Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT CHOOSES BETWEEN TWO ARBITRATION VENUES

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Plaintiff sued in state court, alleging that he and his company were “blacklisted” from doing business on the Commodities Futures Exchange due to e-mails circulated by the defendant, which is a large clearing firm on the New York Mercantile Exchange (“NYMEX”). After the case was removed, it was stayed pending arbitration before the NYMEX. Plaintiff then filed an arbitration demand before the National Futures Association, contending that arbitration before the NYMEX could not be impartial due to the defendant’s “considerable power and influence” within NYMEX. The district court found that potential bias did not rise to the standard of the fraud, duress or unconscionability required to disregard an arbitration agreement. The court directed plaintiff to withdraw the arbitration demand to the National Futures Association and proceed, if at all, before the NYMEX. Carboni v. Lake, Case No. 06-15488 (USDC S.D.N.Y. June 20, 2008).

This post written by Rollie Goss.

REINSURER BOUND TO ARBITRATE DESPITE ITS FAILURE TO SIGN THE CONTRACT CONTAINING THE ARBITRATION PROVISION

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Prior to 1995, Fencourt Reinsurance Company was a wholly owned subsidiary of ITT Corp., and provided reinsurance to Century Indemnity Company, which insured ITT. Fencourt alleged that ITT promised to hold it harmless for any net losses resulting from the reinsurance arrangement, but did not produce any written agreement to that effect. In 1995, ITT reorganized, splitting into three unaffiliated public companies. This split was accomplished through a Distribution Agreement (“DA”), which Fencourt did not sign, and which contained a broad arbitration provision. Century suffered asbestos-related losses, and demanded $85.5 million from Fencourt under their reinsurance agreement. Fencourt sought indemnification from what it alleged was the successor to the indemnification promisor. Century and Fencourt commenced arbitration of their dispute, and Fencourt and the former ITT-related entities commenced a separate arbitration. Fencourt sued ITT to enforce the indemnification promise.

ITT contended that the arbitration provision in the DA covered the dispute, even though Fencourt was not a signatory to that agreement. The district court agreed with ITT and stayed the case pending the result of the already commenced Fencourt-ITT arbitration. There were three bases for the ruling: (1) the DA plainly covered the dispute, and as a wholly owned subsidiary of a party to the DA, Fencourt was bound to arbitrate; (2) Fencourt was equitably estopped from asserting that its lack of signature precluded arbitration since despite its status as a non-party to the DA, it nevertheless took advantage of certain of its provisions; and (3) Fencourt was an intended third-party beneficiary of the DA. This opinion contains a good discussion of these various theories. Fencourt Reinsurance Company, Ltd. V. ITT Industries, Inc., Case No. 06-4786 (USDC E.D. Pa. June 20, 2008).

This post written by Rollie Goss.

IS THE MANIFEST DISREGARD OF LAW DOCTRINE DEAD IN THE FIRST CIRCUIT?

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In an April 28, 2008 Special Focus posting and related article, we raised the question as to whether the manifest disregard of law doctrine would survive the Supreme Court’s decision in Hall Street Associates v. Mattel. This issue came up in a recent district court opinion. ALS & Associates sought the vacation of an arbitration award on three bases: (1) the arbitrator’s failure to postpone the proceedings; (2) the arbitrator’s evident partiality; and (3) the arbitrator’s manifest disregard of law. The district court confirmed the award. The court found that there was no evidence that the failure to postpone the proceedings to allow ALS to pursue documents from a third party deprived it of a fair hearing. The court noted that proceedings to enforce a subpoena to obtain 12 documents had been ongoing for two years, with two trips to the First Circuit, and that there was no showing that the documents were critical to ALS’s case. The court also rejected the contention that the arbitrator's very attenuated “connection” with one of the law firms resulted in any appearance of impropriety, much less evident partiality.

The interesting part of this opinion is the holding that the First Circuit has ruled that the manifest disregard of law doctrine is not a valid basis for vacating or modifying an arbitration award after Hall Street Associates. In so ruling, the district court relied upon the First Circuit’s decision in Ramos-Santiago v. UPS, No. 07-1024 (1st Cir. April 24, 2008), which stated that “manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the [FAA]”. That statement in Ramos-Santiago, however, is dicta, since the Court stated later in the footnote in which the statement appears that it was nevertheless not reaching that issue in deciding that case. However, in UMass Memorial Medical Center, Inc. v. United Food and Commercial Worker’s Union, No. 07-2527 (1st Cir. May 15, 2008), the First Circuit stated that courts still retain “inherent powers outside” the FAA to vacate arbitral awards, including situations in which the arbitrator acts in disregard of law. It seems that there is some dissention in the First Circuit on this issue. Stay tuned for further developments. ALS & Associates, Inc. v. AGM Marine Constructors, Inc., Case No. 06-10088 (USDC D. Mass. June 2, 2008).

This post written by Rollie Goss.

ARBITRATION AWARDS SHOULD NOT HAVE BEEN VACATED FOR LACK OF NOTICE, NEW JERSEY COURT RULES

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A trial court had no basis to vacate arbitration awards, the New Jersey Appellate Division has held. An insurer, Selective, sued a bus company, Coach, in a subrogation action, but subsequently offered to pursue the dispute in an arbitral forum. The attorney for Coach agreed and the litigation was voluntarily dismissed on stipulation of the parties specifying the particular forum to be used. Shortly before the stipulation was filed, Coach’s attorney indicated to Selective’s attorney that it was self-insured, and that Sedgwick Claims Management served as its third-party administrator of claims made against it. The arbitration was later filed, and Sedgwick was served by Selective in accordance with the rules of the arbitral forum. Neither Coach nor Sedgwick appeared at the arbitration hearing, and the arbitrator issued two awards in Selective’s favor. Selective then sought the awards’ confirmation. The trial court initially confirmed the awards, and entered a default judgment against Coach for failure to answer. However, the trial court later vacated both the default judgment and the arbitration awards, concluding that there had not been due process notice of the arbitration to Coach, which the trial court determined had not designated Sedgwick as its “local representative” to handle the claim in accordance with the arbitral rules.

On appeal, Selective argued that the trial court erred because it had served Coach in accordance with the rules. Coach countered that the awards were properly vacated for lack of notice of the arbitration, that it provided a timely defense to the awards after receiving actual notice, and that it was never a proper party to any subrogation action. The appellate court first determined that the awards should be enforced. The stipulation of voluntary dismissal expressly acknowledged that the parties would arbitrate in the forum designated. Moreover, it was undisputed that Coach’s counsel furnished the name and address of a Sedgwick adjuster as the person to whom Selective should direct any questions or inquiries. Adequate notice of the arbitration was thus given to Coach. Next, the court determined that the default judgment was properly vacated because, although Coach had failed to answer in a timely fashion, it nonetheless moved to vacate the entry of default two days after the entry of judgment. However, Coach was estopped to present any defense that it was not a proper party to a subrogation action, since the statute it relied on, N.J.S.A. 39:6A-9.1, was not a defense to an arbitration award and, in any event, applied to self-insureds, which Coach had admitted it was. Selective Insurance Co. v. Coach Leasing, Inc., Case No. A-4007-06T2 (N.J. App. Div. June 16, 2008).

This post written by Brian Perryman.

NEW JERSEY SUPREME COURT AFFIRMS VAILIDITY OF CONTRACTUAL BAR TO JUDICIAL REVIEW OF ARBITRATION AWARDS, WITH ONE EXCEPTION

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In an opinion that runs just over one page long, the New Jersey Supreme Court has affirmed the decision of the Appellate Division that upheld a provision of an arbitration agreement entered into by two “sophisticated business parties” which foreclosed appellate court review of the decision of an arbitrator, but finding the provision invalid to the extent that it foreclosed the right to initial judicial review, which would have deprived a court of the ability to vacate the award if it violated public policy. The contractual provision stated that the arbitrator’s decision would be “final, binding and conclusive” and “not subject to an appeal to any authority in any forum.” “Additionally, the parties forswore any legal action other than one to confirm or enforce (but not to vacate) the arbitration award.” After an award was entered, a trial court judge confirmed the award, and an appeal was filed. A motion to dismiss the appeal was filed, on the basis that the parties had expressly waived any right to appeal. The Appellate Division panel denied the motion to dismiss, and entered an opinion examining the award and upholding its validity, finding the absence of any grounds under the New Jersey Arbitration Act for vacating an award on the basis of public policy. In a single sentence, the Court mentioned that the “rare circumstances” that might justify an appellate court in vacating an arbitration award on public policy grounds might include bias or misconduct of the trial judge or unconscionability in the formation of the contract, and that none of these bases were present. The Court affirmed “substantially for the reasons expressed in” Appellate Division’s opinion. Van Duren v. Rzasa-Ormes, No. A-52-07 (N.J. June 19, 2008).

This post written by Rollie Goss.