Week's Best Posts

TEXAS SUPREME COURT FINDS WAIVER OF RIGHT TO ARBITRATE BY TAKING CASE TO EVE OF TRIAL

May 27, 2008 by Carlton Fields

The Texas Supreme Court has held that a party waived its right to arbitrate by vigorously, and successfully, opposing a demand for arbitration, taking substantial discovery on virtually every issue in the case and taking a dispute to the eve of trial before reversing course and demanding arbitration. The court's opinion reverses the decision of the lower courts, which had allowed the change in tactics. The court found that a showing of prejudice was required to support a finding that the right to arbitration had been waived, and found that prejudice was present due to the unfairness of the change of position, and the delay, expense and damage to the opponent's legal position. The court was bothered by the fact that the process had been manipulated to gain an unfair tactical advantage. The facts were so extreme here, that the court found that to deny the proposition that the right to arbitrate had been waived would amount to a holding that a party could never waive its right to arbitrate through participating in a lawsuit in lieu of arbitration. Homes v. Cull, No. 05-882 (Tex. May 2, 2008).

This post written by Rollie Goss.

UK COURT RULES ON SCOPE OF CONFIDENTIALITY OF ENGLISH ARBITRATIONS

May 20, 2008 by Carlton Fields

Due to the relationships between the UK and US insurance and reinsurance markets, and the fact that different reinsurance agreements in a reinsurance program may involve both UK and US arbitration provisions, there are frequent overlaps between the two jurisdictions when things go awry. In a lengthy opinion, the UK Court of Appeals has engaged in an extensive discussion of the basis for the confidentiality of UK arbitration materials, and the circumstances under which such materials may be disclosed in other proceedings. Noting the strong tradition of confidentiality, the Court noted that exceptions “are still in the process of development on a case-by-case basis,” but that the principal instances in which disclosure may be appropriate are: (1) where there is consent, express or implied; (2) by court order (with courts not having general discretion to waive confidentiality); (3) where reasonably necessary for the protection of the legitimate interests of an arbitrating party; and (4) where required in the interests of justice, and perhaps the public interest. This may become a very influential opinion in this area of English jurisprudence. Emmott v. Michael Wilson & Partners Limited [2008] EWCA Civ 184 (Mar. 12, 2008).

This post written by Rollie Goss.

U.S. SUPREME COURT FINDS FAA PREEMPTS CALIFORNIA STATE LAW

May 19, 2008 by Carlton Fields

The U.S. Supreme Court ruled that when parties agree to arbitrate all questions arising under a contract, the Federal Arbitration Act (“FAA”) supersedes state laws that refer certain state-law controversies to a judicial forum or administrative agency. This case arose out of a contract dispute between a former Florida trial court judge (currently appearing as “Judge Alex” on Fox television) and his attorney regarding the payment of certain fees. The Petitioner sought to arbitrate the dispute. In response, the Respondent, Ferrer, petitioned the California Labor Commissioner for a determination that the contract was invalid because if violated a California state law known as the Talent Agencies Act (“TAA”). Ferrer also filed a state court action seeking a stay of the arbitration proceeding. The lower courts held that the statutes vested exclusive jurisdiction of the dispute with the Labor Commissioner.

The Supreme Court reversed that decision. The Court stated that “the dispositive issue… is not whether the FAA violates the TAA wholesale. The FAA plainly has no such destructive aim or effect. Instead, the question is simply who decides whether Preston [violated the TAA].” The Court concluded that because the contract contained an arbitration provision, the FAA superseded California state law, lodging jurisdiction elsewhere. blank”>Preston v. Ferrer, No. 06-1463, 552 U.S. _ (Feb. 20, 2008).

This post written by Lynn Hawkins.

COURT RULES THAT REINSUREDS MAY NOT RECOVER TORT DAMAGES FOR BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

May 13, 2008 by Carlton Fields

The plaintiff, a joint powers self-insured retention pool consisting of numerous California public agencies, sued the defendant, a reinsurer that reinsured plaintiff pursuant to two agreements, after the defendant declined to provide reinsurance coverage. The lawsuit alleged breach of contract and tortious breach of the implied covenant of good faith and fair dealing, and sought declaratory relief. The defendant moved to dismiss the implied covenant claim, arguing that, under California law, reinsureds may not recover tort damages for a breach of the implied covenant of good faith and fair dealing. That motion was granted. The court held that the availability of tort remedies in the context of a contractual dispute depends on whether social policy supports their imposition. While tort remedies for breach of the implied covenant of good faith and fair dealing in insurance policies had previously been recognized by California courts, they were only considered appropriate because the policies were characterized by elements of adhesion and unequal bargaining power, public interest and fiduciary responsibility. The relationship between reinsurer and reinsured does not implicate the same concerns since reinsureds are sophisticated business entities and, in obtaining reinsurance coverage, are merely seeking the commercial advantage of writing more policies than their reserves would otherwise sustain. The court ruled that more was needed before it could justify the imposition of tort damages in a straightforward contractual dispute. California Joint Powers Insurance Authority v. Munich Reinsurance America, Inc., Case No. CV 08-956 (USDC C.D. Cal. Apr. 21, 2008).

This post written by Brian Perryman.

COURT ADDRESSES PROCESS FOR REPLACING PARTY-APPOINTED ARBITRATOR WHO HAS WITHDRAWN

May 12, 2008 by Carlton Fields

WellPoint Health Networks and John Hancock Life Insurance Company became involved in a dispute over the interpretation of three documents relating to WellPoint’s purchase from John Hancock of what were termed Hancock’s Group Business Operations. The Purchase and Sale Agreement, Coinsurance Agreement and Administration Agreement all contained arbitration provisions. The issue was whether three loss-producing books of insurance business, the most important of which were heavily loss producing personal accident risks originated by JEH Re Underwriting Management in Bermuda, were included in the transaction. WellPoint demanded arbitration, seeking additional information about these businesses and a declaration of its responsibilities. Hancock counter-demanded for arbitration seeking $42.4 million from WellPoint, which it later “revised” to $464.4 million. Both parties appointed an arbitrator, and when the party-appointed arbitrators could not agree on an umpire, under the terms of the contract the Denver office of the American Arbitration Association appointed the umpire. Shortly after Hancock increased its claim by ten-fold, Hancock replaced its counsel and sought to replace its party-appointed arbitrator. Conceding that it could not “fire” its appointed arbitrator, WellPoint apparently convinced the arbitrator to withdraw, and a dispute arose as to how to appoint a replacement.

Neither the agreements nor applicable law expressly covered the issue. WellPoint contended that it could appoint a replacement, while Hancock contended that it could appoint the replacement under a provision allowing it to do so if WellPoint defaulted in timely appointing an arbitrator. The remaining arbitrator and umpire allowed WellPoint to appoint a successor, who Hancock conceded was qualified under the arbitrator qualification provisions of the agreements. The arbitration proceeded in two phases, with an interim award entered after the initial phase, and a final award entered after the second phase. The panel's conclusion was that the JEH Re business was not included in the purchase transaction, and that WellPoint owed Hancock $26.4 million instead of the $464 million it had requested.

Hancock moved to vacate the awards, while WellPoint moved to confirm. The first issue was whether the award after the initial phase was subject to immediate confirmation. If it were, Hancock’s motion to vacate was untimely. The court determined that the “initial award” was not a final award, and that Hancock had acted timely in seeking to vacate the final award.

With respect to the replacement of the arbitrator, the court held that Hancock had not waived its right to challenge the appointment by failing to seek relief immediately under section 5 of the FAA. The court upheld the appointment of the replacement arbitrator by WellPoint based upon its interpretation of the agreements and the evident intention of the parties that each would appoint one of the arbitrators. The fact that neither the agreements nor the FAA clearly addressed the situation provided the court with discretion, which it interpreted to require it to attempt to implement the intention of the parties.

This is a very interesting, 33 page opinion, which addresses a number of issues of great importance in many reinsurance arbitrations. The Seventh Circuit has addressed some interesting arbitration process issues, and we will watch to see if this decision is appealed. WellPoint Health Networks, Inc. v. John Hancock Life Ins. Co., Case No. 07-943 (USDC N.D. Ill. Apr. 24, 2008).

This post written by Rollie Goss.