Scandinavian Reins. Co. Ltd. v. St. Paul Fire and Marine Indemnity Co. (2d Cir. 2012)
Issue Discussed: Bias/Evident Partiality
Submitted by Michele L. Jacobson, Esq., Andrew S. Lewner, Esq.
Date Promulgated: February 3, 2012
Issues Decided: Whether the failure of two arbitrators to disclose their concurrent service as arbitrators in another, arguably similar, arbitration constitutes “evident partiality” within the meaning of the Federal Arbitration Act (the “FAA”)?
In Scandinavian Reinsurance Company Limited v. St. Paul Fire and Marine Indemnity Company, the Second Circuit Court of Appeals reversed a decision of the United States District Court for the Southern District of New York which vacated an arbitration award on the ground of “evident partiality.” The district court’s finding of evident partiality was premised upon the alleged nondisclosure by two of the three arbitrators in the arbitration panel that they were simultaneously sitting on another arbitration panel in an arbitration which involved related parties, similar issues and a common fact witness.
The Second Circuit Court of Appeals held that the failure to disclose this potential conflict by the two arbitrators did not rise to the level of evident partiality. Specifically, the Court held that the mere failure to disclose their simultaneous service on the other arbitration panel was not indicative that the two arbitrators were predisposed in favor of one of the parties. As a result, the Court held that “their failure to disclose that concurrent service is not indicative of evident partiality.” As such, the Second Circuit Court of Appeals reversed the district court’s decision granting vacatur and remanded the case back to the district court with instructions to confirm the arbitration award. Background
On August 21, 1999, Scandinavian Reinsurance Company Limited (“Scandinavian”) agreed to reinsure St. Paul Fire and Marine Indemnity Company (“St. Paul”) under a stop-loss retrocessional agreement (the “Agreement”). Scandinavian Reinsurance Company Limited v. Saint Paul Fire and Marine Indemnity Company, 668 F.3d 60, 64 (2d Cir. 2012). Pursuant to the terms of the Agreement, rather than paying premiums to Scandinavian directly, St. Paul retained the premium funds in an “experience account,” which would accumulate interest. Id. at 65. To the extent that Scandinavian was liable to pay claims under the Agreement, such payments would first be paid out of the experience account, and if the account was fully depleted, Scandinavian would then be required to pay St. Paul out of its own funds.
After St. Paul entered run-off in January 2002, two disputes arose between the parties: (1) whether the Agreement was “finite,” such that Scandinavian’s losses would be capped at a certain amount; and (2) whether the Agreement provided for a single experience account or three separate experience accounts. Id.
The Agreement contained an arbitration clause providing that “any dispute arising out of the interpretation, performance or breach of the Agreement, including the formation or validity thereof” was required to be submitted to binding arbitration before a Panel of three arbitrators comprised of “disinterested active or former executive officers of insurance or reinsurance companies or Underwriters at Lloyd’s, London.” Id.
The St. Paul / Scandinavian Arbitration
Pursuant to the arbitration clause of the Agreement, in September 2007, St. Paul issued an arbitration demand to Scandinavian. Id. St. Paul named Peter Gentile as its party-appointed arbitrator and Scandinavian appointed Jonathan Rosen. Id. at 66. On November 29, 2007, after his completion of an umpire questionnaire, Paul Dassenko was subsequently selected as umpire. Id.
On February 25, 2008 the parties and panel conducted an organizational meeting. At the organizational meeting, the two party-appointed arbitrators (Messrs. Gentile and Rosen) and Mr. Dassenko made oral disclosures, including disclosures relating to past and present employment, their relationship to the parties and law firms, and their participation as witnesses or arbitrators in other proceedings involving the same parties, law firms and arbitrators.Id. During the course of the arbitration, each of the arbitrators supplemented their prior disclosures to the parties. Id.
An arbitration hearing was held in the St. Paul / Scandinavian arbitration from June 15, 2009 through July 1, 2009. Id. at 67. On August 19, 2009, the Panel issued its award (the “Award”). By a majority, the Panel held that (1) there was no cap on Scandinavian’s liabilities under the Agreement; and (2) the Agreement provided for a single experience account, as argued by St. Paul. Id.
The Platinum / PMA Arbitration
During the pendency of the St. Paul / Scandinavian arbitration, an arbitration was commenced by Platinum Underwriters Bermuda, Ltd. (“Platinum”) against its cedent, PMA Capital Insurance Company (“PMA”) related to the interpretation of a reinsurance agreement between the two parties. Id. at 68. Two of the arbitrators in the St. Paul arbitration – Messrs. Gentile and Dassenko (the umpire) – were appointed to the panel in the Platinum arbitration. Mr. Gentile was appointed as Platinum’s party-appointed arbitrator and Mr. Dassenko was appointed umpire. Id.
An organizational meeting was held in the Platinum / PMA Arbitration on September 23, 2008, and over three non-consecutive days from March through May 2009, the parties and panel in the Platinum / PMA arbitration conducted an arbitration hearing. Id. On May 22, 2009, less than one month before the commencement of the St. Paul / Scandinavian arbitration hearing, the panel in the Platinum / PMA arbitration issued its final award. Id.
As the Court noted, “despite the many disclosures made by Dassenko and Gentile during the St. Paul Arbitration – including disclosures about the specific matter of their participation in other arbitrations involving the same arbitrators – it is undisputed that neither Dassenko nor Gentile even disclosed to the parties the fact of their concurrent service in the Platinum Arbitration.” Id..
The District Court Action
On November 16, 2008, Scandinavian filed a petition to vacate the Award in the United States District Court for the Southern District of New York. Id. at 70. Scandinavian sought vacatur pursuant to the FAA on evident partiality grounds, based upon the service by Messers. Dassenko and Gentile on the Platinum / PMA arbitration panel. In its petition, Scandinavian alleged that it first became aware of this dual service two months after the panel’s issuance of the Award in the St. Paul / Scandinavian arbitration. Id. at 70. On December 30, 2009, St. Paul opposed Scandinavian’s petition to vacate and cross-moved to confirm the Award. Id. at 70.
On February 23, 2010, the district court granted Scandinavian’s petition and vacated the arbitration award. Id. In doing so, the district court relied on four areas of overlap between the St. Paul / Scandinavian arbitration and the Platinum / PMA arbitration. Id. at 69-70. First, the roles held by Mr. Dassenko (umpire) and Mr. Gentile (party-appointed arbitrator) were identical in both arbitrations. Second, while St. Paul was not a party to the Platinum / PMA arbitration, there was a relation between St. Paul’s business and Platinum’s business. Specifically, the district court noted that Platinum had actually succeeded St. Paul as PMA’s reinsurer. Moreover, Platinum argued in the arbitration that, in calculating the balance of its experience account (under the Platinum / PMA contract), it was entitled to carry forward certain losses incurred by St. Paul under the predecessor reinsurance contract. Id.
Third, the two arbitrations had a common witness: Bart Hedges, who had previously been employed by both Platinum and Scandinavian. While his testimony in each arbitration related to distinct periods of his employment, the district court concluded that it was possible that Mr. Dassenko and Mr. Gentile might have found his testimony between the two arbitrations to be inconsistent. Finally, the district court found that the two arbitrations “shared similar [legal] issues.” Id. at 70.
In light of these four factors, the district court reasoned that:
- By participating in both the [St. Paul / Scan Re] Arbitration and the [Platinum / PMA] Arbitration, Dassenko and Gentile placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the [St. Paul / Scandinavian] Arbitration, be influenced by recent credibility determinations they made as a result of Hedges testimony in the [Platinum / PMA] Arbitration, and influence each other’s thinking on issues relevant to the [St. Paul / Scandinavian] Arbitration. By failing to disclose their participation in the [Platinum / PMA] Arbitration, Dassenko and Gentile deprived Scandinavian of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy.
Id. (citing Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 732 F. Supp. 2d 293, 308 at 308).
The district court concluded that these factors amounted to evident partiality and, as such, vacated the Award. Id.
The Second Circuit began its discussion by noting that the confirmation and vacatur of the Award was governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Id. at 71. However, because the Award was issued in the United States, the action was also subject to confirmation / vacatur under the FAA. Id.
As the Court noted, the FAA provides for vacatur of an arbitration award “where there was evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. Sec. 10(a)(2). Under established Second Circuit case law, “evident partiality . . . will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Id. at 71-72. The Court further discussed that while evident partiality does not require proof of actual bias, such a finding “may not be based simply on speculation.” Id. at 72.
In addition, while the Court noted that an evident partiality finding may be supported by evidence than an arbitrator failed “to disclose a relationship or interest that is strongly suggestive of a bias in favor of one of the parties,” the Court cautioned that it was not “quick to set aside the result of an arbitration because of an arbitrator’s alleged failure to disclose information.” Id. With respect to the case at bar, the Second Circuit held that the nondisclosures did not strongly suggest that either arbitrator was biased in favor of one of the parties, and as such, did not support setting aside the Award on the grounds of evident partiality. Id. at 73.
In analyzing whether the nondisclosures by Messrs. Dassenko and Gentile were supportive of a finding of evident partiality, the Second Circuit was guided by the factors adopted by the Fourth Circuit Court of Appeals in Three S. Del., Inc. v. DataQuick Info. Sys., Inc., 492 F.3d 520 (4th Cir. 2007):
- To determine if a party has established [evident] partiality, a court should assess four factors: “(1) the extent and character of the personal interest, pecuniary or otherwise, of the arbitrator in the proceeding; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator; and (4) the proximity in time between the relationship and the arbitration proceeding.”
Id. at 74.
Applying these factors to the St. Paul / Scandinavian arbitration, the Court concluded that “Scandinavian has not met its burden of establishing that Dassenko and Gentile’s service in the [Platinum / PMA] Arbitration was indicative of bias in these proceedings so as to constitute a non-trivial conflict of interest.” Id.
The Court explained that the mere fact that the two arbitrators had served together in both arbitrations, without more, did not indicate in any way that either of those arbitrators favored one party over the other in either arbitration or was somehow predisposed to rule in favor of one party over the other. Id. Consistent with this view, the appeals court rejected Scandinavian’s contention that the similarity of the arbitrations, including the common witness (Hedges), was indicative of bias. Id.
The Second Circuit also premised its holding upon a finding that any relationship between the arbitrators and the parties as a result of the dual service was trivial. As the Court explained. “for a relationship to be material, and therefore require disclosure, it must be such that a reasonable person would have to conclude that the arbitrator who failed to disclose [it] . . . was partial to one side.” Id. at 75. On this point, the Court noted that there was no indication in the record that either arbitrator “had any special financial or professional interest in ruling in St. Paul’s favor as a result of their participation in the Platinum Arbitration.”
In reversing the district court’s order vacating the Award, the Second Circuit rejected Scandinavian’s argument that the failure of the arbitrators to disclose their concurrent service on the Platinum / PMA panel disadvantaged Scandinavian because it deprived Scandinavian of the ability to present its case differently, in particular with regard to the common witness, Hedges. Id. at 77. As the Court explained, “the FAA does not bestow upon a party the right to receive information about every matter that it might consider important or useful in presenting its case. A party is not entitled to the complete and unexpurgated business biographies of the arbitrators whom the parties have selected.” Id.
As a final matter, the Second Circuit cautioned that its holding was not meant to “demean the importance of timely and full disclosure by arbitrators.” Id. at 78. Indeed, the Court noted that “it is far better for a potential conflict of interest to be disclosed at the outset than for it to come to light after the arbitration, when the suspicious or disgruntled party can seize on it as a pretext for invalidating the award. Id. at 78 (internal quotations and citations omitted). However, the Court went on to state that while disclosure is the far better approach, “the better course is not necessarily the only permissible one.” Id.
As such, the Second Circuit issued an order reversing the district court’s vacatur order and confirming the Award.
* Michele L. Jacobson and Andrew S. Lewner are partners in the litigation department of Stroock & Stroock & Lavan L.L.P., concentrating their practice on insurance and reinsurance litigation and arbitration. Ms. Jacobson and Mr. Lewner have 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.