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Arbitration / Court Decisions

REINSURER’S ATTEMPT TO ENFORCE INDEMNITY AGREEMENT FAILS

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This dispute centered around a 1995 General Indemnity Agreement (“GIA”) between defendant PEC and Amwest, a surety company. Pursuant to the GIA, PEC agreed to indemnify Amwest in connection with any bonds written on behalf of PEC. In late 1998 or early 1999, Amwest issued a performance bond to the United States as obligee, with PEC as principal, in connection with a construction contract for the Army Corps of Engineers. Shortly thereafter, Swiss Re agreed to provide reinsurance to Amwest on that performance bond.

Two years later, a Nebraska court declared Amwest insolvent and entered an order of liquidation. When PEC was unable to obtain substitute bonding for the Corps construction project, PEC’s involvement was terminated and Swiss Re was required to complete the project at a cost of over 1.4 million dollars, exclusive of legal fees. Swiss Re filed the instant case seeking to enforce the indemnity agreement between Amwest and PEC.

The district court held that the indemnity agreement did not require PEC to indemnify Swiss Re. Specifically, the court concluded that: (1) the indemnity agreement was unenforceable due to a failure of consideration and/or Amwest’s prior material breach of the contract; and (2) the GIA was unenforceable under the doctrine of ‘frustration of purpose.’ Swiss Reinsurance v. Airport Industrial Park doing business as P.E.C. Contracting Engineers, Case No. 2:05-cv-01127 (USDC W.D. Pa. Aug. 27, 2007).

COURT OF APPEALS HOLDS THAT ARBITRATION AGREEMENT DEADLINES TO BE STRICTLY ENFORCED

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The US Court of Appeals for the Seventh Circuit has held that time deadlines in arbitration agreement must be strictly enforced, affirming a District Court decision previously reported on in this blog in December 11, 2006 and August 24, 2006 posts. The dispute arose out of the timing of appointing an arbitrator in an international arbitration.

The Seventh Circuit affirmed a district court’s ruling that when Argonaut, a California-based insurer, missed the deadline for appointing one of the arbitrators in an international arbitration, it lost its right to appoint an arbitrator. The arbitration agreement required that the parties make their appointments by a certain time. The appointment deadline fell on the Sunday of Labor Day weekend. When Argonaut did not appoint its arbitrator, Lloyd’s appointed an arbitrator for that position on the panel, giving it two party-appointed arbitrators. Argonaut argued that in light of the holiday, the notice it gave on the Tuesday after Labor Day was a “timely nomination” of the arbitrator. The court disagreed, holding that “[i]n the absence of a choice-of-law provision, we conclude that parties are to be bound to the explicit language of arbitration clauses, with no state-specific exceptions that would extend otherwise clear contractual deadlines.” Certain Underwriters at Lloyds v. Argonaut Ins. Co., No. 04 c 5852 (7th Cir. Aug. 29, 2007).

COURT ENFORCES LIMITATIONS ON DISCOVERY IN CONNECTION WITH RULE 60 MOTION

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This case presents an interesting arbitration process issue. In 2004, the parties to this action participated in an arbitration, resulting in a $10,000 award to defendant, Smith Barney. Subsequently, plaintiff filed an action to vacate, and defendant moved to confirm the award. In February, 2005 a California district court confirmed the arbitration award. Plaintiff then filed a motion under Rule 60 of the Federal Rules of Civil Procedure to vacate that order, and later filed a Renewed Rule 60 Motion. The renewed motion was filed on the grounds that defendant and its counsel had committed “fraud. . . misrepresentation or other misconduct” by making material misrepresentations to the court. Plaintiff also sought discovery under its motion on the basis of newly discovered case law and evidence. The court granted “limited’ discovery. Plaintiff proceeded to use the limited permission granted by the court to “bombard” Defendant with voluminous discovery. Concluding that the Plaintiff’s discovery requests were “inappropriate in breadth” and “went well beyond the limited subjects referred to in the court’s. . . [o]rder,” the Court denied plaintiff’s motion to compel and granted Smith Barney’s motion for protective order. Sathianathan v. Smith Barney, Case No. C-04-02130 SBA (JCS) (N.D. Cal. Aug. 24, 2007).

ARBITRATION AWARD CONFIRMATION DECISIONS

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Four recent opinions dealt with arbitration award confirmation on a variety of bases.

  • In Cuie v. Nordstrom, Inc., No. 07-1114 (3d Cir. Aug. 14, 2007) the court affirmed the denial of a motion to vacate an arbitration award. The Court characterized the arguments of the movant as being nothing more than that the arbitrator had made the wrong decision.
  • In Coastal Caisson Corp. v. E. E. Cruz/NAB/Frontier-Kemper, Case No. 05-7462 (USDC S.D. N.Y. Aug. 10, 2007), the court had vacated an initial arbitration decision as being in manifest disregard of law. The court confimed a second award entered after the matter was remanded to the panel. This decision also addresses the availability of pre-judgment interest.
  • In Hutchinson v. Farm Family Casualty Ins. Co., Case No. 99-2584 (USDC D. Conn. Aug. 20, 2007), the court denied a motion to vacate an award based upon the contention that the panel's decision with respect to choice of law exceeded its authority.
  • In New Regency Productions, Inc. v. Nippon Herald Films, Inc., No. 05-55224 (9th Cir. Sept. 4, 2007), the court affimed the vacation of an award on the basis of evident partiality on the part of the arbitrator. The arbitrator took a new employment position and failed to investigate a potential conflict. The court held that he was under a duty to investigate potential conflicts and make an appropriate disclosure, and that the fact that the arbitrator did not have actual knowledge of a conflict did not excuse this breach of duty.

ILLINOIS FEDERAL COURT RULES PARTY’S CONSENT TO JURISDICTION OF STATE COURT IS NOT A WAIVER OF THE STATUTORY RIGHT TO REMOVE

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Plaintiff, Continental Casualty Company’s (“CCC”) and defendant, LaSalle Re Limited (“LaSalle Re”) were parties to several reinsurance agreements, including one Excess of Loss Retrocession Agreement which contained an arbitration clause. In April 2004, the parties executed a Release Agreement, terminating all obligations under the Reinsurance Agreements. Pursuant to the Release Agreement the parties consented to the jurisdiction of Illinois courts in connection with any legal action arising out of the Agreement.

A dispute subsequently arose pertaining to the Retrocession Agreement, and LaSalle Re made a demand for arbitration. In response, CCC filed an action in Illinois state court seeking a declaration of its rights under the Release Agreement. Specifically, CCC argued that the Release Agreement extinguished all obligations under the Retrocession Agreement, including the obligation to arbitrate. Subsequently, LaSalle removed the case to federal court and CCC filed an emergency motion for remand. CCC argued that the forum selection clause in the Release Agreement prevented the case from proceeding in federal district court. The court disagreed and denied CCC’s motion concluding that “[a] general consent to the jurisdiction of a particular court does not. . . adequately demonstrate a waiver of defendant’s statutory right to remove.” Continental Casualty Co. v. LaSalle Ltd., Case No. 07 C 4228 (N.D. Ill. Aug. 16, 2007).

Nine days later, CCC filed a motion in the federal court to stay the arbitration proceedings. (see CCC’s Motion to Stay Arbitration and CCC’s Memorandum of Law in Support of Motion to Stay Arbitration). In connection with its motion, CCC attached copies of the Arbitration Request and the Retrocession Agreement as exhibits to the Amended Complaint (See Ex. 1). To date, the court has not ruled on this motion.