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Arbitration / Court Decisions

Texas High Court Declines to Enforce Compel Arbitration Against Non-Signatory

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In a recent dispute involving a crop insurance policy, the Texas Supreme Court held that an independent insurance agency could not compel arbitration of certain claims brought against it in state court by an insured (JJ Farms) where the agency was not a signatory to the operative arbitration agreement in the subject policy.

The dispositive issue the Texas Supreme Court addressed was the question of arbitrability, on which the court decided the trial court was charged with determining whether a valid arbitration agreement existed because there was no clear and unmistakable evidence that JJ Farms agreed to arbitrate arbitrability with non-signatories such as the agency. Therefore, the Texas Supreme Court reviewed the decision on arbitrability de novo.

On de novo review, the court assessed under a myriad of legal theories whether the underlying arbitration agreement between the insurer (R&H) and JJ Farms allowed for arbitration of disputes with non-signatories. First, the court concluded the insurance policy’s arbitration agreement did not require arbitration with non-signatories because the plain terms limited disagreements to be arbitrated to only those between the insured and insurer. Second, the court rejected an agency theory of arbitrability because R&H did not exercise control over the agency. Third, the court declined to confer third-party beneficiary status upon the agency because the insurance contract did not facially benefit it, nor did any language in the federal statute governing crop insurance grant third-party beneficiary status to insurance agents. Fourth, the court considered and ultimately discarded both direct-benefits estoppel, because the insurance policy did not impose duties or obligations on the agency, and alternative estoppel, because even though JJ Farms’s claims were intertwined with the insurance policy the relationship between R&H and the agency was insufficiently close to infer consent by JJ Farms to arbitrate the dispute.

Jody James Farms, JV v. The Altman Grp., Inc., No. 17-0062 (Tex. May 11, 2018).

This post written by Thaddeus Ewald .

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Northern District Of New York Allows Evidence That Follow The Fortunes Or Follow The Settlements Provision Could Be Implied In Facultative Reinsurance Certificates

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Munich Reinsurance America, Inc. and Utica Mutual Insurance are headed to a bench trial in the United States District Court for the Northern District of New York in a case regarding two facultative reinsurance certificates issued by Munich to Utica in 1973 and 1977, and the court has ruled on certain motions in limine filed by both parties.

In an earlier ruling on cross motions for summary judgment, the court noted that neither the 1973 nor the 1977 certificates contained a follow the fortunes or follow the settlements provision and declined to find this such a clause was implied in the contracts based on the record before it. Munich filed a motion in limine asking the court to preclude Utica from presenting evidence in support of the existence of a follow the fortunes/settlements provision. The court denied this motion, however, holding that Utica would be allowed to present evidence that “the doctrines of follow the fortunes or follow the settlements were, at the time the parties agreed to the Certificates, so ‘fixed and invariable’ in the reinsurance industry as to be part of the Certificates.” In doing so, however, the court emphasized that it would be Utica’s burden to show that such custom and practice was “fixed and invariable,” and not merely generally understood within the (re)insurance industry during the relevant time period.

The court also considered Munich’s motion to preclude certain testimony by Utica’s expert witnesses regarding trade usage and custom and practice in the reinsurance industry. The court declined to exclude such testimony, doing so largely on the basis that such decisions could better be made in the context of trial and that such exclusions are less necessary in a bench trial “[w]here the gatekeeper and the factfinder are one in the same—that is, the judge . . . .” However, the court granted Munich’s motion to preclude testimony on withdrawn claims and defenses as well as its motion to preclude evidence of decisions from certain other matters, which the court held was hearsay.

Utica was similarly unsuccessful in most of its motions in limine. The court rejected Utica’s request that Munich not be allowed to make certain arguments about the meaning of the 1973 and 1977 certificates on the basis of collateral estoppel. The court found that this interpretation was an issue of law, and “collateral estoppel does not operate to bar relitigation of pure issues of law.” However, the court granted Utica’s motion to preclude the use of a privilege log it produced in the litigation, which Munich argued was admissible to show when Utica considered certain issues, finding that there was no relevant, nonspeculative inference that could be drawn from that log.

Utica Mutual Insurance Company v. Munich Reinsurance America, Inc., 6:13-cv-00196(BKS/ATB) (N.D.N.Y. June 27, 2018)

This post written by Jason Brost.

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Second Circuit Joins Sister Circuits in Holding Party-Appointed Arbitrators Not Subject to Same Disclosure Requirements as Neutral Arbitrators

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The Second Circuit recently held that parties seeking to vacate awards under Federal Arbitration Act Section 10(a)(2) must satisfy a higher burden in showing evident partiality by a party-appointed arbitrator. The parties arbitrated a workers compensation reinsurance dispute and the losing party (Lloyds) moved to vacate the ultimate arbitral award on the ground that the prevailing party (ICA)’s selected arbitrator displayed evident partiality by failing to fully disclose his connections to ICA. The lower court vacated the award, finding that ICA’s appointed arbitrator’s undisclosed relationships were “more significant, more numerous, and involve[d] more financial entanglements” than would be acceptable, particularly in light of the “apparent willfulness” of the non-disclosure.

On appeal, the Second Circuit addressed as an issue of first impression what the appropriate standard is for a Section 10(a)(2) evident partiality challenge to a party-appointed arbitrator. The court disagreed with the lower court and instead followed the approach of other circuits in distinguishing between a heightened burden standard for party-appointed arbitrators and a reasonable person standard for neutral arbitrators. Despite the heightened burden, party-appointed arbitrators are subject to certain “baseline limits to partiality.” First, undisclosed relationships are material—and therefore warrant vacatur—if they violate the arbitration agreement. Here, the court noted, the only limitation in the arbitration agreement was that arbitrators be “disinterested,” in terms of financial and personal stake in the outcome. Second, undisclosed relationships are material if the complaining party can demonstrate the partiality had a prejudicial effect on the award.

As a result of this new framework, the Second Circuit remanded to the trial court to determine whether ICA’s arbitrator’s undisclosed relationships betrayed his disinterest or had a prejudicial effect on the arbitral award.

Certain Underwriting Members of Lloyds of London v. Ins. Co. of Am., No. 17-1137 (2d Cir. June 7, 2018).

This post written by Thaddeus Ewald .

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Ninth Circuit Confirms Arbitration Award Due to Failure to Preserve Objection to Arbitrability

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Pioneer Roofing Organization (PRO) appealed an order from a federal district court granting summary judgment in favor of Sheet Metal Workers’ Local Union No. 104 on PRO’s petition to vacate the arbitrator’s award. PRO primarily argued that the arbitrator lacked authority to resolve the underlying grievance, arguing that it was a jurisdictional dispute not subject to arbitration. Reviewing de novo, the Ninth Circuit affirmed, finding that PRO waived its arbitrability challenge by failing to preserve the issue through either of the two recognized methods for doing so: (1) objecting to the arbitrator’s authority, refusing to argue the arbitrability issue before the arbitrator, and proceeding to the merits of the grievance; or (2) making an objection as to jurisdiction and expressly reserving the question on the record. Pioneer Roofing Organization v. Sheet Metal Workers’ Local 104, Case No. 17-15296 (9th Cir. June 4, 2018).

This post written by Gail Jankowski.

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In Deepwater Horizon Arbitration, UK Appellate Court Declines to Remove Arbitrator with Multiple Related Appointments

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The underlying case concerned the 2010 explosion and fire on the Deepwater Horizon oil rig in the Gulf of Mexico, when a well which was in the process of being plugged and temporarily abandoned, experienced a blow out. The appellant, Halliburton, provided cementing and well-monitoring services to BP in relation to the temporary abandonment of the well. Halliburton made a claim on its liability insurance against Chubb; however, Chubb refused to pay Halliburton’s claim, contending, among other things, that Halliburton’s settlement of the claims was not reasonable and that Chubb had not consented to the settlement.

At the coverage dispute arbitration between Halliburton and Chubb, two arbitrators were appointed on behalf of Halliburton and Chubb respectively. The third arbitrator, however, was Chubb’s preferred candidate. While the third arbitrator disclosed to Halliburton that he had acted, and was currently acting, as an arbitrator in multiple arbitrations involving Chubb, he did not disclose that he was serving as an arbitrator appointed by Chubb in two other disputes involving Transocean, the owner of the rig in this case. As such, in both instances, the third arbitrator heard similar or identical arguments by Chubb. Upon learning of this information, Halliburton issued a claim form seeking that the third arbitrator be removed. But the claim form was subsequently dismissed, and Chubb went on to win the arbitration against Halliburton.

Among several issues on appeal was “[w]hether and to what extent an arbitrator may accept appointments in multiple references concerning the same or overlapping subject matter with only one common party without thereby giving rise to an appearance of bias.” On this question, the Court reasoned that “the mere fact that an arbitrator accepts appointments in multiple references concerning the same or overlapping subject matter with only one common party does not of itself give rise to an appearance of bias.” With regard to the requirement, if any, of disclosure, the Court reiterated the English law principle that the required disclosure was “facts or circumstances which would or might lead the fair-minded and informed observer, having considered the facts, to conclude that there was a real possibility that the arbitrator was biased.”

Applying these principles, the court was persuaded that “(1) the non-disclosed circumstance does not in itself justify an inference of apparent bias; (2) disclosure ought to have been made, but the omission was accidental rather than deliberate; (3) the very limited degree of overlap means that this is not a case where overlapping issues should give rise to any significant concerns; (4) the fair-minded and informed observer would not consider that mere oversight in such circumstances would give rise to justifiable doubts as to impartiality; and (5) there is no substance in Halliburton’s criticisms of [the third arbitrator’s] conduct after the non-disclosure was challenged or in the other heads of complaint raised by them.” The court then affirmed the judgment, denied Halliburton’s challenge, and declined to find a real possibility that the third arbitrator was biased. Halliburton Co. v. Chubb Bermuda Ins. Co., Case No. [2018] EWCA Civ 817 (Royal Courts of Justice, Apr. 19, 2018).

This post written by Gail Jankowski.

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