Arbitration Process Issues

Reinsurance Company’s Claims Not Barred by FAA’s 90-Day Deadline

June 27, 2007 by Carlton Fields

Pursuant to the terms of a settlement agreement arising out of a personal injury claim, Plaintiff, R&Q Reinsurance Company (“R&Q”), was obligated to make periodic payments to defendant Gwendolyn Sands Brown (“Brown”). Despite the fact that the settlement agreement prohibited Brown from transferring her rights to a third party, Brown entered into an agreement to transfer her interest in the payments to co-defendant, Rapid Settlements (“Rapid”). When Brown sought to cancel the Transfer Agreement, Rapid filed a demand for arbitration and ultimately succeeded. Upon receiving notice of the arbitration award, R&Q filed this action seeking declaratory and injunctive relief. Rapid sought to dismiss the complaint based upon R&Q’s alleged failure to comply with the timing provisions of the Federal Arbitration Act.

The U.S. District Court for the Southern District of Florida disagreed with Rapid and denied its motion to dismiss. The court explained that the FAA did not apply because R&Q was not a party to the arbitration proceedings and did not directly attack the quality of the arbitration proceedings. The court concluded that the declaratory judgment action was properly before the court. R&Q Reinsurance Co. v. Rapid Settlements, Ltd. and Gwendolyn Sands Brown, Case No. 06-14329 (USDC S.D. Fla., May 14, 2007).

Third Circuit Holds Arbitrator, Not Court, Decides Whether To Consolidate Arbitration Proceedings

June 20, 2007 by Carlton Fields

In an appeal of a District Court decision discussed in an August 30, 2006 posting in this blog, the Third Circuit recently affirmed a district court’s ruling that an arbitrator, not a court, should decide whether coverage disputes under essentially identical insurance contracts should be arbitrated separately on a contract-by-contract basis or collectively in a consolidated arbitration.

The underlying dispute related to the payment of asbestos claims under reinsurance coverage that Westchester Fire Insurance Company purchased from certain Lloyd’s of London reinsurers. The parties disagreed as to how to characterize the coverage at issue.

The Third Circuit’s decision relied heavily on two recent Supreme Court decisions, namely, Howsam v. Dean Witter Reynolds, Inc. and Green Tree Financial Corp. v. Bazzle. In light of this authority, the parties’ agreement to arbitrate their disputes, contractual silence as to the consolidation issue, and the longstanding federal policy favoring arbitration, the Court could see no reason why this procedural issue should not be resolved in arbitration. Certain Underwriters at Lloyd’s v. Westchester Fire Insurance Company, No. 06-1457 (3d. Cir., June 12, 2007).

England’s High Court Orders Reinsurer To Provide For Security For Costs

June 14, 2007 by Carlton Fields

This dispute arose out of an alleged breach of a gas transit agreement, in which Russian gas giant Gazprom alleged that Naftogaz’s predecessor took more gas than it was entitled to under the terms of a transit agreement. Gazprom’s captive insurer, Sogaz, paid Gazprom over $88 million dollars to cover its loss. Sogaz’s reinsurer, Monde Re, in turn paid Sogaz the like sum. Gazprom’s claims against Naftogaz passed to Monde Re by way of subrogation. Monde Re succeeded on its claim against Naftogaz at the International Commercial Arbitration Court in Moscow. The award was later assigned from Monde Re, which was in liquidation, to Gater Assets Limited (“Gater”).

Subsequently, an English court ordered enforcement of the arbitration award. Naftogaz applied to the English High Court to have the award set aside based on the fact that there was no arbitration agreement between the claimant and the defendant, among several other reasons. Naftogaz also applied for an order that Gater provide security for costs pursuant to CPR 25.12 and 13.

Over Gater’s objections, the Court ruled that it had jurisdiction to order security for costs in favor of a party seeking to set aside enforcement of a domestic or New York Convention arbitration award because such a party can qualify as a defendant under CPR 2.3(1). The court ordered Gater to provide security in the amount of £250,000. Gater Assets Ltd. v. Nak Naftogaz, [2007] EWHC 697 (Comm. Ct. Mar. 22, 2007).

COURT HOLDS DISPUTE OVER SETTLEMENT OF DISPUTES UNDER REINSURANCE ADMINISTRATION AGREEMENT ARBITRABLE

May 24, 2007 by Carlton Fields

Trustmark Insurance and American General Assurance entered into a Reinsurance Administration Agreement with Transamerica Occidental Life Insurance, pursuant to which Transamerica provided administration services. Trustmark cancelled the Agreement, and a dispute arose as to Transamerica’s performance of the Agreement and whether it was entitled to further payments for services that it had provided pursuant to the Agreement. Trustmark and Transamerica reached a “settlement” of the dispute, which later fell apart. There was no written settlement agreement, and although the Agreement contained an arbitration provision, no party sought arbitration of the dispute under the Agreement.

Trustmark sued Transamerica, seeking to compel performance of the settlement agreement. Transamerica moved to compel arbitration. The District Court held that even though there was no written settlement agreement, the arbitration provision of the Reinsurance Administration Agreement covered any dispute “relating to” the parties’ performance of the Agreement, including Transamerica’s claim for further payments under the Agreement. The court therefore compelled arbitration of the substance of the dispute that was covered by the “settlement agreement.” Trustmark Insurance Co. v. Transamerica Occidental Life Insurance Co., Case No. 06-5561 (N.D.Ill. May 1, 2007).

CONNECTICUT SUPREME COURT UPHOLDS AAA ARBITRATION AWARD DESPITE VACANCY ON ARBITRATION PANEL

May 22, 2007 by Carlton Fields

C.R. Klewin Northeast (“Klewin”) entered into a contract with the city of Bridgeport (“the City”) for the construction of a multipurpose sports arena. After construction was completed, a dispute arose regarding whether Klewin was entitled to additional compensation due to design changes. The dispute was submitted to an arbitration panel pursuant to the contract. Under the applicable AAA rules, the dispute would ordinarily be heard by a panel of three arbitrators. However, when one of the arbitrators resigned due to illness, the two remaining arbitrators chose to proceed with the arbitration over the City’s objection. After 37 days of hearings, the arbitration panel awarded Klewin $6,020,231, plus interest. The trial court confirmed the award.

The City raised several issues on appeal. First, the City argued that the arbitration panel lacked jurisdiction because the underlying contract was procured illegally and thus void. The Court rejected this argument, holding that the defense of contract illegality was a question for the arbitrators, at least in the first instance, because the challenge related to the entire contract rather than just its arbitration clause.

Second, the City challenged the trail court’s ruling that the City waived the defense of contract illegality though its conduct in the arbitration. In upholding this ruling, the Court explained that the City’s attempt to raise the defense on the 20th day of hearings was, in essence, “too little, too late.”

Finally, the City argued that the arbitration panel lacked jurisdiction because it had only two members. In rejecting this argument, the Court noted that in the event of a vacancy, the AAA rules authorize the remaining arbitrators to continue with the hearing “unless the parties agree otherwise.” C.R. Klewin Northeast, LLC v. City of Bridgeport, Case No. 17590 (Conn. Apr. 17, 2007).