Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Court Holds That Issue of Arbitrability Is for an Arbitrator to Decide Pursuant to Agreement

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A group of customers appealed the denial of a motion to compel arbitration and a declaratory judgment entered in an action brought by three internet providers. The customers subscribed to internet service in Georgia and Alabama through the internet providers, which was governed by a terms of service agreement. The customers claimed that the internet service was slower than promised. At the time the customers asserted this claim, the terms of service contained an arbitration clause providing that “any controversy or claim arising out of or relating to [the Terms of Service] shall be resolved by binding arbitration at the request of either party.” The terms of service also incorporated the rules of the American Arbitration Association. After the internet providers learned of the customers’ intent to initiate arbitration, they updated the terms of service to expressly state that the internet providers do not consent to arbitration with respect to all customers receiving internet service in Alabama or Georgia.

The customers moved to compel arbitration, and the internet providers argued that they were not required to arbitrate the dispute under the updated terms of service. The customers’ motion to compel arbitration was denied, and they appealed. The Alabama Supreme Court reversed the trial court’s decision and compelled arbitration. The court explained that although questions of arbitrability are typically answered by the courts, those questions should be sent to an arbitrator if there is clear and unmistakable evidence that the relevant parties intended an arbitrator to decide the issue of arbitrability. Here, the original terms of service incorporated the rules of the AAA, which evidences an agreement to delegate issues of arbitrability to an arbitrator. Therefore, the court determined that the arbitration clause in the initial terms of service included an agreement between the internet providers and the customers to have an arbitrator decide issues of arbitrability, including whether the updated terms of service effectively excluded the customers’ disputes from arbitration.

Blanks v. TDS Telecomms. LLC, No. CV-18-900097 (Ala. Sept. 6, 2019).

District Court Compels Arbitration Citing Insurance Policy’s “Service-of-Suit” Provision

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The plaintiff’s property sustained fire damage, for which the plaintiff sought coverage under an insurance policy issued by the defendants. After a dispute arose, the plaintiff sued the defendants in Mississippi state court. The defendants, foreign insurance companies, removed the action to Mississippi federal court pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The defendants then moved to compel arbitration based on an arbitration clause in the insurance policy, which stated that the parties would arbitrate any dispute if they failed to agree on any aspect of the policy. The plaintiff opposed and moved to remand the case to state court, citing language in the policy’s cover note conferring U.S. courts with “exclusive jurisdiction” over any dispute under the policy. The sole issue was whether the plaintiff’s claim was arbitrable.

Applying a four-factor test used in the Fifth Circuit to analyze arbitrability under the Convention, the court found the first factor – whether there is a written agreement to arbitration – to be decisive here. The court rejected the plaintiff’s argument that the policy’s arbitration and exclusive jurisdiction clauses conflicted, finding that any such conflict was resolved by the policy’s “service-of-suit” provision. That provision addressed service of process in the event of litigation but also expressly provided that it “will not be read to conflict with or override the obligations of the parties to arbitrate their disputes as provided for in any Arbitration clause within this Policy” and that it is solely “intended as an aid to compelling arbitration or enforcing such arbitral award, not as an alternative to such Arbitration clause for resolving disputes arising out of this contract of insurance.” Finding that this language clearly demonstrated the parties’ intent to arbitrate, and that the three other factors in the four-factor test were undisputed, the court granted the defendants’ motion to compel arbitration and denied the plaintiff’s motion to remand.

First United Methodist Church of Corinth, Inc. v. Certain Underwriters at Lloyds Subscribing to Policy No. PG197716, No. 1:19-cv-00120 (N.D. Miss. Sept. 4, 2019).