Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

International Arbitration Award Under the New York Convention and Against the Haitian Government Confirmed by Southern District of New York

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The Southern District of New York confirmed an international arbitration panel’s award in favor of a Haitian company (PRH) and against the Haitian Bureau de Monetisation des Programmes d’Aide au Developpement (BMPAD). PRH entered into a series of contracts to source, ship, and deliver fuel to BMPAD. The first four fuel deliveries proceeded without a hitch, but BMPAD allegedly fell behind on payments on the fifth order. Eventually, PRH stopped the fuel shipments, alleging that BMPAD owed approximately $27.2 million.

PRH served a notice upon BMPAD demanding arbitration of their dispute pursuant to the arbitration clause in their agreements. The clause provided that if BMPAD did not appoint a second arbitrator within 10 days, then PRH would be entitled to select the second arbitrator, which PRH proceeded to do after the deadline had lapsed. The two PRH-selected arbitrators then selected a third and final arbitrator, again, pursuant to the procedure provided by the arbitration clause.

After PRH submitted its initial claim statement and request for an interim partial award of security to the arbitration panel, BMPAD indicated that it did not recognize the panel’s jurisdiction and that it had sought a stay of the arbitration proceeding in New York state court. However, in the absence of any injunctive relief issued by the New York state court, the panel ruled that the arbitration would proceed. BMPAD continued to object and refuse to participate, citing a recent COVID-19 surge in Haiti and the recent assassination of the Haitian president, among other things. Despite BMPAD’s objections, the panel ruled in PRH’s favor and directed BMPAD to deposit approximately $23 million into an escrow account.

PRH sought and obtained confirmation of the arbitration award from the Southern District of New York. The court ruled that none of the grounds provided by the New York Convention for refusing to confirm an arbitration award applied. The court held that BMPAD was estopped by the doctrine of res judicata (stemming from the stay proceeding it had initiated in New York state court) from arguing that the arbitration provision was illegal under Haitian law or that service of notice regarding the arbitration was not properly effected. Even if res judicata did not apply, the court found that the arbitration provision was not illegal under Haitian law and that service was proper because it complied with the method required by the parties’ agreement.

BMPAD also argued that the arbitration panel’s composition was improper based on an alleged “appearance of a conflict of interest.” However, the court noted that the New York Convention “specifically requires a showing that the composition of the panel was not in accordance with the agreement of the parties.” Here, the procedure for appointing the arbitration panel provided by the parties’ arbitration agreement was followed properly, which was the only relevant consideration under the Convention.

Finally, BMPAD argued that the public policy exception in Article V(2)(b) of the Convention should prevent confirmation of the award. The court noted that the law of the Second Circuit requires the public policy exception to be “construed very narrowly to encompass only those circumstances where enforcement would violate our most basic notions of morality and justice.” To the contrary, the court found that enforcement of the award would not violate morality and justice but rather would further America’s strong public policy in favor of international arbitration.

Preble-Rish Haiti, S.A. v. Republic of Haiti, No. 1:21-cv-06704 (S.D.N.Y. Jan. 26, 2022).

Ninth Circuit Reverses Order Compelling Arbitration

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The Ninth Circuit Court of Appeals recently reversed a district court’s decision granting a motion to compel arbitration filed by a non-signatory to the agreement containing the arbitration clause. The non-signatory argued that it was a third-party beneficiary of the agreement and that equitable estoppel allowed it to compel arbitration, but the Ninth Circuit rejected those claims under California law.

Kim Ngo bought a BMW from a California dealership. Ngo financed the car through a purchase agreement with the dealership that contained an arbitration clause. The car was allegedly riddled with problems, and Ngo sued the car’s manufacturer, BMW of North America, under, inter alia, California and federal consumer protection statutes regarding car warranties.

BMW moved to compel arbitration under the arbitration clause in the purchase agreement Ngo had signed with the dealership. BMW conceded that it was not a party to the purchase agreement but claimed it was a third-party beneficiary of that agreement and could therefore compel arbitration under it. The district court agreed and granted BMW’s motion. Ngo appealed and the Ninth Circuit reversed.

Applying California law, the Ninth Circuit concluded that BMW could not invoke the purchase agreement’s arbitration clause. The Ninth Circuit repeatedly noted that, by its terms, the arbitration clause could only be invoked by Ngo, the dealership, or the dealership’s assignee, which was defined as BMW Bank of North America (the financing company that financed the purchase). The Ninth Circuit distinguished case law cited by BMW that used broader language to include disputes against “affiliates” as within the scope of arbitration.

More specifically, the Ninth Circuit explained that California law required the purchase agreement to be “made expressly for” BMW’s benefit but that the three-part test for determining whether that was the case was not met under the facts. First, BMW did not “benefit from” the purchase agreement more than “incidentally or remotely” because BMW was not even a party who could invoke the arbitration clause under the terms of the arbitration clause. Any benefit to BMW was “peripheral and indirect because it was predicated on the decisions of others to arbitrate.” Second, a “motivating purpose” behind entering the contract was not “providing a benefit to” BMW because “the vehicle purchase agreement … was drafted with the primary purpose of securing benefits for the contracting parties themselves.” The arbitration clause supported this conclusion because it only allowed the contracting parties and the financing company to invoke arbitration. Third, allowing BMW to compel arbitration was not “consistent with the ‘objectives of the contract’” because, as noted above, “[n]othing in the contract … evince[d] any intention that the arbitration clause should apply to BMW.”

The Ninth Circuit also rejected BMW’s claim that equitable estoppel allowed it to invoke the arbitration clause. The court rejected BMW’s argument that Ngo’s claims were “intimately founded in and intertwined with” the purchase agreement.

Ngo v. BMW of North America, LLC, No. 20-56027 (9th Cir. Jan. 12, 2022).

SDNY Confirms Arbitration Award in Employment Dispute, Finds Arbitrator Did Not Manifestly Disregard Law

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A federal court in the Southern District of New York recently confirmed an arbitration award in an employment dispute between Gould Paper Corp. and its former employee David Berkowitz. On July 19, 2019, Berkowitz initiated arbitration proceedings against Gould under JAMS rules. Berkowitz generally alleged age discrimination, and Gould asserted counterclaims for conversion and unjust enrichment. The arbitrator issued a final award dated February 18, 2021, and an amended award dated March 17, 2021, finding for Berkowitz on his age discrimination claim and for Gould on its unjust enrichment counterclaim. In the award, the arbitrator ordered Gould to pay a net amount to Berkowitz of $45,533.49 and rejected all other relief sought by the parties, including fees, costs, liquidated damages, and emotional distress damages.

On August 4, 2021, Berkowitz filed a petition in federal court seeking to confirm the award of compensatory damages and to vacate and/or modify the award so as to grant an additional award of attorneys’ fees and costs, liquidated damages, and emotional distress damages. As a threshold issue, the court considered whether Berkowitz’s petition to modify the award was timely filed. Under the Federal Arbitration Act, the statutory period during which a motion to vacate or modify may be filed is three months after the arbitration award is “filed or delivered.” According to the court, neither party disputed whether the three-month limitation applied, but they disagreed over when the period began to run — namely, when the award was first transmitted to the parties by email, or when Berkowitz was first “served” with the award by mail in compliance with established JAMS procedures. However, noting that the question of when an award is considered “filed or delivered” has not been definitively settled in the Second Circuit, the court declined to rule on the issue.

Next, the court considered Berkowitz’s entitlement to a modification of the award so as to grant attorneys’ fees and costs, liquidated damages, and emotional distress damages pursuant to 9 U.S.C. § 11(c), which allows a court to modify or correct an award “[w]here the award is imperfect in matter of form not affecting the merits of the controversy.” Noting that this provision of the FAA has been interpreted narrowly to permit modification “to reflect the clear intent of the arbitrator,” the court concluded that the arbitrator had in fact indicated a clear intent not to award such damages, and rejected Berkowitz’s argument accordingly.

The court then considered whether the arbitrator’s refusal to award attorneys’ fees and costs, liquidated damages, and emotional distress damages constituted “manifest disregard of the law” warranting vacatur in part. Noting that a movant seeking vacatur based on “manifest disregard” bears a heavy burden in establishing that (1) the arbitrator knew of a governing legal principle yet refused to apply it or ignored it altogether and (2) the law ignored by the arbitrator was well defined, explicit, and clearly applicable to the case, the court concluded that Berkowitz was unable to meet this standard. Specifically, the court found that Berkowitz had failed to adequately cite controlling law or statutory provisions supporting his entitlement to the requested fees, costs, and damages in the underlying arbitration and thus could not meet the first prong of the “manifest disregard” standard.

Finally, the court considered whether the arbitrator exceeded his authority in refusing to award attorneys’ fees and costs, liquidated damages, and emotional distress damages to Berkowitz. Noting that Berkowitz’s “real objection” was that the arbitrator committed a legal error in denying the damages sought, the court concluded that Berkowitz’s claim that the arbitrator exceeded his authority was without merit. Based on the above, the court denied Berkowitz’s petition and granted Gould’s motion to confirm.

Berkowitz v. Gould Paper Corp., No. 1:21-cv-06582 (S.D.N.Y. Jan. 12, 2022).

Tenth Circuit Finds Non-Signatory May Compel Arbitration Based on Equitable Estoppel

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Defendant SemGroup Corp. and intervenor-defendant Cypress Environmental Management-TIR appealed an Oklahoma district court order denying their motions to compel arbitration. The plaintiff, Robert Ferrell, was a Cypress employee. He and Cypress entered into an employment agreement containing an arbitration clause, but SemGroup was not a party to that agreement. After Ferrell filed a putative class action against SemGroup, SemGroup moved to dismiss and compel arbitration, relying on the arbitration clause in the Ferrell/Cypress employment agreement. Cypress intervened, and both Cypress and SemGroup moved to dismiss and compel arbitration, arguing: (1) there was a question of arbitrability to be decided by the arbitrator as to whether a delegation clause in the arbitration agreement applied to non-signatories, such as SemGroup; and (2) arbitration of Ferrell’s claims was required based on theories of equitable estoppel. The district court denied the motions to compel, ruling that, based on Belnap v. Iasis Healthcare, 844 F.3d 1272 (10th Cir. 2017), the court, not the arbitrator, is required to decide the arbitrability issue. The court also rejected the movants’ estoppel arguments, finding they did not justify estopping Ferrell from avoiding arbitration.

On appeal, the Tenth Circuit held initially that the district court misapplied Belnap, clarifying that in Belnap the court “expressly declined to consider” whether responsibility for determining if a non-signatory may compel arbitration must be delegated to the arbitrator. The Tenth Circuit declined to decide that issue here as well, ruling instead that the motion to compel should have been granted based on equitable estoppel. Noting that the posture and issues in this case were nearly identical to those raised in a prior Tenth Circuit decision also involving Cypress, the court found the Oklahoma Supreme Court would recognize a “concerted misconduct estoppel” theory where, as here, a signatory (Ferrell) asserted allegations of “substantially interdependent and concerted misconduct” by a non-signatory (SemGroup) and another signatory (Cypress). This case, the court ruled, is “precisely the type of lawsuit that ‘concerted misconduct estoppel’ was designed to address.” As such, the Tenth Circuit reversed and remanded the district court order, finding Ferrell should be estopped from avoiding arbitration.

Ferrell v. Cypress Environmental Management-TIR, LLC, No. 20-5092 (10th Cir. Nov. 30, 2021).

Third Circuit Finds Publishing Company Waited Too Long to Challenge Arbitration Award Under Labor Management Relations Act

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Under a collective bargaining agreement that ran from 2014 to 2017 between the Newspaper Guild of Pittsburgh and PG Publishing, the publisher of the Pittsburgh Post-Gazette, PG was required to cover a portion of increases to newsroom employees’ health care costs. PG stopped making the contributions after the agreement expired in 2017. After bringing their labor dispute before the NLRB, the parties pursued arbitration to decide whether the guild’s grievance was arbitrable, and if so, whether PG breached the agreement in declining to make the required contributions. In December 2019, the arbitrator found in favor of the guild and directed PG to cover the health care premium increases.

In February 2020, PG sought to vacate the award in federal court through a complaint under both the Labor Management Relations Act (LMRA) and the Federal Arbitration Act (FAA). The U.S. District Court for the Western District of Pennsylvania dismissed PG’s complaint as time-barred and entered an order to enforce the arbitration award. PG appealed.

Agreeing with the district court, the Third Circuit found that PG’s bid to vacate the arbitration award was untimely. The panel noted that even though PG filed its complaint within 90 days of the arbitrator’s award, which is the limitations period applicable to motions to vacate under the FAA, PG’s general references to the FAA in its complaint were not sufficient to invoke the FAA as a means of seeking vacatur distinct from the LMRA. The Third Circuit reasoned that under the LMRA, the limitations period was 30 days from the December 2019 award, and PG did not file its complaint more than 30 days after the issuance of the award. In addition, the Third Circuit rejected PG’s attempt to take advantage of the longer statute of limitations available under the FAA, as PG failed to challenge the award by motion practice, which is required under the FAA.

PG Publishing, Inc. v. Newspaper Guild of Pittsburgh, Communication Workers of America, AFL-CIO LOCAL 38061, No. 20-3475 (3d Cir. Nov. 30, 2021).