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Arbitration Process Issues

COURT OF APPEALS AFFIRMS ORDER COMPELLING ARBITRATION

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3M Company (“3M”) and Amtex Security, Inc. (“Amtex”) entered into two agreements, a master agreement and a sub-agreement. While the sub-agreement contained an arbitration provision, the master agreement did not. Despite their titles, the parties agreed that the sub-agreement controlled to the extent the two agreements conflicted. A dispute arose, and Amtex filed a complaint in Texas state court. 3M removed the case to federal district court, demanded arbitration and filed a motion to compel arbitration in federal district court in Minnesota. Amtex then filed an amended complaint that included fraud claims and requested punitive damages. The district court in Texas granted 3M’s motion to stay pending a decision by the court in Minnesota as to whether the disputes should be arbitrated. The Minnesota district court granted 3M’s motion to compel arbitration, and Amtex appealed.

In affirming, the Eighth Circuit ruled that the order compelling arbitration is final and appealable since the motion to compel arbitration was the only matter brought before the Minnesota district court. In affirming the order of the district court, the court reasoned that the definitions of the terms in the arbitration agreement indicated an intent to arbitrate a broad range of disputes. The court then looked to the underlying factual allegations in the amended complaint and determined that the broad scope of the arbitration clause could cover each of Amtex’s claims. 3M Co. v. Amtex Sec., Inc., No. 07-3519 (8th Cir. Sept. 16, 2008).

This post written by Dan Crisp.

TWO-YEAR TIME LIMITATION FOR COMMENCING “LEGAL ACTION” BARS PLAINTIFF FROM ARBITRATION

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In this insurance contract case before the Rhode Island Supreme Court, the plaintiff, National Refrigeration, appealed from an entry of summary judgment in favor of the defendant after the plaintiff filed a petition to enforce an arbitration clause in the insurance contract. The lower court granted summary judgment on the grounds that the plaintiff initiated its petition for arbitration years after the two-year limitations provision expressly provided for in the contract between the two parties. On appeal, plaintiffs argued that the trial court erred in ruling that plaintiff’s petition for arbitration was time-barred and that defendant’s actions had not tolled the limitations period. The defendant argued that the contract’s two-year limitation for commencing legal action with respect to damages under the policy applied to petitions for arbitration and that, therefore, plaintiff’s petition was not timely. The Supreme Court affirmed the trial court’s judgment, concluding that a petition for arbitration “fits squarely within the definition of legal action.” The Supreme Court also held that the ongoing settlement negotiations between the parties did not estop the defendant from invoking the time limitation defense. Some other courts have held that the issue of whether arbitration is barred by a limitation agreement is an issue for the arbitrators to decide. See JPD, Inc. v. Chronimed Holdings, Inc., 2008 WL 3876343 (6th Cir. Aug. 22, 2008). Nat’l Refrigeration, Inc. v. Travelers Indemnity Co. of Am., No. 2007-252 (R.I. May 29, 2008).

This post written by Lynn Hawkins.

SIXTH CIRCUIT DISCUSSES WHETHER COURTS OR ARBITRATORS SHOULD DETERMINE CERTAIN ISSUES

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In 2005, Chronimed purchased DiCello’s retail pharmacy business. The purchase agreement contained an additional purchase price payment based on the business’ 2006 earnings before interest, taxes, depreciation and amortization. The agreement provided that if the parties disagreed as to the calculation, accounting firm KPMG would arbitrate the dispute. A dispute arose as to the calculation, and DiCello invoked the arbitration clause, alleging that the business underperformed due to Chronimed’s management practices. Chronimed disputed DiCello’s position, contending that DiCello had failed to contest the calculation in sufficient detail to invoke the arbitration clause. DiCello sued, and Chronimed moved to compel arbitration. The district court held that Chronimed had waived the right to arbitrate by its pre-litigation conduct.

On appeal, the issues revolved around whether the court or the arbitrator should determine certain issues, with guidance drawn from the Supreme Court's decision of Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002). Not all courts have agreed as to the implementation of Howsam. The Sixth Circuit affirmed the holding that the court, rather than the arbitrator, should determine whether the dispute was within the arbitration clause, and agreed that the language of the broad arbitration clause encompassed the dispute. The Court further held that whether Chronimed failed to satisfy a contractual precondition to arbitration relating to the required documentation of the tax calculation was an issue for the arbitrator to decide. Finally, the Court held that the issue of whether Chronimed’s pre-litigation conduct waived the right to arbitrate was an issue for the court, not the arbitrator, and that the conduct here was not so “completely inconsistent” with the later arbitration demand as to constitute a waiver. The Court found that Chronimed’s conduct could be interpreted as a disagreement with DiCello’s position rather than a repudiation of arbitration as a process for resolving the dispute. JPD, Inc., et al. v. Chronimed Holdings, Inc., No. 07-4427 (6th Cir. Aug. 22 2008).

This post written by Dan Crisp.

ILLINOIS APPELLATE COURT AFFIRMS STAY OF STATE COURT DECLARATORY JUDGMENT ACTION PENDING INTERNATIONAL ARBITRATION

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Boeing insured satellites it manufactured partly through a Bermuda captive, which reinsured 100% of the risks, partly through Lloyds’ syndicates, which syndicates also assumed part of the risk as direct insurers. When a satellite sold to a Middle Eastern company failed, an arbitration was commenced under the auspices of the International Chamber of Commerce in Paris, France, with the governing law being the civil laws of Abu Dhabi, United Arab Emirates. The rules of that proceeding provided for limited discovery. The Lloyds’ syndicates filed a declaratory judgment action against Boeing in Illinois state court, seeking a declaration of their obligations as both direct insurer and reinsurer. The court stayed the lawsuit pending the outcome of the arbitration. The court of appeals affirmed, finding that the action was premature prior to the determination of liability in the arbitration, and that it was an improper attempt to obtain discovery for use in the arbitration. The dual roles of some of the parties in the two proceedings played an important role in the decision. This opinion presents a very interesting analysis of the interface between these two proceedings. Certain Underwriters at Lloyds’ v. Boeing, No. 1-07-1667 (Ill.Ct.App. Je. 30, 2008).

This post written by Rollie Goss.

IS A SERVICE OF SUIT CLAUSE SUFFICIENT TO TRUMP AN ARBITRATION CLAUSE?

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Reinsurance treaties often contain so-called “service of suit” clauses. The clause typically states something to the effect that “in the event of the failure of Reinsurer hereon to pay any amount claimed to be due, Reinsurer hereon, at the request of the Reinsured, will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.” Practitioners may wish to consider the interaction of this clause with an arbitration clause co-existing in the same treaty. Specifically, does the reinsurer’s submission to the jurisdiction of the courts take precedence over the right to arbitrate disputes between the parties? Different courts have reached different results, with the different decisions generally being reconcilable based upon varying language in the service of suit and arbitration provisions of different agreements. In Ace Capital Ltd. v. CMS Energy Corporation [2008] EWHC 1843 (Comm. July 30, 2008), the UK Commercial Court held that it does not. The court acknowledged what it characterized as the minority view that the more specific service of suit clause should prevail over a general arbitration clause, where the single issue of the service of suit clause is a “failure . . . to pay” an amount “claimed to be due” under the treaty, and the arbitration clause broadly refers to “any dispute” arising out of the entire contract. However, the court favored an apparent majority view that a service of suit clause is merely an aid to enforcing awards granted to reinsureds through arbitration.

This post written by Brian Perryman.