Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

EIGHTH CIRCUIT UPHOLDS ARBITRATION AGREEMENT IN ABSENCE OF ACTUAL PROOF OF UNCONSCIONABILITY DUE TO COST

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The Eighth Circuit affirmed a decision by the U.S. District Court for the Eastern District of Missouri which rejected the contention that an arbitration agreement was unconscionable, and unenforceable under the Federal Arbitration Act, because (1) the prohibitively high costs associated with an individual arbitration proceeding prevented plaintiffs from pursuing their claims; and (2) it included a waiver of punitive damages and attorneys’ fees. In this case, a class of cleaning business franchisees sued a franchisor and related companies for RICO violations. Plaintiffs also contended that some defendants were non-signatories and therefore could not enforce the arbitration agreement. In response, defendants moved to compel individual arbitration citing the arbitration provision language in the respective franchise agreements.

Plaintiffs supported their claims with several figures including average loss per plaintiff, a range of individual filing fees, average daily fees for arbitrators in four cities, and a likely hearing length of three days. Altogether, plaintiffs asserted that their individual arbitration costs would exceed their respective damages. Ultimately, the court found that plaintiffs’ proof was insufficient because (1) the arbitrations would not take place in any of the four cities for which daily fees were provided and (2) plaintiffs did not submit individual affidavits demonstrating their inability to afford arbitration costs. The court emphasized that rather than a hypothetical inability to pay, plaintiffs must provide specific evidence of their individual inability to pay the actual arbitration fees likely to be incurred in order to overcome the federal policy favoring arbitration. The court also rejected plaintiffs’ claim that even if enforceable, the arbitration agreement prohibited non-signatories from compelling arbitration. The court also held that the arbitration agreement language was broad enough to include various non-signatory third parties, and deemed them capable of enforcing the arbitration provision. Torres v. Simpatico, Inc., No. 14-1567 (8th Cir. Mar. 25, 2015).

This post written by Rollie Goss.

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FIFTH CIRCUIT AFFIRMS INTERPRETATION OF TWO AGREEMENTS AND DENIAL OF MOTION TO COMPEL ARBITRATION

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The Fifth Circuit addressed the question of whether a subcontract between the parties requires arbitration, a question that turned on the interpretation of the term “contract documents” in the subcontract. TRC Environmental Corporation hired LVI Facilities Services, Inc. as a subcontractor in an effort to decommission a power plant in Austin, Texas. The Fifth Circuit agreed with the district court’s interpretation that (1) the phrase “Contract Documents” in the subcontract, includes the subcontract itself; and (2) claims arising under the Contract Documents requires an alternative dispute resolution process as laid out in the separate Project Agreement, which did not require arbitration. Based on this interpretation of the two documents, the Fifth Circuit held, the district court correctly denied LVI’s motion to compel arbitration. TRC Environmental Corp. v. LVI Facility Servs., Inc., No. 14-51269 (5th Cir. May 22, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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CHINESE ARBITRATION AWARD AFFIRMED IN MINERAL COMPANY DISPUTE

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The court ruled that ACC Resources is bound by an arbitral award issued by the China International Economic & Trade Arbitration Commission (“CIETAC”). The award required the mineral company to pay its supplier, Calbex Mineral Limited the unpaid balance for minerals supplied. ACC argued that the award was made without its knowledge and without offering the company the opportunity to defend itself. ACC also argued that the arbitration award was void because the CIETAC subcommission that initially rendered the award in favor of Calbex had broken away from CIETAC.

The district court held that ACC failed to meet the standards of the New York Convention—which governs the enforceability of international arbitration—by not providing sufficient proof to show that they had not been given notice of the proceedings. Further, the court noted that ACC failed to offer evidence that it knew about the subcommission’s split from CIETAC during the relevant time. ACC also disputed the panel’s failure to forward evidence received in the course of its investigation, but the district court held that ACC did not show prejudice from this violation. Because ACC had not been prejudiced, the arbitral award must stand. Calbex Mineral Ltd. v. ACC Resources Co., L.P., No. 13-276 (USDC W.D. Pa. Mar. 13, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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COURT REMANDS ARBITRATION AWARD FOR FURTHER CLARIFICATION WHERE RATIONALE WAS NOT GIVEN

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In a case involving a dispute over steel production to replace a portion of the Whitestone Bridge spanning New York City’s East River, a federal district court remanded an arbitration award back to the arbitrator. Under the parties’ arbitration agreement, the arbitrator was to issue a reasoned award. However, the arbitrator’s award was a two-page award with the “arbitrator merely list[ing] various categories of monetary damages without explanation as to how he calculated those figures or determined liability.” Under the Southern District of New York standard, a reasoned award is one where the arbitrator presents “something short of findings of fact and conclusions of law but more than a simple result. Where the award offered no more than the damages, the court found that this low standard was not met.

The court chose not to vacate the award, however. Noting that some courts have completely vacated the award where arbiters have ignored the arbitration agreement and exceeded their powers, the court found that the doctrine of functus officio (once the award is made, the duty is done) was inapplicable. Because the arbitrator never completed his duty, the court found that remand to do so was proper. Tully Const. Co. v. Canam Steel Corp., No. 1:13-cv-03037-PGG (USDC S.D.N.Y. Mar. 2, 2015).

This post written by Zach Ludens.

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