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New reinsurance-related and arbitration developments from Carlton Fields

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FIFTH CIRCUIT WEIGHS IN ON ARBITRABILITY OF ISSUES THAT COULD HAVE BEEN DECIDED BY THE COURT

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In the recent unpublished opinion, the United States Court of Appeals for the Fifth Circuit confirmed that if an issue is voluntarily submitted to an arbitrator, then the arbitrator can decide the issue, even if it is one that should have been left to the court. After the arbitrator found for the defendant, Heritage Actions, on the basis that there was no meetings of the minds and therefore the contract was unenforceable and should be rescinded, the plaintiffs, OMG, L.P. and Greg Martin, attempted to have the award vacated in federal district court. The district court agreed with OMG and vacated the award on the basis that “a court was the proper decision-maker as to the contract formation issues in this case, not the arbitrator.” The Fifth Circuit reversed, pointing out that if the parties agree, they may arbitrate issues that are not part of the arbitration agreement. While OMG argued that the issue of the contract’s validity had not been submitted to the arbitrator either by the arbitration contract or by agreement, the Fifth Circuit found that both parties actively put forth arguments during the arbitration on whether there had been a meeting of the minds and whether the contracts should be rescinded. At no time during the arbitration did OMG argue that the arbitrator did not have the authority to decide this issue. The remedy OMG should have sought, said the Fifth Circuit, was to have “refused to arbitrate, leaving a court to decide whether the arbitrator could decide the contract formation issue,” i.e., whether there was a meeting of the minds. The district court’s judgment was reversed and the case remanded with instructions to confirm the arbitration award. OMG, L.P. v. Heritage Actions, Inc., No. 14-10403 (5th Cir. May 8, 2015).

This post written by Barry Weissman.

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SERVICE OF SUIT CLAUSE WAIVES REINSURERS’ RIGHTS TO REMOVE CASE TO FEDERAL COURT

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A federal district court in New Hampshire has held that a service of suit clause contained in reinsurance contracts waives the reinsurers’ rights to remove a litigation brought against them in state court by the Insurance Commissioner of the State of New Hampshire, in his capacity as liquidator for the Home Insurance Company. The liquidator had filed the action in state court to collect reinsurance under the contracts. The reinsurers removed the case to federal court and the liquidator moved to remand, citing the reinsurance contracts’ service of suit clause which states that the reinsurer “will submit to the jurisdiction of any court of competent jurisdiction within the United States” and will “abide by the final decision of any such Court.”

The liquidator argued the clause was a mandatory forum selection clause requiring litigation in the forum chosen by the insured, and thereby constituted a waiver by the reinsurers of their right to remove. The reinsurers contended that the clause was a permissive forum selection clause which constituted merely a consent to jurisdiction and did not mandate litigation in any particular forum. The court agreed with the liquidator and granted the motion to remand, finding the clause mandated exclusive jurisdiction in the New Hampshire state court. The court denied, however, the liquidator’s request for costs and expenses, finding the removal was “not objectively unreasonable.” Sevigny v. British Aviation Insurance Co., Case No. 15-cv-127 (USDC D.N.H. June 16, 2015).

This post written by Renee Schimkat.

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EIGHTH CIRCUIT UPHOLDS ARBITRATION AGREEMENT IN ABSENCE OF ACTUAL PROOF OF UNCONSCIONABILITY DUE TO COST

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The Eighth Circuit affirmed a decision by the U.S. District Court for the Eastern District of Missouri which rejected the contention that an arbitration agreement was unconscionable, and unenforceable under the Federal Arbitration Act, because (1) the prohibitively high costs associated with an individual arbitration proceeding prevented plaintiffs from pursuing their claims; and (2) it included a waiver of punitive damages and attorneys’ fees. In this case, a class of cleaning business franchisees sued a franchisor and related companies for RICO violations. Plaintiffs also contended that some defendants were non-signatories and therefore could not enforce the arbitration agreement. In response, defendants moved to compel individual arbitration citing the arbitration provision language in the respective franchise agreements.

Plaintiffs supported their claims with several figures including average loss per plaintiff, a range of individual filing fees, average daily fees for arbitrators in four cities, and a likely hearing length of three days. Altogether, plaintiffs asserted that their individual arbitration costs would exceed their respective damages. Ultimately, the court found that plaintiffs’ proof was insufficient because (1) the arbitrations would not take place in any of the four cities for which daily fees were provided and (2) plaintiffs did not submit individual affidavits demonstrating their inability to afford arbitration costs. The court emphasized that rather than a hypothetical inability to pay, plaintiffs must provide specific evidence of their individual inability to pay the actual arbitration fees likely to be incurred in order to overcome the federal policy favoring arbitration. The court also rejected plaintiffs’ claim that even if enforceable, the arbitration agreement prohibited non-signatories from compelling arbitration. The court also held that the arbitration agreement language was broad enough to include various non-signatory third parties, and deemed them capable of enforcing the arbitration provision. Torres v. Simpatico, Inc., No. 14-1567 (8th Cir. Mar. 25, 2015).

This post written by Rollie Goss.

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FIFTH CIRCUIT AFFIRMS INTERPRETATION OF TWO AGREEMENTS AND DENIAL OF MOTION TO COMPEL ARBITRATION

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The Fifth Circuit addressed the question of whether a subcontract between the parties requires arbitration, a question that turned on the interpretation of the term “contract documents” in the subcontract. TRC Environmental Corporation hired LVI Facilities Services, Inc. as a subcontractor in an effort to decommission a power plant in Austin, Texas. The Fifth Circuit agreed with the district court’s interpretation that (1) the phrase “Contract Documents” in the subcontract, includes the subcontract itself; and (2) claims arising under the Contract Documents requires an alternative dispute resolution process as laid out in the separate Project Agreement, which did not require arbitration. Based on this interpretation of the two documents, the Fifth Circuit held, the district court correctly denied LVI’s motion to compel arbitration. TRC Environmental Corp. v. LVI Facility Servs., Inc., No. 14-51269 (5th Cir. May 22, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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