Arbitration Process Issues

FOURTH CIRCUIT REVERSES RULING THAT REINSURANCE AGREEMENT IS AN “INSURANCE CONTRACT” UNDER VIRGINIA LAW

September 14, 2017 by John Pitblado

Applying the doctrine of judicial estoppel, a district court refused to compel arbitration finding that the arbitration clause in a reinsurance agreement was unenforceable under a Virginia statute that voided a mandatory arbitration clause in an “insurance contract.” On appeal, the issue was whether an arbitrator can be delegated the authority to decide if a contract is an “insurance contract” under the statute. The Fourth Circuit held that the district court properly refused to compel arbitration, but committed reversible error by applying judicial estoppel to reach that conclusion.

The contract here was a Reinsurance Participation Agreement (“RPA”). An arbitration clause in the RPA had a “delegation provision” granting authority to resolve all questions of arbitrability to the arbitrator. This included the right to decide if the RPA was an “insurance contract” under Virginia law, and, in turn, whether the arbitration clause was void. The Fourth Circuit narrowed the issue to the enforceability of the delegation provision itself and applied a two-prong test: (1) did the insured specifically challenge the delegation provision, not the entire arbitration clause; and if so (2) was the provision unenforceable “upon such grounds as exist at law or in equity.”

The Court held that the first prong was satisfied because the insured challenged “any” arbitration provision in the RPA, and asserted that the delegation provision was unenforceable under Virginia law. It explained that, to grant an arbitrator the authority to answer a “core” question of Virginia insurance law—whether a contract is an “insurance contract”—would undermine “the precise outcome Virginia sought to prevent” in enacting the statute; namely, guaranteeing insureds access to Virginia courts. Thus, the Court found that delegation provisions in even “putative” insurance contracts governed by Virginia law are invalid, “at least to the extent such provisions authorize an arbitrator to resolve whether the contract at issue is an ‘insurance contract.’”

Finally, the Court held that the district court abused its discretion in applying judicial estoppel to preclude the insurer from arguing on the merits that the RPA was not an “insurance contract” for purposes of Virginia law. The Court therefore remanded the case for full briefing on that issue.

MinnieLand Private Dayschool, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 16-1511 (4th Cir. Aug. 11, 2017)

This post written by Alex Silverman.

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NINTH CIRCUIT FINDS PLAINTIFF ENTITLED TO TRIAL ON ISSUE OF WHETHER AN ARBITRATION AGREEMENT WAS EXECUTED

September 13, 2017 by John Pitblado

Defendant provided the district court with copies of two contracts – a Reinsurance Participation Agreement and a Request to Bind – that were purportedly signed by Plaintiff’s CEO and contained arbitration clauses. However, Plaintiff submitted a declaration by the CEO’s son and successor, stating that “he is very familiar with his father’s signature an did not recognize the signatures or believe they were written by his father.” Thus, the Court concluded Plaintiff raised a genuine issue of fact with respect to the execution of the agreements and was entitled to a trial pursuant to Section 4 of the FAA, as it states that “if the making of the arbitration … be in issue, the court shall proceed summarily to a trial thereof.” 9 U.S.C. § 4.

Arevalo Tortilleria, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 15-56830 (9th Cir. Aug. 4, 2017)

This post written by Nora A. Valenza-Frost.
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SIXTH CIRCUIT AFFIRMS VACATUR OF ARBITRATION AWARD BASED ON PRIOR TERMINATION OF SALES CONTRACT

September 12, 2017 by John Pitblado

The Sixth Circuit has affirmed an order vacating an arbitration award, agreeing with the district court that the mandatory arbitration clause at issue was unenforceable upon termination of the agreement in which it was contained.

The plaintiff, Gridsmart Technologies, Inc. (“Gridsmart”), manufactured camera equipment that it sold to the defendant, Marlin Controls, Inc. (“Marlin”). The parties had an agreement granting Marlin the exclusive right to distribute Gridsmart’s products within a defined region of the United States (the “Agreement”). An arbitration clause in the Agreement required the parties to submit all disputes arising under it to the American Arbitration Association.

Gridsmart exercised its right to terminate the Agreement in June 2015. Thereafter, the parties tried to reconcile the handling of outstanding orders that Gridsmart first delivered to Marlin in September 2015. Marlin ultimately returned these items to Gridsmart, claiming it was unable to sell them due to a lost construction contract. Gridsmart nevertheless demanded payment for the items and Marlin refused. Gridsmart filed an arbitration claim to resolve the issue, but Marlin did not participate. As such, the arbitrator granted an award in favor of Gridsmart, which Gridsmart then sought to enforce against Marlin in a Tennessee state court action.

Marlin removed the enforcement action to district court and moved to have the award vacated. The district court granted the motion, finding that the arbitration clause in the Agreement did not survive after it was terminated by Gridsmart in June 2015. The Sixth Circuit affirmed. Under the plain language of the Agreement, the Court found it was clear that the parties’ rights as to orders outstanding upon termination were to be governed by a separate “mutual agreement.” No such agreement existed here. The Court ruled that, absent a separate contract concerning the handling of outstanding orders, it was equally clear that the parties rights under the Agreement with respect to such orders – including the right to enforce the arbitration clause – immediately ceased when the Agreement was terminated in June 2015.

The Court held that Tennessee Uniform Commercial Code demanded the same conclusion. It provided that when, as here, a party terminates a contract for the sale of goods, all executory obligations on both sides are “discharged.” Moreover, after finding that Gridsmart waived additional contractual interpretation arguments, the Court went on to reject them in dicta. It held that the presence of “survival” language in certain other provisions of the Agreement – but not in the arbitration clause – plainly demonstrated that the parties did not intend for the arbitration clause to survive upon termination of the agreement.

Gridsmart Technologies, Inc. v. Marlin Controls, Inc., No. 17-5121 (6th Cir. July 20, 2017).

This post written by Alex Silverman.
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SECOND CIRCUIT VACATES DISTRICT COURT’S CONFIRMATION OF CLASS CERTIFICATION AWARD

September 11, 2017 by John Pitblado

The question presented was whether the arbitrator had the authority to certify a class that included absent class members, i.e., employees other than the named plaintiffs and those who have opted into the class. Finding the district court improperly relied on Jock v. Sterling Jewelers, Inc., 646 F.3d 113, 124 (2d Cir. 2011) (“Jock I”), the law of the case did not conclusively resolve this question. The Court also distinguished Justice Alito’s concurrence in Oxford Health Plans LLC v. Sutter, 133 S.C.t. 2064, 2066 (2013), as the case did not speak to whether an arbitrator has authority to certify a class containing absent class members. The Second Circuit vacated and remanded for further consideration of the issue of whether the arbitrator exceeded her authority in certifying a class that contained absent class members who have not opted in.

Jock et al. v. Sterling Jewelers, Inc., No. 15-3947 (2d Cir. July 24, 2017)

This post written by Nora A. Valenza-Frost.
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LONDON COURT UPHOLDS ARBITRAL AWARD IN CONTRACTOR DISPUTE IN FACE OF CHALLENGE THAT ARBITRAL PANEL FAILED TO CONSIDER COVERAGE DEFENSES

September 8, 2017 by Carlton Fields

A court in London recently upheld an arbitral award in the face of claims that the arbitral panel failed to consider several coverage defenses one party asserted during the proceedings. The arbitration arose from a dispute between contractors relating to the construction of a power station in Kabul, Afghanistan. The prime contractor (“JV”) engaged Symbion Power LLC (“Symbion”), which in turn engaged Venco Imtiaz Construction Co. (“Venco”) as a sub-contractor. JV and Symbion participated in an arbitration in 2012 (“prior arbitration”) which preceded the current arbitration between Venco and Symbion in 2013. The arbitral panel issued an award in Venco’s favor in July 2016. This opinion arises from Symbion’s challenges to the arbitral award on the grounds that the arbitral panel failed to address two coverage defenses outright, and failed to address all essential parts of two other coverage defenses. The court addressed in turn each of the four defenses Symbion alleges were not adequately addressed by the arbitral panel.

First, Symbion alleged a defense that the court referred to as the “conclusive evidence” defense. Symbion argued Venco’s case was based on invoices and POs it treated as conclusive evidence of the amount due to Venco, but Symbion disputed that these documents were conclusive. The court concluded this was not actual an issue that arose, and, further, the panel did not treat the invoices and POs as conclusive evidence, so they could not have “failed’ to deal with the defense.

Second, Symbion asserted a defense that Venco failed to meet its burden of proof. However the argument was framed in the arbitration, and the court held the defense was addressed by the panel, which decided against Symbion.

Third, Symbion argued that the panel was bound by the findings in the prior arbitration. The court noted the collateral estoppel issue was not one the panel needed to address because it had fallen away. But if the issue was still in play, it was not reasonably arguable and there would be no substantial injustice had the panel not dealt with it.

Fourth, Symbion alleged the prior arbitration award was binding or persuasive as to value, and as to proof and evidence. The court found this defense was repetitive of the collateral estoppel defense, and rejected the defense for similar reasons.

Finally, the court admonished one of the arbitrators for inappropriate ex parte conduct with Symbion, the party that appointed him. The Symbion-appointed arbitrator e-mailed Symbion at the outset of the proceedings to complain about the third, neutral arbitrator, with the express condition that Symbion not use the complaint in any of its arbitral submissions. While the episode was not dispositive to any issues in the court’s review, it sharply criticized such conduct as inappropriate. Symbion Power LLC v. Venco Imtiaz Constr. Co., Case No. HT-2016-000211 (Royal Court of Justice Mar. 10, 2017).

This post written by Thaddeus Ewald .
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