Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

English Court Enjoins Washington State Court Action in Favor of Arbitration in London

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In a dispute involving a complex, multilayered excess insurance policy, the Commercial Court of the Queen’s Bench Division enjoined Weyerhaeuser, a Washington company, from suing Catlin Syndicate Limited, a London-based insurer, in Washington based on the parties’ agreement to arbitrate in London.

The “Layer 4 Policy” at the heart of the lawsuit provided that the choice of law and jurisdiction governing disputes under the contract would be “as per Lead Underlying Policy.” Endorsement 7 of the Lead Underlying Policy provided for “any dispute, controversy or claim arising out of or relating to the policy to be determined in London under the Arbitration Act 1996.” However, Endorsement 8 of the Lead Underlying Policy stated that Washington state law governed the policy, and Endorsement 9 provided that Catlin would “submit to the jurisdiction of any court of competent jurisdiction within the United States.” Significantly, however, Catlin’s submission to jurisdiction in the United States was “solely for the purpose of effectuating arbitration.” Therefore, the court held the result was dictated by Endorsement 7, which required the parties to arbitrate disputes in London.

The court gave great weight to the “commercial parties” involved in the dispute, finding that a conflict in drafting “could or should [not] lightly be attributed to commercial parties,” and “struggl[ing]” to see why “commercial parties” would provide for the “unusual” limits on arbitration advanced by Weyerhaeuser.

The court’s ruling was based on English law, but the court found the result would be the same under Washington law, as presented to the court via expert evidence. Although the court recognized that Washington’s adopted policy is “adverse to arbitration,” the court stated that an interpretation of the parties’ contract that “does not work commercially … weigh[s] strongly against” a finding that Washington state policy should alter the parties’ agreement.

Catlin Syndicate Limited v. Weyerhauser Company, No. CL-2018-000292, [2018] EWHC 3609 (Comm) (Dec. 21, 2018).

D.C. Circuit Court Affirms $1.2 Billion Arbitration Award to Gold-Mining Company

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Crystallex International Corporation (“Crystallex”) is a Canadian gold-mining company. Crystallex acquired the rights to explore gold deposits in Venezuela through a contract. To explore the mines, Crystallex completed all the permit requirements and posted a bond. The Venezuelan Ministry of Environment denied the permits based on environmental concerns.

Crystallex initiated international arbitration proceedings, alleging that the denial of the permits violated a bilateral treaty between Canada and Venezuela. The arbitration tribunal awarded Crystallex a little more than $1.2 billion in damages. Crystallex petitioned in federal district court for confirmation of the award, and Venezuela opposed and moved to vacate the award under the FAA.

The district court affirmed the award and denied the motion to vacate. Venezuela appealed. On appeal, the court affirmed the district court’s judgment. The court explained that: (1) the district court considered all of Venezuela’s FAA arguments and applied the correct standard of review drawn from FAA case law; (2) the district court did not err in applying a deferential standard to its review of the arbitral award’s method of calculating damages; and (3) the district court did not confirm the arbitral award based on misunderstandings of the arbitration tribunal’s reasoning.

Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, No. 17-7068, 2019 WL 668270 (D.C. Cir. Feb. 14, 2019)

Tenth Circuit Affirms Partial Enforcement of Arbitration Clause

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The Tenth Circuit recently affirmed a district court’s decision partially compelling arbitration. Jesse Romero took out three title loans with TitleMax of New Mexico, Inc. Romero used his third loan to pay off his second loan and his second loan to pay off his first loan. Each loan was related to the same car and each loan agreement contained an identical arbitration clause. The clause was broadly worded to cover “Disputes.” However, the clause stated it did not apply to “disputes about the validity, coverage, or scope of” the arbitration clause. The loan agreements also contained an opt-out provision allowing the party to opt out of the arbitration clause if the borrower provided notice to TitleMax within 60 days of taking out the loan. Romero did not opt out of the arbitration clause in his first or second loan agreements, but elected to opt out of the clause in his third agreement. He then filed a putative class action asserting that TitleMax’s practices violated various New Mexico consumer protection statutes.

TitleMax removed the case to federal court and sought to invoke the arbitration provision and compel all of Romero’s claims to be arbitrated. The district court agreed that arbitration was proper with respect to Romero’s first and second loan agreements because Romero had not opted out of the arbitration clauses in those agreements. The court concluded, however, that Romero had properly opted out of the arbitration clause in the third agreement and accordingly, declined to compel arbitration with respect to Romero’s claims based on that agreement. The district court declined to rule on arbitration with respect to putative class members who were not before the court.

The Tenth Circuit affirmed. It first noted that the provision covered disputes broadly but also that the clause gave the court broad authority to interpret the clause. The court rejected TitleMax’s argument that Romero did not properly opt out of the clause in the third agreement and that the third agreement was a refinancing of the second agreement, which Romero had not opted out of and therefore required an arbitrator to determine whether Romero’s claims regarding his third agreement were subject to arbitration. The court explained that the arbitration clause gave the court the authority to interpret the arbitration provision. The court noted that each agreement was separate and contained its own (identical) arbitration clause.

Romero v. TitleMax of New Mexico, Inc., No. 18-2077 (10th Cir. Feb. 5, 2019)

Eighth Circuit Rejects Claim that Arbitral Award Was Insufficiently Broken Down or Explained

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Great American denied a claim for coverage for damage to an insured’s corn and soybean crops in three Missouri counties, asserting that the insured had failed “to substantiate an insurable cause of loss” and “fail[ed] to provided adequate records to establish production ‘by unit.'” The insured brought an arbitration seeking coverage, and a three-arbitrator panel awarded him $1.4 million for the damages to his corn crop. Great American moved to vacate the award, arguing that the panel had “imperfectly executed” its powers by failing properly to break down the award “by claim” as required by federal regulations for arbitrations regarding such federally reinsured crop insurance. The district court, finding that the “by claim” requirement meant that an award must break down such claims by county and that the panel had not done this, found this argument sufficient to nullify the entire award.

On appeal, the Eighth Circuit rejected this argument entirely. Recognizing that the regulations require the insurer to determine losses “on a unit basis” and that a unit cannot cover more than one county, the court nonetheless found that a “unit” and a “claim” were not the same thing, and that the arbitrators’ obligation was to break down the award by claim, not by unit. In fact, it was Great American who chose to treat all of these alleged crop losses as one claim, and the panel simply accepted that decision.

Great American also argued that the panel’s explanation for the award amount was insufficient because it merely adopted the calculations of the insured’s expert, but the Eighth Circuit found that this was acceptable, particularly because Great American neither contested this calculation nor offered an alternative calculation. The court thus remanded the case to the trial court so that it could consider Great American’s alternative argument that the panel’s decision rested on an improper interpretation of the applicable regulations.

Great American Insurance Company v. Jonathan L. Russel, No. 17-2441 (8th Cir. Jan. 31, 2019)

Tenth Circuit Affirms District Court’s Confirmation of Arbitration Award While Applying “One of the Narrowest Standards of Review Known to Law”

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Plaintiffs-Appellants MEMC II, LLC and Mike McDaniel (collectively, “MEMC”) contracted to have Defendant-Appellee Cannon Storage Systems, Inc. (“Cannon”) build a commercial storage facility in Dallas, Texas. The contract included, among other things, precise design specifications and required that any disputes between the parties be resolved by binding arbitration. During construction, Cannon deviated from the agreed-upon design specifications, and MEMC began withholding payments, arguing that Cannon had materially breached the Contract by deviating from those specifications. Cannon continued construction without payment for nearly five months until the parties proceeded to arbitration.

Cannon brought claims for breach of contract based on MEMC’s nonpayment, to which MEMC responded with an affirmative defense, arguing that Cannon’s departure from the design specifications constituted a material breach that discharged MEMC of its payment obligations. Additionally, MEMC counterclaimed for breach of contract due to Cannon’s failure to use the approved plans and specifications. Ultimately, the arbitrator found that MEMC breached the contract by refusing to pay Cannon and that Cannon breached the contract by failing to construct the storage facility according to the agreed-upon specifications. Importantly, the arbitrator did not find Cannon’s breach to be material under Texas law, and therefore, held that MEMC could not evade liability for its refusal to pay.

The District Court for the Western District of Oklahoma confirmed the award and the Tenth Circuit affirmed. The Panel reiterated the narrow scope of judicial review of arbitral awards and found that nothing in the arbitrator’s decision suggested that she did not interpret the contract; in fact, the Panel found the opposite—that the arbitrator considered the respective clauses using relevant case law, weighed the evidence, and decided that, even though Cannon breached the operative contract, its breach did not excuse MEMC from payment obligations. As such, and “[b]ecause the arbitrator interpreted the Contract and applied the law of the jurisdiction selected by the parties, she did not dispense [of] her own brand of industrial justice or exceed her authority under the agreement.”

MEMC II, LLC v. Cannon Storage Sys., Inc., No. 18-6079, 2019 WL 549633 (10th Cir. Feb. 12, 2019).