Clear Blue Insurance, Co. v. Amigo MGA, LLC, No. 3:20-cv-312-GCM, 2020 WL 9810106 (W.D.N.C.).

Case: Clear Blue Insurance, Co. v. Amigo MGA, LLC, No. 3:20-cv-312-GCM, 2020 WL 9810106 (W.D.N.C.).

Court:  United States District Court for the Western District of North Carolina (Charlotte Division)

Issue Decided: Whether the plaintiff, an insurance company, was entitled to a preliminary injunction – pending arbitration – to require the defendant, an insurance agent, to immediately remit policyholder-paid premiums that the defendant collected on the plaintiff’s behalf.

Submitted by: Fielding E. Huseth, Moore & Van Allen (the author and his firm represented the plaintiff)

May an Injunction Issue Compelling an MGA to Remit Premiums Pending Arbitration?

The plaintiff, Clear Blue, is an insurance company that entered into a contract with the defendant, Amigo, to be Clear Blue’s managing general agent.  Under the contract, Amigo was responsible for selling policies, collecting premiums from policyholders, placing the premiums in a trust account, and remitting the entrusted premiums at Clear Blue’s direction.  The contract required the parties to resolve any dispute in an ARIAS arbitration, except that either party could seek “interim, preliminary or injunctive relief that is necessary to protect the rights and property of that Party, pending an arbitration award by the arbitrators.”

In its motion for a temporary restraining order and/or preliminary injunction in the Western District of North Carolina, Clear Blue alleged that Amigo was obliged to immediately remit approximately $2.8 million of premiums that it had not yet remitted.  Amigo argued, among other things, that Clear Blue (a) had to arbitrate the issue rather than seek relief from the court and (b) in any event could not meet the standard for preliminary injunctive relief because Clear Blue was merely seeking money damages.

The court did not explicitly address Amigo’s challenge concerning the parties’ contractual carve-out for seeking injunctive relief outside the arbitration process.  Instead, the court proceeded to analyze the merits of the requested relief under the four-part test for preliminary injunctions: the plaintiff must establish: “(1) that he is likely to succeed on the merits, (2) that he is likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in his favor, and (4) that an injunction is in the public interest.”  Clear Blue Ins., Co. v. Amigo MGA, LLC, No. 3:20-cv-312-GCM, 2020 WL 9810106, at *1 (W.D.N.C. June 19, 2020) (quoting Real Truth About Obama, Inc. v. FEC, 575 F.3d 342, 345 (4th Cir. 2009) (citing Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 129 S. Ct. 365, 374, 172 L. Ed. 2d 249 (2008))).

First, the court concluded that Clear Blue was likely to succeed on the merits because the premiums are “owned by Plaintiff.”  Second, the court concluded that Clear Blue was likely to suffer irreparable harm absent the grant of a preliminary injunction in part because the premiums were Clear Blue’s property.  Third, the court found that the equities tipped in favor of Clear Blue because its potential loss of property would be “permanent.”  Fourth, the court determined that the public interest weighed in favor of preventing the loss of assets.

The court granted the preliminary injunction and ordered Amigo to transmit all policyholder-paid premiums collected on Clear Blue’s behalf.

O’Neal Constructors, LLC v. DRT America, LLC.

O’Neal Constructors, LLC v. DRT America, LLC., 957 F.3d 337 (11th Cir. 2021)

Court:                         United States Court of Appeals for the Eleventh Circuit

Date Decided:            April 1, 2021

Issue Decided:           Whether a Notice of a Motion to Vacate May be Accomplished Via Email Service Under 9 U.S.C. § 12

Submitted by             Michele L. Jacobson, Esq. and TaLona H. Holbert, Esq.[1]

In O’Neal Constructors, LLC v. DRT America, LLC., the United States Court of Appeals for the Eleventh Circuit held that notice of a motion to vacate an arbitration award cannot be effectuated by emailing the memorandum of law in support of the motion if opposing counsel did not consent to email service.  According to the Federal Arbitration Act (“FAA”) and the Federal Rules of Civil Procedure, opposing counsel must expressly consent in writing to email service of a notice of motion to vacate and, once consent is obtained, the moving party must serve the actual motion upon the nonmoving party.  DRT America, LLC (“DRT”) (1) failed to obtain O’Neal Constructors, LLC’s (“O’Neal”) express written consent to accept service by email, and (2) emailed the supporting memorandum of law instead of the motion to O’Neal.  The Eleventh Circuit ruled that service was not timely, dismissed the appeal, and affirmed the district court’s order and judgment confirming the arbitration award and denying the motion to vacate.

The arbitration award at issue arises from a dispute related to a contract between DRT and O’Neal.  The contract contained an arbitration provision providing that any arbitration between the parties would be governed by the American Arbitration Association’s (“AAA”) Construction Industry Arbitration Rules (the “AAA Construction Rules”).  As a result of its contract with DRT, O’Neal entered into a subcontract with Excel Contractors, Inc. (“Excel”)  When a dispute arose between O’Neal and Excel, the companies entered arbitration and DRT participated as a third-party respondent.  On January 7, 2019, the arbitration panel awarded O’Neal attorney’s fees, inter alia, from DRT, pursuant to the parties’ contract.  O’Neal Constructors, LLC, 957 F.3d at 1378.

DRT refused to pay O’Neal’s attorney’s fees, and O’Neal filed suit in Georgia state court on April 4, 2019.  The case was removed to the United States District Court for the Northern District of Georgia on April 11, 2019, seeking confirmation of the arbitration award.  DRT separately filed suit in the Northern District of Georgia on April 5, 2019, seeking to vacate the attorney’s fees portion of the arbitration award.  Though DRT emailed O’Neal a “courtesy copy” of the memorandum of law in support of its motion to vacate when the suit was filed, it did not formally serve notice of the motion until April 30, 2019, more than three months after the arbitration award was entered.  The cases were consolidated in the Northern District of Georgia and the district court confirmed the arbitration award and denied the motion to vacate.  The court ruled that the award must be confirmed because O’Neal never consented to email service and thus, DRT’s service was untimely.  Even if O’Neal had consented to service by email, the district court reasoned that DRT’s email service would have been defective because the email did not include a copy of the motion itself.  Id. at 1378-79.

On appeal, DRT argued that O’Neal consented to service by email because the arbitration provision of their contract provided that the arbitration would be governed by the AAA Construction Rules, which allow for service by email.  The “Serving of Notice” provision of the AAA Construction Rules provides that:

(a) Any papers, notices, or process necessary or proper for the initiation or continuation of an arbitration under these rules; for any court action in connection therewith; or for the entry of judgment on any award made under these[] rules may be served on a party by mail addressed to the party or its representative at the last known address or by personal service, in or outside the state where the arbitration is to be held, provided that reasonable opportunity to be heard with regard thereto has been granted to the party.

(b) The AAA, the arbitrator and the parties may also use overnight delivery, electronic fax transmission (fax), or electronic mail (email) to give the notices required by these rules. Where all parties and the arbitrator agree, notices may be transmitted by other methods of communication.

AAA Construction Rule 44 (“Rule 44”).  The Eleventh Circuit disagreed with DRT’s reading of Rule 44, reasoning that subsection (a) does not allow for service by email or encompass motions to vacate.  Though subsection (b) of Rule 44 allows for email service, the Eleventh Circuit pointed out that the provision only applies to “notices required by these rules.”  The AAA Construction Rules do not specifically provide for notices of a motion to vacate, so the Eleventh Circuit rejected DRT’s argument that the rules permit email service of such notices and that O’Neal consented to email service by agreeing that the rules governed the parties’ arbitration.  Id. at 1380.

Unlike the AAA Construction Rules, Section 12 of the FAA requires notice of a motion to vacate.  Under the FAA, notice must be served within three months after the arbitration award is filed or delivered.  9 U.S.C. § 12.  The FAA also requires that service be made on opposing counsel according to the law of the court in which the motion to vacate is made if opposing counsel is a resident of that court’s district.  Id.  If a moving party fails to follow the FAA’s service procedures, it is barred from challenging the arbitration award as invalid (or moving to vacate the award) when the opposing party seeks to confirm it.  Cullen v. Paine, Webber, Jackson, and Curtis, Inc., 863 F.2d 851, 854 (11th Cir. 1989); see, e.g., Corey v. N.Y. Stock Exch., 691 F.2d 1205, 1212 (6th Cir. 1982) (citing Piccolo v. Dain, Kalman, & Quail, Inc., 641 F.2d 598, 601 (8th Cir. 1981).  Id. at 1379.

The Eleventh Circuit explained that DRT should have served O’Neal with the motion to vacate by April 8, 2019 in order to meet the FAA’s three-month time limit because the arbitration award was issued on January 7, 2019.  As O’Neal is a resident of the Northern District of Georgia where the cases are pending, the Eleventh Circuit applied the Federal Rules of Civil Procedure to determine how service should have been made.  Rule 5 of the Federal Rules of Civil Procedure allows service by email if the nonmoving party expressly agrees to electronic service in writing.  Fed. R. Civ. P.(5)(b)(2)(E); see Fed. R. Civ. P.(5)(b)(2)(E), Advisory Committee Note to 2001 Amendment.  Although O’Neal’s counsel responded to DRT’s April 5, 2019 by stating “[g]uess we need to figure out which court can hear these issues the quickest,” the Eleventh Circuit ruled that express consent cannot be implied from conduct, pursuant to Rule 5.  See Fed. R. Civ. P.(5)(b)(2)(E), Advisory Committee Note to 2001 Amendment.  As neither O’Neal’s response to DRT’s email nor the parties’ contract (as discussed above) constituted express, written consent to email service, the Court ruled that the district court properly held that DRT’s service was not timely and appropriately confirmed the arbitration award and denied DRT’s motion to vacate.  Accordingly, the Eleventh Circuit affirmed the district court’s order and judgment.  Id. at 1378-81.

[1] Michele L. Jacobson is a Partner at Stroock & Stroock & Lavan LLP, where she serves as Co-chair of the General Litigation Practice Group, Head of the New York General Litigation Practice Group, Co-Chair of the Insurance Industry Practice Group, and member of the Executive Committee.  She concentrates her practice on complex insurance and reinsurance matters in the property, casualty and life insurance fields.  She has represented clients in a wide array of disputes involving issues of misrepresentation, coverage, standard-of-conduct, broker negligence, underwriting and claims handling, YRT rate increases, and insurance regulatory issues.  Ms. Jacobson regularly appears in state and federal courts, as well as before arbitration Panels throughout the country.

TaLona H. Holbert is an Associate in the Insurance Industry Practice Group of Stroock & Stroock & Lavan LLP, where she serves on the Associates’ Committee. She concentrates her practice on complex insurance and reinsurance matters in the property, casualty, and life insurance fields.

Eaton Partners, LLC v. Azimuth Capital Mgmt. IV Ltd., No. 18 Civ. 11112 (ER) (S.D.N.Y. Oct. 18, 2019)

Case:  Eaton Partners, LLC v. Azimuth Capital Mgmt. IV Ltd., No. 18 Civ. 11112 (ER) (S.D.N.Y. Oct. 18, 2019)

Issue Discussed: Judicial Review/Manifest Disregard

Court: U.S. District Court for the Southern District of New York

Date Decided: October 18, 2019

Issues Decided:  Whether an arbitrator’s failure to postpone a hearing when a witness becomes unavailable provides a basis to vacate the arbitration award

Submitted by: Polly Schiavone, Vice President, Swiss Reinsurance America Holding Corp.

Eaton Partners, LLC (“Eaton”), an investment placement agent entered into a placement agreement (“Placement Agreement”) with Azimuth Capital Management IV, Ltd. (“Azimuth”).  Eaton filed a demand for arbitration alleging that Azimuth breached the Placement Agreement by failing to pay Eaton certain fees and accrued interest.

The arbitrator entered an Order, with approval of the parties, requiring each party to submit a list of all fact witnesses expected to be called at the hearing.  Azimuth disclosed three witnesses including Jason Montemurro, a partner at Azimuth.

Right before the first arbitration hearing, Montemurro became unavailable because of a family death.  The arbitrator discussed several alternatives with the parties including video testimony and adjournment.   Azimuth ended up withdrawing Montemurro from the witness list and the initial hearing went forward.  At a later hearing, Azimuth sought to introduce a new rebuttal witness and the arbitrator denied that request.

The arbitrator eventually issued an award in favor of Eaton and Eaton filed a petition to confirm the award.  Azimuth moved to vacate the award arguing that the arbitrator was guilty of misconduct for failing to postpone the hearing when Montemurro became unavailable and for refusing to accept Azimuth’s rebuttal witness.  Azimuth also asserted that the arbitrator showed manifest disregard for the law and improperly favored Eaton in her interpretation of the Placement Agreement. Lastly, Azimuth asked the court to enter judgment in its favor, citing breach of contract and various other legal theories.

In its discussion the Court cites the high burden of proof required to vacate an arbitration award and points out that misconduct can rise to the level of vacatur when and if an arbitrator refuses to accept evidence from a key witness. In addition, the Court points out that it has no authority to review an arbitrator’s decision on the merits.

A review of the arbitration record revealed that Azimuth never made a valid request for postponement of the hearing and that, when withdrawing Montemurro as a witness, Azimuth’s counsel stated: “I don’t think that he is going to be needed”.  Also, Azimuth failed to cite any new allegations that the rebuttal witness was intended to address. Finally, the Court found that there was no basis in the record to support Azimuth’s allegations regarding interpretation of the Placement Agreement.

Azimuth’s motion to vacate the arbitration award was denied and Eaton was awarded reasonable attorneys’ fees.

Matter of Daesang Corporation et al. v. NutraSweet Company et al.

Matter of Daesang Corporation et al. v. NutraSweet Company et al. 167 A.D.3d 1(1^st Dept. Sept. 27, 2018)

Court:                         New York State Supreme Court, Appellate Division, First Department

Date Decided:            September 27, 2018

Issue Decided:            Whether under the Federal Arbitration Act a court is authorized to substitute its own judgment regarding the law and the facts for that of an arbitration tribunal in determining whether to vacate the tribunal’s international arbitration award under the doctrine of manifest disregard of the law.

Submitted by:            Michele L. Jacobson Esq.[1] and Beth K. Clark Esq.[2]

In Matter of Daesang Corporation v. The NutraSweet Company., the First Department of the Appellate Division of the New York Supreme Court, held that, under the arbitration awards under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”) for “manifest disregard of the law” had severely limited authority and could not impose their own conclusions of the relevant facts and law to vacate an international arbitration award on the grounds that the arbitration tribunal had acted in manifest disregard of the law. The Appellate Division also held that ordinary errors of law or fact are insufficient to support vacatur of an arbitral award for manifest disregard of the law.

In 2002, Daesang Corporation (“Daesang”) and The NutraSweet Company (“NutraSweet”) entered into a Joint Defense and Confidentiality Agreement (“JDA”) in connection with NutraSweet’s potential acquisition of Daesang’s aspartame business.  Under the JDA, NutraSweet had the authority to rescind the ultimate acquisition if a customer with annual worldwide aspartame requirements in excess of 1 million pounds commenced legal proceedings against the parties to challenge the deal as an antitrust violation.  The parties closed the acquisition in 2003 and, in turn, entered into an Asset Purchase Agreement (“APA”) and a Processing Agreement.  Both the APA and Processing Agreement were governed by New York law and included clauses which provided that disputes were to be resolved in arbitration pursuant to the International Chamber of Commerce Rules.  Daesang Corp., 167 A.D.3d at 5-6.

For the first two years following the transaction’s closing, NutraSweet complied with its obligations and paid two of the annual installment payments on the purchase price under the APA.  In the third year, however, NutraSweet defaulted causing Daesang to invoke its contractual right to accelerate the $55 million balance on the purchase price and inform NutraSweet that it planned to manufacture aspartame for its own account.  In response, NutraSweet advised Daesang that it was exercising its rights under the JDA to rescind the acquisition based on an antitrust class action lawsuit filed against the parties by several industrial aspartame customers.  Id. at 6.

In 2008, Daesang commenced arbitration against NutraSweet under the APA and Purchasing Agreement seeking monetary damages for NutraSweet’s breach of those agreements.  In response, NutraSweet asserted four defenses and counterclaims:  (1) it had appropriately rescinded the acquisition under the JDA based on the antitrust lawsuit; (2) equitable rescission based on allegations that Daesang had issued a false compliance-with-law warranty in the APA and had fraudulently induced NutraSweet into the acquisition; (3) equitable rescission based on Daesang’s allegedly false representations and warranties in the APA and Processing Agreement concerning its product quality, manufacturing processes, production capacity, production costs and customer complaints; and (4) Daesang was in breach of the APA and Processing Agreement based on is failure to maintain the plant, timely manufacture aspartame and supply sufficient amounts of saleable aspartame.  Id. at 7.

In December 2012, after a nine-day evidentiary hearing and oral argument on post-hearing submissions, the arbitration panel issued a 34-page “Partial Final Award” unanimously ruling in Daesang’s favor on all of its claims and dismissing all of NutraSweet’s defenses and counterclaims.  Among the reasons asserted for its ruling, the arbitrators stated that NutraSweet’s breach of contract counterclaim, “ ‘ha[d] not asserted any alleged breaches of the APA and Processing Agreement as a claim independent of its claim for rescission of those agreements.’ ”  Id. at 8.  After the Partial Final Award, the parties addressed the appropriate remedy for NutraSweet’s breaches, on which the arbitration panel had reserved decision.

On June 14, 2016, the tribunal issued its final award and awarded Daesang over $100 million in monetary damages.  In the award, the tribunal reaffirmed its decision to dismiss NutraSweet’s defenses and counterclaims, including its breach of contract claim, which decision NutraSweet had challenged during the remedy phase of the proceeding.  In response to NutraSweet’s contention that its breach of contract claim was independent of its claims for rescission, the arbitrators ruled that, to the extent that was true, NutraSweet had waived its right to assert that independent claim during the course of the proceedings.  Id. at 11-12.

In September 2016, Daesang commenced a proceeding in the New York Supreme Court, New York County to obtain confirmation of the final award under the Federal Arbitration Act, 9 U.S.C. § 1 et al. (“FAA”).  The parties agreed that the FAA applied to the proceeding in this international dispute per the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 UST 2517, TIAS No. 6997 (1958) (“Convention”).  NutraSweet answered and cross-moved to vacate both the partial and final awards on the grounds that, “ ‘the arbitrators manifestly disregarded the law and evidence, violated public policy, and utterly failed to discharge their duties in accordance with the law and the Terms of Reference governing the arbitration.’ ”  Id. at 13.  The New York Supreme Court granted NutraSweet’s motion to vacate the awards to the extent that the awards dismissed its counterclaims based on fraudulent inducement and breach of contract, and remanded the matter to the arbitration panel for a “redetermination” of those claims.  Id.  In so doing, the court determined that the panel had manifestly disregarded the law by ignoring the well-established rule that a fraudulent inducement claim may be based on a breach of contractual warranty if the misrepresentations are of present, as opposed to future, facts and caused actual loss.  The court also concluded that, based on the record which it had carefully reviewed, NutraSweet had clearly not waived its breach of contract claim.  The court held that “’[t]he refusal to consider the merits of NutraSweet’s breach of contract counterclaim and the baseless determination of waiver goes beyond mere error of law or facts, and amounts to an egregious dereliction of duty on the part of the Tribunal.’”  Id. at 13-14.

On appeal, the Appellate Division reversed the Supreme Court’s decision.  In so doing, the Appellate Division noted that Section 10 of the FAA sets forth only four grounds upon which a court may vacate an arbitration award; NutraSweet had only moved on one of those grounds, namely, “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.” 9. U.S.C. § 10(a)(4).  Id. at 15.  NutraSweet also moved on the grounds that the arbitrators had manifestly disregarded the law – which ground the Appellate Division stated was “a ‘severely limited’ doctrine.”  “It is a doctrine of last resort limited to the rare occurrence of apparent ‘egregious impropriety’ on the part of the arbitrators, ‘where none of the provisions of the FAA apply.”  Id. at 16.  With that background, the Appellate Division held that, vis-à-vis the arbitrators’ decision to dismiss NutraSweet’s equitable rescission counterclaims, it must stand because it did not meet the “high standard required to establish manifest disregard of the law, namely a showing that ‘the arbitrator[s] knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it’.” Id. at 18 (quoting Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 217 (2d Cir. 2002).  The record established that the arbitrators had considered and analyzed the competing case-law presented by both parties with respect to the viability of those fraud-based claims.  Regardless of whether the arbitrators had ultimately reached the wrong conclusion, manifest disregard of the law requires more than an error of law or a miscomprehension by the arbitrators (and that was the most NutraSweet could establish).  Moreover, given the existence of competing case-law, the law at issue was not sufficiently “well-defined” to support a finding of manifest disregard of the law.  Id. at 19.

As regards the arbitrators’ dismissal of NutraSweet’s breach of contract counterclaim, the Appellate Division rejected NutraSweet’s argument that it constituted an imperfect execution of the tribunal’s powers such that the final award was not “a mutual, final and definite award upon the subject matter submitted” under Section 10(a)(4) of the FAA.  NutraSweet had proffered this argument on the basis that the arbitrators had dismissed the breach of contract counterclaim only on procedural grounds without reaching the counterclaim’s substantive merits.  The Appellate Division held that this was not a basis under the FAA to vacate an award.  Rather, an award is subject to vacatur under Section 10(a)(4) of the FAA if it leave the parties unable to discern their rights and obligations, and fails to resolve the submitted dispute or creates a new one.  Moreover, the Appellate Division held that the Supreme Court lacked authority to carefully review the underlying hearing transcript to ascertain whether NutraSweet had, in fact, waived its breach of contract counterclaim; proceedings to confirm and/or vacate arbitration awards under the FAA do not allow for such a review.  Id. at 20-22.  “A court is not empowered by the FAA to review the arbitrators’ procedural findings, any more than it is empowered to review the arbitrators’ determinations of law or fact.”   Id. at 22.  Instead, a court is only empowered to ascertain whether the arbitrators arguably interpreted the procedural record; if they did, the court cannot inquire further.

Finally, the Appellate Division rejected NutraSweet’s argument that the Supreme Court’s decision should by upheld on the ground that enforcing the Partial and Final Awards would be contrary to public policy of the United States.  Under the Convention, a court may deny enforcement of an arbitral award if it “would be contrary to the public policy of that country” Convention, art V, § 2 [b].  The Appellate Division explained that this provision must be construed narrowly and applied only where enforcement would violate the basic notions of morality and justice. In this case, NutraSweet had not argued that the transactional contracts were unlawful; it claimed, instead, that it had been fraudulently induced into entered into those agreements by Daesang, and that enforcing the monetary damage award would permit Daesang to profit from unclean hands  The Appellate Division rejected this argument because the tribunal did not conclude that Daesang had fraudulently induced NutraSweet to enter into the deal; therefore, there existed no basis to vacate the award on public policy grounds.  Id. at 24-25.

[1] Michele L. Jacobson is a partner in the litigation department and member of the Executive Committee of Stroock & Stroock & Lavan, L.L.P. concentrating her practice on complex insurance and reinsurance matters in the property, casualty and life insurance fields.  She has represented clients in a wide array of disputes involving  issues of misrepresentation, coverage, standard-of-conduct, broker negligence, underwriting and claims handling, YRT rate increases and insurance regulatory issues.  Ms. Jacobson regularly appears in state and federal courts, as well as before arbitration Panels throughout the country.

[2] Beth K. Clark is Special Counsel in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating on insurance and reinsurance litigation and arbitration.  Ms. Clark has represented ceding companies, reinsurers, retrocessionaires, intermediaries and liquidators in a wide variety of matters in federal and state court and before arbitration panels.  These disputes have involved, inter alia, property, casualty and life insurance issues such as YRT rate increases, allocation of loss, broker negligence, misrepresentation, coverage, underwriting and claims handling, as well as insurance regulatory issues.

Stolt-Nielsen S.A., et al. v. AnimalFeeds International Corp.

Stolt-Nielsen S.A., et al. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010)

Court: U.S. Supreme Court

Issues Decided:  Whether an arbitrator can require a party to submit to class arbitration when the operative agreement is silent on the issue and the parties dispute whether class arbitration is permissible?

Petitioners, certain shipping companies, chartered vessels to AnimalFeeds International Corp. (“AnimalFeeds”), which supplies raw ingredients to producers around the world.  The relevant contract between the parties, known as a “charter party”, contained an arbitration clause which provided that any arbitration would “be conducted in conformity with the provisions and procedure of the [FAA]”.

AnimalFeeds brought a putative class action against Petitioners in the U.S. District Court for the Eastern District of Pennsylvania asserting antitrust claims for supracompetitive prices that Petitioners allegedly charged their customers over a period of several years.  Thereafter, AnimalFeeds served Petitioners with a demand for class arbitration, designating New York as the forum of the arbitration.  The parties entered into a supplemental agreement providing for the question of class arbitration to be submitted to a panel of three arbitrators.  The parties also stipulated that the subject arbitration clause was “silent” with respect to class arbitration and asserted that either federal maritime law or New York law governed the dispute.

After hearing argument and evidence, the panel concluded that the arbitration clause allowed for class arbitration.  Petitioners moved to vacate the panel’s ruling under Section 10(a)(4) of the FAA on the grounds that the arbitrators exceeded their powers, and that the ruling was in manifest disregard of federal maritime law.  The District Court vacated the panel’s award based on manifest disregard of the law, but the U.S. Court of Appeals for the Second Circuit reversed.  While the Second Circuit found that the “manifest disregard” doctrine survived the U.S. Supreme Court’s decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), it held that the panel’s ruling was not in manifest disregard of federal maritime law, as the Petitioners cited no authority on custom and usage against class arbitration under federal maritime law, and New York law did not otherwise establish a rule against class arbitration.  The Supreme Court granted certiorari to hear the dispute, and reversed and remanded the Second Circuit’s decision.

Initially, the Supreme Court found that the FAA governed the issue in dispute, given the Act’s central purpose of ensuring that “private agreements to arbitrate are enforced according to their terms.”  Applying FAA standards and related case law, a majority of the Court held that a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.  Here, because the parties disputed the issue of whether class arbitration was warranted under the operative provision, which was silent on the matter, the majority found that the panel’s ruling contravened the foundational principle that arbitration is a matter of consent.  Moreover, the majority of the Court disagreed with the dissent’s finding that the issue of class arbitration was a “procedural question” left solely for the arbitrators to decide, characterizing the question as whether the parties agreed to authorize class arbitration in the first place.

^[1] Rob DiUbaldo is a Partner at Carlton Fields Jorden Burt, whose practice focuses on insurance, reinsurance and commercial litigation and arbitration.

Dewan v. Walia

Dewan v. Walia, 544 Fed. Appx. 240 (4th Cir. 2013)

Court: U.S. Court of Appeals for the Fourth Circuit

Issues Decided:  (1) whether the doctrine of manifest disregard of the law remains a viable basis to challenge arbitral awards implicating the Federal Arbitration Act (“FAA”), even after the U.S. Supreme Court’s decision in Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008); and (2) whether an award that violates state law meets the standard for vacatur based on manifest disregard of the law.

Arun Walia, a Canadian national, came to work for Kiran M. Dewan, CPA, P.A. (“Dewan”) in the United States as an accountant via an employment visa.  Walia entered into an employment agreement with Dewan, which contained certain nonsolicitation and noncompetition provisions and a broad arbitration clause encompassing disputes between the parties.  In 2009, Walia’s employment was terminated, and he entered into a Release Agreement (the “Release”) with Dewan pursuant to which Walia “released and discharged” any claims against Dewan related to Walia’s employment in consideration for payment of $7,000.00.

Thereafter, Dewan commenced an arbitration against Walia with the American Arbitration Association pursuant to the relevant clause in the employment agreement, alleging that Walia breached the noncompetition/nonsolicitation provisions.  Despite the Release, Walia asserted numerous counterclaims against Dewan in the arbitration, primarily alleging that he was underpaid during his employment; that Dewan breached the profit-sharing terms of the employment agreement; and that Dewan had violated federal immigration law related to the work-visa program.  After a four-day hearing, an arbitrator found in favor of Walia with respect to Dewan’s claims and, though finding the Release executed by Walia was valid and enforceable, awarded him substantial monetary relief on his counterclaims.

Walia moved in the U.S. District Court for the District of Maryland to confirm the aspect of the award addressing his counterclaims, and Dewan cross-moved to vacate the same.  The arguments asserted by both parties were based on the Maryland Uniform Arbitration Act (“MUAA”).  The District Court granted Walia’s motion and denied Dewan’s, both originally and on reconsideration, finding that Dewan failed to demonstrate that any of the applicable grounds set forth in the MUAA warranted vacatur.  Dewan then appealed to the U.S. Court of Appeals for the Fourth Circuit.

Initially, the Fourth Circuit found that the FAA, and not the MUAA, governed the dispute, because the employment agreement and Release “evidence and arose out of” transactions involving foreign commerce, pursuant to Section 2 of the FAA.  The Court further found that the basis upon which Dewan sought vacatur at the appellate level – that the arbitrator’s award manifestly disregarded the law – remained a valid basis for review of arbitral awards even after the U.S. Supreme Court’s decision in Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008), whether as an independent ground for review or as a “judicial gloss” on the enumerated grounds set forth in Section 10 of the FAA.  The Court characterized the manifest disregard standard as only being applicable where “the arbitrator understands and correctly states the law, but proceeds to disregard the same.”  Here, the Fourth Circuit held the standard warranted vacating the award, because the arbitrator concluded that the Release between Walia and Dewan was enforceable and encompassed Walia’s counterclaims.  While the arbitrator further ruled that the Release only applied to claims asserted in state or federal court, as opposed to those brought in the arbitral forum, the Court found that this distinction was not supportable under either Maryland law or common law generally.

^[1] Rob DiUbaldo is a Partner at Carlton Fields Jorden Burt, whose practice focuses on insurance, reinsurance and commercial litigation and arbitration.

Wachovia Securities, LLC v. Brand, et al.

Wachovia Securities, LLC v. Brand, et al., 671 F.3d 472 (4^th Cir. 2012)

Court: U.S. Court of Appeals for the Fourth Circuit

Issues Decided:  (1) Whether a panel’s award of attorneys’ fees under a state statute warranted vacatur under Section 10 of the Federal Arbitration Act where the panel did not adhere to certain procedural requirements of the statute; and (2) whether manifest disregard of the law remains an independent basis to challenge an arbitral award in an arbitration governed by the FAA.

Wachovia Securities, LLC (“Wachovia”) commenced an arbitration with the Financial Industry Regulatory Authority (“FINRA”) against four former employees who, after being terminated, went to work for a competitor brokerage firm.  In the arbitration, Wachovia alleged that the employees violated contractual and common law obligations owed to Wachovia by conspiring with their current employer to open a competing office in the same region, misappropriating certain confidential and proprietary information in the process, and soliciting current Wachovia clients and employees to join their new firm.  The parties submitted briefing to the arbitration panel on the issues in dispute and held a hearing at which both sides presented evidence in support of their claims and defenses.  Ultimately, the panel denied Wachovia’s claims in their entirety and awarded the former employees attorneys’ fees and costs under the South Carolina Frivolous Civil Proceedings Act (“FCPA”).

The former employees moved to confirm the panel’s award in the U.S. District Court for the District of South Carolina.  Wachovia moved to vacate a portion of the panel’s award on two grounds.  First, it argued that the panel exceeded its authority under Section 10(a)(4) of the Federal Arbitration Act and manifestly disregarded the law by awarding sanctions under the FCPA.  Second, Wachovia argued that it was deprived of a fundamentally fair hearing, pursuant to Section 10(a)(3) of the FAA, because the panel did not adhere to certain procedural requirements of the FCPA or allow Wachovia to review and rebut the evidence submitted by the employers in support of their FCPA claim.  In Wachovia’s view, the panel was required under the FCPA to hold a separate hearing on the issue of attorneys’ fees, and Wachovia was denied this procedural safeguard.

The district court confirmed the award, and Wachovia appealed to the U.S. Court of Appeals for the Fourth Circuit.  On appeal, Wachovia did not directly challenge the district court’s finding that vacatur under Section 10(a)(4) of the FAA was not warranted.  Rather, Wachovia argued that the award should be vacated under Section 10(a)(3) or, alternatively, under the doctrine of manifest disregard of the law, which it characterized as a “judicial gloss” encompassing the grounds for vacatur set forth in Section 10 of the FAA.

As to Wachovia’s first argument, the Fourth Circuit held that the panel was not required to adhere to the procedural requirements of the FCPA in awarding the former employees attorneys’ fees and costs under that statute, consistent with the broad discretion given to arbitrators on procedural matters.  But even if the panel were so required, the Fourth Circuit held that the panel was not guilty of misconduct under Section 10(a)(3) because Wachovia missed the briefing deadline set by the panel on the attorneys’ fee issue and then refused the panel’s invitation to submit post-deadline briefing on the same.  With respect to Wachovia’s challenge to the award based on manifest disregard of the law, the Fourth Circuit found that while this doctrine remains an independent basis to challenge an arbitral award, even after the U.S. Supreme Court’s decision in Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2008), the doctrine was not implicated in this case because the panel’s decision did not violate any clearly accepted legal principle.

^[1] Rob DiUbaldo is a Partner at Carlton Fields Jorden Burt, whose practices focuses on insurance, reinsurance and commercial litigation and arbitration.

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

Issues Decided: Whether an honorable engagement clause in a reinsurance contract could authorize an award that: (a) provided relief neither party specifically requested; and (b) eliminated a material provision of the contract.

Factual Background

PMA Capital Insurance Company (“PMA Capital”) and Platinum Underwriters Bermuda, Ltd. (“Platinum”) entered into a reinsurance contract, in which PMA Capital was the cedent and Platinum was the reinsurer. The reinsurance contract contained a “deficit carry forward provision,” by which Platinum was entitled to reimbursement for losses carried from one year to the next.

In 2008, a dispute arose over the proper application of the “deficit carry forward provision.” PMA argued that Platinum was not entitled to carry forward any losses from 1999-2001. Platinum contended that it was entitled to carry forward approximately $10.7 million in losses.

After an evidentiary hearing, the Arbitration Panel issued a one-page award which: (a) ordered PMA Capital to pay Platinum $6 million — an amount neither party sought — within 30 days; and (b) eliminated the “deficit carry forward provision” from the reinsurance contract. The District Court granted PMA Capital’s motion to vacate the award, and Platinum appealed from that Order.

The Holding

The Third Circuit affirmed the District Court’s Order vacating the arbitration award. After acknowledging that a court’s review of an arbitration award is “highly deferential,” the Court noted that, under §10(a)(4) of the FAA, courts should vacate an award only if: (1) “the form of the award cannot ‘be rationally derived either from the agreement between the parties or from the parties submission to the arbitrators,’ and (2) the terms of the award are ‘completely irrational.’” Id. at **4-5 (quoting Mut. Fire, Marine & Inland Ins. Co. v. Norad Reins. Co., 868 F.2d 52, 56 (3d Cir. 1989)).

Applying that deferential standard, the Court nonetheless agreed with the District Court that the relief awarded by the Arbitration Panel “exceeded the arbitrators’ powers because it was not sought by either party, and was completely irrational because it wrote material terms of the contract out of existence.” Id. at *5. The Court further agreed with the District Court’s conclusion that the Honorable Engagement Clause in the reinsurance contract did not authorize the Panel’s Award. The Third Circuit concluded:

We agree with the District Court in all respects. The arbitrators in this case, by ordering unrequested relief and rewriting material terms of the contract they purported to implement, went beyond the scope of their authority. That the honorable engagement clause permitted the arbitrators to stray from judicial formalities did not give them authority to reinvent the contract before them, or to order relief no one requested.

Id. at *6. Accordingly, PMA Capital is one of the rare cases in which a court has overturned an arbitration award under §10(a)(4) of the FAA.

* Robert A. Kole is the co-chair of the Insurance/Reinsurance Practice Group of Choate, Hall & Stewart LLP, as well as the co-chair of the ARIAS Law Committee.

Commercial Risk Reinsurance Co. Ltd v. Security Ins. Co. of Hartford

Issue Decided:
1. Whether a Court may reexamine an arbitration panel’s decision to exclude, on untimeliness grounds, testimony and documents.
2. Whether an arbitration award that does not break down the total amount due as between two unsuccessful entities, even though the two entities’ liabilities were undisputedly several and not joint, is sufficiently definite to merit confirmation.
3. Whether an arbitration panel exceeds its authority when it rules on issues that are arguably outside the scope of the underlying contract being arbitrated.

The United States District Court for the Southern District of New York, in Commercial Risk Reinsurance Co. v. Security Ins. Co. of Hartford, denied a petition to vacate a reinsurance arbitration award, and granted a cross-petition to confirm it. The Court held that, despite contrary assertions in the vacatur motion: (1) the arbitrators were not guilty of misconduct, pursuant to 9 U.S.C. § 10(a)(3), when they excluded as untimely testimony and exhibits proffered by the losing parties on the issue of damages; (2) the award was definite enough to survive a challenge under 9 U.S.C. § 10(a)(4) even though it failed to allocate the total damage amount severally between the two separate losing entities, because the Court could simply condition confirmation on a stipulated allocation, and then modify the award pursuant to 9 U.S.C. § 11; and (3) the arbitrators did not exceed their authority by making rulings involving the scope of that authority, such as awarding damages based on policies that were arguably not covered by the underlying reinsurance agreements, awarding damages that arguably exceeded the reinsurance agreements’ limit of liability, and awarding interest that runs after the arbitration is over. 525 F. Supp. 2d 424, 433 (S.D.N.Y. 2007).

Commercial Risk Reinsurance Company Limited and Commercial Risk Re-Insurance Company (together, “Commercial Risk”) brought an action to vacate an arbitration award in favor of Security Insurance Company of Hartford (“Security”). Id. at 426. In the underlying arbitration, Security sought to recover losses arising from worker’s compensation programs that Commercial Risk had agreed to reinsure, pursuant to two reinsurance agreements (the “Treaties”) entered into by the parties in 1999 and 2000. Id. Under the Treaties, each of the two Commercial Risk entities agreed to accept a specific share of Security’s interests and liabilities associated with the worker’s compensation program written on Security’s paper. Id. When Commercial Risk refused to pay amounts billed by Security, contending that a portion of the losses were not covered under the Treaties, Security initiated the arbitration. Id.

The Treaties contained an arbitration clause that granted the arbitrators “the power to determine all procedural rules for the holding of the arbitration including but not limited to inspection of documents, examination of witnesses and any other matter relating to the conduct of the arbitration,” and included an “Honorable Engagement” provision directing that the arbitrators were to “interpret [the Treaties] as an honorable engagement and not merely as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law.” Id. at 426-27.

Pursuant to its authority under the Treaties, the arbitration panel set a discovery schedule. After the close of discovery, Commercial Risk proffered a witness to testify on the issue of damages. Then, two days before the hearing began, Commercial Union introduced documents they intended the witness to refer to. Id. at 428. Security objected to the introduction of both the witness and certain of the documents, alleging that it would be prejudiced by both the lack of sufficient notice and the inability to depose the witness. Id. The three-member panel unanimously agreed. Id. at 428-29. The record before the District Court revealed that the panel heard oral argument from both sides before issuing a ruling that, since the witness “was not on the witness list,” he would be precluded from testifying. Id.

Observing that an arbitration panel’s broad discretion, which parties confer when they agree to abandon the rigors of a judicial proceeding, was even further liberalized by the Treaties’ “Honorable Engagement” clause, the Court found “no justification for going behind the arbitrators’ interpretation and application of their procedural mandate[.]” Id. at 429. In so holding, the Court distinguished a Second Circuit case, Tempo Shain Corp. v. Bertek, Inc.,120 F.3d 16 (2d Cir. 1997), which held that an award must be vacated where the arbitration panel excludes, as cumulative, testimony on a topic that no other competent witness could address. Id. The Court found that the exclusion of evidence in Tempo Shain “amounted to a substantive ruling regarding the extent of the evidence,” while the exclusion in the instant case was “a factual finding in respect of an evidentiary ruling.” Id. The Court concluded that, “if the arbitrators make a factual and procedural determination that under their governing rules proffered evidence is untimely or not included in approved discovery schedules, absent evidence of misconduct that determination is beyond judicial review.” Id. at 430.

The District Court also rejected Commercial Risk’s argument that the award should be vacated on the grounds that it was insufficiently definite because it failed to preserve the several liability of the two Commercial Risk entities, directing both to pay a single amount of $20,754,990 plus interest. Id. at 431. Without disagreeing that the awarded amount should be broken down, the Court refused to vacate it and instead relied on its authority pursuant to 9 U.S.C. § 11 to correct an award “so as to effect the intent thereof and promote justice between the parties.” Id. Noting that the quota share percentages delineated in the Treaties offered a point of reference, it conditioned confirmation on a stipulated allocation of the award amount between the two Commercial Risk entities. Id.

Finally, the Court was not persuaded by Commercial Risk’s various arguments that the arbitration panel exceeded its authority. Id. at 432. Whether the panel was correct to award damages that were based on policies Commercial Risk contended were not covered by the Treaties, and that exceeded what Commercial Risk contended was the limit of liability set by the Treaties was, the Court held, a matter of contractual interpretation not subject to judicial challenge. Id. The panel also did not exceed its authority in granting post-award interest at ten percent, when the Treaties permitted it to award interest, without qualifying the type or fixing a cap at any particular rate. Id.

Commercial Risk subsequently moved for reconsideration of the Court’s ruling on the witness exclusion issue, arguing that the arbitration panel had improperly excluded their witness and evidence. Id. at 433. The Court denied the motion, emphasizing that the panel had considered the potential prejudice to Security arising from the lack of sufficient notice and opportunity to depose the witness, and that the panel’s decision was well within the broad authority delegated to it by the Treaties and the Honorable Engagement clause. Id. at 434.

* Michele L. Jacobson is a partner in the litigation department of Stroock & Stroock & Lavan LLP, 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.

Christian Fletcher is an associate in the litigation department of Stroock & Stroock & Lavan, LLP, focusing on reinsurance and tax certiorari matters.

Stroock & Stroock & Lavan LLP was counsel of record to Security Insurance Company of Hartford in the underlying arbitration, as well as the proceeding in the United States District Court for the Southern District of New York.

Ace American Ins. Co. v. Christiana Ins., LLC

Issues Decided: Confirmation of an arbitration award

In Ace American Insurance Company v. Christiana Insurance, LLC, the court confirmed an arbitration award in favor of Ace American. The court held that a heavy burden of proof applies to a party asking a court to review an arbitration decision and that all of Christiana’s arguments failed to meet this burden.

Background

Christiana Insurance LLC provided Dupont with a first party insurance policy covering property damage and business interruption during the 2008-2009 policy year. Christiana reinsured this policy with Ace American Insurance Company for up to $500 million, with a $200 million deductible.

In September 2008, Hurricane Ike caused substantial property damage and shut down business operations at DuPont’s Texas facilities. Ace initially paid $50 million to Christiana based on Christiana’s representation that the total claim would exceed $250 million. The $50 million payment took into account the $200 million deductible. Subsequently, the parties were unable to resolve the valuation of the losses and arbitration ensued.

Christiana claimed that there were $411 million in covered losses, and thus sought $161 million after accounting for the $200 million deductible and Ace’s previous $50 million payment. Ace counterclaimed, seeking to recover the $50 million payment it had made on the grounds that there was insufficient proof that losses exceeded the $200 million deductible. After an eight-day arbitration hearing, on November 3, 2011, the arbitration panel unanimously decided that it was unable to resolve the dispute because both parties failed to sustain their respective burdens of proof—Christiana failed to prove that the losses exceeded $250 million, and Ace failed to prove that the amount of the losses was less than $250 million.

Christiana filed a motion for clarification and/or reconsideration before the panel. The panel issued another unanimous decision explaining that it was no longer empowered to hear any requests to reconsider the award since it was functus offficio. The panel also reiterated that Christiana “had received all the compensation it was entitled to receive until it established that its loss exceeded $250 million.” Ace then filed an amended petition to confirm the arbitration award. Christiana opposed this petition and filed a cross-petition to vacate the arbitration award.

Holding

Christiana argued that that it was entitled to vacatur of the arbitration award under sections 10(a)(3) and 10(a)(4) of the Federal Arbitration Act (FAA) as well as under the Second Circuit’s “manifest disregard” doctrine. Christiana argued that the panel refused to hear material evidence on the parties’ prior course of dealings. FAA section 10(a)(3) provides that a court may vacate an arbitration award if “the arbitrators were guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy; or of any other misconduct by which the rights of the party have been prejudiced.” Christiana also argued that the panel “exceeded their powers” under FAA section 10(a)(4) by failing to specify and apply a proper burden of proof standard. Christiana additionally argued that the award was in “manifest disregard of the law” because the panel failed to construe the contract against the drafter (Ace) and ignored case law relevant to determining the appropriate burden of proof in evaluating its “business interruption” claims.

The court rejected all of Christiana’s challenges and confirmed the award. The court reasoned that Christiana failed to establish that there was fundamental unfairness in the arbitration proceedings under FAA section 10(a)(3), because the panel gave Christiana an adequate opportunity to argue that the prior course of dealing evidence should be admitted. Regarding FAA section 10(a)(4), the court held that the panel acted within the scope of their authority even if the panel had applied the wrong burden of proof. And, the court held that the panel did not manifestly disregard the law because Christiana did not show that the panel was required to construe the contract against the drafters or apply any particular burden of proof with respect to proof of damages, or that the panel went beyond its authority in the parties’ contract.

*Daniel M. Perry is a partner and Aluyah I. Imoisili is an associate in the law firm of Milbank, Tweed, Hadley & McCloy LLP.

NGC Network Asia, LLC v. Pac Pacific Group International

Issues Decided: Evident Partiality; Undue Means; Manifest Disregard of the Law – Whether the award of an arbitrator who discloses that one of the branch offices of his law firm had done work for a parent company of a potential witness (not a party in the case) is subject to vacatur based upon his alleged evident partiality; alternatively, whether the award was rendered by undue means when the AAA did not disqualify the arbitrator; also, whether the award must be vacated based upon manifest disregard of the law in view of the arbitrator’s alleged failure to consider the covenant of good faith and fair dealing inherent in the contract between the parties.

Summary

In NGC Network Asia, LLC v. Pac Pacific Group International, Inc., the United States District Court for the Southern District confirmed the arbitrator’s award, and denied the Respondent’s Motion to Vacate the Award on the basis of evident partiality, relating to the attorney-client relationship between a branch office of the arbitrator’s law firm and the parent company of a potential witness in the arbitration who is not a party to the proceeding. The Court also found that the award was not procured by “corruption, fraud or undue means” based upon the Respondent’s claim that the American Arbitration Association (“AAA”) did not replace the arbitrator or conduct a sufficient investigation into the arbitrator’s relationship with the potential witness. Finally, although noting that the Respondents’ argument for vacatur based upon manifest disregard of the law was advanced for “largely symbolic reasons” in alleging that the arbitrator “so imperfectly executed his powers that a mutual, final and definite award was not made,” the Court nevertheless examined the issue of manifest disregard of the law and held that there was no showing that the arbitrator incorrectly applied or knowingly disregarded a well-defined, explicit and clearly applicable governing legal principle.

Background

The underlying dispute relates to a Memorandum of Understanding (”MOU”) between China Central Television (“CCTV”) and the Petitioner (“NGC”) involving an arrangement wherein it was agreed that CCTV would air a National Geographic program distributed through NGC. The deal was brokered through Pac Pacific Group International, Inc. (“PPGI”). PPGI was to receive a portion of the advertising revenues generated by the broadcast. NGC was authorized sell airtime during the broadcast and sponsorships for the program. The participants in the MOU were not guaranteed revenue; the amount of money the agreement would generate was dependent entirely on the response of potential advertisers and sponsors. NGC subsequently notified PPGI that it was terminating the MOU because the arrangement had not been sufficiently lucrative. Thereafter, PPGI filed a demand for arbitration with the AAA against NGC alleging that NGC did not use commercially reasonable efforts to sell the airtime and sponsorships depriving PPGI of the compensation for which it claimed entitlement under the MOU.

After a motion filed by NGC to stay the action was denied by the Southern District, the parties followed the AAA procedures and jointly selected an arbitrator, Robert C. O’Brien, a partner at the Los Angeles office of the law firm of Arent Fox. Upon his selection, O’Brien informed the parties that the Washington D.C. office of Arent Fox had done work for the National Geographic Society (“Society”), a parent company of National Geographic Television (“NGT”) who O’Brien thought might be a potential witness in the arbitration. NGT was the entity that sold programming to an entity, NGC Network International, LLC that in turn provided it to NGC. After receiving this information, PPGI objected to O’Brien serving as arbitrator. NGC responded confirming, among other points, that the Society was only a 25% shareholder of NGC. PPGI continued to object to O’Brien’s appointment during the course of the arbitration, claiming that O’Brien would be partial due to Arent Fox’s client relationship with the Society. Following each objection, the AAA confirmed O’Brien as an acceptable arbitrator. After the proceeding, O’Brien issued an award denying PPGI’s claims in their entity and allowing NGC to move for costs and attorneys’ fees which he granted in the amount of almost $1 million. NGC moved to confirm the arbitration award and PPGI cross-moved to dismiss, transfer or stay confirmation of that award. PPGI’s cross-motion to vacate the award was based upon three grounds: evident partiality, an award procured by undue means, and manifest disregard of the law.

Evident Partiality

The sole basis for the claim of evident partiality relates to the attorney-client relationship between Arent Fox (the Washington D.C. office) and the Society. Arent Fox has no relationship with NGC. The Court found Respondent’s claim to be without merit, based upon its overarching position that the arbitrator would be biased in favor of a client of the firm when the client is not a party to the arbitration, not a party to the MOU, not a witness and has no controlling or direct ownership in NGC. The Court reviewed the Rules of the AAA in considering the AAA’s decision to dismiss PPGI’s claim of partiality and permit O’Brien to hear the case and found the parties are bound by the AAA’s determination.

The Court also reviewed the Federal Arbitration Act’s basis for vacatur, noting that evident partiality within the meaning of the FAA is where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration. Under the facts of this case, the Court ruled that O’Brien did not exhibit evident partiality and found no conflict was created by the Society/Arent Fox relationship. Recognizing that the purpose of disclosure is to encourage conflicts over arbitrators to be dealt with early in the process and to limit collateral attacks on arbitration awards, the Court specifically stated that in this case there was not even a requirement that O’Brien disclose the Society/Arent Fox relationship given that it was tangential to the underlying dispute. The Court found the mere fact of disclosure followed by the review of that disclosure was more than adequate to dispose of any question of partiality. While failure to make a disclosure when one is actually required could be evidence of bias, such was not the case here.

Undue Means

The FAA provides that an award may be vacated if the award was procured by corruption, fraud or undue means. Respondent argued that the award was procured by undue means because the AAA did not replace O’Brien, did not undertake a sufficient investigation, and did not provide Respondent with an explanation as to its decision affirming O’Brien’s appointment. The Court found that the argument “did not add up” and could not possibly amount to “undue means” where both parties had submitted substantial briefing on the issue and where the parties adopted the rules of the AAA and had agreed to abide by its determinations. Manifest Disregard of the Law

Respondent, referring to Section 10(a) (3) and (4), argued that the arbitrator “so imperfectly executed his powers that a mutual, final and definite award upon the subject matter submitted was not made” when he disregarded the covenant of good faith and fair dealing inherent in all contracts under the applicable law. According to the Court, in order for an award to be vacated based upon manifest disregard of the law, it must be shown that the arbitrator knew of the governing law and refused to apply it or ignored it and that the law was well defined, explicit and clearly applicable to the case. The Court found that in fact O’Brien correctly stated the law and applied it to the facts of the case such that there was no basis upon which it could vacate the award for manifest disregard of the law.

* Sylvia Kaminsky is currently an ARIAS certified umpire and arbitrator as well as a consultant to the insurance/reinsurance industry. She is a lawyer licensed in New York. She was formerly General Counsel, Senior Vice President and Corporate Secretary of Constitution Reinsurance Corporation and Sirius Reinsurance Corporation; Deputy General Counsel of Gerling Global and Senior Vice President of Claims; and was in private legal practice for 15 years serving the industry.

Jock et al. v. Sterling Jewelers Inc.

Issues Decided: Whether a district court has the authority to vacate an arbitration award where it believes that the arbitrator improperly interpreted the terms of the arbitration agreement?

In Jock v. Sterling Jewelers Inc., the Second Circuit reversed the judgment of the district court vacating an arbitration award, and remanded the decision with instructions to confirm the award. The Plaintiffs, a group of employees of defendant Sterling Jewelers, Inc. (“Sterling”) appealed from an order of the United States District Court for the Southern District of New York (Rakoff, U.S.D.J.) vacating an arbitration award on the ground that the arbitrator had exceeded her authority in light of the United States Supreme Court’s decision in Stolt–Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). The Second Circuit Court of Appeals held that: (1) the district court did not have authority to vacate an arbitration award where it believed that the arbitrator had improperly interpreted terms of arbitration agreement; and (2) the arbitrator did not exceed her authority in determining that an arbitration agreement permitted employees to proceed with their effort to certify a class in arbitration proceedings against the employer. Jock, 646 F.3d at 127. Sterling filed a petition for rehearing en banc, which was denied on September 6, 2011.

In May 2005, plaintiff Laryssa Jock filed an action with the Equal Opportunity Employment Commission (“EEOC”) under Title VII, the Equal Pay Act (“EPA”), and the Age Discrimination in Employment Act (“ADEA”) alleging that Sterling’s discriminatory promotion and compensation policies denied promotional opportunities to qualified female employees and paid female employees less than male employees performing the same work. Id. at 115. Eighteen other female employees filed similar charges against Sterling before the EEOC. Id.

Jock and the other employees simultaneously initiated dispute resolution procedures pursuant to their employment contracts, which mandated a three-step alternative dispute resolution program known as RESOLVE. Id. The RESOLVE dispute resolution process lacked an explicit authorization permitting class arbitration. Id. at 116.

In March 2008, Jock and other female employees (the “Plaintiffs”) filed a class arbitration complaint with the AAA, asserting the same allegations and challenging the same practices. Id. The parties submitted to the arbitrator the question of whether the RESOLVE agreement permitted or prohibited class arbitration. Id. In its brief, Sterling asked the arbitrator to “find … [t]hat RESOLVE does not allow for class arbitration.” Id. The Plaintiffs conversely asked the arbitrator to “find that the RESOLVE Arbitration Agreements at issue permit class arbitration.” Id. The arbitrator found in favor of the Plaintiffs, holding that the RESOLVE arbitration agreements “cannot be construed to prohibit class arbitration.” Id.

The arbitrator construed the absence of an express prohibition on class claims against the contract’s drafter, Sterling. Id. at 117. The arbitrator noted that the issue of intent was “problematic in the context of a contract of adhesion.” Id. “Because this contract was drafted by Sterling and was not the product of negotiation, it was incumbent on Sterling to ensure that all material terms, especially those adverse to the employee, were clearly expressed.” Id. She also found that merely agreeing to the RESOLVE process could not constitute a waiver of the employee’s right to participate in a collective action. Id. Finally, the arbitrator concluded that “[t]he RESOLVE arbitration agreements cannot be construed to prohibit class arbitration,” which thus permitted the Plaintiffs to proceed and pursue their claims on a class-wide basis. Id. The arbitrator allowed the parties to move in the district court to confirm or vacate that determination. Id.

Sterling moved to vacate the arbitration award. Id. The district court initially denied the motion to vacate the award. Id. Sterling appealed the district court’s order denying its motion to vacate the award or, in the alternative, stay the arbitration. Id. at 118. Three months later, the United States Supreme Court issued its decision in Stolt–Nielsen prompting Sterling to move in the district court for relief from its earlier order. Id.

The district court concluded that, in light of the Supreme Court’s decision in Stolt–Nielsen, “the arbitrator’s construction of the RESOLVE agreements as permitting class certification was in excess of her powers and therefore cannot be upheld.” Id. citing Jock v. Sterling Jewelers, Inc., 725 F. Supp. 2d 444, 448 (S.D.N.Y. 2010). The district court first held that the arbitrator’s approach — determining whether there was any indication of an intent to preclude class arbitration — “was plainly incompatible with the Supreme Court’s subsequent pronouncements in Stolt–Nielsen.” Id. Then, addressing the issue whether the record “evince[d] the parties’ shared intent to permit class arbitration,” the court found the record devoid of any such indication. Id. The district court granted Sterling’s motion to vacate the arbitrator’s award permitting class arbitration. Id. Plaintiffs appealed that ruling.

The Second Circuit reviewed the Supreme Court’s decision in Stolt–Nielsen v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). In Stolt-Neilson, the parties submitted the question of the permissibility of class arbitration to the arbitration panel. In connection therewith, the parties stipulated that the arbitration clause was “silent” with respect to class arbitration. Id. at 119 citing 130 S. Ct. at 1766. The arbitration panel held that the arbitration clause allowed for class action arbitration. Id. The petitioners filed an application to vacate the award in the United States District Court for the Southern District of New York. Id. The district court vacated the award, the Second Circuit reversed, and the Supreme Court granted certiorari to decide the issue “whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the [FAA].” Id. citing 130 S. Ct. at 1764. The Supreme Court found that a “party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Id. at 121 citing 130 S. Ct. at 1775 (emphasis in original).

The Second Circuit emphasized that the Supreme Court’s “interpretation of the parties’ ‘silence’ [was] key” to its decision in Stolt-Nielson. Id. at 120. The Second Circuit highlighted the fact that the Supreme Court declined to hold that an arbitration agreement must expressly state that the parties agreed to class arbitration. Thus, the Second Circuit determined that the Supreme Court found “the question as being whether the parties agreed to authorize class arbitration” and held that “where the parties stipulated that there was ‘no agreement’ on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration.” Id. at 121 (emphasis in original). Stolt–Nielsen, therefore, did not “foreclose the possibility that parties may reach an ‘implicit’- rather than express – ‘agreement to authorize class-action arbitration.’” Id. at 123 citing Jock, 725 F. Supp. 2d at 449 (quoting Stolt–Nielsen, 130 S. Ct. at 1775).

The Second Circuit next turned to whether the arbitrator’s award was properly vacated by the district court. The Second Circuit noted that “[a]s the Supreme Court emphasized in Stolt–Nielsen/, vacating an arbitration award requires the moving party to “clear a high hurdle,” and “[i]t is not enough … to show that the panel committed an error—or even a serious error. It is only when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice that his decision may be unenforceable.” Id. at 122 citing 130 S. Ct. at 1767.

The Second Circuit held that the arbitrator was acting within her authority when she concluded – after being requested by the parties to decide the issue – that the arbitration agreement between Sterling and the Plaintiffs manifested an intent to permit for class arbitration. Id. at 124. The Court decided that by “re-examining the record to determine the question that the arbitrator had already decided—whether the parties intended to permit arbitration of class claims—the district court substituted its legal reasoning for the arbitrator’s.” Id. The Court emphasized that the record dictated that the arbitrator “operated within the bounds of her authority in reaching her decision.” Id.

Finally, the Second Circuit found that Sterling’s interpretation of Stolt–Nielsen was not persuasive. Id. at 125. Sterling had attempted to equate the lack of an express agreement with a lack of intent to agree to class arbitration. Id. The Second Circuit found that this analysis “misse[d] the mark” because it relied upon a justification that Stolt–Nielsen Court did not advance. Id. The Second Circuit reiterated that Stolt–Nielsen did not hold that the intent to agree to class action arbitration must be acknowledged explicitly in the arbitration agreement. Id. at 125-126 citing Stolt–Nielsen, 130 S. Ct. at 1776 n.10. The Second Circuit reinforced that the Supreme Court’s decision to vacate the arbitration award in Stolt–Nielsen was based on the fact that the arbitration award went beyond the terms of the agreement and governing law, and that the panel relied on public policy grounds to support its finding that the arbitration agreement permitted class arbitration, despite the parties’ stipulation that the agreement was silent on that score. Id. at 126 citingStolt–Nielsen, 130 S. Ct. at 1767–68. The Court found that none of those factors existed in this case. Id.

The Court held that “[w]hether the arbitrator was right or wrong in her analysis, she had the authority to make the decision, and the parties to the arbitration are bound by it.” Id. at 127. Accordingly, the Second Circuit reversed the judgment of the district court vacating the arbitration award, and remanded with instructions to confirm the award. Id.

Circuit Judge Winter dissented on the grounds that the issue in Stolt–Nielsen was, in the Supreme Court’s words, “‘whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the [FAA].’” Id. at 129 citing Stolt–Nielsen, 130 S. Ct. at 1764. Concluding that that was precisely the issue in this case, Judge Winter argued that the Second Circuit should have followed the Supreme Court’s precedent and affirmed the judgment of the district court vacating the arbitration award. Accordingly, Judge Winter dissented.

Robert Lewis Rosen Associates Ltd. v. Webb

Issue Decided: Whether manifest disregard of the law remains a viable basis for vacatur of an arbitration award in the Second Circuit after the Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., __ U.S. __, 128 S. Ct. 1396 (2008)?

In Robert Lewis Rosen Associates, Ltd. v. Webb, 2008 WL 2662015 (S.D.N.Y. 2008), the United States District Court for the Southern District of New York held that, after the foundation of the Second Circuit’s adoption of the manifest disregard standard of review for vacatur was eroded by the Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., manifest disregard of the law was no longer a viable ground for vacatur in the Second Circuit. 2008 WL 2662015 at * 4.

Petitioner Robert Lewis Rosen Associates, Ltd. (“RLR”) and Respondent William Webb (“Webb”) had a seven year history of arbitration and litigation relating to RLR’s contractual performance of career management services for Webb. 2008 WL 2662015 at * 1-2. This history culminated in RLR’s filing a petition to vacate the arbitration award that dismissed its claim for attorneys’ fees incurred in enforcing a judgment awarded in connection with an earlier arbitration between RLR and Webb. 2008 WL 2662015 at * 2. Rejecting RLR’s contention that the award rendered was in manifest disregard of the law, the Court denied the petition for vacatur and granted Webb’s cross-motion to confirm the award. 2008 WL 2662015 at * 4, 6.

The Court explained that the Second Circuit’s adoption of the manifest disregard of the law standard of review for arbitration awards stemmed from its interpretation of Supreme Court dicta in Wilko v. Swan, 346 U.S. 427 (1953), which suggested that “‘manifest disregard of the law’ provide[d] an additional judicial basis for vacatur” that was not found in the federal arbitration law. 2008 WL 2662015 at * 3-4. The Court noted, however, that the Supreme Court’s rejection of contractual expansion of judicial review of arbitration awards in Hall Street was based on two essential propositions that clashed with the Second Circuit’s interpretation of Wilko: (1) that the FAA’s statutory grounds for vacatur are exclusive; and (2) that “the Supreme Court ha[d] never endorsed manifest disregard as an independent basis for vacatur.” 2008 WL 2662015 at * 4. Concluding that, after Hall Street, Wilko could no longer support application of the manifest disregard standard, and that the Second’s Circuit adoption of that standard was based on Wilko, the Court held that “the manifest disregard of the law standard [was] no longer good law.” 2008 WL 2662015 at * 4.

The Court also pointed out that application of the ‘severely limited’ manifest disregard standard as articulated by the Second Circuit would mandate denial of the petition for vacatur. 2008 WL 2662015 at * 4. The Court confirmed that even when the manifest disregard standard is applied, vacatur is only appropriate where “(1) the arbitrator knew of a governing legal principle yet refused to apply it or ignored it altogether; and (2) the law ignored by the arbitrator was well defined, explicit and clearly applicable to the case.” Id. In rejecting RLR’s claim that the arbitrator acted in manifest disregard of the law, the Court reasoned that that: (1) the arbitrator was not alerted to any applicable and governing legal principle which he ignored (2008 WL 2662015 at * 4-5); (2) the manifest disregard standard of review does not permit a court to substitute its own interpretation of an agreement for that of the arbitrator (2008 WL 2662015 at * 5); and (3) an arbitrator’s refusal to have an evidentiary hearing before dismissing a claim as a matter of law does not satisfy the requirements for vacatur based on manifest disregard of the law (Id.). Finally, chiding both parties for their exploitation of the right to publicly air their grievances “to an excessive degree,” the Court denied that portion of Webb’s cross-motion that sought sanctions and attorneys’ fees. 2008 WL 2662015 at * 6.

* Michele L. Jacobson is a partner, and Regan A. Shulman is special counsel, in the litigation department of Stroock & Stroock & Lavan LLP, concentrating on insurance and reinsurance litigation and arbitration.

Commercial Risk Reinsurance Co. Ltd v. Security Ins. Co. of Hartford

Issue Decided:
1. Whether a Court may reexamine an arbitration panel’s decision to exclude, on untimeliness grounds, testimony and documents.
2. Whether an arbitration award that does not break down the total amount due as between two unsuccessful entities, even though the two entities’ liabilities were undisputedly several and not joint, is sufficiently definite to merit confirmation.
3. Whether an arbitration panel exceeds its authority when it rules on issues that are arguably outside the scope of the underlying contract being arbitrated.

The United States District Court for the Southern District of New York, in Commercial Risk Reinsurance Co. v. Security Ins. Co. of Hartford, denied a petition to vacate a reinsurance arbitration award, and granted a cross-petition to confirm it. The Court held that, despite contrary assertions in the vacatur motion: (1) the arbitrators were not guilty of misconduct, pursuant to 9 U.S.C. § 10(a)(3), when they excluded as untimely testimony and exhibits proffered by the losing parties on the issue of damages; (2) the award was definite enough to survive a challenge under 9 U.S.C. § 10(a)(4) even though it failed to allocate the total damage amount severally between the two separate losing entities, because the Court could simply condition confirmation on a stipulated allocation, and then modify the award pursuant to 9 U.S.C. § 11; and (3) the arbitrators did not exceed their authority by making rulings involving the scope of that authority, such as awarding damages based on policies that were arguably not covered by the underlying reinsurance agreements, awarding damages that arguably exceeded the reinsurance agreements’ limit of liability, and awarding interest that runs after the arbitration is over. 525 F. Supp. 2d 424, 433 (S.D.N.Y. 2007).

Commercial Risk Reinsurance Company Limited and Commercial Risk Re-Insurance Company (together, “Commercial Risk”) brought an action to vacate an arbitration award in favor of Security Insurance Company of Hartford (“Security”). Id. at 426. In the underlying arbitration, Security sought to recover losses arising from worker’s compensation programs that Commercial Risk had agreed to reinsure, pursuant to two reinsurance agreements (the “Treaties”) entered into by the parties in 1999 and 2000. Id. Under the Treaties, each of the two Commercial Risk entities agreed to accept a specific share of Security’s interests and liabilities associated with the worker’s compensation program written on Security’s paper. Id. When Commercial Risk refused to pay amounts billed by Security, contending that a portion of the losses were not covered under the Treaties, Security initiated the arbitration. Id.

The Treaties contained an arbitration clause that granted the arbitrators “the power to determine all procedural rules for the holding of the arbitration including but not limited to inspection of documents, examination of witnesses and any other matter relating to the conduct of the arbitration,” and included an “Honorable Engagement” provision directing that the arbitrators were to “interpret [the Treaties] as an honorable engagement and not merely as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law.” Id. at 426-27.

Pursuant to its authority under the Treaties, the arbitration panel set a discovery schedule. After the close of discovery, Commercial Risk proffered a witness to testify on the issue of damages. Then, two days before the hearing began, Commercial Union introduced documents they intended the witness to refer to. Id. at 428. Security objected to the introduction of both the witness and certain of the documents, alleging that it would be prejudiced by both the lack of sufficient notice and the inability to depose the witness. Id. The three-member panel unanimously agreed. Id. at 428-29. The record before the District Court revealed that the panel heard oral argument from both sides before issuing a ruling that, since the witness “was not on the witness list,” he would be precluded from testifying. Id.

Observing that an arbitration panel’s broad discretion, which parties confer when they agree to abandon the rigors of a judicial proceeding, was even further liberalized by the Treaties’ “Honorable Engagement” clause, the Court found “no justification for going behind the arbitrators’ interpretation and application of their procedural mandate[.]” Id. at 429. In so holding, the Court distinguished a Second Circuit case, Tempo Shain Corp. v. Bertek, Inc.,120 F.3d 16 (2d Cir. 1997), which held that an award must be vacated where the arbitration panel excludes, as cumulative, testimony on a topic that no other competent witness could address. Id. The Court found that the exclusion of evidence in Tempo Shain “amounted to a substantive ruling regarding the extent of the evidence,” while the exclusion in the instant case was “a factual finding in respect of an evidentiary ruling.” Id. The Court concluded that, “if the arbitrators make a factual and procedural determination that under their governing rules proffered evidence is untimely or not included in approved discovery schedules, absent evidence of misconduct that determination is beyond judicial review.” Id. at 430.

The District Court also rejected Commercial Risk’s argument that the award should be vacated on the grounds that it was insufficiently definite because it failed to preserve the several liability of the two Commercial Risk entities, directing both to pay a single amount of $20,754,990 plus interest. Id. at 431. Without disagreeing that the awarded amount should be broken down, the Court refused to vacate it and instead relied on its authority pursuant to 9 U.S.C. § 11 to correct an award “so as to effect the intent thereof and promote justice between the parties.” Id. Noting that the quota share percentages delineated in the Treaties offered a point of reference, it conditioned confirmation on a stipulated allocation of the award amount between the two Commercial Risk entities. Id.

Finally, the Court was not persuaded by Commercial Risk’s various arguments that the arbitration panel exceeded its authority. Id. at 432. Whether the panel was correct to award damages that were based on policies Commercial Risk contended were not covered by the Treaties, and that exceeded what Commercial Risk contended was the limit of liability set by the Treaties was, the Court held, a matter of contractual interpretation not subject to judicial challenge. Id. The panel also did not exceed its authority in granting post-award interest at ten percent, when the Treaties permitted it to award interest, without qualifying the type or fixing a cap at any particular rate. Id.

Commercial Risk subsequently moved for reconsideration of the Court’s ruling on the witness exclusion issue, arguing that the arbitration panel had improperly excluded their witness and evidence. Id. at 433. The Court denied the motion, emphasizing that the panel had considered the potential prejudice to Security arising from the lack of sufficient notice and opportunity to depose the witness, and that the panel’s decision was well within the broad authority delegated to it by the Treaties and the Honorable Engagement clause. Id. at 434.

* Michele L. Jacobson is a partner in the litigation department of Stroock & Stroock & Lavan LLP, 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.

Christian Fletcher is an associate in the litigation department of Stroock & Stroock & Lavan, LLP, focusing on reinsurance and tax certiorari matters.

Stroock & Stroock & Lavan LLP was counsel of record to Security Insurance Company of Hartford in the underlying arbitration, as well as the proceeding in the United States District Court for the Southern District of New York.

Hall Street Associates, L.L.C. v. Mattel, Inc.

Issue Decided: The role of the district courts in reviewing arbitration awards under The Federal Arbitration Act. (9 U.S.C. Sect 1 et seq.) may not be modified by contract.

In a case that began as a lease dispute the U.S. Supreme Court in a 6-3 decision ruled that the Federal Arbitration Act’s (FAA) grounds for prompt vacatur, correction or modification of awards are exclusive for parties seeking expedited review under the FAA. Any such judicial review may not be expanded or modified by contract.

Mattel rented property from Hall Street Associates (Hall). The property was used as a manufacturing site. The lease provided that Mattel would indemnify Hall for any costs resulting from the failure of Mattel or any of its predecessor lessees to follow environmental laws while using the premises. In 1998 tests of the well water on the property showed high levels of trichloroethylene (TCE), an apparent residue of the manufacturing process discharged by a predecessor lessee. Mattel issued notice of intent to terminate the lease in 2001. Hall filed suit contesting Mattel’s right to vacate at that time and claiming Mattel was obligated under the lease to indemnify Hall for the clean up costs. Following a bench trial in U.S. District Court for the District of Oregon where Mattel won on the right to terminate, with the consent of the District Court the parties agreed to submit their indemnity claim to arbitration.

The parties signed an arbitration agreement which the court approved and entered as an order. That agreement contained the following provision: “The Court shall vacate, modify or correct any award: (i) where the arbitrator’s findings of fact are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.”

The arbitration took place and the arbitrator decided that no indemnity obligation was owed to Hall by Mattel. This decision was based on a determination that the lease obligation to follow the environmental laws did not require compliance with the testing requirements of the Oregon Drinking Water Quality Act. The arbitrator characterized that Act as dealing with human health as opposed to environmental pollution. Hall filed for a District Court Order vacating the arbitrator’s decision on grounds of legal error for failing to treat the Oregon Act as an applicable environmental law within the scope of the lease provision. Applying the standard of review chosen by the parties in the arbitration agreement the court vacated the award and remanded the case for further consideration by the arbitrator.

On remand the arbitrator found the Oregon Act to be an applicable environmental law within the scope of the lease obligation and found Mattel liable for clean up costs. Each party sought modification and again the District Court applied the parties’ agreed standard of review for legal error, correcting the arbitrator’s calculation of interest and otherwise affirming the award in favour of Hall.

Both parties appealed to the Court of Appeals for the Ninth Circuit. Here Mattel changed positions and challenged the District Court’s use of the agreed standard of review of legal error as unenforceable as such a standard is not permissible under sections 10 or 11 of the FAA.. The Ninth Circuit agreed with Mattel citing Kyocera Corp. v. Prudential-Bache Trade Svcs., Inc., 3412 F. 3rd 987, 1000 (2003) holding the terms of the judicial review in the arbitration agreement to be unenforceable. On remand to the District Court the Ninth Circuit instructed the Court to confirm the original award of the arbitrator unless it should be vacated or modified or corrected exclusively under the grounds specified under sections 10 or 11 of the FAA.

On remand the District Court vacated the original arbitration award in favour of Mattel because it rested on an implausible interpretation of the lease provisions and therefore exceeded the arbitrator’s powers. Mattel again appealed and the Ninth Circuit again reversed holding implausibility was not a valid basis for vacating an award under Section 10 of the FAA. The Supreme Court granted certiorari to decide whether the grounds for vacatur and modification provided by sections 10 and 11 of the FAA are exclusive. Justice Souter delivered the opinion of the Court holding that such provisions are the exclusive grounds for vacating, modifying or correcting an arbitration award under the FAA. His opinion was joined by Chief Justice Roberts and Justices Thomas, Ginsburg, Alito and Scalia. Justices Stevens, Bryer and Kennedy dissented.

The Supreme Court based its decision on two principal grounds. First, the Court interpreted the textual content of FAA sections 10 and 11 as the exclusive permissible basis for vacating, modifying or correcting an arbitration award. The Court held such an interpretation was compelled by the provisions of FAA section 9 which instructs that district courts “must grant” an order confirming an arbitration award unless such award is vacated, modified or corrected as prescribed in sections 10 and 11. The Court stated such language “unequivocally tells courts to grant confirmation in all cases, except when one of the “prescribed” exceptions applies.” Slip op. at 10.

The second ground dismissed Hall’s argument that the Supreme Court’s prior decision in Wilko v. Swan, 346 U.S. 427 (1953) added “manifest disregard” of the law as a ground for vacatur. The Court determined that the phrase “manifest disregard” used in Wilko may have merely been a “shorthand” referral to the collective grounds expressed in section 10 of the FAA “rather than adding to them,” and saw no reason to accord that phrase the significance Hall had urged. Slip op. at 8.

The decision revolves a number of contradictory interpretations in the lower federal courts regarding the scope of judicial review of arbitration awards under the FAA..

*John R. Cashin is General Counsel – International Businesses at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, claims litigation and arbitration as well as general legal matters in twenty jurisdictions outside of Europe and North America. 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.

U.S. Life Ins. Co. v. Insurance Commissioner of California

Issues addressed: Grounds for vacating awards; jurisdiction of federal court; Eleventh Amendment immunity for receivers

The United States Court of Appeals for the Ninth Circuit, in an unpublished decision, recently upheld an arbitral award reducing a reinsurer’s liability under a reinsurance agreement, saying it did not exhibit “manifest disregard of the law” and was not “irrational.” The Ninth Circuit further held that such an award did not offend the public policy of California favoring disclosure in reinsurance transactions. The district court did not lack jurisdiction to entertain a petition to vacate the award, even though the reinsurer previously had sought assistance from the state court to lift the injunction arising from the cedent’s insolvency. Finally, the Ninth Circuit held that the Eleventh Amendment was no bar to suing an insurance commissioner in his capacity as receiver of an insolvent insurer.

U.S. Life initiated arbitration against Superior National Insurance Group (SNIG) accusing SNIG and other insurers (Cedents) of nondisclosure in the placement of reinsurance on policies valued at over $1 billion. According to U.S. Life, SNIG knew but did not disclose that its subsidiary that issued the reinsured policies was under-reserved by between $100 million and $300 million.

During the course of the arbitration, SNIG was declared insolvent. The Insurance Commissioner of California took control of SNIG’s assets, and a California state court issued a stay of proceedings against the company. U.S. Life requested an order in state court to lift the stay with respect to its ongoing arbitration with SNIG, which was granted in November 2000. The arbitration thus proceeded to its conclusion. Ultimately, the arbitration panel denied U.S. Life’s claim for rescission, but “reformed” the contract, saying that “Cedents should have acted in a more open and forthright manner,” and reduced the liabilities ceded to U.S. life by 10 percent. U.S. Life moved to vacate the award in the District Court for the Central District of California. That petition was denied, and U.S. Life appealed the denial to the Ninth Circuit.

U.S. Life had petitioned the district court to set aside the award on grounds that the panel exceeded its powers and that the award exhibited “manifest disregard of law” and was “completely irrational.” It also claimed that the finding that “Cedents should have acted in a more open and forthright manner” was the equivalent of a finding of concealment, thus mandating an award of rescission. The Ninth Circuit agreed with the district court that the Panel’s words fell short of a finding of concealment. Even if the Panel had found concealment, however, the arbitration clause contained “honorable engagement” language and permitted the arbitrators to “abstain from following the strict rules of law.” This language gave the arbitrators wide latitude which, combined with the court’s narrow scope to review arbitral awards, preventing a finding of “manifest disregard of law.” The Ninth Circuit also found that the award could not be “completely irrational,” noting that the panel’s award reflected the “low end of the estimated reserve shortfall.”

U.S. Life also argued that the arbitration award violated California’s public policy “to promote full disclosure in reinsurance transactions.” The Ninth Circuit recognized that policy, but said that it also had to consider California’s strong public policy in favor of arbitration. The Ninth Circuit said courts must “indulge every intendment to give effect” to arbitral awards. Moreover, California public policy was served by an award granting relief “likely … in excess of $100 million” for nondisclosure short of concealment.

In opposing the petition to vacate, the Insurance Commissioner argued that the district court lacked jurisdiction to review the award for three reasons. First, the Commissioner argued, U.S. Life was bound to litigate in state court because it had “voluntarily invoked state court jurisdiction.” Second, the state court’s general stay of proceedings against the cedent prevented the petition from being heard in federal court. Finally, the Commissioner claimed immunity under the Eleventh Amendment, which bars lawsuits against states.

The Ninth Circuit disagreed with the Commissioner on all three jurisdictional arguments. The Ninth Circuit noted that U.S. Life had invoked state court jurisdiction merely for the purpose of lifting the stay and had not asked the state court to review the award. Even if U.S. Life had asked the court to review the award, the federal court would not have needed to abstain from hearing the case. The Ninth Circuit noted that the state court’s order said that the stay of proceedings “shall not deprive U.S. Life of any of its rights or remedies in connection with the Arbitration,” and a petition for review of the award was one such right. Finally, the Eleventh Amendment does not bar suit against a state entity when it is sued only in its representative capacity as receiver of an insolvent insurer.

* Mr. Haab is the managing partner of Lovells’ Chicago office. Mr. Glusman is an associate in Lovells’ Chicago office. Their practices involve a wide array of reinsurance matters, including insurer insolvencies and disputes with cross border and international dimensions.

National Casualty Company v. First State Insurance Group

Issue Addressed: Whether an arbitration award should be vacated where the prevailing party refused to comply with the arbitrators’ order to produce certain documents relevant to the arbitration.

The First Circuit Court of Appeals in National Casualty Company v. First State Insurance Group, 430 F.3d 492 (1st Cir. 2005), upheld a refusal to vacate an arbitration award that was granted despite the cedent’s refusal to produce documents relevant to the arbitration.

National Casualty served as reinsurer to First State on several of First State’s insurance policies covering asbestos non-product liability claims. First State settled a number of contested claims under the underlying insurance policies and ceded those payments to National Casualty as a single occurrence. National Casualty then compelled arbitration against First State regarding whether First State’s cede on a singe occurrence basis was appropriate.

During the arbitration, National Casualty requested that First State provide it with documents detailing First State’s internal legal assessment of the claims which would presumably reveal the basis on which First State had settled the underlying claims. The panel ordered First State to produce the documents, and warned that the panel may draw negative inferences if First State failed to do so. First State refused to produce the documents, claiming attorney-client privilege and attorney work product protection.

After the panel denied National Casualty’s request to delay the hearing in order to permit the parties to brief the issue of the prejudicial effect of withholding the documents, National Casualty filed a claim in the U.S. District Court for the District of Massachusetts seeking to enjoin further arbitration proceedings. The panel ruled in First State’s favor while that claim was pending. National Casualty amended its Complaint in the District Court case, seeking to overturn the panel’s award, arguing that First State’s refusal to follow the panel’s production order constituted a breach of contract which voided the arbitration clause and terminated the panel’s jurisdiction. The District Court denied the motion to vacate and National Casualty appealed.

The First Circuit Court of Appeals upheld the District Court’s decision, finding that the panel’s failed attempt to compel production from First State did not prejudice Northern Casualty and thus, did not amount to a “refusal to hear evidence” under the FAA so as to warrant misconduct-based vacatur. The Court noted that under section 10(a)(3) of the FAA, “[v]acatur is appropriate only when the exclusion of relevant evidence ‘so affects the rights of a party that it may be said that he was deprived of a fair hearing.’” See Hoteles Condado Beach v. Union De Tronquistas Local 901, 763 F.2d 34 (1st Cir. 1985).

The Court looked to the reinsurance contract and determined that it relieved the arbitrators of the “strict rules of law” and released them from “all judicial formalities.” The Court found that the panel’s drawing of an inference against First State in this case offset any unfairness to National Casualty, and that the procedural device of offering First State the choice between production and a negative inference was well within the discretion afforded to the panel by the parties under the FAA. The Court also found that National Casualty’s argument that the panel could not have decided in First State’s favor if it did, in fact, draw a negative inference was without merit.

Furthermore, the Court held that the question of whether First State’s failure to comply with the arbitration panel’s production order constituted a breach of contract and thus terminated the panel’s jurisdiction was a procedural matter. In the Court’s view, National Casualty was seeking “a court hearing on the effect of another arbitrating party’s selection among procedural options [production or negative inference] offered by an arbitrator, during a discovery dispute, in the course of an arbitration both parties agreed to enter.” In the absence of express contractual terms to the contrary, courts have jurisdiction to decide the validity and scope of the arbitration clause, and arbitrators have jurisdiction over all matters within the scope of a valid clause.First Options of Chicago v. Kaplan, 514 U.S. 938 (1995). Therefore, under the terms of the reinsurance contract and in accordance with the intent of the FAA, the Court held that it was precluded from deciding this procedural matter. See Marie v. Allied Home Mortgage Corp., 402 F.3d 1 (1st Cir. 2005).

– – – – – – – – – – – – – –

* Michael T. Walsh is a member of the firm of Boundas Skarzynski Walsh & Black, LLC, resident in the New York office. Mr. Walsh concentrates his practice on reinsurance and insurance arbitration and litigation. He has represented ceding companies and reinsurers in arbitration and litigation involving most major reinsurance issues.

Jennifer A. Dowd is also a member of Boundas Skarzynski Walsh & Black, LLC, also resident in the New York office. She specializes in reinsurance and insurance litigation and arbitration and professional liability insurance coverage.

Garamendi v. California Compensation Insurance Company

Issue Addressed: Vacating an Arbitration Award due to Improper Granting of Set-Off?

The California Court of Appeals, in an unpublished decision, vacated an arbitration award in its entirety and required the parties to hold another arbitration proceeding. The court held that the award improperly granted a setoff in violation of a court order, and it held that under the California Insurance Code a cedent is entitled to the return of its entire premium upon rescission of a reinsurance treaty.

Background

Insurance Corporation of Hannover, Scandinavian Reinsurance Company, Ltd., and Odyssey Reinsurance Corporation (collectively, “Reinsurers”) entered into a reinsurance treaty with Business Insurance Group, which included several insurance company affiliates (“Reinsureds”). The treaty provided for $37.5 million excess layer reinsurance in exchange for 50 percent of the premium.

Several of the Reinsureds became insolvent, a conservator was appointed, and proceedings were instituted to liquidate the Reinsureds’ assets. During the course of the liquidation proceedings, the liquidation court issued an order prohibiting the parties from “exercising any right of setoff.”

Thereafter, the Reinsurers filed suit against the Reinsureds, seeking rescission of the reinsurance contract and seeking damages based on alleged material misrepresentations and fraudulent concealment. The Reinsurers moved to arbitrate their affirmative claims against the Reinsureds. The liquidation court granted the motion, but ordered that “[n]o payment of any award or judgment obtained against . . . any of the [Reinsureds] . . . shall be paid in whole or in part out of any assets of the estates of any of these liquidating [Reinsureds] . . . .”

The arbitration panel issued a final award in which it rescinded the reinsurance treaty from its inception and declared the treaty void ab initio. The arbitration panel ordered that the Reinsurers pay the Reinsureds the amount of $2.5 million, which included the return of the premium with interest. The Reinsureds sought vacatur based on the fact that the amount of premium paid was at least $7 million, and the $2.5 million final award amount reflected a setoff.

Reinsureds Entitled to Return of Entire Premium

As an initial matter, the appellate court held that rescission of the contract from its inception required the return of the whole premium. The court determined that the California Insurance Code mandated this result because the Code provides for the return of the whole premium “if the insurer has not been exposed to any risk of loss.”

Arbitration Award Constituted a Setoff That Exceeded Arbitration Panel’s Authority

The appellate court then held that the arbitration award constituted a setoff because it was undisputed that the premium paid was at least $7 million, and the shortfall was a setoff in favor of the Reinsurers who sought recovery of tort damages. The court reasoned that the shortfall was attributable to tort damages such as fraud, costs, and expenses that the Reinsurers sought against the Reinsureds in the same arbitration proceeding. Thus, the court concluded that issuance of the $2.5 million award, on its face, reflected a setoff against the whole premium due the Reinsureds, which violated the liquidation court’s order and exceeded the authority of the arbitrators. Thus, the appellate court found that the award should be vacated.

Court Requires New Arbitration Proceeding

Finally, the appellate court found that the award was incapable of correction since, on its face, it failed to specify the nature and amount of the relief granted. Because the final award did not attribute any amount to the premium or interest, the court required that the entire award be vacated in its entirety and a new arbitration proceeding be initiated.

* Mr. Janaskie is a partner and Ms. Santos is an associate in the Insurance and Reinsurance Practice Group of Hunton & Williams LLP. They represent cedents and reinsurers in a wide range of reinsurance and insurance coverage matters.

B.L. Harbert Int’l, L.L.C. v. Hercules Steel Co.

Issue Addressed: Whether an Award Should be Vacated for Manifest Disregard of the Law

In B.L. Harbert Int’l, L.L.C. v. Hercules Steel Co., the 11th Circuit Court of Appeals refused to vacate an arbitration award because the Court found that the arbitrator did not act in manifest disregard of the law. The Court, moreover, issued an admonition warning future potential litigants seeking to challenge arbitration awards of the possibility of sanctions in the event that the challenge is found to be frivolous. B.L. Harbert International, L.L.C. (“Harbert”) is a general contractor based in Birmingham Alabama that specialized in large construction projects, including governmental projects. Harbert was awarded a contract to construct an office complex, and it awarded a subcontract to Hercules Steel Co. (“Hercules”). The dispute between the parties centered over the fact that Harbert created two work schedules, which it referred to as the 2000 Schedule and the 3000 Schedule. The timeframe within which the work had to be completed was earlier in the 2000 Schedule than in the 3000 Schedule. While Hercules completed its work within the more lenient timeframe of the 3000 Schedule, its completion fell outside of the date contained in the 2000 Schedule.

Dissatisfied with Hercules’ failure to meet the earlier deadlines, Harbert refused to pay Hercules the amounts outstanding under the subcontract, and, instead, demanded delay damages from Hercules. Hercules initiated arbitration before the American Arbitration Association pursuant to the arbitration provision contained in the subcontract to recover the amounts owing, as well as interest, other damages and attorney’s fees. Harbert counter-claimed that it was entitled to delay damages, accelerated costs, miscellaneous back charges, interest and attorney’s fees. After seven hearing sessions before a single arbitrator which, consistent with construction industry custom, were not transcribed by a court reporter, the arbitrator issued an award in Hercules’ favor.

Harbert moved for modification and clarification of the award from the arbitrator, contending that the award did not contain the requisite level of specificity agreed to between the parties. In that regard, Harbert requested that the arbitrator provide “enough discussion” of each of the six issues of decision contained in the award. The arbitrator issued his Disposition for Application of Modification/Clarification of the Award (the “Disposition”) which, aside from correcting a computational error contained in the award, provided the arbitrator’s findings. Specifically, the Disposition noted that Hercules was bound by the 3000 Schedule, and not the 2000 Schedule, which had been “unilaterally set by Harbert.”

Harbert sought to vacate the arbitration award in the United States District Court for the Northern District of Alabama, contending that the award reflected a manifest disregard of the law. Hercules opposed Harbert’s request, and moved for confirmation of the award. The district court entered an order denying Harbert’s motion to vacate and granting Hercules’ motion to confirm. The district court interpreted the arbitrator’s award, as well as his subsequent disposition of the motions to clarify / modify the award as evidencing that the arbitrator concluded that Hercules was bound by the date contained in the 3000 Schedule, as opposed to the 2000 Schedule.

Harbert subsequently appealed the order of the district court to the United States Court of Appeals for the 11th Circuit. In reviewing the case, the 11th Circuit began its analysis by noting the strong federal policy in favor of arbitration as a method of dispute resolution. In that regard, the Court reviewed governing 11th Circuit law which holds that the grounds for appealing an arbitration aware are limited to those grounds enumerated in the Federal Arbitration Act (“F.A.A.”), 9 U.S.C. § 10, as well as three non-statutory grounds recognized in the 11th Circuit: (1) if the award is arbitrary and capricious; (2) if enforcement of the award is contrary to public policy; and (3) if the award was made in manifest disregard of the law. Since Harbert only sought vacatur on the ground of manifest disregard of the law, the Court limited its discussion to that ground for vacatur.

The Court recited established 11th Circuit case law holding that vacatur for manifest disregard “requires clear evidence that the arbitrator was conscious of the law and deliberately ignored it. A showing that the arbitrator merely misinterpreted, misstated, or misapplied the law in insufficient.” The Court noted that the 11th Circuit had only vacated an arbitration award for manifest disregard of the law in one instance, in Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1461 (11th Cir. 1997), and that all cases subsequent to Montes had distinguished Montes on the facts of the case. The Court specifically noted that in Montes, the facts justifying vacatur were: “(1) the party who obtained the favorable award had conceded to the arbitration panel that its position was not supported by the law, which required a different result, and had urged the panel not to follow the law; (2) that blatant appeal to disregard the law was explicitly noted in the arbitration panel’s award; (3) neither the award itself nor anywhere else in the record is there any indication that the panel disapproved or rejected the suggestion that it rule contrary to law; and (4) the evidence to support the award is at best marginal.” The Court found that the facts of the case at bar did “not come within a shouting distance” of satisfying the burden of proving manifest disregard of the law, since the arbitrator had apparently simply determined that the 3000 Schedule, and not the 2000 Schedule, was controlling.

Similarly, the Court rejected Harbert’s contention – based entirely upon dicta contained in a prior 11th Circuit case (Univ. Commons-Urbana, Ltd. v. Universal Constructors, Inc., 304 F.3d 1331 (11th Cir, 2002)) – that “theoretically, the arbitrator’s approach to the award of damages could be in manifest disregard of the law altogether, if it differed from the provisions of the contract.” The Court held that misinterpretation of a contract cannot amount to manifest disregard of the law, and noted that the single sentence of dicta relied upon by Harbert was entirely contradictory with the remainder of the Universal opinion, as well as the actual holding in that case.

The Harbert decision concludes with an admonition to future potential litigants. Specifically, the Court noted that, when a party who loses an arbitration “drags the dispute through the court system,” the goals of arbitration are broken; thus “it may be that we can and should insist that if a party on the short end of an arbitration award attacks that award in court without any real legal basis for doing so, that party should pay sanctions.”

The Court did not, however, impose sanctions upon Harbert for three reasons: (1) the dicta contained in Universal provided Harbert with “a little cover for its actions”; (2) Hercules did not move for sanctions; and (3) at the time that Harbert brought the instant dispute to court, it did not have the benefit of the warning contained in this opinion. Regarding that warning, the Court ended its opinion by stating, “we are ready, willing and able to consider imposing sanctions in appropriate cases. While Harbert and its counsel did not have the benefit of this notice and warning, those who pursue similar litigation positions in the future will.”

* 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.

Patten v. Signator Insurance Agency Inc.

Issue Addressed: Vacating an Arbitration Award on Grounds of Manifest Disregard of the Law.

In Patten v. Signator Insurance Agency the Fourth Circuit held that where an arbitrator disregarded the plain and unambiguous language of the governing arbitration agreement, the arbitrator failed to draw his award from the essence of the agreement and acted in manifest disregard of the law.

In 1972 Ralph F. Patten, began working as a sales agent for John Hancock Mutual Life Insurance Company in Washington D.C. In 1992 Patten signed a ‘’Mutual Agreement’’ that included an arbitration clause and a one year statute of limitations on all employment claims. In 1998 Patten became a branch manager and signed a ‘’Management Agreement’’ with the Hancock affiliate, Signator. This agreement superceded the previous agreement. It also contained an arbitration clause, but a filing period for claims was not included. The Management Agreement mandated that it was to be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. In 2001 Signator terminated Patten’s employment and alleged grounds of poor performance. Patten waited fourteen months before seeking arbitration of his claim for age discrimination.

Signator proceeded to arbitration and the parties participated in discovery and an exchange of potential witnesses. Signator then filed a motion for summary judgment on grounds that Patten’s claim was time-barred as more than one year had passed since his termination. The sole arbitrator dismissed the arbitration proceedings as time-barred and entered summary judgment for Signator without conducting a hearing on the merits. As a preliminary matter, he determined that the arbitration proceedings were governed by both the Mutual Agreement and the Management Agreement. While the arbitrator observed that the Management Agreement contained no notice requirement, he determined that it contained an implied term limit. The arbitrator referenced the Mutual Agreement for guidance and adopted its one year limitation.

Patten filed a motion in district court to vacate the arbitration award contending manifest disregard of the law. The district court characterized the arbitration decision as a mere misinterpretation of the agreement which did not constitute grounds to vacate the award. Patten appealed the decision to the Fourth Circuit.

In a 2-1 decision, the Fourth Circuit vacated the district court’s refusal to vacate the arbitration award and remanded the case for further proceedings. The court relied principally on the common law grounds for vacatur where the award fails to draw its essence from the contract, or the award evidences a manifest disregard of the law (Apex Plumbing Supply, Inc., v. U.S. Supply Co., 142 F. 3D 188, (4TH Cir. 1998).

Citing a series of Fourth Circuit opinions, the Court stated: ‘’Under our precedents, a manifest disregard of the law is established only where the arbitrator understands and correctly states the law but proceeds to disregard the same. Moreover, an arbitration award does not fail to draw its essence from the agreement merely because a court concludes that an arbitrator misread the contract. An arbitration award fails to draw its essence from the agreement when the result is not rationally inferable from the contract.’’ (internal quotation marks omitted). (See Remmey v. Paine Webber, Inc., 32 F. 3d 143 (4th in 1994); Upshur Coal Corp., v. United Mine Workers, Dist. 31, 933 F2d 225 (4TH Cir. 1991); Int’l Union, United Mine Workers of Am v. Marrowbone Dev. Co., 232 F3d 383 (4th Cir. 2000)

The Fourth Circuit found that the arbitrator disregarded the plain and unambiguous language of the agreement when he concluded it contained an implied one-year limitations period. The arbitrator also failed to recognize that Massachusetts law was to govern the contract and that Massachusetts law should have provided guidance on the issue. Under Massachusetts law, claims of wrongful termination are subject to a three year statute of limitations.
*John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance arbitrations and contract wording. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department.

M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, as Liquidator of American Integrity Insurance Co. v. Cologne Reinsurance (Barbados) Ltd.

Issue Addressed: Whether an Arbitration Award Should Be Vacated for Manifest Disregard of the Law

In Koken v. Cologne Reinsurance (Barbados) Ltd., the District Court for the Middle District of Pennsylvania vacated, in part, an arbitration award because the Court found that a portion of the award had been rendered in manifest disregard of the law.

The underlying dispute between the parties centered upon two separate agreements: a Coinsurance Agreement and a Stop Loss Agreement. Koken sought recovery from Cologne under the Coinsurance Agreement, and Cologne sought to offset against that recovery amounts due to Cologne under the Stop Loss Agreement. With respect to the Stop Loss Agreement, Koken contended that that agreement had terminated on July 25, 1993, thirty days after an order was entered placing American Integrity Insurance Company (“American Integrity”) into liquidation.

At the inception of the case in 1999, Koken disputed the validity and enforceability of the arbitration agreement between the parties. The District Court for the Middle District of Pennsylvania compelled the parties to arbitrate. The arbitration originally convened on May 11, 2001, but due to an unrelated circumstance, the umpire withdrew and the arbitration was discontinued. On March 11, 2004, arbitration was convened before a new panel, which bifurcated the hearing into two phases: liability and damages.

After a two-day hearing on the issue of liability, on July 22, 2004, the arbitration panel (the “Panel”) entered an award (the “Award”) which, inter alia,provided as follows:

1. Under 40 P.S. § 221.32, the Liquidator’s claim against Cologne under the Coinsurance Agreement is subject to offset under the Stop Loss Agreement. The exceptions to setoff in the statute do not apply to the facts of this case.

2. The Stop Loss Agreement did not terminate as of July 25, 1993 pursuant to 40 P.S. § 221.21.

The Award also required the parties to confer as to damages and to jointly report the results to the Panel. On March 17, 2006, the Panel issued its final award (the “Final Award”) which, in pertinent part, reiterated the relief set forth in the Award.

Cologne moved to confirm the Final Award under the Convention on the Enforcement and Recognition of Foreign Arbitral Awards (the “Convention”), claiming that confirmation was proper because none of the grounds for refusing confirmation enumerated in the Convention were present. Koken opposed Cologne’s motion to confirm and filed a motion to vacate the arbitration award. Koken claimed that vacatur was appropriate because one of the enumerated grounds for refusal provided in the Convention – the unenforceability of the agreement to arbitrate – existed. Koken further argued that vacatur was appropriate because the Final Award was rendered in manifest disregard of the law.

With respect to Koken’s claim that the agreement to arbitrate was unenforceable, Koken raised three distinct claims. First, Koken argued that the arbitration agreement cannot be enforced against the Liquidator. Secondly, she argued that the FAA is “reverse pre-empted by the McCarran-Ferguson Act.” Third, Koken contended that since the time when the Court originally ruled on the issue of arbitrability, the case law in Pennsylvania had changed.

The Court disagreed with Koken’s contention that the agreement to arbitrate was unenforceable. Specifically, the Court rejected the claim that the arbitration agreement could not be enforced against the Liquidator, because the Court held that “the Liquidator stands in the shoes of the insolvent insurer and is bound by the insurer’s contractual agreements.” Equally, the Court rejected the contention that the FAA was specifically pre-empted by the McCarran-Ferguson Act, relying on the Third Circuit’s decision in Grode v. Mutual Fire, Marine and Island Ins. Co., 8 F.3d 953 (3d Cir. 1993). Finally, after reviewing each of the cases cited by Koken, the Court concluded that the law on arbitrability had not changed since the time that Koken originally raised each of these same arguments in 1999. As such, the Court held that the agreement to arbitrate was valid and enforceable against Koken.

On the issue of manifest disregard, Koken argued that the Panel’s Final Award ignored two governing Pennsylvania statutes. Specifically, while the Panel ruled that the Stop Loss Agreement did not terminate 30 days after the liquidation order pertaining to American Integrity was entered, Koken contended that 40 P.S. § 221.21 explicitly terminates the insurance liability of an insolvent insurer 30 days after entry of a liquidation order. Koken further argued that because the Coinsurance Agreement had the effect of increasing American Integrity’s surplus, it should have been considered a capital contribution, and thus not subject to setoff, as dictated by 40 P.S. § 221.32(b)(3). Koken contended that the Panel’s failure to apply these two statutes was a manifest disregard of the law, and that such a finding was supported by the fact that the Panel did not issue a reasoned award.

Discussing the standard for vacatur of an arbitral award, the Court explained that such an award may be vacated “where the arbitrator’s decision evidences a manifest disregard for the law rather than an erroneous interpretation of the law . . . A Court can vacate an arbitration award under the manifest disregard standard if it finds that . . . (1) the arbitrators knew of a governing legal principal yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.” The Court also noted that while the manifest disregard standard for vacatur is not contained in the Convention, “the Convention specifically contemplates that the state in which, or under the law of which, the award is made, will be free to set aside or modify an award in accordance with its domestic arbitral law and its full panoply of express and implied grants for relief.”

Setoff

40 P.S. § 221.32(a) provides that “mutual debts or mutual credits between the insurer and another person in connection with any action or proceeding under this article shall be setoff and the balance only shall be allowed or paid, except as provided in subsection (b).” In pertinent part, subsection (b)(3) provides that “No setoff or counterclaim shall be allowed in favor of any person where . . . (3) the obligation of the person is to pay an assessment levied against the member or subscribers of the insurer, or to pay a balance upon a subscription to the capital stock of the insurer, or is in any other way in the nature of a capital contribution.” Koken argued that, because the agreement between Cologne and American Integrity increased American Integrity’s surplus, it was “in the nature of a capital contribution,” and, therefore, not subject to set-off. The Court disagreed with Koken’s position, explaining that, since the language of subsection (b)(3) cited by Koken had never been interpreted by any Pennsylvania Court, state or federal, “the only argument possible” is that “the arbitration panel erroneously interpreted the law.” The Court held that “an erroneous interpretation by the arbitration panel does not warrant a finding of manifest disregard.” The Court, therefore, refused to vacate the Final Award on this ground.

Continuation of the Stop Loss Agreement

On the issue of the termination of the Stop Loss Agreement thirty days after American Integrity was placed into liquidation, however, the Court held that the arbitration panel manifestly disregarded 40 P.S. § 221.21. In pertinent part, 40 P.S. § 221.21 provides that “[a]ll insurances in effect at the time of issuance [of] an order of liquidation shall continue in force only with respect to the risks in effect, at that time (i) for a period of thirty days from the date of entry of the liquidation order.” Based upon this language, Koken argued that the Stop Loss Agreement terminated on July 25, 1993 (30 days after the order placing American Integrity into liquidation).

Cologne opposed this position by arguing that 40 P.S. § 221.21 only applied to direct insurance, and that the Panel, therefore, did not manifestly disregard that statute. In support of this contention, Cologne cited to the NAIC model law, which specifically exempts reinsurance from the analogous provision to 40 P.S. § 221.21. The Court rejected Cologne’s position, however, and held that “the panel’s decision as to the continuation of coverage is in manifest disregard of the law. Contrary to the set-off statute, which is open to interpretation, 40 P.S. § 221.21 is quite clear. The legislature chose to adopt language different then that in the NAIC model law. If the legislature had wanted to exclude reinsurance from the statute, it could have.” Thus, the Court concluded that the Panel manifestly disregarded 40 P.S. § 221.21, and granted Koken partial vacatur of the Final Award on this point.

Lack of a Reasoned Award

Koken also argued that the lack of a reasoned award, coupled with the length of time that it took the Panel to render its award, further evidenced manifest disregard of the law. While the Court noted that it had already found that the Panel manifestly disregarded 40 P.S. § 221.21, this argument was unpersuasive with respect to the setoff claim. The Court premised this holding on the fact that the transcript of the proceeding did not demonstrate that the parties had agreed to a reasoned award. Moreover, the Court noted that no case had ever held that a delay in rendering an arbitration award evidences manifest disregard.

* 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.

OneBeacon America Ins. Co. v. Turner (S.D. Tex. 2006); AND Int’l Marine Underwriters v. Thomas J. Turner (5th Cir. 2006)

Issues Addressed: Whether an arbitration award should be vacated for Manifest Disregard of the law.

In OneBeacon America Insurance Company v. Turner, the Court of Appeals for the Fifth Circuit affirmed the District Court’s judgment that in part denied OneBeacon’s effort to vacate an arbitration award on grounds that the arbitrators acted in manifest disregard of the law in awarding attorney’s fees and had exceeded their powers in awarding administrative fees and expenses.

The dispute arose from an insurance policy covering a yacht owned by Turner that the parties agreed had an insured value of $95,000. The vessel was reported missing and was subsequently discovered with damage from flood and vandalism. An initial insurance estimate determined that the damage was between $55,000 and $65,000. Believing that Turner was partially responsible for the loss, OneBeacon offered $9,000 to settle the claim. Turner rejected the offer and invoked the policy’s arbitration provisions. Such provisions called for each party to appoint an arbitrator and the two arbitrators appoint a third. The policy also provided that each party was responsible for its arbitrator’s fees and half the third arbitrator’s fees and expenses.

The arbitration panel conducted a hearing and both parties waived their right to record the proceedings. The panel issued an award finding the vessel a ‘‘total loss’’ and awarded Turner the full value of the yacht. The panel also awarded Turner for personal property damage and for administrative fees and expenses relating to the arbitration and for attorney’s fees. OneBeacon moved to vacate the award, arguing that the arbitrators had acted in manifest disregard of the law in awarding attorney’s fees and expenses. OneBeacon also challenged the panel’s factual findings relating to personal effects and total loss of the yacht. The District Court vacated the portion of the award allocated to the fees and expenses of the arbitration, finding that the arbitrators has acted ‘‘in a manner inconsistent with the arbitration provision’’. OneBeacon America Insurance Company v Turner, 2006 wl 547959, at *3 (S.D. Tex. 2006). As to attorneys fees, however, the District Court denied the motion to vacate, noting there was ‘‘no evidence in this case that the arbitral panel was aware of the Fifth Circuit law requiring litigants in maritime cases to pay their own attorney’s fees.’’ Tex A&M Research Found v Magna Carta Transp., Inc., 338 F. 3d 394 (5th Cir. 2003). The Court also dismissed OneBeacon’s challenge to factual findings. OneBeacon appealed solely on the issue of the award of attorney’s fees alleging manifest disregard of the law.

In a per curiam opinion the Fifth Circuit affirmed the judgment of the District Court and described the two step analysis necessary to determine manifest disregard of the law. First, ‘‘the error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.’’ Kergosien v. Ocean Energy, Inc., 390 F. 3rd. 356, 355 (5th Cir. 2004) In addition, ‘‘the term ‘disregard’ implies that the arbitrator appreciates the existence of a clearly governing principle but decides to ignore or pay no attention to it.’’ Id. The second step requires ‘‘the Court must find that the award results in significant injustice’’. Id. The Fifth Circuit agreed with One Beacon’s argument that the general rule applicable to maritime disputes requires litigants to pay their own attorney’s fees. It held nevertheless that ‘‘the failure of an arbitrator to apply the law correctly is not a basis for setting aside an arbitrator’s award.’’ Kergosien 390 F. 3rd at 356. Having failed to secure a record of the Panel’s proceeding, OneBeacon failed to show that the arbitration panel was aware of the governing principle and refused to follow it so ‘‘its claim that the award was in manifest disregard of the law fails at the first step’’ of the required analysis.

* John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance litigation, arbitration and contract wording. 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.

Vital Basics, Inc. v. Vertrue, Inc.

Issue Decided: When may an arbitration award be vacated on grounds that it violated the plain language of the parties’ contract.

In a non-insurance case, the Court of Appeals for the First Circuit affirmed the lower court’s confirmation of an arbitration award that it found to be based upon a plausible reading of the contract between the parties. Vital Basics Inc (VBI) markets and sells nutritional and dietary supplements directly to consumers. Vertrue Incorporated (Vertrue) sells membership programs that provide consumers with discounts on health care and related services. The two companies had a long term marketing agreement whereby VBI would attempt to sell Vertrue memberships to consumers who called to order products from VBI. Vertrue would pay a commission to VBI for memberships that were sold and remained in force for a full year. A dispute arose over the payment of commissions for memberships that were paid but subsequently cancelled with the customer receiving a partial refund and Vertrue retaining a portion of the membership fee. VBI contended it was entitled to a commission on the portion of the membership fees retained by Vertrue. While the dispute was being debated between the parties, VBI was quietly developing its own competing membership program. VBI launched the program in violation of the contract’s exclusivity clause which banned VBI from marketing or selling any competing membership program. Vertrue initiated arbitration before a three-judge arbitration panel as provided in the contract. Vertrue alleged breach of contract, fraud and violation of the Connecticut Unfair Trade Practices Act. VBI asserted counterclaims for breach of contract.

After numerous days of complex testimony, the panel ordered VBI to pay Vertrue $3.5 million in compensatory damages and $1.3 million in punitive damages and attorney fees. After the arbitration process commenced VBI became insolvent and sought protection of the United States Bankruptcy Court, District of Maine. After the arbitration panel issued its award, VBI sought vacation of the award before the bankruptcy court. The bankruptcy court found no grounds to vacate and confirmed the award. VBI appealed to the United States District Court, District of Maine alleging that the panel disregarded the law, exceeded its authority, was biased and failed to hear relevant evidence. The district court received extensive briefs from both sides and affirmed the bankruptcy court in all respects, holding that ‘‘the arbitration award represents a final and definite award based upon a ‘plausible’ reading of the contract between VBI and Vertrue.’’ Vital Basics, Inc. v. Vertrue Inc. 332 B.R. 491 at 494 (D. ME. 2005). VBI appealed alleging that the Panel’s award violated the express language of the contract and that Vertrue was the first party to breach the contract thereby nullifying VBI’s subsequent breach of the exclusivity clause.

In affirming the District Court’s confirmation of the award the Court of Appeals acknowledged that any review of an arbitral panel’s award is ‘‘exceedingly narrow’’ Wonderland Greyhound Park, Inc. v. Autotote Sys., Inc., 274 F. 3d 34 at 35 (1st Cir. 2001) and that confirmation of an award is required where the arbitrator was ‘‘even arguably construing or applying the contract.’’ Gupta v. Cisco Sys., Inc., 274 F. 3d 1 at 3 (1st Cir. 2001). The court held that the panel’s conclusion was not contrary to the plain language of the contract and therefore left no basis to vacate the award. The Court concluded ‘‘having presented its arguments to the arbitration panel, the bankruptcy court, the district court and this court, VBI must now abide by the reasonable conclusions reached by the arbitration panel, a body that they themselves selected to resolve disputes under the contract.’’ Bull HN Info. Sys., Inc. v. Hutson, 229 F. 3d 321 at 330 (1st Cir. 2000). ‘‘It is the arbitrator’s view of the facts and of the meaning of the contract that (the parties) have agreed to accept.’’ United Paperworks Int’l Union v. Misco, Inc., 484 U.S. 29, 38 (1987).

* John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS-U.S. Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance litigation, arbitration and contract wording. 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.

Reliance v. Raybestos

Issue Decided: An arbitration panel is not required to apply state substantive law in contract interpretation if not so required by the parties’ arbitration agreement or the rules of the AAA.

Reliance v. Raybestos is not a newcomer to the courts. It first appeared in the Southern District of Indiana in 1997 when Reliance Insurance Company instituted a declaratory judgment action against Raybestos to determine if coverage was available for the alleged environmental contamination of property located adjacent to the Raybestos manufacturing facility in Crawfordsville, Indiana. After several years of litigation, Raybestos filed for bankruptcy, which led to the filing of third-party complaints against its other insurers to recover the costs of the environmental cleanup of the property. Some of the other insurers moved the court to stay the action and compel arbitration under Sections 3 and 4 of the Federal Arbitration Act (“FAA”) which stated, in pertinent part:

Should any dispute arise out of or related to this endorsement and contract of insurance which cannot be resolved in the normal course of business with respect to the validity or interpretation of this insurance contract… the matter or matters upon [which] this agreement cannot be reached shall be settled by arbitration in accordance with the rules of the American Arbitration Association…

The District Court denied the motions to stay and compel arbitration, but on appeal, the Seventh Circuit Court of Appeals reversed and directed the parties to arbitrate “in accordance with the Rules of the American Arbitration Association (“AAA”) and Federal Arbitration Act.”

Raybestos filed a Demand for Arbitration to be pursuant to Indiana law. By this point, Raybestos had settled with all but one of its insurers, Westchester, who objected to Raybestos’ Demand. Pursuant to Indiana law, the absolute pollution exclusion of the Westchester policy would be considered ambiguous and thus unenforceable to bar claims arising out of a government-mandated environmental clean-up. The Panel, however, was aware that Indiana law was anathema to the law of every other jurisdiction that had tried this issue. In their decision, the Panel noted that

Indiana is the only jurisdiction, of the 48 that have ruled on this issue, that has declared the pollution exclusion ambiguous and, as a matter of law, unenforceable to bar claims arising out of a government-mandated environmental clean up.

After each party filed its motion for Summary Determination, the Panel, comprised of three former judges, agreed with Westchester, finding that “there is nothing in the arbitration provision or in any other policies that compels the application of the substantive law of any particular jurisdiction.” Applying Seventh Circuit case law, the Panel held that it was free to interpret the insurance contract according to its collective best judgment and ultimately determined that the absolute pollution exclusion in the Westchester insurance policy barred Raybestos’ claim.

Raybestos then appealed the Panel’s decision to the Southern District of Indiana in the instant litigation. In order for the Southern District of Indiana to overturn an arbitration ruling, Raybestos would have to show, in pertinent part, that the Panel exceeded its powers or that the arbitration award was in manifest disregard of the law. See Butler Mfg. v. United Steelworkers of Am., 336 F.3d 629, 632 (7th Cir. 2003), Wise v. Wachovia Securities, 450 F.3d 265, 268 (7th Cir. 2006), 9 U.S.C. §10. Raybestos argued exactly that, i.e. the Panel, which was aware of the Indiana interpretation of the absolute pollution exclusion, “manifestly disregarded the law” and/or “exceeded their powers under 9 U.S.C. §10(4),” by not applying state substantive law in their contract interpretation, thereby necessitating vacatur of their decision. Heath Services Management Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir. 1992).

The Southern District of Indiana, however, looked to the arbitration agreement itself and the rules of the AAA to determine the scope of the Panel’s powers. The Southern District of Indiana found that neither the agreement nor the rules required the Panel to apply substantive law, and both allowed an arbitrator fairly free reign “in the formulation of remedies.” Bavarti v. Josephthal, Lyons & Ross, 28 F.3d 704, 710 (7th Cir. 1994). Therefore, under Seventh Circuit case law, the Panel was free to interpret the contract any way it deemed fit. Thus, as long as the Panel interpreted the absolute pollution exclusion without exceeding its powers, (even if the interpretation is “incorrect or even wacky”), the Southern District of Indiana must uphold the Panel’s award. See Wise, 450 F.3d at 269. Accordingly, the Southern District of Indiana found that the Panel’s interpretation of Westchester’s absolute pollution exclusion as barring Raybestos’ claims to be conclusive and binding.

Lastly, Raybestos argued that the arbitrators’ award should be vacated as violative of Indiana public policy, since Indiana courts specifically held that certain pollution exclusions contained in insurance policies were ambiguous and unenforceable. The Southern District of Indiana, however, found that as public policy did not play a role in the outcome of those previous decisions, Raybestos failed in identifying a well-defined and dominant public policy, and therefore none could be violated by the Panel’s ruling. Chicago Fire Fighters Union Local No. 2 v. City of Chicago, 751 N.E.2d 1169 (Ill.App. 2001).

Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi

Issue Decided: Arbitrator’s continuous duty to disclose conflicts; evident partiality of an arbitrator

In Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., the Second Circuit Court of Appeals affirmed the District Court’s finding vacating an arbitration award where one of three arbitrators acted with “evident partiality” by failing to either investigate what he knew to be a potential business relationship between his corporation and one of the parties or by failing to inform the parties that he had created a “Chinese Wall” to insulate himself from learning more about the relationship.

Applied Industrial Materials Corp. (“Aimcor”) and Ovalar Makine (“Ovalar”) had entered into a Joint Venture Agreement (“Agreement”) relating to the sale in Turkey of petroleum coke. A dispute arose over the distribution of profits under the Agreement, which contained an arbitration clause providing that the dispute be resolved by arbitration in New York. The arbitration was to be heard before a tripartite panel consisting of two party appointed arbitrators who jointly selected the third arbitrator to serve as chairman. The chairman, Charles Fabrikant, was the Chairman, President and CEO of Seacor Holdings (“Seacor”), a multi-billionaire dollar company.

The arbitration provision in the Agreement contained the following disclosure requirements: “all arbitrators are required to disclose any circumstance which could impair their ability to render an unbiased award based solely upon an objective and impartial consideration of the evidence present to the Panel. Such disclosure shall include relations with anyone of: a) the parties to the arbitration; b) other affiliates or associated companies of the parties.”

In April 2005, after the arbitration hearings commenced, Fabrikant disclosed to the parties that Seacor’s affiliate was negotiating a contract with Oxbow Industries (“Oxbow”), the parent of Aimcor. Fabrikant decided not to inquire further into the extent of the dealings between Seacor and Oxbow and did not advise the parties that he would make no further inquiries.

The arbitration proceeding had been bifurcated into liability and damages phases. In September 2005, the Panel issued a 2-1 decision against Ovalar on the liability issue with Fabrikant writing the decision and rendering the decisive vote. Several months later, Ovalar discovered a contract existed for over a year between Seacor’s affiliate and Oxbow which generated $275,000 in revenue. With the issue of damages still to be decided, Ovalar requested that Fabrikant withdraw from the Panel due to the commercial relationship between Seacor’s affiliate and Oxbow. Fabrikant refused stating that the amount of the business conducted with the affiliate was less than one-third of 1% of the affiliate’s revenue and amounted to an imperceptible fraction of his employer’s revenue.

In February 2006, when Aimcor moved to confirm the partial arbitration award, Ovalar moved to vacate the award on the grounds that Fabrikant’s failure to recuse himself violated the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10. In finding against Aimcor, the District Court focused on the disclosure requirements in the arbitration clause, Fabrikant’s statement that, subject to later clarification, no conflict existed, and his later disclosure that talks were occurring between Seacor’s affiliate and Oxbow but that he did not know about them or intend to get involved. Based upon Fabrikant’s disclosures, the District Court found that Ovalar had a reasonable expectation that it would be notified of any actual contracts with Oxbow. The District Court held that by insulating himself from learning about any such relationship, and failing to tell the parties that he had done so, Fabrikant created an “appearance of partiality.” The District Court observed that Fabrikant’s failure to investigate the status of his company’s negotiations with Oxbow and his subsequent lack of knowledge did not excuse his lack of disclosure. Citing the American Code of Ethics for Arbitrators and the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration, the District Court found there to be a continuous obligation on the part of the arbitrator to avoid partiality or the appearance of partiality.

In determining the standard to be applied in construing the meaning of “evident partiality” to vacate an arbitration award as required under the FAA, the Second Circuit found that the District Court’s focus on whether there was an “appearance of partiality” on the part of the arbitrator set too low a standard. Reviewing its own precedent in Morelite Construction Corp. v. New York City District Council Benefit Funds, 748 F. 2d 79 (2d Cir. 1984) and Justice White’s concurrence in Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968), the Second Circuit stated that the standard to be applied must be based upon whether a reasonable person would have to conclude that an arbitrator was partial to one party in the arbitration. In circumstances of actual knowledge of a potential conflict, the Court noted that this can be dispositive of evident partiality while the absence of actual knowledge may not be. The Second Circuit, in placing an affirmative duty on the part of arbitrators to investigate nontrivial relationships, held that arbitrators must take steps to ensure that the parties are not misled into believing that no nontrivial conflict exists. The Court emphasized that, “The mere failure to investigate is not, by itself, sufficient to vacate an arbitration award. But, when an arbitrator knows of a potential conflict, a failure to either investigate or disclose an intention not to investigate is indicative of evident partiality.” The Second Circuit specifically ruled that “where an arbitrator has reason to believe that a nontrivial conflict of interest might exist, he must 1) investigate the conflict (which may reveal information that must be disclosed…) or 2) disclose his reasons for believing there might be a conflict and his intention not to investigate.”

The Second Circuit found that Fabrikant had an ongoing obligation to disclose conflicts and that he had previously assured the parties that he intended to comply with that obligation. Once he learned that negotiations were proceeding, he knew at a minimum that a potential conflict existed. His possible subjective good faith reasons for not further investigating did not meet the test. The Court noted that had he investigated further, Fabrikant would have discovered that there already existed a relationship generating $275,000 in revenue that the Court did not consider a trivial amount. Fabrikant also failed to advise the parties of the “Chinese Wall.” Under these circumstances, the Court found that a reasonable person would have to conclude that evident partiality existed.

*Sylvia Kaminsky is currently an ARIAS certified umpire and arbitrator as well as a consultant to the insurance/reinsurance industry. She is a lawyer licensed in New York. She was formerly General Counsel, Senior Vice President and Corporate Secretary of Constitution Reinsurance Corporation and Sirius Reinsurance Corporation; Deputy General Counsel of Gerling Global and Senior Vice President of Claims; and was in private legal practice for 15 years serving the industry.

ALS & Associates, Inc. v. AGM Marine Constructors, Inc.

Issue Decided: Whether an arbitration award may be vacated for an arbitrator’s refusal to postpone a hearing to give a party more time to obtain evidence, failure to investigate and disclose possible conflicts, and/or manifest disregard of the law.

In ALS & Associates v. AGM Marine Constructors, Inc., the District Court of Massachusetts recently reinforced the difficult standards for vacating an arbitration award, confirming that courts give “profound deference to arbitral decisions.”¹ Notably, the Court cited a recent U.S. Supreme Court case,Hall Street Associates, L.L.C. v. Mattel, Inc., 128 U.S.1396 (2008), to hold unequivocally that manifest disregard of the law is not grounds for vacating an award under the Federal Arbitration Act (FAA).

Ruling on a party’s attempt to vacate an award based upon an arbitrator’s alleged: (1) failure to postpone a hearing to give it more time to obtain evidence, (2) partiality to one party over the other, (3) failure to investigate and disclose possible conflicts, and (4) manifest disregard of the law, the Court rejected each allegation in turn, at times with little discussion. Though the opinion discusses only a few details of the underlying arbitration, it appears that the party moving for vacatur had little support for its assertions against the arbitrator. It also appears that throughout the litigation of the review of the award, the movant had made a practice of accusing various parties of misconduct, with little or no support—a practice which clearly irritated the Court.

The Court reiterated the policy of promoting arbitration as a speedy and relatively inexpensive vehicle for resolving certain disputes², and acknowledged that the FAA limits judicial review of arbitral decisions by laying out streamlined procedures to be followed by reviewing courts in order to prevent those courts from closely scrutinizing arbitration decisions.³ “Because arbitration’s essential virtue is resolving disputes straightaway, . . . judicial review of an arbitral award is extremely narrow and exceedingly deferential,” stated the Court.⁴

In summary, the Court announced the following holdings: First, an arbitrator’s refusal to postpone a hearing does not warrant vacatur, even if it may have deprived that party of the chance to obtain certain evidentiary documents, where the party has not proved the relevance of the documents sought, and has been given the chance to cross-examine and impeach its adversary as to the failure to produce such documents. Second, a party seeking vacatur based on an arbitrator’s evident partiality to its adversary must show that a reasonable person would have to conclude that the arbitrator was partial to one party over another. Third, an arbitrator’s failure to investigate and timely disclose possible conflicts, in and of itself, does not warrant vacatur. Finally, manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the FAA.

Underlying Facts

The Court in ALS was called on to review an arbitral award given in a dispute between AGM Marine Contractors (“AGM”) and ALS & Associates, f/k/a Southeast Floating Docks, Inc. (“Southeast”) that had arisen from a construction project in which the town of Provincetown, Massachusetts had hired AGM to install a floating dock system as part of a larger municipal project. The docks which AGM installed had been manufactured by Southeast. During a December 2003 storm, the dock system failed, resulting in the dispute between AGM and Southeast as to which party was at fault for the failure. The dispute went to arbitration, and the arbitrator awarded $389,703 to AGM. Southeast moved to vacate the award.

Exclusion of Evidence

In its attempt to vacate the award, Southeast first asserted that the arbitrator had severely prejudiced it by refusing to grant its request to postpone a hearing in order to give it more time to obtain certain documents from third parties. Southeast had issued arbitral subpoenas to several third parties and, dissatisfied with their responses, filed separate actions in the District Court to secure compliance from two of the parties. Meanwhile, the arbitrator refused to delay the hearing pending the outcome of the separate court actions, and the hearing was held before Southeast had a chance to obtain the documents.

In its analysis, the Court laid out the requirement for vacatur based on the exclusion of evidence in an arbitration: namely, the complaining party must show that the exclusion has so affected its rights that it has been deprived of a fair hearing.⁵ The Court also stated that an arbitrator may successfully ameliorate unfairness that might otherwise result from the exclusion of evidence by drawing inferences against the party that has failed to produce.

That said, it went on to find that Southeast failed to show that the documents in question were vital to its case. “On the contrary, th[e documents] seem fairly innocuous,” it stated. The Court also pointed to the fact that the arbitrator had permitted the party to cross-examine and impeach the subpoenaed third parties as to their failure to produce the documents, and that the arbitrator had expressly drawn an inference against those parties for their failure to produce. Noting that Southeast never showed how such measures were inadequate to protect its rights, the Court held that the arbitrator’s refusal to hold up the arbitration did not deprive Southeast of a fair hearing.

The Court also rejected Southeast’s suggestion that its eventual victory in the two separate subpoena actions proved that postponement of the hearing was necessary. The court in the two separate actions had ultimately found that the third parties had not complied with Southeast’s subpoenas. However, the Court in ALS found that those rulings had no bearing on the case before it, because the materiality and relevance of the subpoenaed documents were not at issue in those actions. Rather, the issue in the separate cases was whether the third parties had substantially complied with a court order to respond to the subpoenas. The Court also noted that the subpoena cases took several years to resolve—a fact which underscored the reasonableness of the arbitrator’s decision not to wait for their outcome, given the fact that expediency is a principal benefit of arbitration.

Evident Partiality

As a second basis for its application for vacatur, Southeast alleged that the arbitrator displayed evident partiality to AGM, in part because the arbitrator was the acting as an attorney in an unrelated matter against a party represented by the same law firm that was representing AGM in the arbitration. Noting the tenuous nature of this alleged connection, the Court held that a party seeking vacatur based on an arbitrator’s evident partiality to its adversary must show that a reasonable person would have to conclude that the arbitrator was partial to one party over another.

Significantly, the Court declared that courts deciding the question of partiality should bear in mind that arbitrators, by necessity, usually have extensive practical experience in the same field in which the parties to the dispute are involved. As a result, arbitrators are often not only familiar at the outset with the parties appearing before them, but are more likely than a typical juror to be precommitted to a particular substantive position.⁶ Thus, because an arbitration by nature is not characterized by “austere impartiality,” the standard for showing evident partiality sufficient to vacate an award is particularly high: it is not enough to identify some remote connection between the arbitrator and one of the parties⁷ ; rather, the standard is a tough, objective one that is close to the “beyond a reasonable doubt” standard in criminal law.

Failure to Disclose Possible Conflicts

As part of its argument for evident partiality, Southeast also alleged that the arbitrator had failed to investigate and timely disclose possible conflicts of interest which might impair its impartiality or independence. Apparently, Southeast claimed that this failure violated Rule 16 of the American Arbitration Association (AAA) Commercial Arbitration Rules, which requires arbitrators to disclose any conflict of interest likely to impair his or her ability to preside over a case without bias. ⁸

The Court rejected this assertion, noting that the case was not governed by the AAA, but by the FAA—which contains no provisions for vacatur based on an arbitrators’ failure to disclose a possible conflict of interest alone.⁹ Rather, vacatur is warranted under the FAA only when a failure to disclose a conflict is linked to evident partiality. In this case, since the Court saw little evidence that the arbitrator was partial to AGM, it rejected Southeast’s argument.

The Court further stated that even an unsupported accusation of partiality can cast an arbitrator in an unfavorable light. As such, given the shaky basis for Southeast’s assertion of partiality and its apparent history of issuing similar unfounded accusations, the Court criticized Southeast for its “unhelpful penchant for levying poorly supported accusations of impropriety and malfeasance against various individuals and entities involved,” and stated that “at least some of Southeast’s aspersions border on the vexatious.”¹⁰

Manifest Disregard of the Law

Finally, Southeast argued that the award should be vacated because the arbitrator had manifestly disregarded the law. Without going into the facts of the arbitration, the Court swiftly rejected this argument, holding that that manifest disregard of the law is not a ground for vacating an award in cases brought under the FAA.¹¹ Specifically, the Court cited another First Circuit case from earlier this year, Ramos-Santiago v. UPS, 524 F.3d 120 (1st Cir. 2008), which itself cited the recent U.S Supreme Court case, Hall Street Associates, supra, as standing for the rule that the FAA does not provide for vacatur based on manifest disregard. However, the ALS Court also briefly noted that even if manifest disregard of the law remained a valid basis for vacatur, Southeast had failed to show that the arbitrator in question had manifestly disregarded the applicable law. ¹²

Summary

The Court’s decision to affirm the award in ALS may have been predictable, given that the allegations made in support of vacatur were apparently largely unfounded. However, the opinion clearly reinforces the strong sense of deference to arbitrator’s decisions. This sense of deference indicates that parties who submit to binding arbitration—particularly those who submit to the governance of the FAA—will have an increasingly difficult burden in vacating arbitration awards.

*Mr. Walsh is a Principal in the New York office of Boundas, Skarzynski, Walsh & Black, LLC, concentrating on reinsurance and insurance litigation and arbitration. He is also a certified arbitrator for ARIAS.

Ms. McCormack is an associate concentrating on insurance and reinsurance coverage issues.

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¹ Id., at *1.
² Id., at *2.
³ Section 10 of the FAA provides, in pertinent part:

In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration:

1. Where the award was procured by corruption, fraud, or undue means.

2. Where there was evident partiality or corruption in the arbitrators, or either of them.

3. Where the 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 by which the rights of any party have been prejudiced.

4. Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

⁴ ALS, at *1.
⁵ Id., at *2, citing Nat’l Cas. Co. v. First State Ins. Group, 430 F.3d 492 (1st Cir. 2005).
⁶ Id., at *3
⁷ Id.
⁸ Rule 16 of the AAA Commercial Arbitration Rules provides that:

Any person appointed or to be appointed as an arbitrator shall disclose to the AAA any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives.

⁹ ALS, at *4.
¹⁰ Id., at *4, fn 6.
¹¹ Id., at *4, citing Ramos-Santiago v. UPS, 524 F.3d 120, 124 n.3 (1st Cir. 2008)
¹² Id.