Arbitration Process Issues

TENTH CIRCUIT AFFIRMS REFUSAL TO COMPEL ARBITRATION WHERE AGREEMENTS CONTAINED CONFLICTING ARBITRATION PROVISIONS

December 20, 2016 by Michael Wolgin

Mr. Ragab sued two financial companies and a corporate officer for misrepresentation and for violating several consumer credit repair statutes. There were six agreements between the parties, including, for example, a consulting agreement, a purchase agreement, and an operating agreement. Each agreement contained arbitration provisions, but they varied in material ways, including: (1) which rules governed, (2) how the arbitrator would be selected, (3) the notice required to arbitrate, and (4) entitlement to attorney’s fees. The district court refused to compel arbitration, concluding that there was no meeting of the minds on essential terms, and therefore no actual agreement to arbitrate. On appeal, a divided panel of the Tenth Circuit affirmed, distinguishing cases where the contracts provided for a solution to resolve conflicting provisions, or where contracts failed to spell out the requirements for arbitration; where, as here, there are multiple, specific, conflicting arbitration provisions with no agreed way to resolve them, “there was no meeting of the minds with respect to arbitration.” The court also rejected the defendants’ argument that the district court should have granted a summary trial to decide whether the parties agreed to arbitrate. The court held that in this case there were no material factual disputes, leaving only an issue of law for the court to resolve. Ragab v. Howard, Case No. 15-1444 (10th Cir. Nov. 21, 2016).

This post written by Michael Wolgin.

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EIGHTH CIRCUIT UPHOLDS ARBITRAL IMMUNITY IN CHALLENGE TO AAA’S REMOVAL OF ARBITRATOR

December 19, 2016 by Michael Wolgin

Owens, a terminated CEO, engaged in a AAA arbitration with his former company before a three-member panel. In the course of the proceeding, the company sought to remove an arbitrator for making an incomplete disclosure regarding conflicts of interest. The AAA removed the conflicted arbitrator without holding a hearing or consulting the panel, and the remaining two arbitrators ultimately awarded Owens $3 million. The company then successfully moved for dismissal of the award in the district court. Following dismissal, Owens sued the AAA for breach of contract, unjust enrichment, and tortious interference, but his claims were dismissed by the court based on arbitral immunity. On appeal, the Eighth Circuit affirmed, explaining that the reason courts extend immunity to arbitrators is to protect them and the arbitration process from undue influence and attacks from dissatisfied litigants. The Court concluded that “the removal of arbitrators is similarly protected by arbitral immunity because it is just as much a part of the arbitration process as the appointment of arbitrators.” Owens v. American Arbitration Association, Inc., Case No. 16-1055 (8th Cir. Nov. 18, 2016).

This post written by Gail Jankowski.

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RECIPIENT OF ARBITRATION AWARD IN REINSURANCE DISPUTE PERMITTED DISCOVERY OF FUNDS WITHHELD ACCOUNT

December 8, 2016 by Rob DiUbaldo

Plaintiffs secured an interim arbitration award in the amount of $7.8 million, plus interest, in what the court described as a complex insurance/reinsurance program. Seeking to collect on the award, plaintiffs served a subpoena on a third party which allegedly owed funds to the judgment debtor evidenced by a liability set up on its books in a funds withheld account. The recipient of the subpoena moved to quash the subpoena. The court held that the holder of the arbitration award was entitled to conduct discovery reasonably calculated to lead to the discovery of assets of the judgment debtor. The court found that it was undisputed that the funds listed on the books of the recipient of the subpoena were identified as a liability owed to the judgment debtor. The court enforced the subpoena, ordering the recipient of the subpoena to respond to the subpoena, and entered a “restraining notice” preventing the subpoena’s recipient from transferring the funds or taking them for its own use. The court did not find that the judgment debtor was entitled to the funds in the funds withheld account. That issue will be resolved later, if necessary. Amtrust North America, Inc. v. Preferred Contractors Insurance Co. Risk Retention Group, Case No. 15-7505 (USDC S.D.N.Y. Oct. 18, 2016)

This post written by Rollie Goss.
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ARBITRATION CLAUSE IN BODY OF REINSURANCE AGREEMENT GOVERNS OVER PROVISION IN ENDORSEMENT

December 5, 2016 by Rob DiUbaldo

In a dispute between First Mutual, a ceding company, and its reinsurer, Infrassure, over which of two competing arbitration clauses in a reinsurance contract governed, the Second Circuit affirmed a lower court decision in favor of the reinsurer and found the arbitration provision contained in the body of the operative agreement controlling over a second provision located in an endorsement.

First Mutual, the insurance arm of New York’s Metropolitan Transit Authority, sought to resolve its claims against Infrassure arising from damage caused by Superstorm Sandy in a London arbitration. The endorsement relied upon by First Mutual contained the second arbitration clause, which was titled “LONDON ARBITRATION AND GOVERNING LAW (UK AND BERMUDA INSURERS ONLY).” Infrassure argued the endorsement was inapplicable because it was not a UK or Bermuda insurer. Another provision in the agreement, the so-called ‘Titles Clause,’ provided that titles in the agreement existed for convenience and were not deemed to limit or affect the provisions they titled. First Mutual argued that the endorsement’s title limiting the provision to UK and Bermuda Insurers could not limit the substance of that provision.

The Second Circuit ruled that the reinsurance agreement was unambiguous in this respect, and that the arbitration clause contained in its body controlled, because the second clause was contained in a section expressly limiting its effect to UK and Bermuda insurers. Furthermore, the court noted that First Mutual’s construction of the Titles Clause would render several critical clauses within the reinsurance agreement meaningless because the titles provided critical context regarding what the language therein governed.

Infrassure, Ltd. v. First Mut. Transp. Assurance Co., No. 16-306 (2nd Cir. Nov. 16, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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THIRD CIRCUIT REVERSES ORDER DENYING ARBITRATION, RULING THAT STATE LAW PROHIBITING ARBITRATION OF INSURANCE MATTERS CHALLENGED REINSURANCE CONTRACT AS A WHOLE

November 29, 2016 by Michael Wolgin

Applied Underwriters Captive Risk Assurance Company appealed from the denial of its motion to compel arbitration in a dispute related to a reinsurance participation contract with South Jersey Sanitation Company. The trial court denied the motion because it held that Nebraska law: (1) governed the dispute, (2) prohibits arbitration provisions that relate to insurance policies, as the relevant provision here purportedly does (according to South Jersey), and (3) preempted the FAA under the McCarran-Ferguson Act. The Third Circuit reversed, holding that it was for the arbitrator to determine the precise nature of the reinsurance participation contract, and whether it fell under an exception to the Nebraska law. Similarly, the Third Circuit held that South Jersey’s contention that the contract was procured based on fraud, implicated the contract “as a whole,” rather than specifically the arbitration provisions. “Therefore,” the court ruled, “the question of whether the [contract’s] arbitration provision is enforceable under Nebraska law is a question for the arbitrator,” and not the court. The court vacated the judgment and remanded to the trial court. Because the default location set forth in the contract was not within the district in which the petition to compel arbitration was filed, as is required by the FAA, the trial court was directed to determine the proper forum for arbitration, and “how to proceed” if the trial court is not able “to compel arbitration in the default location provided for in the contract.” South Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co., Case No. 14-4010 (3d Cir. Oct. 25, 2016).

This post written by Michael Wolgin.

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