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PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd.

Issue Discussed: Honorable Engagement Clause

Submitted by Elizabeth V. Kniffen, Dennis Anderson

Date Promulgated: November 8, 2010

PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 400 Fed.Apprx. 654 (2010)

Court: United States Court of Appeals for the Third Circuit

Issues Decided: Can an arbitration panel operating under an honorable engagement clause “reinvent” the contract before them or order relief not requested?

In PMA Capital Insurance Company v. Platinum Underwriters Bermuda, Limited, the United States Court of Appeals for the Third Circuit affirmed a federal district court’s decision to vacate an arbitration award, concluding that, despite an honorable engagement clause in the reinsurance contract, the arbitration panel exceeded its authority when it removed a bargained-for “deficit carry forward” provision from the contract.

PMA Capital Insurance (“PMA”) is an insurance company and Platinum Underwriters (“Platinum”) is a reinsurer. In 2003, they made a contract under which Platinum indemnified PMA for obligations arising from PMA’s insurance policies. The contract included a “deficit carry forward” provision that entitled Platinum to reimbursement for losses carried from one year to the next. It also included an honorable engagement clause providing that arbitrators must:

[I]nterpret this Agreement as an honorable engagement and not as merely a legal obligation. They are relieved of all judicial formalities and may abstain from following the strict rules of law. They will make their award with a view to effecting the general purpose of the Agreement in a reasonable manner rather than in accordance with the literal interpretation of the language.

In 2008, a dispute arose over whether Platinum could carry forward any losses from 1999-2001. Platinum contended it was entitled to carry forward $10.7 million, and PMA argued Platinum was not entitled to any losses for that period. A panel of arbitrators received evidence, testimony, and argument and issued an award (1) ordering PMA to pay Platinum $6 million, and (2) removing the “deficit carry forward” provision from the contract.

PMA successfully petitioned the Federal District Court for the Eastern District of Pennsylvania for vacatur of the award, and Platinum appealed. The appellate court noted that, although courts are highly differential to arbitration awards, they are not entitled to simply rubber-stamp arbitrators’ decisions, and arbitrators may not exceed the scope of the authority granted to them by the parties’ contract.

The appellate court agreed “in all respects” with the district court’s reasoning, which was as follows:

The Honorary Engagement Clause allowed the Arbitrators to stray from “judicial formalities” and the 2003 Contract’s “literal language” to effectuate in a “reasonable manner” the Contract’s “general purposes.” No court has held that such a clause gives arbitrators authority to re-write the contract they are charged with interpreting…. The 2003 “contract itself” requires the enforcement of the Deficit Carry Forward Provision, not its elimination.

The appellate court concluded that “the honorable engagement clause permitted the arbitrators to stray from judicial formalities [but] did not give them authority to reinvent the contract before them.”