Reinsurance Focus

In February 2019, the U.S. District Court for the Southern District of New York denied petitioner Hanwei Guo’s discovery application after determining that the China International Economic and Trade Arbitration Commission (CIETAC) did not qualify as a “foreign or international tribunal” under 28 U.S.C. § 1782(a). That ruling – blogged about here – was based primarily on the Second Circuit’s decision in National Broadcasting Co. (NBC). On appeal, Guo argued that NBC was no longer good law, having been overruled or otherwise undermined by the U.S. Supreme Court’s decision in Intel Corp. While acknowledging that courts following Intel have reached diverging conclusions on the issue of whether a private foreign arbitration falls within section 1782(a), the Second Circuit rejected the notion that Intel undermined NBC. Rather, the court declared that NBC remains binding in the Second Circuit.

Turning to the merits of the appeal, the Second Circuit agreed with the district court that CIETAC arbitration is a private international commercial arbitration, thus falling outside the scope of section 1782(a)’s “foreign or international tribunal” requirement. The court clarified that in determining whether arbitration is a “foreign or international tribunal,” the inquiry does not turn on the governmental or nongovernmental origins of the entity in question, but whether the body possesses the functional attributes most commonly associated with private arbitration. Considering the relevant factors, the functional attributes of CIETAC arbitrations were found to clearly fall outside the scope of the tribunals contemplated by section 1782. As such, the Second Circuit affirmed the district court order denying Guo’s petition.

In re Application of Hanwei Guo, No. 19-781 (2d Cir. July 8, 2020).

In this matter, plaintiff Marisco Ltd. hired defendant GL Engineering & Construction (GL E&C) to construct and deliver a floating dry dock. Marisco alleged that GL E&C’s principals misrepresented their experience and ability with respect to constructing dry docks, causing GL E&C to deliver the dry dock late, unfinished, and not according to specifications. GL E&C filed a counterclaim alleging that Marisco failed to pay the full amount due under their agreement and failed to pay for change orders. Marisco challenged the counterclaim by way of two motions, one for judgment on the pleadings and one for summary judgment, the latter of which sought to compel GL E&C to arbitrate the matters raised in the counterclaim.

Count I of GL E&C’s counterclaim asserted breach of contract based on Marisco’s failure to pay the $148,400 due on the final progress payment and failure to pay amounts owed on certain change orders. Count II of GL E&C’s counterclaim (now part of Count I) asserted that Marisco breached the implied covenant of good faith and fair dealing by approving change orders but then failing to pay for the extra work covered by the change orders, and by pressuring GL E&C to complete the construction of the dry dock in spite of delayed payments. Count III of GL E&C’s counterclaim asserted that Marisco was unjustly enriched by getting the dry dock without having paid for all of it.

In its first motion, Marisco sought judgment on the pleadings as to Counts II and III of the counterclaim, but the court only granted judgment on the pleadings as to Count II.

In its second motion, Marisco sought summary judgment, arguing that the counts in the counterclaim must be arbitrated, or that Marisco was entitled to judgment as a matter of law with respect to the counterclaim. The court found that to the extent Count I concerned the $148,000 allegedly due on the final progress payment, Marisco failed to show that the parties agreed to arbitrate that claim. The court analyzed the terms of the dry dock construction agreement and noted that with respect to progress payments, the parties appeared to have contemplated arbitration of disputes as to whether the state of construction triggered Marisco’s progress payment obligations. However, because there was no dispute that GL E&C delivered the dry dock to Marisco, thereby triggering the obligation to pay the final progress payment, any claim arising out of nonpayment of the full amount of the last progress payment did not appear to involve the type of dispute of which the parties contemplated arbitration.

Conversely, the court found that both the Federal Arbitration Act and the terms of the dry dock agreement required the parties to arbitrate only GL E&C‘s breach of contract claim (Count I) arising out of Marisco’s failure to pay invoices for the change orders. The court declined to order the parties to arbitrate the unjust enrichment claim (Count III).

As to the matters not referred to arbitration, the court denied summary judgment given the questions of fact as to which party was responsible for the delays.

Marisco, Ltd. v. GL Eng’g & Constr. Pte., Ltd., No. 1:18-cv-00211 (D. Haw. June 26, 2020).

Section 10(a)(2) of the Federal Arbitration Act allows a court to vacate an arbitration award based on “evident partiality” in the arbitrators. Citing section 10(a)(2), the petitioner moved to vacate a JAMS arbitration award issued in favor of the respondent, claiming the arbitrator failed to timely disclose the full extent of her financial interest in JAMS, and because JAMS itself belatedly disclosed the number of proceedings it had conducted involving the respondent’s law firm. The information was first disclosed after post-hearing briefing and roughly one week before closing arguments.

Failure to disclose apparent interests and/or conflicts is not, in and of itself, a basis for vacating an arbitration award in the Third Circuit. Rather, the court explained, non-disclosure is relevant only to the extent that the non-disclosure reveals evident partiality, defined as “proof so powerfully suggestive of bias that a reasonable person would have to believe that the arbitrator was partial to Respondent.” Using a four-factor balancing test adopted from the Second and Fourth Circuits, the court held that the failures to disclose in this case were “blatant and indefensible” and thus weighed in favor of a finding of bias. Nevertheless, the court denied the petitioner’s motion to vacate, finding her “glaring” failure to raise the issue until several months later, and only after an award was issued against her, constituted a waiver of any otherwise valid objection.

Martin v. NTT Data, Inc., No. 2:20-cv-00686 (E.D. Pa. June 23, 2020).

In this cattle-feeding dispute, cattle owner Bonsmara Natural Beef Co. and its principal George Chapman brought an action against feed yard owner Hart of Texas Cattle Feeders LLC, alleging claims including breach of contract, negligence, and fraud. Chapman also sought a declaratory judgment discharging him from liability as a guarantor for the cattle finishing contract. The trial court denied Hart’s motion to compel arbitration and, after a jury trial, entered judgment in favor of Bonsmara and Chapman. Hart appealed, and the court of appeals reversed and remanded.

On petition for review, the Supreme Court of Texas, in a 6-3 decision, affirmed the court of appeals’ judgment overturning the trial court’s denial of Hart’s post-judgment motion to compel arbitration, holding that a party does not forfeit its right to challenge a ruling on an appeal from a final judgment simply by opting not to pursue an interlocutory appeal of that ruling.

The Supreme Court addressed two issues:

1. Whether Hart’s failure to appeal the interlocutory order denying its motion to compel arbitration deprived the appellate court of jurisdiction to overturn that order on appeal from a final judgment; and
2. If the order was appealable, whether the court of appeals erred in ordering arbitration.

As to the first issue, the majority found that the court of appeals had jurisdiction to consider the trial court’s denial of Hart’s motion to compel arbitration because interlocutory appeal statutes do not alter the principle that orders merge into – and may be challenged on appeal from – a final judgment. The majority relied on the legislature’s use of the permissive term “may” in the interlocutory appeal statute and the fact that the statute did not provide a noncompliance penalty or indicate consequences of not appealing the arbitration decision immediately to support its opinion. The majority noted that the decision to appeal a court’s denial of arbitration is one that must be weighed and decided by the parties and their counsel based on the case’s facts.

As to the second issue, the majority held that the court of appeals did not err in ordering arbitration, finding that the arbitration agreement was enforceable because Bonsmara had not shown that the arbitrator determined that the arbitral forum was unavailable and that the arbitration clause’s language did not foreclose the application of direct-benefits estoppel to require arbitration with non-signatories.

Accordingly, the majority affirmed the judgment of the court of appeals.

The dissenters felt that the majority’s decision ran counter to common sense and basic notions of fairness – that by allowing litigants to see the outcome of a trial before appealing a denial of a motion to compel arbitration, the majority endorses a dispute resolution process that will result in “double the cost and double the time.”

Bonsmara Natural Beef Co. v. Hart of Texas Cattle Feeders, LLC, No. 19-0263 (Tex. June 26, 2020).