Service Partners, LLC v. American Home Assurance Co.

Issue Discussed: Arbitrator Selection / Challenges / Judicial Intervention

Submitted by John R. Cashin, Andrew D. Shapiro

Date Promulgated: June 20, 2011

Service Partners, LLC v. American Home Assurance Co., 2011 WL 2516411 (C.D. Cal. June 20, 2011)

Issues Decided: Jurisdiction under Federal Arbitration Act and ability to remove arbitrator before rendering an award.

In Service Partners, LLC v. American Home Assurance Co. the District Court for the Central District of California held that barring a contractual basis to challenge an arbitrator’s qualification in the arbitration agreement, it is not proper for a district court to entertain a challenge to an arbitrator’s qualifications or partiality until after the arbitration has concluded and an award has been rendered.

This dispute arose under a Payment Agreement for Insurance and Risk Management Services between plaintiff Services Partners and defendant American Home (the “Agreement”). The Agreement was effective on July 30, 2001 and contained an arbitration provision specifying the following arbitrator qualifications: “. . . all arbitrators must be executives or former executive officers of property or casualty insurance or reinsurance companies . . . or risk management officials in an industry like Yours . . . and not under the control of either Party to this agreement.” The Agreement further specified that if one party failed or refused to appoint an arbitrator or if the two arbitrators failed to agree on a third arbitrator either party could make application to a Justice of the Supreme Court of New York and that court would appoint the additional arbitrator or arbitrators. The Agreement also stated that the arbitration was to be governed by the Federal Arbitration Act (the “FAA”).

On July 6, 2010 plaintiff demanded arbitration and named its arbitrator. Defendant raised questions about plaintiff’s arbitrator’s ability to serve and refused to proceed unless plaintiff selected a new arbitrator. Defendant established that plaintiff’s arbitrator was a former executive of defendant’s parent company, AIG, and that he recently served as a party arbitrator and a litigation consultant and expert witness for defendant. Plaintiff refused to replace its arbitrator and filed a motion to compel arbitration in federal court in the Northern District of California. Defendant challenged the motion on two principal grounds: (1) plaintiff’s party-appointed arbitrator should be disqualified; and (2) the venue provision in the Agreement required the Supreme Court of New York, not a federal court in California, to decide the issue. Plaintiff contended that the FAA governed the dispute and that there was nothing in the Agreement or in federal law permitting defendant to disqualify a named arbitrator who met the qualifications specified in the Agreement before entry of an arbitration award.

Forum and Jurisdiction

Defendant argued that since plaintiff’s arbitrator was not qualified, it was akin to not nominating anyone. Therefore, according to defendant, plaintiff failed to make an appointment under the terms of the Agreement and the matter should properly be decided by the New York Supreme Court. Plaintiff contended that, under the Agreement, the New York Supreme Court had only limited jurisdiction when a party failed to appoint an arbitrator or the two appointed arbitrators failed to select an umpire.

The District Court found that the Agreement did indeed limit the jurisdiction of the Supreme Court of New York to the two instances described by plaintiff and that limited jurisdiction did not include disputes over the qualifications of named arbitrators. Instead, the Court determined that those disputes fell under the FAA, which governed every other procedural aspect of the Agreement. The Court concluded that it was the proper forum for adjudicating the motion to compel arbitration under the FAA. In a footnote the Court further stated that diversity between the parties and the amount in controversy qualified the venue in Federal District Court.

Qualification and Ability to Remove an Arbitrator Before the Rendering of an Award

Defendant contends that because plaintiff’s arbitrator previously worked for defendant’s parent company and served as a party-appointed arbitrator for defendant he was intimately aware of defendant’s litigation “playbook information.” Those facts, defendant argued, should disqualify plaintiff’s arbitrator. Plaintiff countered that the arbitrator met all of the prerequisites for qualification specified in the Agreement and that its party-appointed arbitrator was not under the control of either party. Additionally, plaintiff contended that there were no provision in the Agreement allowing either party to challenge the other’s appointed arbitrator.

The District Court found that the Agreement did not permit one party to disqualify the other’s named arbitrator as it specifically lacked any such statement or provision. Had defendant wished to provide for such an opportunity, as drafter of the Agreement, it could have explicitly done so. The Court further noted that the clear terms of the Agreement precluded the appointment of an arbitrator who “is under the control of either Party.” As that provision was expressed in the present tense, the Court interpreted it to mean neither arbitrator could currently be under the control of either party. Citing the principle of Contra Proferentem, the Court held that any ambiguity in that provision of the Agreement should be construed against the defendant as the drafting party and the Court refused to disqualify the plaintiff’s named arbitrator.

Finally, the Court found that without a contractual provision covering disqualification, it was not proper to entertain defendant’s challenge to plaintiff’s named arbitrator on the grounds of qualifications or partiality until after the conclusion of the arbitration and the rendering of an award. See Aviall, Inc., v. Ryder System, Inc., 110 F.3d 892 (2nd Cir. 1997). With specific reference to the FAA, the Court noted, “By its own terms [9 U.S.C. Sec. 10] authorizes court action only after a final award is made by the arbitrator. Further, ‘even where arbitrator bias is at issue, the FAA does not provide for removal of an arbitrator from service prior to an award, but only for vacatur of any award.” Gulf Guar. Life Ins. Co., v. Connecticut Gen. Life Ins. Co., 304 F. 3d 476, 490 (5th Cir 2002). Therefore, the Court refused to disqualify plaintiff’s named arbitrator and granted plaintiff’s motion to compel arbitration. * John R. Cashin is the Regional General Counsel for the Middle East and Africa at Zurich Insurance Company, based in Dubai, United Arab Emirates. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include oversight of business operations for compliance with local governance rules, laws and regulations in the Middle East and African jurisdictions where Zurich provides insurance products. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.

* Andrew D. Shapiro is a partner at Butler Rubin Saltarelli & Boyd LLP, where he specializes in reinsurance litigation and arbitration.