Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Ninth Circuit Confirms Arbitration Award Finding FAA Disallows Judicial Review of Whether Arbitrator’s Factual Findings “Are Supported by the Evidence in the Record”

by

Plaintiff Annette Serna appealed from an order of the U.S. District Court for the Central District of California. Serna had brought wrongful termination and related claims against Northrop, including under California’s Fair Employment and Housing Act (FEHA), in the Superior Court of California, Los Angeles County. Northrop removed the matter to the U.S. District Court for the Central District of California and then moved to compel arbitration pursuant to Northrop’s 2010 arbitration policy, which explicitly covered “future” claims between Serna and Northrop. The district court compelled arbitration and stayed the action pending arbitration. The arbitrator dismissed Serna’s claims under FEHA, concluding that Serna was not a qualified individual under the statute. Thereafter, the district court denied Serna’s motion to vacate the arbitrator’s decision. The Ninth Circuit affirmed.

The Ninth Circuit concluded that the district court did not err when it compelled arbitration given that the 2010 policy expressly stated that “any claim, controversy, or dispute, past, present, or future” between Serna and Northrop would be subject to binding arbitration. The court rejected Serna’s argument that she was no longer bound by the 2010 policy because it was “superseded” by an updated policy in 2013, finding that nothing in the 2010 policy stated that a revised policy would nullify Serna’s agreement in 2010 to arbitrate all claims, including future claims arising out of her employment with Northrop. The Ninth Circuit also found that the district court did not err when it denied Serna’s request to vacate the arbitrator’s decision on the basis that Serna was not a qualified individual under FEHA, holding that the arbitrator’s factual findings on that issue are beyond the scope of judicial review allowed by the FAA. Finally, the court found that the arbitrator did not exhibit a “manifest disregard of the law,” concluding that the arbitrator did in fact identify the relevant legal standards and applied them, and noted that “because he did so, we may not second-guess his interpretation or application of the law.”

Serna v. Northrop Grumman Systems Corp., No. 21-55238 (9th Cir. July 12, 2022).

Third Circuit Confirms Arbitration Award Finding Award Was Consistent With Controlling Authority and Arbitrator Did Not Manifestly Disregard Parties’ Agreement

by

Defendants Jeffrey M. Smith and Sarah A. Smith appealed from an order of the U.S. District Court for the District of the Virgin Islands. The district court denied the Smiths’ motion to vacate the arbitration award entered against them, concluding that the arbitrator made a good faith attempt to interpret and apply the agreement between the parties, which included the arbitration clause. The Third Circuit affirmed.

The Smiths entered into an agreement, which included an arbitration provision, with plaintiff Bayside Construction LLC wherein Bayside was to perform repair work on the Smiths’ home located on St. Thomas, in the Virgin Islands. The Smiths declared Bayside in default for defects in the repair work but did not allow Bayside to cure the alleged defaults before declaring default, as required under the agreement. Bayside filed a demand for arbitration for amounts due and the Smiths filed a counterclaim for alleged overpayment for work performed. The arbitrator concluded that the Smiths had breached the agreement and entered an award in favor of Bayside, which included a modest reduction for “shoddy” work to the amount that Bayside had claimed.

The Smiths argued that the arbitrator “manifestly disregarded” Virgin Islands law and exceeded his powers by issuing an award to Bayside. The Third Circuit rejected the Smiths’ arguments and agreed with the district court’s finding that, while the arbitrator did not cite Virgin Islands law in the award, it was consistent with authority in the territory addressing both the “opportunity to cure” before terminating an agreement and the application of set-offs for defects in construction cases. The Third Circuit concluded it was “immaterial” that the arbitrator cited an arbitration rule rather than case law from the Virgin Islands in the award since the award would have been no different under Virgin Islands law. The Third Circuit also held that since the award was consistent with authority in the Virgin Islands, the arbitrator had not “manifestly disregarded” the law or the parties’ agreement, and did not exceed his powers.

Bayside Construction LLC v. Smith, No. 21-2716 (3d Cir. July 8, 2022).

Court Confirms Foreign Arbitration Award, Notwithstanding Pending Action in Foreign Court Seeking Award’s Annulment

by

Applying the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a U.S. federal district court confirmed a Lebanese arbitration award in favor of Iraq Telecom Ltd. for $3 million against Intercontinental Bank of Lebanon S.A.L. (IBL).

IBL had argued that the court should refuse to confirm the award because it had brought an annulment action in Lebanon, which, according to IBL, had the effect of rendering the award “nonbinding on the parties” under the primary jurisdiction’s (Lebanese) law. The court found, however, that the Convention did not support IBL’s request because the terms of the underlying agreement between the parties made the award final and not subject to an appeal. The court also found that the award had not been set aside or suspended, and even if it could take into account the fact that the annulment action was pending, there was no showing that the annulment action had a likelihood of success.

After weighing certain factors used by the Second Circuit, the court also rejected IBL’s motion under Article VI of the Convention to stay the confirmation pending the resolution of IBL’s Lebanese annulment action. The court found, in pertinent part, that the award “was entered after three years of proceedings before the Tribunal and is supported by the Tribunal’s lengthy, detailed findings of fact and law. The twin goals of arbitration, ‘settling disputes efficiently and avoiding long and expensive litigation,’ favor expeditious execution of the Award.” The court then granted Iraq Telecom’s request for a declaratory judgment recognizing the findings made in the award.

Iraq Telecom Ltd. v. IBL Bank S.A.L., No. 1:21-cv-10940 (S.D.N.Y. Apr. 8, 2022).

Pennsylvania Federal Court Transfers Suit Against Applied Underwriters Per Forum-Selection Clause in Unfiled Reinsurance Agreement

by

The Eastern District of Pennsylvania has transferred a lawsuit filed against Applied Underwriters Inc. and its subsidiaries to the District of Nebraska. The dispute involved a workers’ compensation insurance program issued by an Applied Underwriters subsidiary to Coyle Trucking Inc. Coyle alleged that the defendant companies misled it into believing that it had purchased a guaranteed cost policy when it had actually been sold a retrospective rating plan.

As part of the scheme, Coyle alleged that Applied’s subsidiary had “intentionally circumvented” Pennsylvania supervisory regulations by filing a guaranteed cost policy with the Pennsylvania insurance commissioner but then using two unfiled agreements to effectively convert the policy into a retrospective rating plan. According to Coyle, these unfiled agreements were a reinsurance treaty between one Applied subsidiary and another, and a reinsurance participation agreement. The agreement, which Coyle had entered into with one of the subsidiaries, included a forum-selection clause that required any dispute relating to the agreement to be brought in the District of Nebraska.

Coyle argued that the forum-selection clause was void because it was contained in an agreement pertaining to an insurance policy, and Pennsylvania law required such agreements to be filed and approved. Although the court noted that it “appears the [reinsurance participation agreement] should have been filed,” Coyle cited no Pennsylvania case that held that such a failure rendered the contract void. Coye cited several California cases that had so held, but those cases did not bind the Pennsylvania federal court. As such, the court found the forum-selection clause was valid and binding on the parties to the agreement. The court then applied the Third Circuit’s four-step test to determine whether to transfer the case because not all parties to the case were bound by the reinsurance participation agreement and the forum-selection clause. The court concluded that the case should be transferred to the District of Nebraska.

Coyle Trucking, Inc. v. Applied Underwriters, Inc., No. 2:19-cv-03164 (E.D. Pa. May 20, 2022).

Eighth Circuit Finds Contract Formation Challenges to Be Decided by the Court, Affirms Order Denying Motion to Compel Arbitration

by

Defendant Litong Capital LLC appealed from an order of the U.S. District Court for the Western District of Missouri. The district court denied Litong’s motion to compel arbitration of claims asserted by GP3 II LLC, having determined there was never a valid contract between them. The Eighth Circuit affirmed.

Litong argued initially that disputes involving the entirety of a contract containing an arbitration clause are to be decided by the arbitrator, not the court, in the first instance, citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). As the Eighth Circuit explained, however, the Supreme Court in Buckeye distinguished “validity of the contract as a whole” disputes from those involving contract formation. In Buckeye, the Supreme Court noted that its ruling “does not speak to the issue … [of] whether the signor lacked authority to commit the alleged principal.” In a later decision, the Supreme Court reaffirmed that disputes involving contract formation, such as the GP3/Litong dispute, are “generally for courts to decide.”

The Eighth Circuit also agreed with the district court that Litong failed to establish, under Missouri law, that the person who purportedly signed the contract for GP3 had apparent authority to do so. Because Litong already conceded that the purported signor did not have actual authority to bind GP3, the court affirmed the district court order denying Litong’s motion to compel.

GP3 II, LLC v. Litong Capital, LLC, No. 21-1443 (8th Cir. June 3, 2022).