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New reinsurance-related and arbitration developments from Carlton Fields

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U.K. TRIBUNAL FINDS BROKER ALLIANCE DOES NOT FALL WITHIN VAT EXEMPTION FOR INSURANCE-RELATED SERVICES BY BROKERS AND AGENTS

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An upper tribunal in the United Kingdom has dismissed an appeal brought by Westinsure, an alliance of brokers formed to provide introductions and improve the business terms of its members, where Westinsure argued its services were tax exempt under a VAT Directive. That Directive exempts insurance and reinsurance transactions including “related services performed by insurance brokers and insurance agents.” The issue was whether Westinsure, which provides its member brokers commercial buying power, regulatory compliance assistance, and other business support, acts as a broker or agent when supplying these services. The tribunal found Westinsure’s services are not of a broker or agent and therefore not exempt under the VAT Directive or the Value Added Tax Act of 1994 (VATA). The tribunal further found that while Westinsure’s services are related to the supply of insurance, they did not have a sufficiently close connection to the insurance transactions themselves to come within the VAT exemption. Westinsure Group Ltd. v. Commissioners for Her Majesty’s Revenue and Customs, [2014] UKUT 00452 (TCC) Appeal No. FTC/96/2013 (Upper Tribunal (Tax and Chancery Chamber) Oct. 13, 2014).

This post written by Renee Schimkat.

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DELAWARE SUPREME COURT REVERSES LOWER COURT AND AFFIRMS ARBITRATOR’S AWARD

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Reversing the Court of Chancery’s ruling vacating an arbitration award, the Delaware Supreme Court held in SPX Corporation v. Garda USA, Inc. that the arbitrator’s decision should have been affirmed because the arbitrator’s decision did not manifestly disregard the law. The award under review concerned whether SPX Corporation properly stated certain reserves on its balance sheets in connection with the sale of one of its subsidiaries to Garda World Security Corporation. The net purchase price for the subsidiary was subject to certain adjustments to the SPX balance sheets as set forth in the parties’ Stock Purchase Agreement (“SPA”). SPX was to provide Garda with a pre-closing balance sheet and an “Effective Date Balance Sheet” reflecting those adjustments. Post-closing, Garda challenged SPX’s calculation of the workers compensation reserve on the balance sheet and submitted the matter to arbitration, arguing the reserve calculation violated the SPA. After reviewing the parties’ briefs and addressing several rounds of questions to the parties, the arbitrator determined that SPX had not failed to comply with the SPA and that the balance sheets did not need to be restated. The arbitrator did not provide an explanation for its decision. Garda asked the Court of Chancery to vacate the award, which found that the arbitrator manifestly disregarded the SPA’s terms.

On appeal, the Delaware Supreme Court applied the Delaware Arbitration Act which provides that an arbitration award will be vacated when “the arbitrators exceeds their powers, or so imperfectly executed them that a final and definite award upon the subject matter submitted was not made.” The high court interpreted this provision as analogous to the Federal Arbitration Act which authorizes vacatur of an award where the arbitrator acts in “manifest disregard of the law.” This standard requires a party seeking vacatur to provide that the arbitrator was “fully aware of the existence of a clearly defined governing legal principle but refused to apply it, in effect, ignoring it.” The parties had submitted to the arbitrator two colorable interpretations of the relevant SPA provisions. While the arbitrator’s interpretation of those provisions may have been wrong, it was not without basis in the contract. Accordingly, under the “manifest disregard” standard, the arbitrator’s award was not subject to vacatur. SPX Corporation v. Garda USA, Inc., No. 332, 2013 C.A. No. 7115-VCL (Del. June 16, 2014).

This post written by Leonor Lagomasino.

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COURT REJECTS INSURER’S ARGUMENT THAT IT CONTRACTED TO ITS REINSURER ALL OBLIGATIONS OWED UNDER A CEDED POLICY

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A federal district court has denied an insurer’s motion for summary judgment on a breach of contract claim, rejecting Liberty National Life’s argument that it contracted to its reinsurer all obligations owed under a ceded policy. At issue was a reinsurance and assumption agreement where Liberty ceded to its reinsurer a number of policies. The reinsurer agreed to “assume and carry out all contractual terms, conditions and provisions” in the ceded policies and “assumed the obligations of the liabilities” for all losses and claims arising out of the ceded policies. Liberty argued that the terms of the agreement absolved it from all contractual liability owed to its policyholders. The court disagreed. Though the agreement was an assumption (as opposed to an indemnity) reinsurance agreement and the reinsurer therefore stepped into Liberty’s shoes with respect to the ceded policy, Liberty remained liable unless there was a novation of the ceded policy substituting the reinsurer for Liberty. Finding Liberty had not submitted sufficient evidence to show a novation, the court denied Liberty’s motion for summary judgment on the breach of contract claim. The court did grant Liberty summary judgment on the bad faith claim, finding the plaintiff had failed to show any tortious or unreasonable act on Liberty’s part. The court also rejected arguments as to the inadmissibility of Liberty’s summary judgment evidence, finding that Liberty’s admissions and the agreement itself were admissible and could be considered. Evans v. Liberty National Life Insurance Co., No. 13-CV-0390 (USDC N.D. Okla. Nov. 12, 2014).

This post written by Renee Schimkat.

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DISTRICT COURT GRANTS MOTION TO STAY PENDING ARBITRATION OVER NON-SIGNATORY’S OPPOSITION

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In late August, a federal district court in Louisiana granted a group of defendants’ motion to stay pending arbitration. Plaintiff alleged breach of fiduciary duty, negligence, and fraud in connection with a trust account set up for plaintiff’s benefit. Benjamin Geller, a sports agent and financial adviser to former football player Frank Warren, recommended Mr. Warren purchase a $1,000,000 life insurance policy. Upon Mr. Warren’s death, those benefits were paid to an irrevocable insurance trust held by one of the defendants, Morgan Keegan & Co., with Geller acting as trustee. Plaintiff alleged that Geller conspired with Morgan Keegan employees to deplete this trust. The motion to stay centered on an arbitration clause in the client agreement that established the trust account. Defendants argued the doctrines of equitable estoppel, third-party beneficiary, and agency theory in support of arbitration. Plaintiff asserted that as the client agreement was induced by fraudulent representations and “never consummated,” arbitration was therefore inappropriate.

The court looked first to whether a valid agreement to arbitrate existed and then to whether the dispute fell within that agreement. Because the plaintiff never challenged the arbitration agreement, instead questioning the validity of the client agreement, the question must be heard before an arbiter. Furthermore, as a third-party beneficiary of the client agreement, plaintiff was bound by the arbitration agreement even though he was a non-signatory. Finally, as plaintiff had accepted benefits under the client agreement from Morgan Keegan, plaintiff was also bound to those terms on equitable estoppels grounds. Warren v. Geller, No. 11-2282 (USDC E.D. La., Aug. 22, 2014).

This post written by Matthew Burrows.

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COURT CONFIRMS AWARD OVER ARGUMENTS OF “MANIFEST DISREGARD,” “EVIDENT PARTIALITY,” AND “CORRUPTION”

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A transported liquid chemical had been found degraded after shipping from Texas to South Korea. The chemical company contended that the shipper was responsible for the losses as samples taken from the chemical prior to its transport tested satisfactorily. The dispute went to arbitration where the panel determined that the company failed to show that the chemical was damaged aboard the ship, and denied the claim. The chemical company attempted to vacate the award but the court found there was no manifest disregard of the law, because the petitioners could not show error beyond a possible erroneous interpretation of the Carriage of Goods by Sea Act, and in any event, “there [was] no indication the majority [of the panel] knew that was not the law but chose to hold petitioners to a different standard.” The court also found there was no misconduct by one of the arbitrators who failed to disclose that he was suffering from a terminal brain tumor at the time of his service on the panel, notwithstanding potential arbitration rule or ethics code violations. The nondisclosure did not cause prejudice and did not rise to “evident partiality or corruption” or misconduct under the FAA, under which “an arbitrator is under no duty to disclose medical conditions.” Finding no reason to vacate the award, the court ordered the award confirmed and granted the respondents’ motion to award attorney’s fees and costs incurred in connection with the motion to vacate. Zurich American Insurance Co. v. Team Tankers A.S., Case No 13cv8404 (USDC S.D.N.Y. June 30, 2014).

This post written by Michael Wolgin.

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