Arbitration Process Issues

COURTS, NOT ARBITRATORS, TO DETERMINE EXISTENCE OF CONTRACT “AS A WHOLE”

May 9, 2007 by Carlton Fields

MemberWorks, Inc.’s (“MemberWorks”) enrolled Sanford in a discount shopping program without her consent, charging her a fee for the program. The membership agreement contained an arbitration provision. Sanford sued MemberWorks, challenging the validity of the contract and seeking damages. The District Court compelled arbitration, holding that Sanford's challenge to the contract should be decided by an arbitrator. The arbitrator intially opined that he did not have jurisdiction to consider the validity of the contract; rather, that the validity of the contract was an issue for the court. The arbitrator then found the contract to be invalid, awarding Sanford $72 in damages, plus interest and arbitration fees, but denying Sanford's other claims. The District Court confirmed the award.

The Ninth Circuit found that Sanford had not waived her right to challenge the order compelling arbitration by waiting to challenge that decision after the arbitration award had been entered, and that the District Court should have ruled on the validity of the contract prior to compelling arbitration. The Court vacated the arbitration award and remanded the case for a determination by the District Court of whether a contract had been formed between Sanford and MemberWorks. Sanford v. MemberWorks, Inc., Case No 05-55175 (9th Cir. April 16, 2007).

THIRD CIRCUIT RULES RIGHT TO ARBITRATE WAIVED BY ACTIVELY LITIGATING CASE

May 2, 2007 by Carlton Fields

In a personal injury action brought by a casino employee against the property owner in the Virgin Islands, the Third Circuit affirmed the denial of the defendant’s motion to stay the proceedings pending arbitration, pursuant to the Federal Arbitration Act. The Court of Appeal held that it had jurisdiction pursuant to section 16(a)(1)(A) of the Federal Arbitration Act, that the issue of whether a party seeking arbitration has waived its right to arbitrate by litigating the case in court remains a question for the trial court to decide, rather than an arbitrator, and that the defendant had waived any right it had to arbitrate by actively litigating the case for nearly four years before seeking to compel arbitration. Ehleiter v. Grapetree Shores, Case No. 06-2542 (3d Cir. Apr. 6, 2007).

UK HIGH COURT ORDERS “FURTHER REASONS” IN EXPERT DETERMINATION

May 1, 2007 by Carlton Fields

In March, the United Kingdom’s High Court ruled that courts have the authority to order further explanations from the umpire in an expert determination. The parties in this case entered into an agreement whereby the claimant, Halifax Life Limited (“Halifax”) agreed to reinsure the defendant’s business. A dispute arouse as to the precise balance of premium payable for the reinsurance. Pursuant to the agreement, an umpire was appointed, who would act as an expert, not an arbitrator, whose decision would be binding on the parties. In September, 2006, the umpire issued a ruling. The claimants, unsatisfied with the ruling, challenged the umpire’s determination on several grounds.

Mr. Justice Cresswell found that the reasons given by the umpire for arriving at his decision were inadequate under the circumstances. Although Justice Cresswell declined to make a declaration that the expert determination was not binding, he referred to section 70(4) of the Arbitration Act of 1996, which allows a court to order the tribunal to state the reasons in detail where it appears that the award does not contain sufficient detail to enable the matter to be properly considered. Justice Cresswell stated that “[i]t would be highly anomalous if an expert’s failure to give reasons caused the determination not to be binding, when this is not the position in the case of arbitration awards.” Instead, he adjourned the hearing and directed the umpire to state further reasons for his ruling. Halifax v. Equitable Life Assurance Society, [2007] EWHC 503 (Mar. 13, 2007).

PETITION TO APPOINT UMPIRE DENIED PENDING MOTION FOR DISQUALIFICATION OF COUNSEL IN OTHER COURT

April 23, 2007 by Carlton Fields

Munich Reinsurance Company (“Munich Re”) initiated arbitration against its reinsurer, Ace Property and Casualty (“Ace”), to recover claims under a reinsurance contract. Ace contended that the amount of the claims was excessive. Each party appointed an arbitrator, and the two party-appointed arbitrators agreed on a pool of names from which an umpire would be selected. Ace then demanded that Munich Re’s counsel, Saul Ewing, voluntarily withdraw from the representing Munich Re in the arbitration, because he had previously represented Ace and possessed potentially prejudicial information. Saul Ewing refused and Ace filed an action in Pennsylvania’s Court of Common Pleas to disqualify him.

Munich Re then filed a Petition for the Appointment of an Umpire in United States District Court. Ace argued that such an appointment would be improper at this time in light of the civil action in Pennsylvania seeking to disqualify Munich Re’s counsel. The District Court stated that “[t][he central issue before me is whether the appointment of an umpire by the Court would move the matter forward despite the pending Pennsylvania action.” Finding that the issue of disqualification was properly before the Pennsylvania court, the Court denied Munich Re's Petition, stating that “although it is clearly within my power to grant a stay [pending the disposition of the Pennsylvania action], there is no articulable benefit to do so since the Pennsylvania court will soon decide the conflict issue” before it. Munich Reinsurance America v. Ace Property & Casualty Ins. Co., Case No. M-82 (HB) (S.D.N.Y. April 10, 2007).

Courts decide issues relating to arbitrability of claims and appointment of arbitrators

April 10, 2007 by Carlton Fields

Three opinions were issued recently of interest regarding arbitration procedures:

In Ancon Ins. Co. (U.K.) Limited v. GE Reinsurance Corp., Case No. 06-2106 (USDC D. Kansas Mar. 30, 2007), one party was five days late in appointing an arbitrator due to a mistake by its run-off manager in reporting when an arbitration demand had been received. The party demanding arbitration sought to enforce a provision in the arbitration agreement, which would have allowed it to appoint an arbitrator on behalf of the defaulting party. The Court refused to enforce the provision, allowing the defaulting party to appoint an arbitrator on grounds of fairness and lack of prejudice.

In International Ins. Agency Services v. Revios Reinsurance U.S., Case No. 04-1190 (USDC N.D. Ill. Mar. 27, 2007), the Court granted the motion of a reinsurer to compel arbitration against an employee benefits firm that developed, marketed, administered and underwrote group life insurance programs on a fronted basis. The reinsurance agreement contained an arbitration provision, but the employee benefits firm was not a party to the agreement. The Court held that the firm was estopped to refuse to arbitrate, since it was asserting claims against the reinsurer based entirely upon alleged damage to its reputation arising out of the reinsurer's attempted repudiation of the reinsurance agreement.

In Invitrogen Corp. v. Employers Ins. Co. of Wausau, Case No. 06-232 (USDC D. Az. Mar. 9, 2007), the Court granted an injunction prohibiting Wausau from pursuing arbitration against Invitrogen under a reinsurance contract, because it found, as a matter of law, that the claims were barred by a settlement agreement reached in a prior proceeding.