Confirmation / Vacation of Arbitration Awards

CALIFORNIA FEDERAL DISTRICT COURT COMPELS ARBITRATION IN REINSURANCE DISPUTE

December 23, 2014 by Carlton Fields

Randazzo Enterprises sued its reinsurer, Applied Underwriters Captive Risk Assurance Company, Inc. in California federal court over Applied’s calculation of premiums of the reinsurance agreement entered between them. Invoking the arbitration clause set forth in the reinsurance agreement, Applied filed a demand for arbitration and, in the pending federal case, moved to compel arbitration and to dismiss Randazzo’s complaint. The court determined it must first consider whether a valid arbitration clause exists and, if so, whether the arbitration encompasses the dispute at issue. To do so, the court found it must apply ordinary state law principles governing the formation and construction of contracts. Applying these principles to the facts before it, the court first rejected Randazo’s argument that the arbitration clause was unenforceable under Nebraska law which the parties agreed would govern. Nebraska law only applied to issues of substantive law and not to arbitration. Moreover, even if Nebraska law were to apply, it was preempted by the Federal Arbitration Act.

The court then turned to Randazzo’s argument that the arbitration agreement was unconscionable. Under California law, a contract must be unconscionable both procedurally and substantively in order to be rendered invalid. Here, because Randazzo had no opportunity to negotiate the arbitration provision, the agreement was an adhesion contract and therefore procedurally unconscionable. The Court then analyzed whether two specific provisions were substantively unconscionable. Under California law, a contract is substantively unconscionable when it is so one-sided that “it shocks the conscience.” The provision regarding the choice of arbitrator, requiring the arbitrators to be active or retired disinterested officials of insurance or reinsurance companies, was not substantively unconscionable. However, the provision which allowed only Applied to seek injunctive relief in Court was found substantively unconscionable, since it exceeded the rights afforded parties in an arbitration under California law and was so one-sided that it could not be justified as a legitimate commercial need. However, because California law permits a court to sever an unconscionable provision from an agreement, the parties’ agreement was not invalid because that one clause could easily be stricken without the need to reform the agreement. Finally, the court concluded that Randazzo’s claims related to the execution, delivery, construction or enforceability of the reinsurance contract, such that all of Randazzo’s claims were subject to arbitration. Randazzo Enterprises, Inc. v. Applied Underwriters Captive Risk Assurance Company, Case No. 5:14-CV-02374-EJD (USDC N.D. Cal. Dec. 11, 2014).

This post written by Leonor Lagomasino.

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REINSURANCE ARBITRATION AWARD CONFIRMED, REACHING RESULT CONTRARY TO PREVIOUS AWARD AGAINST DIFFERENT REINSURER

December 18, 2014 by Carlton Fields

On March 11, 2014, we reported on the First Circuit’s ruling in a contested arbitration between OneBeacon America Insurance Co. and certain of its reinsurers over reinsured asbestos claims. The reinsurers filed a declaratory relief action, seeking to preclude OneBeacon’s claims based on an adverse ruling that OneBeacon received in a previous arbitration against a different reinsurer. The First Circuit affirmed the order dismissing the action and compelling arbitration, holding that the preclusive effect of a prior arbitration award is an arbitrable issue and not an issue for the court to determine.

The arbitration has concluded and an award in favor of OneBeacon has been reached and confirmed by the court. The award found that the phrase “same causative agency” in the governing multiple line reinsurance treaty permitted OneBeacon to accumulate claims of multiple insureds and cede losses as a single occurrence, notwithstanding a contrary finding of the previous adverse arbitration award. The panel also determined the procedure by which OneBeacon must apply its self-insured retention across multiple treaty years. OneBeacon America Insurance Co. v. National Casualty Co., Case No. 1:14-cv-12570 (USDC D. Mass. Aug. 21, 2014).

This post written by Michael Wolgin.

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DELAWARE SUPREME COURT REVERSES LOWER COURT AND AFFIRMS ARBITRATOR’S AWARD

December 2, 2014 by Carlton Fields

Reversing the Court of Chancery’s ruling vacating an arbitration award, the Delaware Supreme Court held in SPX Corporation v. Garda USA, Inc. that the arbitrator’s decision should have been affirmed because the arbitrator’s decision did not manifestly disregard the law. The award under review concerned whether SPX Corporation properly stated certain reserves on its balance sheets in connection with the sale of one of its subsidiaries to Garda World Security Corporation. The net purchase price for the subsidiary was subject to certain adjustments to the SPX balance sheets as set forth in the parties’ Stock Purchase Agreement (“SPA”). SPX was to provide Garda with a pre-closing balance sheet and an “Effective Date Balance Sheet” reflecting those adjustments. Post-closing, Garda challenged SPX’s calculation of the workers compensation reserve on the balance sheet and submitted the matter to arbitration, arguing the reserve calculation violated the SPA. After reviewing the parties’ briefs and addressing several rounds of questions to the parties, the arbitrator determined that SPX had not failed to comply with the SPA and that the balance sheets did not need to be restated. The arbitrator did not provide an explanation for its decision. Garda asked the Court of Chancery to vacate the award, which found that the arbitrator manifestly disregarded the SPA’s terms.

On appeal, the Delaware Supreme Court applied the Delaware Arbitration Act which provides that an arbitration award will be vacated when “the arbitrators exceeds their powers, or so imperfectly executed them that a final and definite award upon the subject matter submitted was not made.” The high court interpreted this provision as analogous to the Federal Arbitration Act which authorizes vacatur of an award where the arbitrator acts in “manifest disregard of the law.” This standard requires a party seeking vacatur to provide that the arbitrator was “fully aware of the existence of a clearly defined governing legal principle but refused to apply it, in effect, ignoring it.” The parties had submitted to the arbitrator two colorable interpretations of the relevant SPA provisions. While the arbitrator’s interpretation of those provisions may have been wrong, it was not without basis in the contract. Accordingly, under the “manifest disregard” standard, the arbitrator’s award was not subject to vacatur. SPX Corporation v. Garda USA, Inc., No. 332, 2013 C.A. No. 7115-VCL (Del. June 16, 2014).

This post written by Leonor Lagomasino.

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COURT CONFIRMS AWARD OVER ARGUMENTS OF “MANIFEST DISREGARD,” “EVIDENT PARTIALITY,” AND “CORRUPTION”

November 25, 2014 by Carlton Fields

A transported liquid chemical had been found degraded after shipping from Texas to South Korea. The chemical company contended that the shipper was responsible for the losses as samples taken from the chemical prior to its transport tested satisfactorily. The dispute went to arbitration where the panel determined that the company failed to show that the chemical was damaged aboard the ship, and denied the claim. The chemical company attempted to vacate the award but the court found there was no manifest disregard of the law, because the petitioners could not show error beyond a possible erroneous interpretation of the Carriage of Goods by Sea Act, and in any event, “there [was] no indication the majority [of the panel] knew that was not the law but chose to hold petitioners to a different standard.” The court also found there was no misconduct by one of the arbitrators who failed to disclose that he was suffering from a terminal brain tumor at the time of his service on the panel, notwithstanding potential arbitration rule or ethics code violations. The nondisclosure did not cause prejudice and did not rise to “evident partiality or corruption” or misconduct under the FAA, under which “an arbitrator is under no duty to disclose medical conditions.” Finding no reason to vacate the award, the court ordered the award confirmed and granted the respondents’ motion to award attorney’s fees and costs incurred in connection with the motion to vacate. Zurich American Insurance Co. v. Team Tankers A.S., Case No 13cv8404 (USDC S.D.N.Y. June 30, 2014).

This post written by Michael Wolgin.

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COURT DENIES PETITION FOR ORDER CONFIRMING FINAL ARBITRATION AWARD AND ENTRY OF JUDGMENT

November 19, 2014 by Carlton Fields

In First State Ins. Co. v. Nationwide Mutual Ins. Co., No. 13-cv-11322-IT (U.S.D.C. D. Mass. Oct. 21, 2014), a petition for an order to confirm a final arbitration award and entry of judgment was denied. The court determined that although labeled a “Final Award,” the arbitration panel expressed no intention to resolve all claims submitted in the demands for arbitration. Instead, the award focused on the plaintiff’s motion regarding contract interpretation, which directed the parties back to the panel with a proposed schedule leading to a hearing on remaining matters. Moreover, although the panel proceeded to address the issues in phases, the parties did not jointly agree to bifurcation of the arbitration. Rather the record in the case showed that the defendant objected to bifurcation of the issues at an organizational meeting with plaintiff and the panel when it argued that the panel should consider all of the issues before it at the same time.

This post written by John Pitblado.

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