Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Compels Arbitration Based on Clause Incorporated Into Guaranty Agreement

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The U.S. District Court for the District of the Virgin Islands recently compelled arbitration after concluding that a personal guaranty incorporated an arbitration agreement from an underlying contract and rejecting various arguments to the contrary.

Solar Leasing Inc. signed a leasing agreement with Dun-Run Holdings to install solar panels at a golf course in the Virgin Islands. William Hutchinson, a principal at Dun-Run, guaranteed Dun-Run’s obligations in a personal guaranty. The leasing agreement contained an arbitration provision, but the personal guaranty did not. The personal guaranty did, however, provide that Hutchinson guaranteed the “performance of any and all financial obligations of the Lessee to the Lessor … subject to the terms and conditions contained in the … Leasing Agreement.”

Solar Leasing subsequently sought to bring suit claiming that Hutchinson, in his capacity as a principal at Dun-Run, had breached the leasing agreement’s terms by, among other things, selling the golf course. Hutchinson sought to compel arbitration under the terms of the leasing agreement. Solar Leasing opposed, arguing that the personal guaranty, which it was seeking to enforce, did not contain an arbitration provision, that even if the leasing agreement’s arbitration clause was incorporated into the personal guaranty, it was not enforceable, and that a condition precedent to arbitration had not been met because the parties were required to first engage in informal efforts to resolve their dispute and then proceed to mediation before arbitration.

The district court sided with Hutchinson and compelled arbitration. The plain language of the personal guaranty incorporated the arbitration provision from the leasing agreement. The personal guaranty did not incorporate only the financial obligations as Solar Leasing suggested. The limitation regarding financial obligations “only describe[d] what [was] being guaranteed, not how th[e] guaranty may be enforced.”

The leasing agreement, meanwhile, clearly articulated a desire to arbitrate by stating that a dispute regarding the leasing agreement would be “resolved by binding arbitration.” Although the leasing agreement did not delineate the process for selecting arbitrators, that was not fatal.

The dispute in the instant case was within the scope of the leasing agreement’s arbitration clause because all of the alleged breaches that Solar Leasing complained of were financial in nature. Even if that was not the case, however, the language was at best for Solar Leasing ambiguous and the court was required to resolve that ambiguity in favor of arbitration.

Solar Leasing, Inc. v. Hutchinson, No. 3:17-cv-00076 (D.V.I. Sept. 20, 2019).

District of Idaho Rejects Challenges to Arbitration Award

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The defendant sought to vacate an arbitration award on the basis of arbitrator misconduct and manifest disregard of the law or, in the alternative, modification of the award.

The defendant argued that the arbitrator committed misconduct by denying its motions to compel, failing to postpone or extend the hearing, excluding testimony from its non-retained experts, and disregarding the defendant’s evidence. The court rejected this argument, stating, “Unless a discovery mandate is found in a statute, contract provision, or the adopted rules, a party to arbitration has no legal right to prehearing discovery.” Pursuant to the parties’ agreements, limited discovery was permitted, but the defendant faulted the arbitrator for failing to compel supplemental discovery when the plaintiff’s discovery responses and 30(b)(6) deponent “purportedly fell short.” Moreover, a denial of discovery is not a basis for vacatur under the Federal Arbitration Act. The court dismissed the remainder of the defendant’s arguments because the arbitrator had acted in accordance with the parties’ agreement and Idaho law.

The defendant next argued that the arbitration award was “so fundamentally flawed in its manifest disregard of the law that it cannot be construed as final, mutual and definite.” The court did not find, nor did the defendant point to, any evidence in the record or the arbitration award to suggest that the arbitrator was “aware of the law and intentionally disregarded it” or that the arbitrator exceeded her powers in how she determined to award attorneys’ fees.

The defendant, in the alternative to vacatur, argued that the arbitration award should be remanded for clarification and modification pursuant to 9 U.S.C. § 11 because it was “incomplete, ambiguous and contradictory.” The court stated that while it certainly understood the defendant’s “desire for a more thorough opinion,” the defendant had not demonstrated that a remand for clarification or modification was warranted. The arbitration award was confirmed.

Twin Falls NSC, LLC v. S. Idaho Ambulatory Surgery Ctr., LLC, No. 1:19-cv-00009 (D. Idaho Sept. 23, 2019).

Second Circuit Confirms Arbitration Awards That Are (Literally) Out of This World

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Arbitration over whether a South Korean company or a Bermuda company headquartered in Hong Kong owns a geostationary satellite in light of an order from a South Korean regulatory agency can be complicated. The Second Circuit recently affirmed a decision confirming an arbitration award adjudicating ownership of the satellite in question and awarding damages related to a party’s failure to obtain regulatory approvals necessary to complete the sale over claims that the arbitration panel exceeded its power, disregarded the law, and violated public policy.

KT Corp., a Korean company, agreed to sell a satellite to ABS Holdings Ltd., a Bermuda company headquartered in Hong Kong. The companies signed a purchase agreement to convey the title to the satellite and an operations agreement under which KT agreed to operate the satellite on behalf of ABS. Both agreements contained New York choice-of-law provisions and mandatory arbitration clauses. The purchase agreement required KT to obtain and maintain all necessary licenses and authorizations for the sale and the continued operation of the satellite.

The sale was completed and title to the satellite was transferred.

Nearly two years later, a South Korean regulatory agency issued an order declaring the purchase agreement null and void because KT had failed to obtain a required export permit. The agency canceled KT’s permission to use certain frequencies to operate the satellite.

KT and ABS arbitrated who held title to the satellite and whether KT had violated the purchase agreement before a panel of the International Chamber of Commerce. In two awards, the panel concluded that ABS held title to the satellite because title had lawfully passed when the conditions precedent to the purchase agreement were completed when there was no requirement that KT obtain an export permit. And even if that was not the case, the panel concluded, the regulatory order had no effect because it was issued retroactively without notice to the parties in violation of New York law, and KT breached its obligations by failing to obtain all the approvals necessary for the continued operation of the satellite (even though an export permit may not have been required for the sale of the satellite, one was necessary to maintain the satellite’s operations).

KT petitioned the Southern District of New York to vacate the award, and ABS petitioned the court to confirm it. The district court granted ABS’ petition and confirmed the panel’s award.

The Second Circuit affirmed. KT argued that the panel had exceeded its authority and that the award disregarded the law and violated public policy. KT claimed that the panel’s conclusion that the regulatory order was without effect violated due process principles. The court disagreed, noting that KT had not challenged the order, its counsel had questioned its validity, and the panel did not rest on the validity of the order; the panel referenced the propriety of the order as an alternate basis for its primary conclusion that title to the satellite properly changed hands. The court also rejected KT’s argument that the panel had disregarded New York contract law. Regarding public policy, although the court recognized that it is the public policy of the United States to enforce foreign judgments that are not repugnant to U.S. policy, it was unclear whether that public policy extended to foreign regulatory orders, and it was not even clear that the regulatory order in this case was enforceable under South Korean law according to KT’s expert.

KT Corp. v. ABS Holdings, Ltd., No. 18-2300 (2d Cir. Sept. 12, 2019).

Nevada Supreme Court Reverses Ordered Arbitration as the FAA Preempts NRS 597.995

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Nevada Revised Statutes section 597.995 requires agreements that include an arbitration provision to also include a specific authorization for the arbitration provision showing that the parties affirmatively agreed to that provision. When a settlement agreement referenced a licensing agreement that included an arbitration provision, the trial court denied the motion to compel arbitration, “concluding the arbitration provision was unenforceable because it did not include the specific authorization required by NRS 597.995.”

In reversing the decision, the Nevada Supreme Court held that the Federal Arbitration Act, 9 U.S.C. § 2, which provides that written provisions for arbitration are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” preempts section 597.995 and that the statute did not void the arbitration clause. The court cited Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), wherein the “Supreme Court explained that under the FFA, courts may not ‘invalidate arbitration agreements under state laws applicable only to arbitration provisions,’ as Congress has ‘precluded states from singling out arbitration provisions for suspect status’ and requires arbitration provisions to be placed on ‘the same footing as other contracts.'” The parties were thus compelled to arbitrate.

MMAWC, LLC v. Zion Wood Obi Wan Tr., No. 75596 (Nev. Sept. 5, 2019).

District Court Dismisses Petition to Confirm Interim Arbitration Award for Lack of Subject-Matter Jurisdiction

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The petitioner sought to confirm an arbitration award, which the respondent opposed for lack of subject-matter jurisdiction. The respondent argued that the district court only had jurisdiction to confirm final arbitration awards and that the petitioner was seeking to enforce an interim ruling. The award at issue was governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as the petitioner was not a U.S. citizen. Under the Convention, the district courts lack authority to confirm an arbitration award unless it is “final,” meaning it resolves the rights and obligations of the parties definitively enough to preclude the need for further adjudication. An interim arbitration decision is “final” as to certain claims under certain circumstances – when, for example, it definitively disposes of specific claims in the arbitration, even if others remain.

The petitioner sought to enforce an award titled “interim emergency award.” While the title itself was not decisive on the issue, the court found that the ruling facially and substantively only “paused” the parties’ business relationship until a full arbitration panel could be convened. Because the award did not definitively dispose of any independent claim submitted to arbitration, the court found that it lacked subject-matter jurisdiction over the petition to confirm and therefore granted the respondent’s motion to dismiss.

Al Raha Grp. for Tech. Servs. v. PKL Servs., Inc., No. 1:18-cv-04194 (N.D. Ga. Sept. 6, 2019).