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PoolRe Insurance Corp. et al. v. Organizational Strategies Inc. et al.

Issue Discussed: Power of Arbitrators

Submitted by Michele L. Jacobson, Yevgenia S. Kleiner

Date Promulgated: April 7, 2015

Issues Decided: (1)Whether a court must sustain an award issued by an arbitrator where the arbitrator exceeds the express limitations of his contractual mandate, and (2) whether a district court may issue an order vacating the entirety of an arbitration award, rather than vacating in part and confirming in part pursuant to 9 U.S.C. § 10(a)(4), where an arbitrator awards a lump sum, rather than two separate and easily divisible awards.

In a published opinion dated April 7, 2015, the United States Court of Appeals for the Fifth Circuit held that an arbitrator exceeded his authority by joining PoolRe Insurance Corp. (“PoolRe”) to an arbitration between Capstone Associated Services Ltd. (“Capstone”) and Organizational Strategies Inc. (“Organizational Strategies”) concerning the termination of contracts relating to the formation of captive insurance companies.  The Fifth Circuit affirmed the decision of the U.S. District Court for the Southern District of Texas, which vacated an arbitration award in Capstone’s favor pursuant to 9 U.S.C. § 10.

The Court’s decision explained that the arbitrator erred in joining PoolRe to the arbitration as a party because PoolRe’s contract with Organizational Strategies’ captive insurers required arbitration pursuant to  a different set of arbitration rules.  The Fifth Circuit agreed with the district court’s holding that the arbitrator had exceeded his authority because he had “acted contrary to the express arbitrator- and forum-selection clauses in the arbitration agreements to which PoolRe was a party”.

The parties’ dispute stemmed from a multi-year agreement between Organizational Strategies, a professional services firm, and Capstone, which, along with its affiliates, provides formation and administrative services for captive insurance companies.  The agreement contemplated the formation of three captive insurance companies that would underwrite alternative-risk programs for Organizational Strategies, and required that any disputes would be resolved in arbitration according to American Arbitration Association (AAA) rules.  The three newly created captive insurance companies and PoolRe, which was to provide insurance services to the three captive insurers, entered into contracts that required arbitration under International Chamber of Commerce (ICC) rules.  Following an annual audit, Organizational Strategies concluded that it had been overpaying for insurance premiums, and requested that Capstone change certain accounting information.  Capstone refused, and, in response, Organizational Strategies terminated its agreement with Capstone.  In turn, PoolRe cancelled its agreements with the captive insurance companies.  A dispute then ensued as to whether PoolRe had properly refunded certain deposits to Organizational Strategies.  Capstone filed an arbitration demand asserting breach of contract claims against Organizational Strategies, and an arbitrator was appointed to hear the dispute.  The arbitrator selection clause in PoolRe’s agreements with the captive insurers required that the arbitrator be selected by the director of insurance in Anguilla, British West Indies.  When it was determined that no such individual existed, Pool Re intervened in the arbitration between Capstone Associated Services Ltd. and Organizational Strategies “for the limited purpose of having [the arbitrator] appoint an Anguilla-based arbitrator”.

The arbitrator issued a jurisdictional ruling which applied AAA rules, and  concluded that, by intervening, PoolRe had waived its right to arbitration in Anguilla.  He likewise found that he had jurisdiction over both Capstone’s and PoolRe’s claims, despite the objection of Organizational Strategies.  Several months later, the arbitrator issued an award granting Capstone, PoolRe and the law firm for Capstone’s captive insurance support program $451,244.44 in attorneys’ fees, expenses and costs, finding that Organizational Strategies had breached its contract with Capstone, PoolRe and the firm.  The district court vacated this award, holding that the arbitrator had exceeded his authority by exercising jurisdiction over PoolRe and the captive insurance companies, and concluding that PoolRe’s involvement had “tainted the entire process.”

Capstone appealed the district court’s decision, arguing that, even if the arbitrator had improperly arbitrated the dispute between PoolRe and the captive insurers, the district court should only have vacated the portion of the award that provided a recovery to PoolRe.

Affirming the lower court, the Fifth Circuit held that the arbitrator had been appointed in “a manner contrary to that provided” in the agreements between PoolRe and the captive insurers.  The Court rejected Capstone’s contention that the district court should only have vacated that portion of the arbitration award pertaining to PoolRe, because the arbitration award was a lump sum, and that “[n]othing in the statute or our cases suggests that a district court errs by failing to vacate in part, particularly where the arbitrator awarded a lump sum ‘to be divided among the parties as they see fit’”.

[1] Michele L. Jacobson is a Partner, and Yevgenia S. Kleiner is an Associate, at Stroock & Stroock & Lavan LLP.