Arbitration Process Issues

After a loan company sued a customer in default and the customer asserted counterclaims on a class-wide basis, the company sought to compel arbitration. However, the particular arbitral forum designated in the arbitration agreement had stopped providing arbitration services after entering a consent decree following another state’s fraud and unfair practices investigation. The lower courts declined the company’s request to designate a new arbitrator and ultimately denied its request to compel arbitration.

On appeal, the Missouri high court found no error in the lower court’s refusal to compel arbitration. Channeling the principle that arbitration is a matter of contract, the court evaluated the arbitration agreement to determine whether the parties agreed to arbitrate regardless of the named arbitrator’s availability or whether they agreed to arbitrate “before – but only before” the named arbitrator. Based on the plain language of the agreement, the court concluded the latter – the parties agreed to arbitrate only before the defunct arbitrator. It noted that the company drafted the agreement, which specified a particular arbitrator, and could not now avoid that specific choice because the arbitrator is unavailable. Moreover, the court was unable to reconcile other parts of the agreement with the idea that the designated arbitrator was not exclusive. The agreement provided that arbitration was to proceed under the designated arbitrator’s procedures, and that arbitration claims must be filed at the designated arbitrator’s home office only. The court emphasized that an agreement’s designation of a specific arbitrator does not always demand this result when the arbitrator later becomes unavailable; rather, the language of this particular agreement required the conclusion that the agreement to arbitrate was limited to the defunct arbitrator only. Thus, the court affirmed. A-1 Premium Acceptance, Inc. v. Hunter, Case No. SC96672 (Mo. Oct. 16, 2018).

Three delivery drivers sued a transportation broker for failure to pay overtime and minimum wages, failure to provide rest and meal breaks, failure to timely pay wages upon termination, and willful refusal to pay wages on behalf of a proposed class of current and former drivers. The transportation broker moved to dismiss or stay the proceedings and compel arbitration, asserting that the plaintiffs were required to submit their claims to arbitration because the broker was a third-party beneficiary to arbitration agreements between the delivery drivers and a third party administrator. The district court granted the motion, concluding that the broker was a third-party beneficiary, that the claims were arbitrable, and that arbitration was the proper forum. The individual plaintiffs appealed, but the Ninth Circuit affirmed, holding that, under the applicable state law, the agreements containing the arbitration provisions intended to create a third-party beneficiary contract for the benefit of the broker. The drivers’ “work under the agreement–delivering parcels–was an integral part of [the broker’s] business, and the agreements obligated [the drivers] to indemnify logistics company customers, grant customers the right to subrogate claims and notify customers within four hours of any accidents.” The Ninth Circuit rejected the drivers’ argument that the agreements contained substantively unconscionable provisions, since they were not raised below. Ege v. Express Messenger Systems Inc., Case No. 17-35123 (9th Cir. Dec. 7, 2018).

This post written by Michael Wolgin.

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A New York district court has granted a motion to compel arbitration of matters arising out of general liability “fronting” policies issued by member companies of AIG. The policies were issued to Building Materials Holding Corporation (“BMHC”) and obligated AIG to “front” litigation costs incurred by BMHC’s additional insureds to defend third-party claims. BMHC was then required to reimburse AIG for such costs. The parties’ duties were further defined in a separate Payment Agreement (“Agreement”). AIG was to provide insurance under the policies, and BMHC agreed to pay its “Payment Obligation” to AIG, defined essentially as amounts AIG was required to front for claims covered under the polices. Pursuant to the Agreement, disputes as to the amount of any claim to be reimbursed by BMHC “must immediately be submitted to arbitration.” For any “other unresolved dispute arising out of this Agreement,” such dispute “must be submitted to arbitration.” The arbitrators were to “have exclusive jurisdiction over the entire matter in dispute, including any question as to its arbitrability.”

BMHC disputed whether certain costs paid by AIG were in fact covered under the policies. It refused to reimburse AIG for such amounts and sought declaratory relief in a California action. AIG filed a petition in the Southern District of New York to compel arbitration of the matters in the California action. BMHC argued that the disputed issues were not subject to arbitration. The SDNY identified two issues: (1) did the parties “clearly and unmistakably” reserve arbitrability issues for the arbitrators; and if not (2) is the California action subject to arbitration?

On the first issue, the court held that, under these facts, the “exclusive jurisdiction” language in the Agreement did not unequivocally reserve arbitrability issues for the arbitrators. Because a subsequent addendum to the Agreement contemplated that a court might in certain instances decide such issues, and the Agreement provided no guidance as to which arbitrability issues were reserved for arbitrators, the court found it had jurisdiction to decide whether the matters in the California action fall within the scope of the arbitration.

As to this second issue, however, the court found it “readily apparent” that the California action was subject to arbitration because the complaint was “clearly” predicated on a dispute over BMHC’s “Payment Obligation.” The court rejected BMHC’s attempt to recast the dispute as one involving insurance coverage issues to be determined before triggering any obligations under the Agreement. Even if there were coverage issues to be decided, the court found nothing in the Policies foreclosing arbitration of coverage issues necessary to resolve payment obligations. The court also declined to follow factually similar decisions by the Sixth and Ninth Circuits, finding the arbitration clauses in those cases to be materially different.

National Union Fire Insurance Company of Pittsburgh, PA v. BMC Stock Holdings, Inc., No. 18-CV-5777 (USDC S.D.N.Y. Dec. 3, 2018)

This post written by Alex Silverman.

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