Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Fifth Circuit Rejects Challenges to $147M International Arbitration Award

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The Fifth Circuit has rejected challenges under Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to a Swedish arbitration award.

In 1994, Carpatsky Petroleum Corp., at the time a Texas company, entered into a joint activity agreement with Ukraine’s state oil and gas enterprise (OJSC Ukrnafta) to develop an oil and gas field in Ukraine.

Two years later, Carpatsky merged into a newly incorporated Delaware company also called Carpatsky. Carpatsky did not formally notify Ukrnafta of this corporate change, and an amendment to the joint activity agreement executed shortly thereafter stated that Carpatsky was registered in Texas and was affixed with a seal that included Carpatsky’s Texas incorporation number.

The oil and gas venture went south and led to litigation and arbitration. A Swedish arbitration tribunal ultimately awarded Carpatsky approximately $147 million. A federal district court subsequently confirmed that award. Ukrnafta appealed that ruling to the Fifth Circuit.

Ukrnafta first challenged the district court’s removal jurisdiction. The Fifth Circuit rejected that claim, noting that “[r]emoval is allowed whenever a defendant asserts a ‘nonfrivolous connection’ to an international arbitration agreement.” The court concluded that that “low bar” was “easily clear[ed]” by Carpatsky under the facts of this case.

The Fifth Circuit accordingly turned to Ukrnafta’s merits claims.

At the outset, the court noted that it only had “secondary jurisdiction” over the case because the arbitration award was rendered in Sweden under Swedish law. The court’s review was therefore limited to determining whether the award should be vacated under the grounds listed in Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Ukrnafta’s principal contention was that the relevant agreements between the parties were not valid because of Carpatsky’s allegedly undisclosed change in domicile from Texas to Delaware and the use of a seal with Carpatsky’s Texas incorporation information on an amendment after Carpatsky had reincorporated in Delaware through a merger. The Fifth Circuit rejected that claim. It explained that Carpatsky’s signatory (whose name was Mr. Texas) had the capacity to bind Carpatsky, and Mr. Texas’ use of the Texas seal to do so didn’t change that. Ukrnafta had also waived its claim that Carpatsky’s reincorporation somehow rendered the arbitration agreement void by submitting to the arbitration in Stockholm after it knew about the reincorporation. That agreement was effectively a new agreement to arbitrate the disputes between the parties.

The Fifth Circuit then rejected Ukrnafta’s remaining claims under Article V:

  • The arbitration awarded Ukrnafta ample due process (the tribunal “held multiple hearings,” the “parties submitted witness statements, expert reports, and multiple rounds of briefing,” and the “merits hearing lasted four days with fifteen witnesses,” similar to a “full-blown federal trial”) and Ukrnafta had therefore not been “unable to present [its] case.”
  • The arbitration award did not exceed the “terms of the submission to arbitration” and was not “beyond the scope of the submission to arbitration” merely because the panel refused to apply a limitation of liability because it concluded “that Ukrainian law renders a limitation of liability unenforceable in cases of international breach” and regardless of whether that decision was “[r]ight or wrong,” it was not a ground for nonrecognition.
  • For the reasons already discussed regarding Ukrnafta’s agreement to arbitrate in Sweden, “Ukrnafta waived [any] challenge to the Stockholm tribunal’s jurisdiction.”
  • The arbitration award was not “contrary to the public policy” on the ground that it disrespected the holding of Ukrainian courts in related litigation that “the 1998 amendment” to the joint activity agreement “was invalid because of Carpatsky’s changed domicile”: although American courts are concerned with comity, there is a “strong policy favoring international arbitration” and “[e]nforcing this award would [therefore] further American policy, not contravene it.”

The Fifth Circuit also rejected Ukrnafta’s argument that the arbitration panel had “‘manifestly disregarded’ the Ukrainian statute of limitations” (that was not a ground for refusing to enforce the award under Article V) and Ukrnafta’s attempt to pursue state law claims (those claims were barred by the doctrine of claim preclusion based on the arbitration proceedings).

The Fifth Circuit, therefore, affirmed the district court’s confirmation.

OJSC Ukrnafta v. Carpatsky Petroleum Corp., No. 19-20011 (5th Cir. Apr. 6, 2020).

Fifth Circuit Affirms Ruling That Parties Lacked Agreement to Arbitrate

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The Western District of Texas had previously concluded that there was no “meeting of the minds” between the parties with respect to arbitration and denied the defendants’ motion to compel arbitration. On appeal, the Fifth Circuit found that the policies and procedures, incorporated by reference into the parties’ agreement, contained conflicting language. The policies and procedures stated that “[i]f mediation is unsuccessful, any controversy or claim arising out of or relating to the Agreement, or the breach thereof, will be settled by arbitration,” while the parties’ agreement contained a jurisdiction and choice-of-law clause, which stated that “[a]ny legal action concerning the Agreement will be brought in the state and federal courts located in Salt Lake City, Utah.” Relying on similar case law from the Tenth Circuit, the Fifth Circuit concluded that the jurisdiction and choice-of-law clause in the agreement signed by the plaintiff was “compelling evidence against an intent to arbitrate breaches of the Agreement.” Given the irreconcilable conflict between the two clauses, and that there was no limiting language in the parties’ agreement suggesting that the jurisdiction and choice-of-law clause only applied to disputes not subject to arbitration, there was no “meeting of the minds” with respect to arbitration.

O’Shaughnessy v. Young Living Essential Oils, L.C., No. 19-51169 (5th Cir. Apr. 28, 2020).

Fifth Circuit Suggests Question of Class Arbitrability Was for Arbitrator Not Court

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The Fifth Circuit has suggested that the question of class arbitrability was for the arbitrator, not the court, based on the language of the arbitration clause at issue. The court ultimately concluded, however, that it did not need to reach that issue because the appellant challenging the arbitrator’s conclusion that class arbitration was available forfeited the argument.

Roy Conrad initiated arbitration against his employer Sun Coast Resources Inc. regarding purported violations of the Fair Labor Standards Act. The arbitrator concluded that the parties’ agreement “clearly provide[d] for collective actions.” Sun Coast moved to vacate that determination, but the district court rejected Sun Coast’s arguments. The Fifth Circuit affirmed.

The court explained that although there was a presumption that class arbitrability is a question for the court, “the arbitration agreement … appear[ed] to assign the question of class arbitrability to the arbitrator rather than to the court.” The arbitration clause covered “any dispute concerning the arbitrability of any such controversy or claim” and incorporated the American Arbitration Association rules for arbitration. Those provisions “strongly indicate[d] that the parties bargained for the arbitrator to decide class arbitrability.”

The Fifth Circuit nevertheless found it unnecessary to decide that issue. Sun Coast had forfeited its argument that the arbitrator invaded the province of the court by failing to raise that argument before the arbitrator and then failing to properly raise it before the district court.

In fact, Sun Coast had “affirmatively agreed that the arbitrator should decide whether collective proceedings were appropriate.”

The court also refused to vacate the arbitrator’s award on the merits. It concluded that the arbitrator interpreted the agreement and focused on the arbitration clause’s text, which was sufficient regardless of whether the arbitrator’s decision was in fact correct.

Sun Coast Resources, Inc. v. Conrad, No. 19-20058 (5th Cir. Apr. 16, 2020).

SDNY Concludes Arbitrators Did Not Exceed Authority in Interpreting Product Pollution Liability Exception to Policy’s Pollution Exclusion

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Petitioner sought to vacate an arbitration award, arguing that the arbitration panel exceeded its authority in interpreting the terms of an insurance policy when it determined that certain claims fell within the policy’s product pollution liability exception to the pollution exclusion. The court found that the petitioner did not demonstrate that the panel manifestly disregarded the terms of the policy: first, the arbitration agreement specifically instructed the panel to interpret the terms of the policy and to determine whether and to what extent the respondent’s losses were excluded by the pollution exclusion or restored by the production pollution liability exception; second, the text of the policy served as the basis for the award, reflecting that the panel did not disregard its terms; and third, the panel explained that the product pollution liability exception only granted coverage for pollution that satisfies the exception’s three requirements, and the court could not review the merits of the panel’s contract interpretation. Accordingly, the award was confirmed.

HDI Global SE v. Phillips 66 Co., No. 1:20-cv-00631 (S.D.N.Y. May 12, 2020).

Pennsylvania Court Finds Respondent’s “Different Reading” of Arbitration Award Need Not Be Raised in a Timely Motion to Vacate, Modify, or Correct

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Middletown Water Joint Venture LLC sought confirmation of an arbitration award finding it had a contractual right to charge the borough of Middletown for certain types of work and enjoining the borough from taking any action to interfere with Middletown Water’s efforts to recover those charges. For its part, the borough did not dispute the award – nor could it, as it did not move to vacate, modify, or correct it within the 30-day limitations period under Pennsylvania law. Rather, it argued that Middletown Water was incorrectly interpreting the award, which, according to the borough, did not require that it forego contract terms allowing the borough to review and approve all imposed charges before Middletown Water can recover them. The court agreed with the borough, finding the award did not address the process by which Middletown Water may recover any charges it imposed under the contract. The court also rejected the argument that the borough’s defense (i.e., its different reading of the award) was the sort that had to be raised in a timely motion to vacate, modify, or correct. As such, the court denied Middletown Water’s petition to enforce the award’s injunction measures, finding any ultimate recovery depended on the borough’s right of approval, which the court found was expressly preserved in the award.

Middletown Water Joint Venture LLC v. Borough of Middletown, No. 1:19-cv-01402 (M.D. Pa. Apr. 13, 2020).