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Alex Silverman

Georgia Supreme Court Finds Mandatory Arbitration Clause in Law Firm Engagement Agreement Is Neither Unconscionable nor Void as Against State Public Policy

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The plaintiff sued its former lawyer and law firm for legal malpractice. The defendants moved to dismiss and compel arbitration based on a mandatory arbitration clause in the parties’ engagement agreement. The trial court denied the motion, finding the arbitration clause was unconscionable, and thus unenforceable, having been entered into in violation of the Georgia Rules of Professional Conduct (GRPC). The appellate court reversed, finding the clause was neither void as against public policy nor unconscionable. Plaintiff appealed to the Supreme Court of Georgia, which granted review of two questions: (1) whether the GRPC requires an attorney to obtain the informed consent of his/her client before including a clause mandating arbitration of legal malpractice claims in the parties’ engagement agreement; and if so, (2) whether failing to obtain that consent renders such a clause unenforceable under Georgia law.

Substantively addressing the second question only, the Court affirmed the decision of the appellate court, finding the first question need not be answered. Specifically, the Court held, even assuming the failure to obtain a prospective client’s informed consent does violate the GRPC, the arbitration clause at issue here would still not be unenforceable. The Court rejected the argument that clauses of this kind violate state public policy, noting that Georgia has a clear public policy in favor of arbitration, and that “[t]here is nothing about attorney-client contracts in general that takes them outside this policy and makes mandatory arbitration of disputes arising under them illegal.” The Court also found Georgia does not have a categorical policy against mandating arbitration of legal malpractice claims. Rather, and contrary to the plaintiff’s argument, the Court held that a contract is void as against public policy, and thus unenforceable, where the agreement itself effectuates illegality, not because the process of entering the contract was allegedly improper. Thus, because the arbitration clause at issue would still be lawful even if the defendants had complied with the GRPC, the Court found the clause is not void as against public policy. In addition, based on the limited record before it, the Court found no basis to conclude the arbitration clause at issue is either procedurally or substantively unconscionable.

Innovative Images, LLC v. James Darren Summerville, et al., Case No. S19G1026 (Ga. Sept. 8, 2020)

Federal Court Confirms $112 Million Foreign Arbitral Award Against Ukraine, Finding No Arbitrator Impartiality

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Pao Tatneft filed suit in Washington, D.C., district court seeking to enforce a $112 million foreign arbitral award entered in its favor against the nation of Ukraine. Confirmation was sought pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the “New York Convention.”

Ukraine argued against confirmation of the award on the grounds that the arbitration panel was not impartial, and that confirmation would be contrary to U.S. public policy. Regarding impartiality, Ukraine claimed the panel’s neutral arbitrator was, in fact, not neutral, having failed to disclose that he accepted an offer from Pao Tatneft’s law firm to serve as an arbitrator in a wholly separate arbitration in which he would earn upwards of $300,000. The parties disputed the standard by which to assess any alleged impartiality. Ukraine argued that the less stringent “evident partiality” standard set forth in Section 10(a)(2) of the Federal Arbitration Act applied. Pao Tatneft argued that Article V of the New York Convention contained the only grounds upon which the court could refuse to enforce the award. The court agreed with Pao Tatneft, but found Ukraine failed to meet its burden under both standards in any event. Ukraine argued alternatively that the award should not be confirmed based on U.S. public policy, but these claims were found to be speculative and/or factually unsupported. As such, the court granted Pao Tatneft’s petition to confirm the award and left the total amount payable after interest for additional briefing.

Pao Tatneft v. Ukraine, Case No. 17-cv-00582 (D.D.C Aug. 24, 2020)

SDNY Finds Insurer, As Subrogee, Lacked Authority to Enforce Arbitration Clause in Fuel Delivery Contract

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The Southern District of New York declared that plaintiff Monjasa A/S was not bound by an arbitration agreement to which neither it nor the defendant was a party. The case stems from a fuel delivery contract between two non-parties, Monjasa Lda and Angola de Navegacao Lda (ANNA). The contract called for Monjasa Lda to supply fuel to a ship known as the BBC Scotland. Monjasa Lda and the plaintiff are wholly separate subsidiaries of Monjasa Group. The defendant underwrote an insurance policy covering the BBC Scotland and its owner. The dispute arose after the BBC Scotland collided with and damaged the Golden Oak, a fuel tanker that Monjasa Lda arranged under the fuel contract, forcing Monjasa Lda to send a different tanker – the Duzgit Venture – to complete the delivery.

Subsequently, various parties – excluding the plaintiff – engaged in settlement discussions regarding the damage to the Golden Oak. The defendant, as insurer for the BBC Scotland parties, ultimately funded the settlement, after which it sent an arbitration demand to the plaintiff seeking reimbursement. According to the defendant, the plaintiff was liable for the settlement and subject to arbitration based on the general Monjasa Group terms and conditions incorporated by reference in the Monjasa Lda/ANNA contract. As support, the defendant cited a reference on the fuel delivery receipt issued by the Duzgit Venture stating that the sale was “governed by terms and conditions between Vessel and Monjasa A/S, acting as principal.” The plaintiff responded by filing this action.

Because there was no dispute that the plaintiff and the defendant were not parties to the contract between Monjasa Lda and ANNA, the district court found that the plaintiff could only be bound by its terms under agency principles. In that regard, the court ruled that the defendant failed to prove that Monjasa Lda was acting with actual or apparent authority to bind the plaintiff when it contracted with ANNA. The court also found that it was the defendant’s burden to prove that it was entitled to enforce a contract to which it was not a party. Although acting as subrogee of the BBC Scotland’s owner, the court found no connection between the owner of the BBC Scotland and the fuel delivery contract. Further, the court held that no reasonable fact-finder could conclude that the owner of the BBC Scotland was a third-party beneficiary of the contract. Accordingly, the court granted the plaintiff’s motion for summary judgment and denied the defendant’s cross-motion to compel arbitration, finding that the defendant had no basis to invoke the arbitration clause in the first instance.

Monjasa A/S v. Mund & Fester GmbH & Co. KG, No. 1:19-cv-06143 (S.D.N.Y. Aug. 6, 2020).

Eleventh Circuit Affirms Order Compelling Arbitration of Cruise Liner Class Action

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Plaintiffs filed a putative class action against Norwegian Cruise Lines claiming that Norwegian failed to disclose profits it earned when the plaintiffs elected to purchase travel insurance during the cruise booking process. Each plaintiff acknowledged accepting the terms of a “guest contract” with Norwegian, which contained a mandatory arbitration clause covering any dispute “relating to or in any way arising out of or connected with this Contract or Guest’s cruise.” The district court granted Norwegian’s motion to compel arbitration and the plaintiffs appealed, claiming the arbitration clause was inapplicable. According to the plaintiffs, Norwegian was not being sued as a cruise line carrier, but for its role in a purported “reinsurance scheme” whereby it received “kickbacks” on the sale of each travel insurance plan. Thus, the plaintiffs claimed, the class action was unrelated to the guest contract or their cruises. The district court disagreed, however, as did the Eleventh Circuit. Both courts concluded that the plaintiffs’ claims “arose out of,” were “related to,” and were “connected with” Norwegian’s obligations under the guest contract, as any alleged wrongdoing by Norwegian was inextricable from the transaction that culminated in the contract, as well as the plaintiffs’ cruises. The Eleventh Circuit also rejected the notion that Norwegian was being sued in its capacity as a “distribution participant” for the travel insurer. As such, the court affirmed the district court order enforcing the arbitration clause and dismissing the plaintiffs’ allegations.

Phillips v. NCL Corp., No. 19-12463 (11th Cir. Aug. 10, 2020).

Seventh Circuit Rejects Third-Party Administrator’s Attempt to Avoid Multimillion-Dollar Arbitration Award

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Standard Security Life Insurance Company of New York and Madison National Life Insurance Co. entered into an administrative services agreement with FCE Benefit Administrators Inc. under which FCE administered insurance policies underwritten by the insurers. After several years, the insurers terminated the agreement and invoked its arbitration clause. Phase I of the arbitration ended with the panel issuing a partial final award to the insurers of more than $5 million. The panel denied all the parties’ remaining claims at the conclusion of phase II. A federal district court in Illinois later confirmed both awards.

On appeal, FCE claimed the phase I award should not have been confirmed for three reasons, each of which was rejected. First, it argued that the phase II award superseded the phase I award and that the phase I award was therefore not confirmable. The Seventh Circuit disagreed, explaining that the panel deliberately bifurcated the arbitration to decide discrete claims in each phase, thus plainly intending the phase I award to be final and confirmable as to all phase I claims. Second, FCE argued that the panel exceeded its authority by deciding the insurers’ indemnification claims, which FCE claimed were expressly carved out of the arbitration process. While the court disagreed with FCE’s reading of the relevant contract provisions, it also held that FCE waived the objection in any event, having only asserted it after the panel issued the phase I award. Finally, the court rejected the contention that the panel exceeded its authority by awarding amounts labeled on the phase I award as “embezzlement.” “Despite the dramatic label,” the court ruled, the claim itself was no more than a “garden-variety assertion that FCE took excessive and unearned administrative fees from the Insurers.” Because FCE had notice of and attempted to defend against the assertion during phase I of the arbitration, the court found the argument to be meritless. As such, the district court order confirming the phase I and II awards was affirmed.

Standard Security Life Insurance Company of New York v. FCE Benefit Administrators, Inc., No. 19-2336 (7th Cir. July 28, 2020).