Contract Interpretation

Third Circuit Reverses District Court Order Compelling Arbitration, Highlighting That Arbitration and “Expert Determinations” Are Different Forms of Dispute Resolution

September 15, 2023 by Kenneth Cesta

The Third Circuit Court of Appeals has reversed a district court decision compelling arbitration, finding that the parties’ designation of an accounting expert to resolve certain issues did not constitute an agreement to arbitrate their claims.

Kevin Sapp and Jamie Hopper entered into an asset purchase agreement with Industrial Action Services (IAS) memorializing the terms of Sapp and Hopper’s sale of their industrial businesses to IAS. The agreement included an “earn-out consideration” provision as part of the sale proceeds to be paid to Sapp and Hopper depending upon the performance of IAS over a three-year term and whether IAS reached certain performance benchmarks. The agreement included a provision that IAS would provide an earn-out statement at the end of the earn-out period, and Sapp and Hopper could submit a “notice of disagreement” with the statement, which would be resolved by an accounting firm. IAS provided an earn-out statement that showed the company did not meet its financial targets. Sapp and Hopper filed a notice of disagreement under the agreement and filed a declaratory judgment action in district court that its claims against IAS were outside the dispute resolution process set forth in the agreement. The district court granted IAS’ motion to compel arbitration, concluding that the agreement did include an arbitration agreement. The accounting firm selected by the parties to hear the dispute concluded that no additional compensation was owed to Sapp and Hopper. Sapp and Hopper moved to vacate the decision. The district court denied the motion and entered judgment for IAS. Sapp and Hopper appealed.

The Third Circuit reversed the district court’s order and vacated the judgment. The court first recognized that arbitration and expert determinations are “two distinct forms of private alternative dispute resolution that produce binding results,” noting that expert determinations involve a less formal process with the expert deciding more narrow issues. Reviewing the terms of the asset purchase agreement, the court concluded that the parties intended the accounting firm hearing disputes would be acting as an expert, not an arbitrator. The court pointed to the fact that the agreement did not include procedural rules that would govern an arbitration and further provided that disputes should be “submitted to non-binding mediation” and if unsuccessful, “either party may initiate litigation.” The court concluded that these and other terms of the agreement show the parties intended the accounting firm would serve as an expert, and not an arbitrator, and the parties were free to continue to litigate their claims in court. The court reversed the district court’s order, vacated the judgment, and remanded the case for further proceedings.

Sapp v. Industrial Action Services, LLC, No. 22-2181 (3d Cir. July 20, 2023).

Ninth Circuit Affirms District Court Order Denying Motion to Compel Arbitration of Discrimination Claims

September 13, 2023 by Kenneth Cesta

In Perez v. Discover Bank, the Ninth Circuit Court of Appeals affirmed a district court order denying a motion to compel arbitration of the plaintiff’s discrimination claims, finding that the mandatory arbitration provisions included in student and consolidation loan agreements signed by the plaintiff did not require arbitration. The plaintiff is a recipient of the Deferred Action for Childhood Arrivals program who applied for a student loan in 2010 from Citibank to attend graduate school. The loan agreement with Citibank included an arbitration agreement providing that the parties “could elect binding arbitration for any claims ‘arising out of or in connection with [the] loan.’” In October 2011, Citibank acquired ownership of the plaintiff’s note. In 2018, the plaintiff submitted a loan application for a Discover Bank consolidation loan, which extinguished the original student loan. The application for the consolidation loan included an arbitration provision, and a provision permitting the plaintiff to opt out of the arbitration provision within 30 days after consummation of the loan. The plaintiff did not opt out because she believed her loan application was rejected.

The plaintiff then filed a discrimination action in district court alleging that she was told by a representative of the bank that she could not refinance her loan because she was not a U.S. citizen or lawful permanent resident. Discover filed a motion to compel arbitration, which was initially granted by the district court when the plaintiff did not confirm she wanted to opt out of the arbitration agreement. However, after the plaintiff informed the court that she wished to opt out of the agreement and filed a motion for reconsideration, the district court reversed its order requiring the plaintiff to arbitrate her discrimination-based claims, rejecting Discover’s argument that the opt-out provision did not apply to the discrimination claims because that claim had accrued before the plaintiff elected to opt out.

On appeal to the Ninth Circuit, Discover argued that both agreements required arbitration of the plaintiff’s discrimination claims. After recognizing the de novo standard of review of a district court’s order denying a motion to compel arbitration, the court found the positions taken by Discover during the hearing in the district court and on appeal were inconsistent, and Discover was judicially estopped from arguing that the plaintiff’s opt out of the arbitration agreement did not apply to her discrimination claims. The court then found the parties “never formed an agreement to arbitrate [the plaintiff’s] discrimination claims via the Citibank agreement,” and affirmed the district court’s order denying the motion to compel arbitration.

Perez v. Discover Bank, No. 22-15322 (9th Cir. July 24, 2023).

District of Maryland Holds Insurance Policy’s Appraisal Provision Constitutes Enforceable Arbitration Clause Under FAA

August 18, 2023 by Kenneth Cesta

In Travelers Casualty Insurance Company of America v. Papagiannopoulous, the U.S. District Court for the District of Maryland addressed the issue of whether a real estate “appraisal provision” included in an insurance policy can be considered an enforceable arbitration clause under the Federal Arbitration Act.

The case, a declaratory judgment and insurance coverage dispute, was brought by Travelers, which disputed the qualifications of appraisers selected by the defendants to conduct an appraisal of a commercial building. The building had been damaged by a fire and the defendants submitted a claim for losses incurred as a result of the incident. The insurance policy included an appraisal provision, which set forth the procedures for the selection of appraisers in the event of a loss. The policy provided that each party would select “a competent and impartial appraiser” and the two appraisers would then select an umpire. The defendants selected an appraiser to conduct a site inspection of the property. Travelers retained an estimator to inspect the property. The defendants then made a written demand under the policy for an appraisal, selecting the same appraiser who conducted the prior inspection, as well as another appraiser. Travelers objected to the defendants’ designated appraisers, contending they were not impartial. Travelers refused to designate an appraiser and filed a declaratory judgment action seeking a declaration that defendants’ appraisers were not qualified, and directing the defendants to designate competent appraisers. The defendants filed a motion to compel appraisal and to stay the case pending the appraisal award, and to dismiss for improper venue.

The district court first recognized that, when considering whether an appraisal provision constitutes an arbitration clause under the FAA, it is “irrelevant that the contract language in question does not employ the word ‘arbitration’ as such. Rather, what is important is whether the parties clearly intended to submit some disputes to binding review by a third party.” The court concluded that the insurance policy section that included the appraisal provision was sufficient to qualify as an agreement to submit disagreements to a third-party appraiser and, as such, the FAA governed the dispute. The court then concluded that it lacked subject matter jurisdiction over the dispute, granted the defendants’ motion, and dismissed the action. The court also concluded that Travelers’ request for a declaration that the defendants’ appraisers were not qualified was premature, since objections to an arbitrator’s qualification may not be entertained by the court until after the arbitration has been concluded and an award has been entered.

Travelers Casualty Insurance Company of America v. Papagiannopoulous, No. 8:22-cv-02314 (D. Md. July 27, 2023).

Second Circuit Affirms Confirmation of Arbitration Award Issued Under Cyprus-Libya Bilateral Investment Treaty

August 11, 2023 by Benjamin Stearns

The Second Circuit Court of Appeals recently affirmed the confirmation of an arbitration award issued under a bilateral investment treaty between Libya and Cyprus. We previously described the underlying Southern District of New York opinion confirming the award in a prior post.

On appeal to the Second Circuit, Libya primarily argued that the district court erred by declining to independently review the arbitrability of the claims involved before confirming the final award. The Second Circuit disagreed with Libya’s contention that a de novo standard should have been applied to review the arbitral tribunal’s decision because Libya “clearly and unmistakably” agreed to submit questions of arbitrability to the arbitrator. Libya indisputably agreed to arbitrate such issues when it signed the bilateral investment treaty providing Cypriot investors with the option of resolving disputes under the arbitral rules of the International Chamber of Commerce (ICC).

In so holding, the court noted the consistent line of cases holding that “when one party is a signatory to a bilateral investment treaty containing a provision for arbitration, the treaty constitutes a standing offer to arbitrate disputes covered by the treaty, and a foreign investor’s written demand for arbitration completes the agreement in writing to submit the dispute to arbitration.” The bilateral investment treaty simply creates “a framework through which foreign investors can initiate arbitration against parties to the Treaty. Accordingly, all that is necessary to form an agreement to arbitrate is for one party to be a [bilateral investment treaty] signatory and the other to consent to arbitration of an investment dispute in accordance with the Treaty’s terms.”

Having determined that a valid arbitration agreement was formed upon submission of the claim to the arbitral tribunal of the ICC by the Cypriot investor, the court turned next to the question of arbitrability of the dispute. While courts presume that questions of arbitrability are for the court to decide, not the arbitrator, that presumption is overcome where the record “supplies clear and unmistakable evidence that the parties agreed to submit the issue to arbitration.” Such “clear and unmistakable” evidence of intent can be provided by the incorporation of rules that empower an arbitrator to decide issues of arbitrability. To determine whether such rules have been incorporated into the parties’ agreement, the courts look to both the text of the relevant bilateral investment treaty and the procedural rules adopted by the parties at the outset of the arbitration.

Here, the terms of the bilateral investment treaty authorized investors to submit a dispute to the ICC. ICC rules presumptively apply to disputes submitted to the ICC. Accordingly, by signing the bilateral investment treaty, “Libya clearly and unmistakably agreed to send questions of arbitrability” to the arbitrator. As a result, the district court was required to defer to the arbitrator’s determination of the arbitrability of the parties’ dispute. The Second Circuit therefore affirmed the district court’s decision declining de novo review and confirmation of the ICC tribunal’s arbitration award.

Olin Holdings Ltd. v. State of Libya, No. 22-825 (2d Cir. July 12, 2023).

Fifth Circuit Affirms Denial of Arbitration, Rejects Arbitration Provisions in “Battle of the Forms” Between Buyer and Seller in UCC Transaction

July 21, 2023 by Michael Wolgin

The case involved the sale of mist eliminators (demisters) from MECS Inc. to Axiall Canada Inc., an owner of a Canadian manufacturing facility. A key issue involved the terms of the parties’ contractual relationship as formed through the sale and delivery process of the demisters: MECS typically would issue a proposal to Axiall; Axiall then sent a purchase order; MECS then sent an order acknowledgment; and Axiall would last accept the demisters. MECS’ proposals and order acknowledgments contained an arbitration clause. Axiall’s purchase order forms, however, did not contain an arbitration clause and contained language that acceptance of its purchase orders indicated an “irrevocable agreement” to Axiall’s general terms and conditions, which contained a no-modification provision and a forum-selection clause permitting Axiall to select a forum within either Louisiana or Kentucky.

When Axiall experienced problems with the demisters, Axiall sued MECS in Louisiana state court. MECS removed the case to federal court and then moved to dismiss, or alternatively stay, and compel arbitration under MECS’ proposal and order acknowledgment forms. The district court, however, denied MECS’ motion, holding that under Louisiana law, the parties had not agreed to the arbitration clauses.

On appeal to the Fifth Circuit, the court held that the case presented a “battle of the forms,” which is governed by two provisions of Louisiana’s version of the UCC adopted in its Civil Code: Article 2601 concerning additional terms in an acceptance of an offer to sell movables (such as demisters); and Article 2602 concerning contracts formed by the conduct of the parties. Applying these provisions, the court found that neither Axiall’s purchase orders nor MECS’ order acknowledgments “were communications that, when read in succession, were sufficient to form contracts under Article 2601.” However, the conduct of MECS’ shipping of the demisters following its sending of the order acknowledgment and Axiall’s accepting delivery, created a contract for “an agreed-upon quantity of demisters delivered at the agreed upon price.” This conduct-based contract, as construed by the court, did not include the arbitration clause as a term. The court rejected MECS’ argument that its order acknowledgments were counteroffers whose terms Axiall accepted by performance. There was no arbitration agreement because the parties never mutually agreed to MECS’ proposed arbitration clauses. The court thus affirmed the district court’s denial of MECS’ motion to compel arbitration.

Axiall Canada, Inc. v. MECS, Inc., No. 21-30105 (5th Cir. June 14, 2023).