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Arbitration / Court Decisions

SECOND CIRCUIT REVERSES AWARD OF ATTORNEYS’ FEES FOR CONFIRMATION OF ARBITRAL AWARD

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The Second Circuit reversed a lower court’s decision granting attorneys’ fees for the cost of confirming an arbitration award. The dispute arose out of a shipping contract for overseas shipping of acrylonitrile, and the defendant in arbitration prevailed. Following arbitration, the district court awarded the prevailing party its fees in seeking to confirm the arbitration award under a provision in the charter agreement awarding fees for a breach of contract. The Second Circuit reversed, finding first that there was no breach of the agreement by the party losing in arbitration. Further, there could be no breach of the agreement by resisting the arbitral award’s confirmation—and even if there was—such a provision would be unenforceable. By agreeing to arbitrate, the parties “also consented to confirmation of the arbitral award in any court of competent jurisdiction,” which the court found to be an effective incorporation of the Federal Arbitration Act into the contract. The Second Circuit went further, however, in holding that any agreement purporting to limit the ability to challenge an arbitration award would be unenforceable because it would “divest the courts of their statutory and common-law authority to review both the substance of the awards and the arbitral process for compliance with § 10(a) and the manifest disregard standard.” Zurich American Insurance Co. v. Team Tankers A.S., No. 14-4036-cv (2d Cir. Jan. 28, 2016).

This post written by Zach Ludens.

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COURT DENIES MOTION TO STAY FURTHER REINSURANCE ARBITRATION PENDING APPEAL CONCERNING INITIAL ARBITRATION

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At the end of January, the United States District Court for the Eastern District of Michigan denied a motion to stay arbitration pending appeal. The case involves a reinsurance dispute between National Union Fire Insurance Company of Pittsburgh and members of the Meadowbrook Insurance Group. Following an initial arbitration, National Union moved to confirm the award. The court confirmed in part but vacated the portion of the arbitration award dealing with prejudgment interest. As a result, the court ordered the parties to arbitrate the issue of prejudgment interest. Both parties appealed, and National Union filed a motion to amend the judgment and a motion to stay the subsequent arbitration pending appeal.

According to National Union, the parties had already arbitrated the amount and interest in the first arbitration and the district court should have confirmed, vacated, or modified the awards—rather than submitting that question to a new arbitration—which National Union is appealing to the Sixth Circuit. However, the district court noted that the arbitration panel found in favor of National Union “in part because Meadowbrook failed to produce documentation” that would allow it to compute damages and prejudgment interest. Therefore, the district court reasoned, this issue had not already been arbitrated, and National Union was unlikely to succeed on the merits of its appeal. For this reason, among others, the court denied both National Union’s motion to amend the judgment and a motion to stay the subsequent arbitration pending appeal. Star Insurance Co. v. National Union Insurance Co. of Pittsburgh, Case No. 14-12915 (E.D. Mich. Jan. 27, 2016).

This post written by Zach Ludens.

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THIRD CIRCUIT FINDS THAT ALLEGED LEGAL ERRORS DO NOT JUSTIFY VACATUR OF ARBITRATION AWARD

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The United States Court of Appeals for the Third Circuit recently confirmed an arbitration award in a dispute concerning the ownership of certain music rights, rejecting the argument that alleged legal errors constituted sufficient grounds to vacate the award. The underlying arbitration involved a dispute between The Pullman Group, LLC and its owner, David Pullman (collectively, “Pullman”), and the estates of John Whitehead and Gene McFadden, who were “an integral part of the Philadelphia music scene in the 1970s.” Pullman entered into a contract with Whitehead and McFadden to purchase their song catalogue, but the sale was never finalized. After the musicians passed away, Pullman and the estates agreed to arbitrate their dispute over ownership of the catalogue. An arbitration panel ruled in favor of the estates, and Pullman brought an action in federal court to vacate the award on the grounds that the panel had committed various legal errors.

The district court denied Pullman’s motion to vacate the award, which the Third Circuit affirmed. The court held that mere errors of law are insufficient to warrant vacatur of arbitration award, and that such outcome is only justified where an arbitrator’s legal error is so substantial that a party was deprived of a fair hearing. In this case, that the arbitration panel’s application of New York law and decision to exclude certain testimony was well-founded, and did not arise to the level of misconduct required to vacate the award. The Third Circuit rejected Pullman’s alternative argument that the panel’s ruling amounted to “manifest disregard of the law,” finding that even if this doctrine is still a viable ground to vacate an arbitration award (which the court declined to address), it would not apply because the panel’s decision did not ignore binding legal precedent. Whitehead v. The Pullman Group, LLC, Nos. 15-1627 & 15-1628 (3d Cir. Dec. 10, 2015).

This post written by Rob DiUbaldo.

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COURT UPHOLDS CLASS WAIVER ARBITRATION CLAUSE, FINDING AN UNAWARE PARTY CAN STILL MANIFEST ASSENT TO BE BOUND

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A federal court in Oregon granted a motion to compel arbitration based on a class waiver and arbitration provision in a credit agreement. The primary question of fact was whether the plaintiff had been read or had received the terms of the credit agreement. The credit agreement’s arbitration provision contained a right to opt out of the arbitration provisions upon written notice by the consumer within the first thirty days of their first transaction. The plaintiff never opted out of this agreement, claiming that she never affirmatively consented to the terms of the agreement or physically received the provision. Based on a preponderance of evidence, the court found that the plaintiff manifested assent to the terms of the arbitration agreement. The defendants did not need to show that the plaintiff verbally assented to or signed a credit agreement in order to bind her. Receipt of the agreement and use of the account, “regardless of whether [the plaintiff] read, signed, or understood the Agreement, objectively manifested assent to the arbitration provision contained in the Agreement.” Campos v. Bluestem Brands, Inc., Case No. 3:15-CV-00629-SI (USDC D. Ore. Jan. 22, 2016).

This post written by Joshua S. Wirth, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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CEDENT IS NOT REQUIRED TO MINIMIZE ITS REINSURANCE RECOVERY IN ORDER FOR THE “FOLLOW THE FORTUNES” DOCTRINE TO APPLY

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On December 9, 2014 and August 20, 2015, we reported on the reinsurance dispute between Utica Mutual Insurance Company and Clearwater Insurance Company. In a recent ruling, the court rejected Clearwater’s argument that the follow the fortunes doctrine did not apply and that Clearwater was relieved of its obligations under the subject reinsurance contract. Clearwater contended that Utica unreasonably and in bad faith shifted all of its liabilities to its umbrella policies to maximize reinsurance recovery. As an alternative basis to avoid liability, Clearwater also argued that Utica billed it for items for which it was not entitled to recover.

In rejecting Clearwater’s arguments, the court explained that while the follow the fortunes doctrine requires the cedent to align its interests with its reinsurer, in order to show bad faith, Clearwater was required to establish an “extraordinary showing of a disingenuous or dishonest failure” and that the cedent acted with gross negligence or recklessness. The court found that Clearwater could not make such a showing. The Court noted that Utica did not have any fiduciary duty to place Clearwater’s interests above its own nor minimize its reinsurance recovery in order to avoid bad faith. And the Court summarily dismissed Clearwater’s argument that some of the billings were not covered by the reinsurance, ruling that if the payment was arguably within the scope of the insurance policy, then it was within the reinsurance. Utica Mutual Insurance Co. v. Clearwater Insurance Co., Case No. 6:13-cv-01178 (USDC N.D.N.Y. Jan. 20, 2016).

This post written by Barry Weissman.

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