Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Michigan Supreme Court Declines Application for Leave to Appeal Lower Court’s Vacation of Arbitration Award

by

In Michigan AFSCME Council 25 v. County of Wayne, the Supreme Court of Michigan declined an application filed by Michigan AFSCME Council 25 and Affiliated Local 101 for leave to appeal a judgment of the circuit court and court of appeals vacating an arbitrator’s decision regarding an employment-related dispute. The court’s order was limited to the denial of the defendant’s application and noted, “we are not persuaded that the questions presented should be reviewed by this Court.” However, a concurring opinion addressed the underlying arbitration and issues created by the court of appeals decision regarding the applicable standard of judicial review.

The underlying case involved a county employee who applied for retirement while a disciplinary action was pending against him. The employee signed a “separation waiver,” which confirmed that he was terminating his employment with no agreement concerning reemployment. The employee was then terminated by the county as a result of the disciplinary action, and he filed a grievance seeking reinstatement of his employment. While the grievance was pending, the employee’s retirement was approved. The grievance seeking reinstatement was arbitrated and the arbitrator ruled in favor of the employee, concluding that the county violated the collective bargaining agreement when it terminated the employee and that he was entitled to reinstatement. The Michigan AFSCME Council 25 labor organization filed a lawsuit in circuit court against the county to enforce the arbitrator’s award, and the county filed a counterclaim seeking to vacate the award. The circuit court ruled in favor of the county and vacated the arbitrator’s award concluding that the arbitrator had exceeded his authority “by failing to enforce the separation waiver in the retirement application and issuing an award that violated Internal Revenue Service regulations.” In an unpublished non-binding opinion, the court of appeals affirmed the circuit court opinion.

Significantly, the concurring opinion also addressed the standard of review that applies to collective bargaining arbitration decisions, noting that the court of appeals had failed to acknowledge the court’s prior decisions that expressed approval of “the policy favoring arbitration of disputes arising under collective bargaining agreements.” The court noted that the court of appeals instead applied the standard of review that the Michigan Supreme Court “adopted in the context of statutory arbitration disputes” and that “the standard of review that applies to collective bargaining arbitration decision is now called into question.” After recognizing this apparent conflict in the applicable standard of review, the concurring opinion concluded that if the court of appeals decision was published and binding precedent “this Court would be obligated to act in this case and resolve the parties’ disagreement about which standard of judicial review governs.” The concurring opinion concludes by encouraging the legislature to clarify state law addressing the standard of review that should be applied to labor arbitrations in Michigan.

Michigan AFSCME Council 25 v. County of Wayne, No. SC 164435 (Mich. May 3, 2024).

South Carolina Supreme Court Vacates Award, Finds Arbitration Panel Manifestly Disregarded Statutory Law

by

National Golf Management LLC sold 13 golf courses to a buyer represented by broker Andrew Waldo. NGM was represented in a previous transaction by Michael Cousins. Although Cousins had no written representation agreement with any of the parties involved in the 13-golf course deal, he and his real estate brokerage company sued Waldo, Waldo’s company, and NGM, among others, for a commission from the sale of the golf courses.

As a result of both Waldo and Cousins’ membership in a local realtor association, they were required to arbitrate their professional dispute. Despite South Carolina statutes stating that oral agreements for a commission from a real estate transaction were unenforceable, the arbitration panel ruled that Cousins was entitled to half of the commission Waldo earned from the sale.

Waldo petitioned the circuit court, which vacated the award. However, the court of appeals reversed, finding that there was a “barely colorable” ground for the arbitration award based on a line of cases upholding oral and implied contracts for real estate commissions that, while in conflict with statutory law, had not been directly overruled.

The South Carolina Supreme Court reversed. While acknowledging and reaffirming the “rare and narrow basis” upon which courts may disturb an arbitration award, the court found that the circumstances of this case constituted just such a “rare” occasion. The court explained that subsequent to the issuance of the opinions cited by the appellate court, the South Carolina legislature had enacted laws that “fundamentally changed real-estate licensing.” Cousins argued that he was a “cooperating broker” or a “subagent” of Waldo and therefore was entitled to a share of the commission. However, the newly enacted laws, which were in effect at the time of the transaction in question, required a subagent agreement to “be in writing” and to “set forth all material terms of the parties’ agency relationship.”

The law went further and explicitly prohibited oral or implied agency relationships, providing that “[f]or all real estate transactions, no agency relationship … exists unless the buyer, seller … and the brokerage company … agree, in writing, to the agency relationship. No type of agency relationship may be assumed … or created orally or by implication.” The court found that the arbitrators were aware of these statutes but nevertheless ordered the commission to be shared with Cousins.

The court noted that courts “may now vacate an arbitration award, but only when it is untethered from controlling legal principles known to, but shrugged off by, the arbitrator….  As we have held, ‘manifest disregard is an exacting standard, but it is not insurmountable.’” In light of the above facts, the court found that the arbitration award was in manifest disregard of the law and vacated the award.

Waldo v. Cousins, No. 2022-000134 (S.C. May 1, 2024).

Ninth Circuit Reverses Denial of Motion to Compel Arbitration

by

The Ninth Circuit Court of Appeals recently reversed a district court’s decision to deny a motion to compel arbitration in a case involving a request to refund the cost of airline tickets after a cancellation.

Winifredo and Macaria Herrera purchased airline tickets on Cathay Pacific flights through a third-party booking website, ASAP Tickets. ASAP’s terms and conditions included an arbitration clause requiring binding arbitration through the American Arbitration Association. During their trip, Cathay Pacific canceled the Herreras’ return flight and told them to talk to ASAP about a refund. ASAP apparently denied the Herreras’ request for a refund. The Herreras filed suit against Cathay Pacific, which moved to compel arbitration pursuant to ASAP’s terms and conditions. The district court denied Cathay Pacific’s motion, reasoning that the Herreras’ gripe was with Cathay Pacific, not ASAP.

Cathay Pacific appealed, and the Ninth Circuit reversed and remanded. It first rejected the argument that federal regulations precluding arbitration provisions in “contracts of carriage” precluded arbitration in this case, explaining that the regulation in question did not prohibit “airline carriers from enforcing arbitration agreements between passengers and third parties if the applicable law permits them to do so.” The court then held that California contract law allowed Cathay Pacific to invoke ASAP’s arbitration clause because the Herreras’ breach of contract claim was “intimately founded in and intertwined with” ASAP’s terms and conditions. ASAP had effectively acted as a “middleman” for “refund-processing purposes.” The Ninth Circuit then rejected the Herreras’ arguments that it would be unfair to allow Cathay Pacific to invoke the arbitration clause because “the refund process was not clear.”

Herrera v. Cathay Pacific Airways Ltd., No. 21-16083 (9th Cir. Mar. 11, 2024).

Second Circuit Affirms District Court Order Confirming Chinese Arbitration Award

by

In Huzhou Chuangtai Rongyuan Investment Management Partnership v. Qin, the Second Circuit Court of Appeals affirmed a district court order granting summary judgment confirming a Chinese arbitration award totaling approximately $450 million, rejecting Respondent/Appellant’s contention that he was not provided with adequate notice of the underlying arbitration.

The underlying arbitration involved a contract dispute between the original shareholders and subsequent investors in a Chinese company that owned and operated movie theaters. The petitioners initiated the arbitration before the China International Economic and Trade Arbitration Commission (CIETAC), alleging that the respondent breached a capital increase agreement. The petitioners were awarded approximately $450 million in connection with the arbitration, which was confirmed by the district court. The respondent then appealed, contending that he was not provided with adequate notice of the arbitration and was unable to participate in the selection of the arbitrators.

In affirming the district court’s order, the Second Circuit first confirmed its standard of review, noting that “we review legal issues de novo and findings of fact for clear error.” Citing the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the court recognized that lack of proper notice of the arbitration is a defense to enforcement under Article V(1)(b) of the New York Convention. The court further noted, however, that the review of arbitral awards under the New York Convention is “very limited in order to avoid undermining the twin goals of arbitration … settling disputes efficiently and avoiding long and expensive litigation.” The court then rejected the respondent’s contention that he was not provided with adequate notice of the arbitration and was unable to participate in the selection of the arbitrators, finding that CIETAC’s efforts to provide notice to the respondent were “reasonably calculated to provide notice under the circumstances of this case,” thus satisfying due process. The court affirmed the district court’s orders granting the petitioners’ motion to confirmation the arbitration award and denying the respondent’s motion for reconsideration.

Huzhou Chuangtai Rongyuan Investment Management Partnership v. Qin, No. 23-0747 (2d Cir. Mar. 20, 2024).

Pennsylvania Federal Court Finds Forum Selection Clause in Services Agreement Between Insurer and Reinsurance Broker to Be Valid and Enforceable

by

In Housing & Redevelopment Insurance Exchange v. Guy Carpenter & Co., a Pennsylvania federal court considered the enforceability of a forum selection clause in a services agreement between Pennsylvania-based insurer Housing and Redevelopment Insurance Exchange (HARIE) and its reinsurance broker Guy Carpenter. In that case, the parties entered into an agreement establishing Guy Carpenter as HARIE’s reinsurance broker of record for a three-year period. The agreement included choice-of-law and forum selection clauses applying New York law and a New York forum “for the resolution of any disputes raising issues regarding the construction, meaning or enforcement of the terms of this agreement.”

HARIE did not renew the contract after that period, notifying Guy Carpenter that it would not serve as its broker of record for new reinsurance agreements. Guy Carpenter deducted $101,646.20 from a fiduciary account it held on behalf of HARIE, arguing it was entitled to that money under the terms of the agreement in the event of nonrenewal. HARIE then sued in Pennsylvania federal court to recover those funds. In the litigation, Guy Carpenter moved to dismiss or, in the alternative, to transfer, arguing (among other things) that the forum selection clause mandated that New York, not Pennsylvania, was the proper forum for the dispute.

The court’s decision focused primarily on the applicability and enforceability of the New York forum selection clause in the services agreement. In this regard, the court conducted a two-part analysis. First, the court considered whether the forum selection clause was valid and enforceable. The court agreed with Guy Carpenter and found that, while the terms of other contracts between the parties were also in issue, resolution of HARIE’s claims would require the court to construe the meaning or enforceability of the terms of the services agreement itself, such that the agreement’s New York forum selection clause governed the dispute.

Second, the court considered whether, even though the forum selection clause applied, public interest factors nonetheless militated against its enforcement in this case. In support of applying the forum selection clause, Guy Carpenter pointed out that the events of this case primarily took place in New York and that Guy Carpenter was based there. Guy Carpenter further pointed out that New York law governed the services agreement at issue. Discounting HARIE’s arguments that HARIE exclusively insures Pennsylvania insureds and that New York federal courts were slightly more congested than those in Pennsylvania, the court concluded that public interest factors weighed in favor of enforcing the New York forum selection clause.

Having found the forum selection clause valid and enforceable, and that public interest factors weighed in favor of its enforcement in this case, the court granted Guy Carpenter’s motion to the extent it sought transfer of the case to federal court in the Southern District of New York.

Housing & Redevelopment Insurance Exchange v. Guy Carpenter & Co., No. 3:23-cv-00996 (M.D. Pa. Mar. 25, 2024).