Arbitration Process Issues

COURT DETERMINES THAT INTERPRETATION OF COURT SELECTION PROVISIONS OF ARBITRATION AGREEMENT IS FOR ARBITRATORS TO RESOLVE

December 16, 2008 by Carlton Fields

Founders Ins. Co. entered a Reinsurance Agreement with primary insurer Lyndon Property Ins. Co. which required Founders and Lyndon to arbitrate any insurance-related disputes. A dispute regarding coverage arose, and the parties submitted to arbitration in Boston. The arbitration panel issued a ruling requiring Founders to post a sum in prejudgment security. Lyndon subsequently filed suit in the District of Massachusetts asserting that Founders had failed to comply with the panel’s order and had evidenced no intent to do so. The parties disputed the choice of the District of Massachusetts as an appropriate forum under seemingly conflicting provisions of the Reinsurance Agreement. The arbitration provision provided for the enforcement of arbitration awards in any court of competent jurisdiction, while a choice-of-law and submission-to-jurisdiction provision named Missouri law as controlling and courts in Missouri as being appropriate.

The court held that while “gate keeping” decisions relating to arbitration may be made by courts, disputes regarding the procedure to be followed in the arbitration were to be decided by the arbitrators. Because the issue here was a procedural one – the proper interpretation of the Agreement’s choice of forum clauses – the interpretation was left to the arbitrators. The court determined that the holding in Richard C. Young & Co., Ltd. v. Leventhal, 389 F.3d 1 (1st Cir. 2004), was dispositive in the instant case as it proclaimed that a dispute between the parties over the location of the arbitration raised not a question of arbitrability but a procedural question and was appropriate for the arbitrator and not the court. The case was dismissed so that the arbitrators could decide the dispute. Lyndon Property Ins. Co. v. Founders Ins. Co., Ltd., Case No. 08-11359 (USDC D.Mass. Nov. 20, 2008).

This post written by John Black.

SECOND CIRCUIT COURT OF APPEALS STRICTLY CONSTRUES FEDERAL ARBITRATION ACT’S SUBPOENA POWER PERTAINING TO NON-PARTIES

December 9, 2008 by Carlton Fields

Life Settlements Corp. d/b/a Peachtree Life Settlements (“Peachtree”) entered into a contingent cost insurance contract with Syndicate 102 at Lloyd’s of London (“Syndicate 102”) to insure against the risk that living insureds under life policies which Peachtree purchased might live past his or her projected life expectancy. Some of the purchased life policies were placed by Peachtree with Life Receivables Trust (the “Trust”), an entity created by Peachtree for the express purpose of holding the policies. Syndicate 102 declined a claim by Peachtree after an insured outlived his life expectancy, asserting that the Trust made fraudulent misrepresentations regarding the date on which the underlying life policy was purchased, and also regarding the insured’s life expectancy. Syndicate 102 and the Trust arbitrated the dispute under the parties’ agreement, which commanded arbitration under American Arbitration Association rules.

After Syndicate 102 unsuccessfully attempted to join Peachtree as a party to the arbitration (Peachtree was also a party to the contract containing the arbitration agreement), it successfully sought the arbitrators’ issuance of subpoenas commanding Peachtree to produce certain documents that the Trust was unable to obtain from Peachtree, due to Peachtree’s expressed position that it was not a party to the arbitration, and the arbitrators thus had no jurisdiction to issue orders binding on Peachtree. After Peachtree refused to comply with the subpoenas, Syndicate 102 filed an action in the federal district court seeking to compel compliance. The court ordered Peachtree to comply. Peachtree appealed, and the Second Circuit held – noting a split among the circuits – that the plain language of §7 of the Federal Arbitration Act does not authorize pre-hearing discovery from non-parties, and that a non-party may only be compelled to produce documents or testimony in conjunction with an appearance before the arbitral panel. The Court thus reversed the district court’s ruling ordering Peachtree to comply with the subpoenas. Life Settlements Corporation d/b/a Peachtree Life Settlements v. Syndicate 102 at Lloyd’s of London, No. 07-1197-cv (2d. Cir. Nov. 25, 2008).

This post written by John Pitblado.

JUDICIAL REVIEW OF ARBITRATION AWARD IN POTENTIAL CLASS ARBITRATION DENIED AS UNRIPE

December 1, 2008 by Carlton Fields

Dealer Computer demanded arbitration of a contract dispute, and sought to arbitrate on a class basis. The arbitration panel issued a “Clause Construction Award,” which permitted the matter to proceed on a class basis. Respondent, DCS, moved to vacate the award as being in excess of the powers of the panel and in manifest disregard of law. The district court denied the motion, and DCS appealed. Rather than reach the merits of the appeal, the appellate court vacated the district court’s order and remanded with instructions to dismiss for lack of jurisdiction on ripeness grounds. The court determined that, because the attempt at class certification could ultimately fail, the potential harm to plaintiff might never occur. Moreover, even if a class were certified, plaintiff could still obtain judicial review of the certification decision through an interlocutory procedure permitted by the arbitration rules (the AAA Supplementary Rules for Class Arbitrations). Although it thus did not reach the merits, in what appears to be dicta, the Sixth Circuit stated in a footnote that a court “may also vacate an award on non-statutory grounds if the arbitration panel demonstrates a ‘manifest disregard of the law,’” citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), but also citing Hall Street Associates v. Mattel, Inc., 128 S. Ct. 1396 (2008), as contrary authority. Dealer Computer Services, Inc. v. Dub Herring Ford, Case No. 07-1819 (6th Cir. Nov. 18, 2008).

This post written by Brian Perryman.

COURT CONFIRMS ARBITRATION AWARD, BUT REVERSES PANEL’S DECISION TO REFUSE TO DISBAND

November 26, 2008 by Carlton Fields

KX Reinsurance Company (“KX”) arbitrated certain disputes with North Star Reinsurance Corporation (“North Star”) and General Reinsurance Company (“Gen Re”) (North Star and Gen Re had each initiated separate arbitral proceedings against KX, but all parties agreed to consolidate the proceedings as they involved interrelated issues). The arbitral panel ruled against KX on North Star’s and Gen Re’s contract claims, and awarded North Star and Gen Re interest and attorneys fees pursuant to the parties’ respective contracts. The Panel ruled in KX’s favor on North Star’s and Gen Re’s bad faith claims.

During the course of the proceedings, North Star and Gen Re also sought an interim order requiring KX to post security in the form of letters of credit pertaining to certain other potential future contract disputes. KX argued that letters of credit pertaining to potential future claims were beyond the scope of the arbitral submission. North Star and Gen Re argued that their respective submissions broadly included future potential claims. The panel ruled against KX and issued the interim order, which it later incorporated into the final award. It also included in the award an explicit retention of jurisdiction over potential future disputes. KX thereafter sought to confirm the award in the district court, except for that aspect of the final award which purported to allow the panel to retain jurisdiction over potential future disputes under the parties’ contracts, which it sought to vacate.

The district court ruled in KX’s favor, confirming the undisputed aspects of the final award, and vacating the panel’s decision to retain jurisdiction insofar as it exceeded the scope of the submission and was violative of KX’s right under its contracts with North Star and Gen Re to select an arbitrator of its choosing pertaining to any future disputes under the contracts. The Court noted that any contrary interpretation of that contractual right would create arbitral panels with unlimited jurisdiction over the course of the parties’ future contractual relations, a result not supported by the public policy underlying the Federal Arbitration Act. KX Reinsurance Co. v. North Star Reinsurance Corp., Case No. 08-7807 (USDC S.D.N.Y. Nov. 14, 2008).

This post written by John Pitblado.

THE STATUTE OF LIMITATIONS FOR A REVIEW OF ARBITRATION PROCEEDINGS BEGINS TO RUN ON THE DATE THE DECISION IS RECEIVED BY THE PETITIONER OR HER AGENT.

October 28, 2008 by Carlton Fields

New York law requires that applications to vacate or modify an arbitration award “be made by a party within ninety days after its delivery to him [or her].” However, New York Civil Practice Law and Rules (CPLR) 7511(a) does not define “delivery” in this context. Petitioner, Lowe, argued that delivery must be construed as the actual receipt of the award. Respondent, Erie, argued that delivery must be interpreted as the mailing of the award. In support of its argument, Erie cited Insurance Department Regulation Section 65-4.10(e)(3), which states that the delivery of the master arbitration award is the date the award is mailed to the parties. However, the court found that New York case law supported Lowe’s argument. Cases cited by the court used the terms “receipt” and “received” in discussing the 90-day period set forth in CPLR 7511(a). Lowe v. Erie Ins. Co., 1145 CA 08-00405 ( N.Y. App. Div. Oct. 10, 2008).

This post written by Dan Crisp.