Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

En Banc Eleventh Circuit Overrules Prior Interpretation of New York Convention

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The Eleventh Circuit Court of Appeals has overruled long-standing precedent and joined the Second, Third, Fifth, and Seventh Circuits to hold that the grounds for vacatur of an arbitral award are set out in domestic law (specifically Chapter 1 of the Federal Arbitration Act), not the New York Convention, where the United States is the primary jurisdiction under the New York Convention.

Since 1998, the Eleventh Circuit had held that a party seeking vacatur of an arbitral award issued under the New York Convention could only rely on the grounds for vacatur set out in Article V of the New York Convention. But that decision and a subsequent Eleventh Circuit ruling following it were “wrong” and “outliers” according to the Eleventh Circuit. The Eleventh Circuit explained that its prior decisions failed to properly analyze the text of the New York Convention or the FAA. “[N]either Article V of the [New York] Convention nor § 207 of the FAA provides the grounds on which a court in the primary jurisdiction can vacate an arbitral award.” Instead, “the primary jurisdiction’s domestic law acts as a gap-filler and provides the vacatur grounds for an arbitral award.” When the United States is the primary jurisdiction under the New York Convention, Chapter 1 of the FAA is that gap-filler. Thus, a party seeking to vacate an award subject to the New York Convention can rely on Chapter 1 of the FAA rather than Article V of the New York Convention when the United States is the primary jurisdiction.

In the case at bar, the district court had correctly followed the Eleventh Circuit’s prior, binding precedent and therefore not considered a challenge to the arbitration award at issue that was based on Chapter 1 of the FAA. The Eleventh Circuit therefore vacated the district court’s award and remanded for consideration of that challenge in light of its new precedent.

Corporación AIC, S.A. v. Hidroeléctrica Santa Rita S.A., No. 20-13039 (11th Cir. Apr. 13, 2023).

First Circuit Weighs in on FAA’s Transportation Worker Exception

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The First Circuit Court of Appeals recently clarified the standards for invoking the “transportation worker” exception to the Federal Arbitration Act. The court noted that fact-finding on that exception should focus on the frequency with which workers transport goods as part of their duties (regularly or only occasionally) and whether that transportation constitutes engaging in interstate commerce.

Sara Fraga worked as a merchandiser for Premium Retail Services Inc., a company that supported brands at their stores by having its merchandisers create advertising displays, update pricing and signage, and perform a number of other tasks. Premium and Fraga agreed that Fraga would receive marketing and promotional materials at her home and bring them to stores as part of her job. But Fraga and Premium disagreed about how frequently Fraga did so. Fraga claimed she received materials at her home and transported them to retail stores almost daily while Premium claimed it sent materials to merchandisers’ homes rarely.

Fraga filed a putative class action lawsuit against Premium under the Fair Labor Standards Act and Massachusetts law. She claimed that Premium failed to pay her and other merchandisers for overtime, time spent traveling to and between worksites, and work performed before arriving at a worksite, such as sorting and preparing display materials.

Premium moved to compel arbitration under Fraga’s employment contract, which also included a class action waiver. Fraga opposed Premium’s motion on the ground that she fell within the FAA’s exception for transportation workers. She argued that the FAA therefore did not apply and that Massachusetts law, which prohibits class action waivers, governed the dispute.

The district court denied Premium’s motion. It concluded that Fraga had plausibly alleged that she fell within the FAA’s exemption for transportation workers.

The First Circuit vacated and remanded. It concluded that further fact-finding was needed to determine whether Fraga and her co-workers fell within the transportation worker exception.

The First Circuit also provided guidance on what facts would allow Fraga to invoke the exception. In short, the First Circuit instructed the district court’s further fact-finding to focus on the work in which Fraga and other merchandisers were actually engaged rather than exclusively or even primarily focusing on the industry in which they worked (i.e., whether they worked in the transportation industry or another industry). The First Circuit emphasized that the “frequency” that Fraga and other merchandisers in the putative class worked on transporting goods was a key question (particularly given that the parties disputed the frequency that Fraga transported goods). If Fraga did not frequently deliver materials to retailers, then Fraga’s FAA exemption argument fails and the matter should be referred to arbitration. Conversely, if sorting, loading, and then transporting materials to retailers were frequently performed job duties, then the exemption would be met if the merchandisers were engaged in interstate commerce.

With respect to interstate commerce, the First Circuit noted that an employee need not necessarily drive across state lines to be engaged in interstate commerce for purposes of the FAA’s relevant exception. At the same time, intrastate deliveries of goods that previously traveled in interstate commerce might not be enough to meet the exception. The First Circuit instructed the district court to analogize this case to its relevant decisions based on the fact-finding that needed to be performed to determine whether interstate commerce existed.

Fraga v. Premium Retail Services, Inc., No. 22-1101 (1st Cir. Mar. 3, 2023).

Mississippi Supreme Court Affirms Denial of Motion to Compel Arbitration of Wrongful Death Suit

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Noting that the Federal Arbitration Act applies to nursing home admission agreements that include a mandatory arbitration provision, the Mississippi Supreme Court affirmed the trial court’s order denying Belhaven Senior Care LLC’s motion to compel arbitration of a wrongful death and negligence suit brought by the administrator and estate of a former patient. The court agreed with the trial court that the party who signed the admission agreement on behalf of the patient lacked the legal authority to bind the patient to the agreement.

When Mary Hayes was admitted to the Belhaven nursing home in November 2018, her daughter, Betty Smith (the administrator of her mother’s estate), executed an admission agreement on behalf of her mother that included a provision for binding arbitration of all claims related to Hayes’ residency at the nursing home. Hayes died in June 2020, and Smith filed a complaint against Belhaven in state court alleging claims for wrongful death, negligence, gross negligence, medical malpractice, and a statutory survival claim. Belhaven moved to compel arbitration, relying on the arbitration clause in the admission agreement. The trial court declined to compel arbitration because Smith did not have the legal authority to bind her mother to the admission agreement.

On appeal, Belhaven argued that under the Health-Care Decisions Act, Smith acted as a “statutory health care surrogate” for her mother when she signed the admission agreement and is estopped from denying the validity of the arbitration clause because she and Hayes benefited from the agreement, and Hayes was a third-party beneficiary. In rejecting Belhaven’s arguments, the court noted that it applies a two-prong inquiry in evaluating arbitration clauses, which includes first determining if there is a valid arbitration agreement, and if so, if the parties’ dispute is within the scope of the arbitration agreement. The court made clear that its focus in this case “rests wholly on the arbitration agreement’s validity.” The court concluded that the capacity to make health care decisions is presumed under the act, and a health care surrogate may only make health care decisions when the adult patient has been determined by the primary physician to lack capacity. Since Hayes was not evaluated by a physician when admitted, and was not found to lack capacity, Belhaven failed to prove the requirements of the act. The court then found that because Smith did not qualify as her mother’s health care surrogate, there was no valid contract. The court further found that Smith was not estopped from contesting the validity of the arbitration clause in the admission agreement. The court affirmed the trial court’s decision not to compel arbitration and remanded the matter.

Belhaven Senior Care, LLC v. Smith, No. 2022-CA-00050-SCT (Miss. Apr. 6, 2023).

Second Circuit Affirms Order Denying Application to Adjourn Enforcement of Arbitration Award Pending Outcome of Parallel Foreign Proceeding

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In Iraq Telecom Ltd. v. IBL Bank S.A.L., defendant IBL appealed an order from the district court that denied its application to stay the enforcement of a $3 million arbitration award rendered in favor of plaintiff Iraq Telecom. Without going into the underlying facts or procedural history, the court focused on whether the district court erred in its application of the factors set forth in Europcar Italia v. Maiellano Tours, 156 F.3d 310 (2d Cir 1998), for considering a request to stay enforcement proceedings pending the outcome of a parallel foreign proceeding. The court held the district court did not err in determining that the factors set forth in Europcar, on balance, weighed against staying enforcement of the award despite a pending Lebanese annulment action.

The court first noted that under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a district court may, if it considers it proper, adjourn the decision on the enforcement of the award if an application for the setting aside or suspension of the award has been made in the jurisdiction in which the award was made. Applying the factors set forth in Europcar, the court noted that it reviews a district court decision in these matters for abuse of discretion, including (1) basing its decision on an error of law or wrong legal standard; (2) basing its decision on a clearly erroneous factual finding; or (3) reaching a conclusion that, “though not necessarily the product of a legal error or a clearly erroneous factual finding, cannot be located with the range of permissible decisions.”

Applying this standard of review, the court found the district court properly applied the Europcar factors in denying the application to stay the enforcement proceedings pending the outcome of the parallel foreign proceeding. The court noted the district court’s determination that the two most important factors (the general objectives of arbitration and the status of the foreign proceeding) weighed against staying enforcement of the foreign award was reasonable. With regard to these factors, the court rejected IBL’s arguments that the district court erred by not considering future delay and the ramifications for international comity should the award be annulled in Lebanon, declining to disturb the district court’s findings on these factors. The court also concluded that the district court’s determination of the other Europcar factors was reasonable, including the conclusion that the balance of the possible hardships to each of the parties weighed against IBL’s request for a stay, and the district court did not abuse its discretion in determining that IBL was not likely to succeed in its Lebanese annulment action. The court affirmed the judgment of the district court, rejecting IBL’s application for a stay.

Iraq Telecom Ltd. v. IBL Bank S.A.L., No. 22-832 (2d Cir. Apr. 17, 2023)

Court Enforces Nine-Figure Chinese Arbitration Award, Finding Notice Requirements of New York Convention Were Satisfied

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The U.S. District Court for the Southern District of New York recently denied a motion to reconsider its prior confirmation of a “multihundred-million-dollar” arbitration award by a Chinese arbitration panel. In the underlying arbitration, the China International Economic and Trade Arbitration Commission (CIETAC), the Chinese arbitral authority, issued the award after attempting three separate times to provide notice of the arbitration to the respondent. Mailed notice was sent to three different addresses, including the address designated in the relevant agreement, as well as two other addresses known to be associated with the respondent. Ultimately, the respondent appeared at the arbitration, which yielded a large award against it.

In a prior ruling, the court granted summary judgment in favor of the petitioner confirming the Chinese arbitration award pursuant to the provisions of the New York Convention. The respondent moved for reconsideration under Federal Rule of Civil Procedure 60(b), which permits “a party to seek relief from a final judgment, and request reopening of his case, under a limited set of circumstances,” including where the judgment is based on “mistake, inadvertence, surprise, or excusable neglect.” The respondent argued the judgment should be set aside because he never received proper notice of the arbitration.

The court declined the respondent’s invitation. While the New York Convention permits non-enforcement of a foreign arbitral award where proper notice was not provided, the notice does not have to meet the requirements of the federal rules. Instead, notice is required only to be sufficient to afford due process. “Because the due process inquiry is limited to determining whether the procedure used was fundamentally unfair, it often demands less than” the federal rules or the applicable arbitration agreement.

Here, the court found the procedures used by CIETAC to provide the respondent with notice were reasonable under the circumstances and sufficient to afford due process. This finding was buttressed by the fact that the respondent actually participated in the arbitration despite the reported difficulties in obtaining service. The arbitration panel’s attempts to provide service via multiple mailings to addresses known to be associated with the respondent met “the relatively low burden imposed by due process.”

Huzhou Chuangtai Rongyuan Investment Management Partnership v. Qin, No. 1:21-cv-09221 (S.D.N.Y. Mar. 31, 2023).