Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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

Arbitration / Court Decisions

SECOND CIRCUIT AFFIRMS ARBITRATION AWARD FINDING NO VIOLATION OF ‘WELL-DEFINED AND DOMINANT’ PUBLIC POLICY

by

The Second Circuit recently addressed the standard by which a court may refuse to enforce an arbitration award on the ground that the award is contrary to public policy. In a case arising out of an employment dispute, Hope Day Nursery appealed a district court decision granting the plaintiffs’ motion to confirm two arbitration awards that (1) reinstated a discharged employee with back pay; and (2) instructed Hope Day nursery to “cease and desist from hiring and/or assigning substitute teachers to work extra hours” before first offering those hours to qualified existing employees.

The Second Circuit agreed with the district court’s finding that Hope Day Nursery’s challenge to the first arbitration award was untimely. With respect to the challenge to the second arbitration award, the court explained that “[w]hile a court may ‘refus[e] to enforce an arbitrator’s award under a collective-bargaining agreement because it is contrary to public policy,’ such a refusal ‘is limited to situations where the contract as interpreted would violate some explicit public policy that is well defined and dominant…and not from general considerations of supposed public interests.’” Since Hope Day Nursery did not point to a well defined and dominant public policy that would be violated by enforcement of the collective bargaining agreement, the Second Circuit affirmed the arbitration award. District Council 1707 v. Hope Day Nursery, Case No. 06-0325-cv (2d Cir. May 4, 2007).

Court remand matter to arbitration panel for new damage award

by

On November 13, 2006, with respect to an NASD arbitration, a District Court entered an order remanding an arbitration award to the panel for a new damage award, finding that the award was in manifest disregard of law, and shocking to the conscience of the court. On April 9, 2007, the Court entered an Order denying a motion for reconsideration. Apparenly upset with the passage of time with no progress, the Order provides that if the panel does not enter a new damage award within 30 days, the court will issue an Order to Show Cause why the panel should not be held in contempt. Strobel v. Morgan Stanley Dean Witter, Case No. 04-1069 (S.D. Cal.).

Court affirms summary judgment on reinsurance claims issue based upon res judicata

by

Two UK-based insurance companies, collectively known as Eagle Star, served as lead underwriter for a quota share reinsurance program reinsuring Legion Indemnity and Legion Insurance. A dispute arose over monies owed under the quota share reinsurance agreements. Legion Insurance was placed in rehabilitation in Pennsylvania, and an Illinois court placed Legion Indemnity under the control of the Illinois Commissioner of Insurance. Eagle Star filed an action against Legion in federal court. The Illinois court granted Eagle Star summary judgment, finding that the Pennsylvania court had determined the issue in Eagle Star's favor as to Legion Insurance, and that Legion Indemnity was bound by the decision based upon its privity with Legion Insurance and the doctrine of res judicata. The Court of Appeals affirmed. In re Liquidation of Legion Indemnity Company, Case No. 02-6695 (Ill. Ct.App. Mar. 29, 2007).

District Court rejects challenge to arbitration award on "manifest disregard of law" basis

by

Westra Construction, Inc. (“Westra”), a subcontractor, sought payment from Alexander Construction, Inc. (“ACI”), the construction manager, for work performed on a Pennsylvania Turnpike Commission project. ACI rejected Westra’s claims as unsubstantiated. Westra subsequently filed a demand for arbitration. Four days before the arbitration hearing, Westra provided ACI with thousands of pages of documents in support of its claims. The hearing that ensued spanned eighty-five hearing days. At the conclusion of the hearing, an arbitration award in Westra’s favor was issued. Westra then commenced an action in the U.S. District Court for the Middle District of Pennsylvania against United States Fidelity & Guaranty Company (“USF&G”), ACI’s surety, to collect the arbitration award. Due to the fact that ACI had declared bankruptcy and could no longer challenge the validity of the award, the District Court permitted USF&G to file a motion to vacate the arbitration award in ACI’s stead.

As grounds for the motion to vacate, USF&G contended that: (1) the arbitrators so imperfectly executed their powers that they were unable to reach a final and fair disposition of the matter; and (2) the arbitrators manifestly disregarded the law. The District Court denied the motion to vacate, holding that procedural irregularities cited by USF&G did not rise to the level of imperfect execution of powers where the arbitrators resolved only those issues that had been properly presented to them and rationally derived the award from the parties’ submissions and arguments. The Court rejected the manifest disregard argument on the basis that support for the arbitral award could be found in the hearing transcripts and in the parties’ post-hearing submissions, there was no evidence that the arbitrators were “fully aware” that their interpretations of relevant agreements were improper, and it could not be proven that law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. Westra Construction, Inc. v. United States Fid. & Guar. Co., Case No. 1:03-CV-0833 (M.D. Penn. Mar. 29, 2007).

COURTS, NOT ARBITRATORS, TO DETERMINE EXISTENCE OF CONTRACT “AS A WHOLE”

by

MemberWorks, Inc.’s (“MemberWorks”) enrolled Sanford in a discount shopping program without her consent, charging her a fee for the program. The membership agreement contained an arbitration provision. Sanford sued MemberWorks, challenging the validity of the contract and seeking damages. The District Court compelled arbitration, holding that Sanford's challenge to the contract should be decided by an arbitrator. The arbitrator intially opined that he did not have jurisdiction to consider the validity of the contract; rather, that the validity of the contract was an issue for the court. The arbitrator then found the contract to be invalid, awarding Sanford $72 in damages, plus interest and arbitration fees, but denying Sanford's other claims. The District Court confirmed the award.

The Ninth Circuit found that Sanford had not waived her right to challenge the order compelling arbitration by waiting to challenge that decision after the arbitration award had been entered, and that the District Court should have ruled on the validity of the contract prior to compelling arbitration. The Court vacated the arbitration award and remanded the case for a determination by the District Court of whether a contract had been formed between Sanford and MemberWorks. Sanford v. MemberWorks, Inc., Case No 05-55175 (9th Cir. April 16, 2007).