Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SDNY Rejects Cross-Petition To Vacate Arbitration Award, Rejecting Claims of Manifest Disregard of Law and “Evident Partiality”

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Recognizing arbitration awards are subject to “very limited review” and should be confirmed, “so long as there is a ‘barely colorable justification’ for the outcome that the arbitrator reached,” the U.S. District Court for the Southern District of New York affirmed the arbitration award in favor of the petitioners, Telecom Business Solution, LLC, LATAM Towers, LLC, and AMLQ Holdings (Cay) Ltd., and denied the respondents, Terra Towers Corp., TBS Management, S.A., and DT Holdings, Inc.’s cross-petition to vacate that award.

The petitioners and respondent, Terra Towers Corp., entered into a shareholders agreement to co-own and operate a business engaged in the operation of telecommunications towers in Central and South America (Company). Terra was the majority shareholder of the Company, and the petitioners were the minority shareholders. The shareholders agreement provided that after five years, the petitioners could unilaterally initiate a sale of the Company, which it did two weeks after the expiration of the five-year period. Terra rejected the sale proposed by the petitioners and sought to buy out the petitioners’ shares of stock in the Company. The petitioners then commenced an arbitration alleging that Terra breached the shareholders agreement “by obstructing their proposed sale of the Company.” The petitioners sought damages from the respondents or specific performance. The petitioners and respondents each appointed one arbitrator who then appointed a third arbitrator to act as chair of the panel. Phase one of the arbitration was limited to the petitioners’ claim for specific performance related to the sale of the Company. After a hearing, the panel issued a First Partial Final Award (FPFA) ordering a sale of the Company. Further disputes developed between the parties after the entry of the FPFA, resulting in the entry by the panel of interim relief, including an injunction. The respondents claimed to the ICDR that there was “‘justifiable doubt’ about their party-appointed arbitrator’s impartiality.” After further submissions on the issue, the ICDR’s International Administrative Review Council denied the respondents’ challenge.

The petitioners filed a petition to confirm the FPFA, and the respondents sought “to vacate the FPFA, asserting that the panel violated “‘fundamental fairness’ by refusing to provide them with ‘a fair opportunity to be heard’ … that the Panel acted in ‘manifest disregard of the law’ … by granting specific performance to Petitioners,” and that there was “evident partiality” by two of the three arbitrators in favor of the petitioners. After noting the grounds on which an arbitration award may be set aside, the court rejected all of the respondents’ arguments and granted the petition to confirm the FPFA. The court found “[n]either the Panel’s decision to phase the arbitration nor the Panel’s denial of discovery in Phase 1 of the Arbitration constituted misconduct that rendered the Arbitration fundamentally unfair.”  The court also rejected the respondents’ contention that the FPFA issued was in “manifest disregard of the law,” finding a court’s review under this standard is “severely limited” and a “doctrine of last resort” limited to “rare instances where some egregious impropriety on the part of the arbitrators is apparent.” Finally, the court rejected the respondents’ claim of evident partiality concluding the “ICDR already has carefully reviewed and rejected all of Respondents’ evidence of a purported disqualifying conflict.”

Telecom Business Solution, LLC et al. v. Terra Towers Corp., et al., No. 22-cv-1761 (SDNY, Jan. 18, 2023)

Wyoming Supreme Court Affirms Finding That Arbitrator’s Determinations Did Not Exceed Authority And Were Not Manifest Errors of Law

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Defendant Fork Road, LLC, is the owner of a floor of an office building, which it purchased several years earlier. Plaintiff Mountain Business Center, LLC (MBC) was a tenant in the building at the time of Fork Road’s purchase. In connection with the purchase, MBC was to provide an estoppel certificate listing, and among other things, subtenant identities and sublease rent payment information. MBC returned the estoppel certificate, but did not provide the requested information concerning the subtenants and sublease rental payments. Fork Road proceeded with the purchase without this information, gave notice to MBC to vacate the premises, and notified the subtenants that Fork Road would be taking over the subleases. MBC refused to vacate and Fork Road filed an eviction action in the Wyoming circuit court. MBC appealed to the district court, which ruled the parties were bound by an arbitration clause in their agreement.

The dispute proceeded to arbitration. MBC and Fork Road submitted a “Stipulated List of Issues to be Determined by the Arbitrator,” which the arbitrator then consolidated and summarized. The result was seven claims by Fork Road and eight claims by MBC, largely related to various alleged breaches of the underlying lease agreement. After a five-day hearing, the arbitrator issued a 47 page decision in which he decided all issues presented, and ruled “for and against both MBC and Fork Road” on their various claims. The arbitrator determined that MBC sustained damages of $35,750, and that Fork Road sustained damages of $11,752. Fork Road was permitted to offset MBC’s damages with the damages it had incurred, and in so doing, the arbitrator rejected MBC’s argument that the “first-to-breach rule” prevented the off-set. The arbitrator also decided MBC was not the prevailing party and not entitled to attorney’s fees. MBC appealed to the district court, which confirmed the award.

MBC then appealed to the Wyoming Supreme Court. First, MBC alleged the arbitrator exceeded his authority “by making factual and legal determination of issues not submitted to him.” The court disagreed, concluding that the arbitrator “properly relied on the stipulated list to determine the issues before him….” Second, the court also rejected MBC’s arguments that it was manifest error of law when the arbitrator determined (1) MBC was not the prevailing party and therefore not entitled to attorney’s fees; and (2) MBC was not entitled to the benefit of the “first-to-breach rule.” The court affirmed the district court’s order, concluding “the arbitrator did not exceed his authority in determining the issues presented to him…” and “did not commit manifest error in its prevailing party and first-to-breach rule analysis.”

Mountain Business Center, LLC v. Fork Road, LLC, Docket No. S-22-0090 (Supreme Court of Wyoming, Nov. 23, 2022)

Ninth Circuit Dismisses Appeal of Denial of Motion to Compel Arbitration as Moot After the Complaint Was Amended While the Appeal Was Pending

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The plaintiff’s original complaint relied on a certain purchase agreement (PA) that included an arbitration clause. While the appeal was pending, the lower court permitted the plaintiff to amend the complaint to no longer rely on the PA for its claims. As a result, the plaintiff contended that the appeal was moot since there was no longer a basis to invoke the arbitration clause. The appellants, however, challenged the lower court’s ruling permitting an amendment to the pleading during the appeal, and further argued that the amended complaint still relied on the PA.

The Ninth Circuit held that a “plaintiff is master of the complaint and an appeal seeking review of collateral orders does not deprive the trial court of jurisdiction over other proceedings in the case.” (Citing Ninth Circuit precedent and noting that the U.S. Supreme Court has granted a petition for a writ of certiorari to resolve the split in the circuits on whether an appeal of the denial of a motion to compel arbitration “oust[s] a district court’s jurisdiction to proceed with litigation pending appeal” or instead, whether “the district court retain[s] discretion to proceed with litigation while the appeal is pending.”)

The Ninth Circuit then concluded that the amended complaint did not rely on the PA, and, in any event, the plaintiff stipulated that he had abandoned any claim under the PA. The court therefore dismissed the appeal as moot.

Matter of Giga Watt, Inc., Case No. 22-35104 (9th Cir. Dec. 23, 2022).

Two California Federal Courts Grant Motions to Compel Arbitration, Finding Arbitration Agreement is Neither Procedurally nor Substantively Unconscionable

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In two separate consumer lawsuits against cryptocurrency exchange Coinbase, federal trial courts in California granted Coinbase’s motions to compel arbitration based on the arbitration provision in its user agreement.

In Donovan v. Coinbase Global, Inc. and Pearl v. Coinbase Global, Inc., plaintiffs were customers of defendant Coinbase, a currency exchange that allows users to buy and trade various forms of cryptocurrency. In both cases, Coinbase moved to compel arbitration based on the terms of its user agreement. In their opposition briefs, plaintiffs conceded that they agreed to Coinbase’s user agreement and that the user agreement contained an arbitration agreement. However, plaintiffs argued that the arbitration provision was unconscionable and therefore unenforceable as a matter of law.

As the courts noted, a party seeking to invalidate a contractual provision as unconscionable must prove both “substantive” and “procedural” unconscionability. Procedural unconscionability refers to the manner in which the contract was negotiated. The two courts noted that in the context of contracts of adhesion, the question of procedural unconscionability turns on whether the circumstances of the contract’s formation creates “oppression or surprise,” and whether offending provisions were “buried in a lengthy agreement.” Substantive unconscionability, by contrast, focuses on whether a contract term leads to “overly harsh” or “one-sided” results.

In the two decisions, both courts first addressed procedural unconscionability. The plaintiffs argued that the arbitration agreement in Coinbase’s user agreement was procedurally unconscionable on the grounds that it was presented in “inconspicuous font” and “buried in lengthy text” in the agreement. The courts disagreed, noting that while the user agreement was indeed a contract of adhesion, Coinbase was not the only cryptocurrency exchange available to the plaintiffs, and, in any event, Coinbase reasonably informed its users of changes to the arbitration provision in its user agreement via email and clearly labelled the arbitration provision within the agreement. As such, both courts found only “minimal” procedural unconscionability arising from the arbitration provision in Coinbase’s user agreement.

Regarding substantive unconscionability, the plaintiffs argued that certain provisions of the arbitration agreement were unfairly one-sided, benefitting Coinbase to its consumers’ detriment. Both courts rejected this argument. The Donovan court held that the plaintiffs in that case failed to meet their burden of establishing that the one-sided nature of the referenced provisions rose to the level of unconscionability. While the Pearl court reached the same result, it also found that the plaintiff’s unconscionability challenge was not directed at the specific language delegating arbitrability challenges to the arbitrator, and concluded that the plaintiff’s unconscionability challenge was thus an issue to be decided by the arbitrator in the first instance. In both cases, the courts rejected the plaintiffs’ remaining arguments and granted Coinbase’s motions to compel arbitration.

Donovan v. Coinbase Global, Inc., 22-cv-02826 (N.D. Ca. Jan. 6, 2023)

Pearl v. Coinbase Global, Inc., 22-cv-03561 (N.D. Ca. Feb. 3, 2023)

Supreme Court of Wyoming Confirms Arbitration Award

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The Supreme Court of Wyoming recently rejected claims by a party that had largely prevailed in arbitration, but asserted that it should have received its fees, and that the arbitrator incorrectly decided several issues.

Fork Road, LLC owned part of a building that it purchased from JAMD, LLC. Mountain Business Center, LLC (MBC) was a tenant in that building. JAMD requested, on behalf of Fork Road, that MBC provide information about subtenants. MBC provided certain information, but withheld other information. Fork Road and MBC ended up in arbitration over that withholding and various other issues related to MBC’s lease. The arbitrator ruled in favor of MBC on certain claims and Fork Road on other claims, but ultimately awarded MBC nearly $24,000. MBC argued that it was the prevailing party and sought its fees, but the arbitrator declined to award them because this was a “mixed outcome” case, in which both parties prevailed on certain claims.

MBC challenged the award, arguing that the arbitrator had exceeded his authority because one of Fork Road’s witnesses had “waived” certain claims by Fork Road, but the arbitrator had nevertheless decided those claims. MBC also argued that it was the prevailing party and therefore entitled to fees and that the arbitrator erred by not applying the “first to breach rule” and holding that Fork Road had been the first to materially breach the lease.

The Supreme Court of Wyoming rejected MBC’s claims noting, “MBC cite[d] no authority that testimony by a lay witness on the substantial acts at issue may be used by party to limit its opponent’s claims.” It also held that the arbitrator did not have to award MBC fees even if it was true, as MBC argued, that MBC had prevailed on the “central issue” in the case.  The court also held that the arbitrator did not commit manifest error by not applying the “first to breach rule,” where MBC had stayed in the building after Fork Road allegedly breached the lease.

Mountain Business Center, LLC v. Fork Road, LLC, No. 2-22 WY 147 (Wyo. Nov. 23, 2022).