbitration award into a judgment of the Court.” The Court also noted the strong federal policy of granting arbitral decisions “great deference.” Id.
In addition, the Court explained that an arbitration award may only be confirmed if the award is determined to be “final.” Id. The Court noted, “an arbitration award is final where it resolves all of the issues submitted to arbitration and resolved them definitively enough so that the rights and obligations of the two parties, with respect to the issued submitted, do not stand in need of further adjudication.” Id. While the Award was not designated by the Panel as a “final award,” the Court found that the Award’s “context and scope” demonstrated that the Award was, indeed, final. Id. at *4.
The Court based this determination upon the following factors:
(1) the arbitration clause in the treaties stated that “the decision of the majority shall be final and binding upon the contracting parties,” (2) “Respondents specifically requested a final award in their demand for arbitration,” (3) “the Panel introduced its ruling by noting that it had ‘heard and fully considered’ all evidence and arguments associated with the matters before them,” and (4) “the Panel specifically stated that ‘all other requests put forward by the parties that have not been addressed in this Award are hereby denied.’” As such, the Court determined that the Award was a final award. Since the only dispute surrounding any portion of the Award involved the portion of the Award retaining jurisdiction, the Court considered whether that portion of the Award should be vacated.
Vacatur of Arbitral Awards
The Court began its analysis by noting that vacatur of an arbitration award is only proper upon a showing by the party seeking vacatur that one of the four grounds for vacatur set forth in the Federal Arbitration Act (“F.A.A.”) exists. Those four grounds are:
(1) award was procured by corruption, fraud or undue means; (2) arbitrators exhibited evident partiality or corruption; (3) arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior that prejudiced the rights of any party; or (4) arbitrators exceeded their powers or so imperfectly executed their powers that a mutual, final, and definite award upon the matter submitted was not made.
Id. at *3. Focusing its analysis on Section 10(a)(4) of the FAA (which permits vacatur of an award if the arbitrators exceeded their power), the Court explained that in determining whether vacatur is proper, “the only question is whether the arbitrators had the power based on the parties’ submission or the arbitration agreement, to reach certain issues, not whether the arbitrators correctly decided those issues.” Id. at *3.
The Court explained that once an arbitration panel decides the submitted issues, “it becomes functus officio and lacks any further power to act. Arbitrators do not have the power to monitor the parties’ compliance with the Award, unless the authority is specifically conferred on them through the parties’ submissions.” Id. In view of this standard, the Court held that the Panel exceeded its authority in retaining jurisdiction over the dispute.
In reaching this determination, the Court rejected Respondents’ contention that the Panel was entitled to remain in place “because KX had yet to pay balances due on several claims that were not addressed by the Panel in the Award.” Id. at *4 (emphasis in original). As the Court reasoned, the Panel’s Award specifically provided that “any claims not addressed in the Award should be deemed as refused.” Id. Thus, to the extent that claims remained unpaid, these claims were already addressed in the Panel’s Award.
The Court also rejected Respondents’ position that the Panel should remain constituted because Respondents anticipated that they would request that KX increase the amounts of security that KX had posted. As the Court explained, by Respondents’ own admission, “Respondents had not submitted their claim for additional security in the arbitration demands,” and, “as such, it was outside the parameters of the Panel’s authority.” Id. at *5.
In addition, the Court rejected Respondents’ contention that the Panel’s incorporation of its November 2007 interim order into the Award permitted the Panel to retain jurisdiction over the amount of security posted by KX. Id. Finally, the Court explained that where there were three narrow exceptions to the functus officio doctrine, none of those exceptions applied.2 Id.
Accordingly, the Court confirmed all portions of the Award, with the exception of the Panel’s retention of jurisdiction, which the Court vacated.
* Michele L. Jacobson is a partner in the litigation department of Stroock & Stroock & Lavan L.L.P., concentrating her practice on insurance and reinsurance litigation and arbitration. Ms. Jacobson has represented ceding companies, reinsurers, retrocessionaires, liquidators and intermediaries in a vast array of matters in state and federal courts, as well as before arbitration Panels throughout the country.
+Andrew S. Lewner is an associate in the litigation department of Stroock & Stroock & Lavan L.L.P., concentrating on insurance and reinsurance litigation and arbitration. Mr. Lewner has represented ceding companies, reinsurers and retrocessionaires in a wide range of matters in state and federal courts, as well as before arbitration Panels throughout the country. 1By agreement of the parties, the two separate arbitrations were consolidated.
2The three recognized exceptions to the functus officio doctrine are: (1) if the award is ambiguous; (2) if the award has an error on its face; or (3) if the award does not adjudicate the submitted issues.