Arbitration Process Issues

As described in a recent posting to this blog (dated Sept. 10, 2007), Continental Casualty Company (“CCC”) and LaSalle Re are currently engaged in a dispute regarding an Excess of Loss Retrocession agreement and a subsequently executed Commutation and Release Agreement. Last month an Illinois federal court ruled that LaSalle Re’s removal of the case to federal court was proper. Quickly reaching the merits of the dispute, on September 21, the same court granted CCC’s motion to stay arbitration proceedings commenced by LaSalle Re. CCC argued that the arbitration clause contained in the Excess of Loss agreement was extinguished, along with all other obligations, by the subsequent Commutation Agreement.

Applying Illinois contract law and looking to the plain language of the Commutation Agreement, the Court concluded that “it would be difficult to envision a more clear statement of the parties’ intent to extinguish their obligations under the Retrocession Agreement.” Recognizing that the parties could have included an arbitration clause in the Commutation Agreement, but did not choose to do so, the Court concluded that the parties intended to extinguish their duty to arbitrate. Continental Casualty Co. v. LaSalle Re Ltd., Case No. 07-C 4228 (USDC N.D. Ill. Sept. 27, 2007).

This case presents a very interesting question regarding the use of non-mutual offensive collateral estoppel in arbitrations. Three former employees sued D. R. Horton, Inc. (“Horton”), alleging in two separate lawsuits that Horton had improperly reneged on a promise to include stock in severance packages when their employment ended as a result of a merger agreement. After Horton's motion to consolidate the cases was denied, one of the employees prevailed at a trial, while the other two took their claims to arbitration. The arbitration panel ruled for Horton on the stock issue. The Claimants contended that the panel should have accorded the prior final judgment in favor of the other former employee on this issue preclusive effect based upon the doctrine of offensive collateral estoppel. The panel had declined to so rule since there was not complete mutuality of parties in the prior lawsuit and the arbitration, and since the prior judgment was on appeal.

The district court denied Claimants' motion to vacate the arbitration award on the basis that it was in manifest disregard of law, and the Ninth Circuit Court of Appeals affirmed. The Court concluded that the arbitration panel could not have manifestly disregarded the law because there was no binding precedent on the issue presented; indeed, it was an issue of first impression in the federal courts of appeal. The Court noted that district courts had discretion in deciding whether to apply collateral estoppel offensively where there was a lack of complete mutuality of parties between the two actions, and held that arbitrators should have the same discretion. The panel had stated that it would not apply the collateral estoppel doctrine due to an interesting procedural difference between lawsuits and arbitration. The panel noted that if the second action was a lawsuit, and the prior judgment was reversed on appeal, the losing party in the second lawsuit could then seek to have the application of collateral estoppel reversed on appeal, but that due to the restrictive judicial review of arbitration awards under the Federal Arbitration Act, if the prior judgment was reversed on appeal, the preclusive effect given the prior judgment in a later arbitration proceeding would remain. The possibility of this inequitable result persuaded the panel to hear evidence and decide the issue itself rather than to short-cut the determination of the issue through the application of collateral estoppel. Collins v. D. R. Horton, Inc., No. 05-15737 (USCA 9th Cir. Sept. 24, 2007).

A district court has denied a motion for preliminary injunction, which would have enjoined an excess insurer from seeking to arbitrate coverage disputes under an excess insurance policy in London, England, as required by the excess policy. The Court rejected the contention that Arkansas law, which would have voided the arbitration provision, applied to the dispute, given a New York choice of law provision and the applicability of the Convention on the Recognition and Enforcement of Arbitral Awards. Considering the requirements for a preliminary injunction, and the potential application of the McCarran-Ferguson Act, the court held that a preliminary injunction was not warranted, based in part upon principles of international comity. Murphy Oil USA, Inc. v. SR Business Ins. Company Ltd., Case No. 07-1071 (USDC W.D. Ark. Sept. 20, 2007).

Recently, a Pennsylvania district court was asked to determine which of four arbitration panels should decide whether individual arbitration proceedings should be consolidated. As reported on in a prior posting (dated Oct. 26, 2006), the court previously held that Argonaut’s petition challenging Century’s attempt to force consolidated arbitration of multiple disputes was properly filed in Century’s home district. With the venue issue resolved, Argonaut filed a petition to compel Century to arbitrate multiple insurance claims in separate arbitration proceedings, and to dismiss the consolidated arbitration proceeding sought by Century. The parties agreed that the issue of whether arbitration proceedings should be individual or consolidated was a procedural question to be decided by the arbitration panel itself. The narrow question before the Court was which of the four arbitration panels was the appropriate body to determine the issue of consolidation.

Both parties advocated for a “first in time” rule, that is, that the first panel that was completely formed should decide the threshold question of consolidation. The parties disagreed, however, as to which of the panels was the first to be formed. The court recognized that the principles of efficiency strongly favored a single arbitration panel’s determination of whether consolidation of the claims was appropriate. However, persuaded by “the combination of statutory directives and case law together with the parties’ contractual agreement” the court concluded that all four arbitration panels should proceed to decide the issues before them. The court left open the options of either the parties or the four arbitration panels reaching an agreement on how the claims should be handled other than independently. Argonaut Ins. Co. v. Century Indemnity Co., Case No. 05-5355 (USDC E.D. Pa. Sept. 5, 2007).