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New reinsurance-related and arbitration developments from Carlton Fields

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Carlton Fields

District Court rejects challenge to arbitration award on "manifest disregard of law" basis

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Westra Construction, Inc. (“Westra”), a subcontractor, sought payment from Alexander Construction, Inc. (“ACI”), the construction manager, for work performed on a Pennsylvania Turnpike Commission project. ACI rejected Westra’s claims as unsubstantiated. Westra subsequently filed a demand for arbitration. Four days before the arbitration hearing, Westra provided ACI with thousands of pages of documents in support of its claims. The hearing that ensued spanned eighty-five hearing days. At the conclusion of the hearing, an arbitration award in Westra’s favor was issued. Westra then commenced an action in the U.S. District Court for the Middle District of Pennsylvania against United States Fidelity & Guaranty Company (“USF&G”), ACI’s surety, to collect the arbitration award. Due to the fact that ACI had declared bankruptcy and could no longer challenge the validity of the award, the District Court permitted USF&G to file a motion to vacate the arbitration award in ACI’s stead.

As grounds for the motion to vacate, USF&G contended that: (1) the arbitrators so imperfectly executed their powers that they were unable to reach a final and fair disposition of the matter; and (2) the arbitrators manifestly disregarded the law. The District Court denied the motion to vacate, holding that procedural irregularities cited by USF&G did not rise to the level of imperfect execution of powers where the arbitrators resolved only those issues that had been properly presented to them and rationally derived the award from the parties’ submissions and arguments. The Court rejected the manifest disregard argument on the basis that support for the arbitral award could be found in the hearing transcripts and in the parties’ post-hearing submissions, there was no evidence that the arbitrators were “fully aware” that their interpretations of relevant agreements were improper, and it could not be proven that law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. Westra Construction, Inc. v. United States Fid. & Guar. Co., Case No. 1:03-CV-0833 (M.D. Penn. Mar. 29, 2007).

COURTS, NOT ARBITRATORS, TO DETERMINE EXISTENCE OF CONTRACT “AS A WHOLE”

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MemberWorks, Inc.’s (“MemberWorks”) enrolled Sanford in a discount shopping program without her consent, charging her a fee for the program. The membership agreement contained an arbitration provision. Sanford sued MemberWorks, challenging the validity of the contract and seeking damages. The District Court compelled arbitration, holding that Sanford's challenge to the contract should be decided by an arbitrator. The arbitrator intially opined that he did not have jurisdiction to consider the validity of the contract; rather, that the validity of the contract was an issue for the court. The arbitrator then found the contract to be invalid, awarding Sanford $72 in damages, plus interest and arbitration fees, but denying Sanford's other claims. The District Court confirmed the award.

The Ninth Circuit found that Sanford had not waived her right to challenge the order compelling arbitration by waiting to challenge that decision after the arbitration award had been entered, and that the District Court should have ruled on the validity of the contract prior to compelling arbitration. The Court vacated the arbitration award and remanded the case for a determination by the District Court of whether a contract had been formed between Sanford and MemberWorks. Sanford v. MemberWorks, Inc., Case No 05-55175 (9th Cir. April 16, 2007).

Minnesota Court of Appeals affirms vacation of arbitration award procured by "undue means"

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Cincinnati Insurance Company (“CIC”) brought a subrogation action against Tyco Fire Products (“Tyco”), alleging that Tyco negligently designed, manufactured, and installed a sprinkler system that malfunctioned, causing property damage to CIC’s insured. The parties agreed to submit the matter to binding arbitration by Arbitration Forums, Inc. (“AF”). AF’s rules provide, among other things: (1) that an arbitration is commenced by the filing of a completed P-Form; (2) that a respondent answers by filing its materials with AF and all other involved parties; and (3) that “personal representation will not be allowed in cases when an answer has not been filed as outlined above.” Despite submission of an incomplete P-Form by CIC (neglecting to “x” the boxes requesting notice of and attendance at the arbitration hearing) and failure by Tyco to provide CIC with copies of its answer, AF, contrary to its own rules, concluded that CIC had waived notice and appearance and allowed Tyco to be represented at the hearing. The arbitration proceeded without attendance of CIC’s counsel and a decision favorable to Tyco was issued. Thereafter, CIC petitioned the Minnesota District Court to vacate the arbitration award under Minn. Stat. § 572.19, subd. 1(1) (2004), as procured by “other undue means.” The District Court granted the petition and Tyco appealed.

The Minnesota Court of Appeals affirmed the District Court’s decision, concluding that Tyco’s failure to provide its arbitration documents to Cincinnati resulted in Tyco having an ex parte communication with the neutrals in the case and constituted procurement of an award by “other undue means.” The Court of Appeals reasoned that, even if CIC could be said to have waived notice of and appearance at the hearing, CIC never waived its right to receive copies of Tyco’s submissions or its right to amend its own submissions in response. Additionally, the Court concluded that the arbitration award should be vacated under Minn. Stat. § 572.19, subd. 1(4), on the alternative ground that the hearing was conducted without due process, in violation of Minn. Stat. § 572.129(a), requiring that the arbitrators have notification of the arbitration hearing served on the parties “personally or by certified mail not less than five days before the hearing.” In re Arbitration Cincinnati Ins. Co. v. Tyco Fire Prod., f/k/a Cent. Sprinkler Co., Case No. 82C806001071 (Minn. Ct. App. May 1, 2007).

Reinsurance Boot Camp program coming in Bermuda

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American Conference Institute is sponsoring a conference called Reinsurance Boot Camp at the Fairmont Hamilton Princess in Bermuda July 11-12, 2007. The program looks like a good general background program on the reinsurance industry and reinsurance transactions. The same organization sponsors other programs, which may of indirect interest to our readers, including programs relating to Fiduciary Liability, Disability Insurance and Obstetric Malpractice.

THIRD CIRCUIT RULES RIGHT TO ARBITRATE WAIVED BY ACTIVELY LITIGATING CASE

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In a personal injury action brought by a casino employee against the property owner in the Virgin Islands, the Third Circuit affirmed the denial of the defendant’s motion to stay the proceedings pending arbitration, pursuant to the Federal Arbitration Act. The Court of Appeal held that it had jurisdiction pursuant to section 16(a)(1)(A) of the Federal Arbitration Act, that the issue of whether a party seeking arbitration has waived its right to arbitrate by litigating the case in court remains a question for the trial court to decide, rather than an arbitrator, and that the defendant had waived any right it had to arbitrate by actively litigating the case for nearly four years before seeking to compel arbitration. Ehleiter v. Grapetree Shores, Case No. 06-2542 (3d Cir. Apr. 6, 2007).