Confirmation / Vacation of Arbitration Awards

Don’t try to confirm an arbitration award when there is still arbitration work to be done. Relying on Seventh Circuit precedent, the Northern District of Illinois concluded that it lacked subject-matter jurisdiction to confirm an arbitration award because the arbitrators’ work was incomplete and the arbitration hearing wasn’t finished.

FCE Benefit Administrators Inc., a third-party benefits administrator, agreed to administer health insurance policies underwritten by Standard Security Life Insurance Co. of New York and Madison National Life Insurance Co. The life insurers terminated the agreement, alleging that FCE had breached it, essentially by doing a bad job. They initiated arbitration and FCE counterclaimed, claiming the insurers wrongfully terminated the agreement.

Before the arbitration, FCE sought a continuance for discovery and to amend its counterclaim. The panel denied the request for a continuance, but granted the request to amend. In addition, the panel explained that FCE’s counterclaims would be presented at a second phase of the arbitration at which FCE would also be required to produce certain documents.

The parties proceeded to arbitration and the panel issued a “Partial Final Award” in favor of the insurers, concluding that the insurers were within their rights to terminate the agreement. The panel awarded the insurers nearly $5.4 million and determined that “[a]ll other claims for relief by the parties [were] denied.” The insurers sought to confirm the award.

The district court dismissed the insurers’ claim for confirmation for lack of subject-matter jurisdiction. It explained that courts lack jurisdiction to confirm an award when the arbitrators’ work was unfinished. Although the award in this case had resolved the insurers’ claim and denied all other claims, it was “undisputed that the Panel still ha[d] left to adjudicate, at a minimum, FCE’s counterclaim against” the insurers. All parties had contemplated a “Phase II.”

Standard Sec. Life Ins. Co. of New York v. FCE Benefit Adm’rs, Inc., No. 19 CV 64 (N.D. Ill. Mar. 13, 2019).

The California Court of Appeal (Fourth District) recently rejected a dissatisfied litigant’s attempt to relitigate an arbitration decision that went against it to the tune of more than $18 million.

An employee of American Claims Management Inc. (ACM), a third-party administrator hired by QBE Insurance Corp. (QBE) to manage QBE’s claims, had a major case of the Mondays and apparently neglected to inform QBE about a demand for a $30,000 policy limit following a car accident. As a result of that “oops,” QBE paid $15 million to settle the claim. QBE then sued ACM for breach of contract. The parties arbitrated the dispute. An arbitration panel awarded QBE nearly $18.5 million.

QBE then petitioned a California trial court to confirm the arbitration award. ACM opposed. The court sided with QBE and confirmed the award, noting ACM appeared to be attempting to relitigate the arbitration award because it did not agree with the panel’s decision. ACM appealed. It raised a number of arguments. Specifically, ACM asserted that the arbitration panel had exceeded its powers by, for example, failing to cite California law, creating law that violated California law, awarding way too much money, and ignoring the Federal Arbitration Act. The appellate court didn’t quite see things ACM’s way, however. It noted that its review was exceptionally narrow and that it could only correct an arbitration award when the arbitrators “exceeded their powers but the award may be corrected without affecting the merits of the decision” (i.e., if the decision was “so utterly irrational that it amounts to an arbitrary remaking of the contract between the parties”). While ACM had couched its arguments in terms of exceeding power, the court concluded that ACM’s “claims amount[ed] to nothing more than assertions of legal error.”

The morals of this case: (1) if you’re a claims administrator, promptly report the claims that come in; and (2) don’t be fooled into thinking that claiming an arbitration panel “exceeded its powers” is a magic password to judicial review.

QBE Ins. Corp. v. Am. Claims Mgmt., Inc., No. D073345 (Cal. Ct. App. Feb. 4, 2019), reh’g denied (Feb. 27, 2019).

Crystallex International Corporation (“Crystallex”) is a Canadian gold-mining company. Crystallex acquired the rights to explore gold deposits in Venezuela through a contract. To explore the mines, Crystallex completed all the permit requirements and posted a bond. The Venezuelan Ministry of Environment denied the permits based on environmental concerns.

Crystallex initiated international arbitration proceedings, alleging that the denial of the permits violated a bilateral treaty between Canada and Venezuela. The arbitration tribunal awarded Crystallex a little more than $1.2 billion in damages. Crystallex petitioned in federal district court for confirmation of the award, and Venezuela opposed and moved to vacate the award under the FAA.

The district court affirmed the award and denied the motion to vacate. Venezuela appealed. On appeal, the court affirmed the district court’s judgment. The court explained that: (1) the district court considered all of Venezuela’s FAA arguments and applied the correct standard of review drawn from FAA case law; (2) the district court did not err in applying a deferential standard to its review of the arbitral award’s method of calculating damages; and (3) the district court did not confirm the arbitral award based on misunderstandings of the arbitration tribunal’s reasoning.

Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, No. 17-7068, 2019 WL 668270 (D.C. Cir. Feb. 14, 2019)

Great American denied a claim for coverage for damage to an insured’s corn and soybean crops in three Missouri counties, asserting that the insured had failed “to substantiate an insurable cause of loss” and “fail[ed] to provided adequate records to establish production ‘by unit.'” The insured brought an arbitration seeking coverage, and a three-arbitrator panel awarded him $1.4 million for the damages to his corn crop. Great American moved to vacate the award, arguing that the panel had “imperfectly executed” its powers by failing properly to break down the award “by claim” as required by federal regulations for arbitrations regarding such federally reinsured crop insurance. The district court, finding that the “by claim” requirement meant that an award must break down such claims by county and that the panel had not done this, found this argument sufficient to nullify the entire award.

On appeal, the Eighth Circuit rejected this argument entirely. Recognizing that the regulations require the insurer to determine losses “on a unit basis” and that a unit cannot cover more than one county, the court nonetheless found that a “unit” and a “claim” were not the same thing, and that the arbitrators’ obligation was to break down the award by claim, not by unit. In fact, it was Great American who chose to treat all of these alleged crop losses as one claim, and the panel simply accepted that decision.

Great American also argued that the panel’s explanation for the award amount was insufficient because it merely adopted the calculations of the insured’s expert, but the Eighth Circuit found that this was acceptable, particularly because Great American neither contested this calculation nor offered an alternative calculation. The court thus remanded the case to the trial court so that it could consider Great American’s alternative argument that the panel’s decision rested on an improper interpretation of the applicable regulations.

Great American Insurance Company v. Jonathan L. Russel, No. 17-2441 (8th Cir. Jan. 31, 2019)

Plaintiffs-Appellants MEMC II, LLC and Mike McDaniel (collectively, “MEMC”) contracted to have Defendant-Appellee Cannon Storage Systems, Inc. (“Cannon”) build a commercial storage facility in Dallas, Texas. The contract included, among other things, precise design specifications and required that any disputes between the parties be resolved by binding arbitration. During construction, Cannon deviated from the agreed-upon design specifications, and MEMC began withholding payments, arguing that Cannon had materially breached the Contract by deviating from those specifications. Cannon continued construction without payment for nearly five months until the parties proceeded to arbitration.

Cannon brought claims for breach of contract based on MEMC’s nonpayment, to which MEMC responded with an affirmative defense, arguing that Cannon’s departure from the design specifications constituted a material breach that discharged MEMC of its payment obligations. Additionally, MEMC counterclaimed for breach of contract due to Cannon’s failure to use the approved plans and specifications. Ultimately, the arbitrator found that MEMC breached the contract by refusing to pay Cannon and that Cannon breached the contract by failing to construct the storage facility according to the agreed-upon specifications. Importantly, the arbitrator did not find Cannon’s breach to be material under Texas law, and therefore, held that MEMC could not evade liability for its refusal to pay.

The District Court for the Western District of Oklahoma confirmed the award and the Tenth Circuit affirmed. The Panel reiterated the narrow scope of judicial review of arbitral awards and found that nothing in the arbitrator’s decision suggested that she did not interpret the contract; in fact, the Panel found the opposite—that the arbitrator considered the respective clauses using relevant case law, weighed the evidence, and decided that, even though Cannon breached the operative contract, its breach did not excuse MEMC from payment obligations. As such, and “[b]ecause the arbitrator interpreted the Contract and applied the law of the jurisdiction selected by the parties, she did not dispense [of] her own brand of industrial justice or exceed her authority under the agreement.”

MEMC II, LLC v. Cannon Storage Sys., Inc., No. 18-6079, 2019 WL 549633 (10th Cir. Feb. 12, 2019).