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Arbitration Process Issues

FIRST CIRCUIT AFFIRMS DISTRICT COURT’S ORDER TO ARBITRATE AND ENFORCEMENT OF ARBITRAL AWARD

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In 2006, the federal district court in Maine confirmed an arbitration award in favor of Sleeper Farms (plaintiff potato farmers) arising out of a dispute with Agway, an agricultural cooperative. Plaintiffs, dissatisfied with their limited victory, appealed to the First Circuit. Plaintiffs argued that the district court erred in referring the dispute to the arbitrator in 2002, and erred again in 2006 when it confirmed the arbitrator’s award.

With respect to the 2002 order, Sleeper Farms argued that the order was unenforceable for two reasons: (1) that the contracts were illegal and (2) that Agway waived its right to arbitrate. The Court rejected both arguments finding that the illegality argument goes to the validity of the substantive provisions of the contract, not to arbitrability. Specifically, the court held that as a matter of federal law, the arbitration clause is unaffected even if the substance of the contract is otherwise void. Secondly, the court recognized that a claim of waiver may be a genuine challenge to arbitrability, but in this case the requirements of waiver were not met.

The First Circuit also rejected Sleeper Farms’ argument that the 2006 arbitration award should be vacated. Specifically, the court concluded that plaintiffs could not satisfy their claim that the arbitrator acted in manifest disregard of the law or that the arbitral award was contrary to public policy. Sleeper Farms v. Agway, Inc., No. 06-2694 (1st Cir. Nov. 2, 2007).

This post written by Lynn Hawkins.

INSURANCE COMPANY LOSES ARBITRABILITY ARGUMENT IN SECOND VENUE

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In a November 7, 2007 post to this blog, we reported on a decision of a US District Court compelling arbitration with respect to a reinsurance agreement. That opinion did not reveal that the Gaffer Insurance, the plaintiff/reinsured, had previously sued the same defendant on essentially the same claims in Pennsylvania state court. On May 22, 2006, the state trial court denied a request to compel arbitration of the disputes, finding that a service of suit provision made the arbitration provision permissive rather than mandatory. For an undisclosed reason, Gaffer Insurance then filed the federal court action on March 23, 2007, alleging different legal theories but the same basic wrongdoing, i.e., the refusal of the reinsurer, Discover Re, to partially release letters of credit securing the reinsurance obligation. Discover Re convinced the federal district judge to compel arbitration of the dispute. A Pennsylvania court of appeal recently reversed the state trial court decision, finding that the arbitration provision was mandatory, and that arbitration should have been compelled. The reasoning and analysis of the federal district court opinion and the state appellate court opinion are substantially the same, yet neither acknowledges the existence of the other lawsuit. One wonders whether the fact that there were two separate lawsuits pending between the same parties, involving the same issues, was disclosed to either court. Gaffer Ins. Co. v. Discover Reinsurance Co., 2007 Pa. Super 339, No. 1023 MDA 2006 (Super. Ct. Nov. 16, 2007).

This post written by Rollie Goss.

UK COURT OF APPEAL REVERSES JUDGMENT ORDERING THE POSTING OF SECURITY IN ARBITRATION-RELATED ACTION

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The UK Court of Appeals has allowed an appeal and reversed an Order for security for costs in favor of a party seeking to set aside the enforcement of an arbitration award rendered at the International Commercial Arbitration Court in Moscow, Russia. The analysis may be of interest to those involved in international arbitrations involving the New York Convention. The lower court’s decision was reported on in this blog on June 14, 2007. Gater Assets Ltd. v. Nak Naftogaz Ukrainiy [2007] EWHC 725 (CA Oct. 17, 2007).

This post written by Rollie Goss.

COURT HOLDS THAT FEDERAL ARBITRATION ACT IS NOT A SOURCE OF SUBJECT MATTER JURISDICTION

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The United States Court of Appeals for the Fifth Circuit recently dismissed an appeal of an Order which addressed venue and transfer issues in a matter filed seeking to vacate an arbitration award under the Federal Arbitration Act (“FAA”). The Court held that since the FAA can not itself be a basis for federal question jurisdiction, and there were insufficient jurisdictional allegations to establish diversity jurisdiction, the federal courts lacked jurisdiction of the matter, and remanded the case with instructions that it be dismissed for lack of subject matter jurisdiction. Other courts have also held that the FAA does not itself confer subject matter jurisdiction upon a federal court. Oteeva, LP v. X-Concepts LLC, No. 06-11181 (5th Cir. Nov. 2, 2007).

This post written by Rollie Goss.

COURT DENIES INSOLVENT INSURER’S MOTION TO DISMISS; ACTION TO BAR ARBITRATION WILL PROCEED

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Plaintiff, Midwest Employers Casualty Company (“MECC”) filed an action to bar Legion Insurance Company (“Legion”) from arbitrating forty-three reinsurance contracts, which MECC claimed did not contain arbitration provisions. MECC also sought a declaration of its liability under those contracts. Legion filed a motion to dismiss on four separate grounds. The court denied the motion to dismiss.

First, Legion, which is in liquidation, argued that because the Pennsylvania court had in rem jurisdiction over its assets, the Missouri federal court could not exercise jurisdiction. The court disagreed, finding that while the liquidation action was in rem, the present action was in personam. Second, Legion argued that the case was “reverse preempted” by the McCarran-Ferguson Act. The court disagreed on the basis that the ultimate issue in the case was a standard contract dispute, and did not involve the state’s regulation of insurance. Third, Legion argued that the court should abstain from deciding the case under Burford v. Sun Oil Company. In Burford, the Supreme Court held that abstention is appropriate where “exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.” The district court concluded that abstention under Burford was not appropriate because this case did not affect complex state administrative processes and would not impair the liquidation process. Finally, Legion argued that full faith and credit and the principle of comity required the court to defer to the liquidation proceedings. The court disagreed, finding that those principles did not prevent its exercise of jurisdiction. Midwest Employers Casualty Co. v. Legion Ins. Co., Case No. 4:07-cv-00870, (USDC E.D. Mo. Nov. 11, 2007).