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You are here: Home / Archives for Arbitration / Court Decisions / Contract Formation

Contract Formation

SUPREME COURT HOLDS FEDERAL ARBITRATION ACT PREEMPTION APPLIES TO CONTRACT FORMATION RULES

May 22, 2017 by Carlton Fields

Last week, the U.S. Supreme Court rejected the Kentucky Supreme Court’s use of a clear-statement rule to require that powers of attorney specifically authorize a representative to enter into an arbitration agreement, finding that the rule violated the Federal Arbitration Act’s (“FAA”) equal treatment principle. The plaintiffs in two consolidated cases were the wife and daughter of individuals who lived and died at a Kindred Nursing Centers facility. They each held powers of attorney with broad authority to manage their family members’ affairs. When each plaintiff signed the necessary paperwork to move their family member into the Kindred facility, they signed binding arbitration agreements.

The present dispute arose from a lower court action in which the plaintiffs sued Kindred over allegations that substandard care caused their family members’ deaths. Kindred moved to dismiss the suits on the basis of the arbitration agreements, the lower courts denied those motions, and the Kentucky Supreme Court affirmed. The state’s highest court found that one plaintiff’s (Wellner) power of attorney was not broad enough to permit her to enter into an arbitration agreement on behalf of her husband, but that the other plaintiff’s (Clark) power of attorney was sufficiently broad. However, the Kentucky court invalidated both arbitration agreements based upon a so-called clear-statement rule—that a power of attorney must specifically state that the representative has the power to enter into an arbitration agreement lest the individual’s “sacred” right of access to the courts and to trial by jury be violated. This rule complied with FAA’s demands that arbitration agreements be treated equally, the court explained, because it would apply to arbitration and other contracts implicating “fundamental constitutional rights.”

Justice Kagan authored an opinion for seven justices that squarely rejected the Kentucky Supreme Court’s reliance on the clear-statement rule, holding that it failed to put arbitration agreements on “an equal plane” with other contracts. The FAA includes an equal treatment principle that courts may invalidate arbitration agreements based upon generally applicable contract defenses, but not on legal rules singling out arbitration. The Supreme Court found that the clear-statement rule did exactly what its prior precedent (Concepcion) barred: it adopted a legal rule turning on the distinctive, primary characteristic of an arbitration agreement—the waiver of the right of access to the court and to a jury trial.

The Supreme Court dismissed the Kentucky court’s attempt to sidestep the equal treatment principle by suggesting the clear-statement rule could apply to other fundamental constitutional rights, referring to the hypothetical examples as “patently objectionable and utterly fanciful contracts.”  The Court stated that adopting the respondents’ view “would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it.”

Importantly, the Supreme Court rejected an argument by respondents attempting to salvage the clear-statement rule by characterizing it as only affecting contract formation, and thus, outside of the FAA’s purview. In rejecting that characterization, the Court relied upon the FAA’s text as well as case law. By its terms, the FAA states arbitration agreements be treated as “valid, irrevocable, and enforceable,” thus covering the initial “valid[ity]” of arbitration contracts.” The Court explained that its discussion of duress in Concepcion, a doctrine involving unfair dealing at the contract formation stage, would not make sense if the FAA did not apply to the contract formation stage. Furthermore, if respondents were correct, states could easily make an end-run around it by declaring everyone incompetent to sign arbitration agreements—a rule only affecting contract formation.

In dispensing with the consolidated cases, the Court reversed and ordered enforcement of Clark’s arbitration agreement because the Kentucky court had invalidated that agreement only based on the clear-statement rule. On the other hand, the Court vacated and remanded Wellner’s case for the state court to determine whether its interpretation of the power of attorney was independent of the clear-statement rule.

Kindred Nursing Ctrs. Ltd. P’ship v. Clark, No. 16-32 (USSC May 15, 2017).

This post written by Thaddeus Ewald .
See our disclaimer.

Filed Under: Arbitration Process Issues, Contract Formation, Contract Interpretation, Week's Best Posts

ENGLISH HIGH COURT OF JUSTICE ANALYZES STANDARDS GOVERNING FRAUDULENT INDUCEMENT CLAIMS IN REINSURANCE DISPUTES

May 16, 2017 by Michael Wolgin

The Court of Appeal of England and Wales approved the judgment of the trial court in a reinsurance dispute between Axa and Arab Insurance Group (Arig) related to certain insured energy construction risks. The trial court had ruled in favor of Arig finding that, notwithstanding that an “unfair presentation of the risk” was made to Axa by Arig by failing to disclose past loss statistics, the latter failed to establish that its underwriter was induced to accept the ceded risks, i.e., Axa did not demonstrate that it “would have declined the risk if a fair presentation had been made” to it by Arig. The appellate court analyzed at length the evidence and testimony before the trial court related to the placement of the risks and the negotiation process. The court upheld the judgment, clarifying that the standard for evaluating non-disclosure includes both an objective component involving what a reasonable underwriter would conclude, and subjective components involving what the insured or broker would have said to the underwriter. The court made clear that whether the underwriter was induced turns on a subjective test; the fact that a reinsurer “could have been interested in something is irrelevant if in fact he would not have been.” Axa Versicherung Ag v. Arab Insurance Group, Case No. [2017] EWCA Civ 96 (Royal Courts of Justice Feb. 28, 2017).

This post written by Michael Wolgin.

See our disclaimer.

Filed Under: Contract Formation, Reinsurance Avoidance, UK Court Opinions, Week's Best Posts

ARBITRATION ROUND-UP

January 8, 2014 by Carlton Fields

Scope of Arbitration

Citigroup, Inc. v. Abu Dhabi Investment Authority, Case No. 1:13-cv-06073 (USDC S.D.N.Y. Nov. 25, 2013) (dismissing action to enjoin arbitration; granting motion to compel arbitration; defense of res judicata based on prior confirmation of arbitration award is an issue for arbitration panel)

Unconscionability

Lombardi v. Kahaly, Case No. 11-56752 (9th Cir. Dec. 2, 2013) (reversing denial of motion to compel arbitration of claims for injunctive relief under California Unfair Competition Law and Consumer Legal Remedies Act; following precedent holding that FAA preempts California unconscionability law and that “effective vindication” exception does not apply to state statutes; arbitration agreement not unconscionable for nonmutuality)

Lombardi v. Twyman, Case No. 10-56602 (9th Cir. Dec, 2, 2013) (reversing order that denied motion to compel arbitration based on unconscionability of class waiver arbitration provision; following Concepcion and American Express; arbitration agreement not substantively unconscionable for nonmutuality, nor procedurally unconscionable for alleged penalty for rejecting arbitration agreement)

Due Process

Staples v. Morgan Stanley Smith Barney, Case No. 6:13-cv-00013 (USDC D. Mont. Oct. 28, 2013) (confirming FINRA award; finding proper service of process by FINRA; no corruption, fraud, undue means, or arbitrator bias, misconduct, or exceeding of powers)

Labor Disputes

Northern New England Telephone Operations LLC v. Local 2327, International Brotherhood of Electrical Workers, AFL-CIO, Case Nos. 13-1167, 13-1186 (1st Cir. Nov. 12, 2013) (affirming confirmation of award and denial of Rule 11 costs and fees; panel did not exceed authority in LMRA arbitration by wrongfully adding/subtracting terms in interpreting the relevant collective bargaining agreement)

Reyco Granning LLC v. International Brotherhood of Teamsters, Local Union No. 245, Case No. 13-1002 (8th Cir. Nov. 15, 2013) (reversing district court’s order granting summary judgment in favor of union and confirming award on collective bargaining agreement; directing court to grant employer’s motion for summary judgment and vacate arbitration award; arbitrator exceeded authority by looking to contract negotiations to discern intent with respect to unambiguous contract language)

Concurrent Proceedings

Alstom Chile S.A. v. Mapfre Compania de Seguros Generales Chile S.A., Case No. 1:13-cv-02416 (USDC S.D.N.Y. Oct. 31, 2013) (compelling arbitration and permanently enjoining defendant from prosecuting related tort proceedings in Chile; holding that broad arbitration clause for all disputes “arising out of or relating to” agreement covered both breach of contract and tort claims; finding that failure to comply with requirement to negotiate dispute did not bar enforcement of arbitration provision)

This post written by Michael Wolgin.

See our disclaimer.

Filed Under: Arbitration Process Issues, Confirmation / Vacation of Arbitration Awards, Contract Formation

TREATY TIPS: THE SCOURGE OF MULTIPLE DISPUTE PROCEEDINGS

October 22, 2013 by Carlton Fields

Continuing our series of reinsurance Treaty Tips, Rollie Goss writes about how to try to manage the risks of multiple disputes concerning one reinsurance contract or a reinsurance program in The Scourge of Multiple Dispute Proceedings.

Filed Under: Contract Formation, Week's Best Posts

SUMMARY JUDGMENT DENIED ON ISSUE OF WHETHER COMPANY WAS PARTY TO REINSURANCE AGREEMENT

July 18, 2013 by Carlton Fields

In a long running dispute concerning reinsurance, which we posted on in March 2011, a court was asked to find that Guarantee Trust was a party to a reinsurance agreement that it never signed. Acknowledging that it was a well established principle of Illinois contract law that “a party may, by his acts and conduct, assent to contravct terms and become bound by them even though he has not signed the contract, if it is clear that his conduct relates to the specific contract in question,” the cour found that there were disputed issues of material fact as to whether American Medical had demonstrated the types of acts and conduct which would bind Guarantee Trust to a reinsurance agreement it had not signed. The court therefore denied American Medical’s motion for summary judgment. Guarantee Trust Life Ins. Co. v. American Medical and Life Ins. Co., Case No. 10-2125 (USDC N.D. Ill. Mar, 27, 2013).

This post written by Rollie Goss.

See our disclaimer.

Filed Under: Contract Formation, Contract Interpretation

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