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Recent Case Summaries

Non-Signatory Bound By Arbitration Clause in Incorporated Contract

Federal Ins. Co. v. Metropolitan Trans. Auth., No. 18-3664 (2d Cir. Aug. 30, 2019) (Summary Order).

In a non-reinsurance case, a surety on a performance bond sued the public transportation authorities that contracted with the contractor principal. The public authorities moved to dismiss the claim based on the arbitration clause in the underlying contract. The underlying contract had a broad arbitration clause, which provided that the "parties to this Contract hereby authorize and agree to the resolution of all disputes arising out of, under, or in connection with, the Contract" through arbitration. The underlying contract and all of its terms were expressly incorporated by reference into the performance bond. The district court concluded that the surety was bound by the arbitration provision in the underlying contract and dismissed the complaint.

On appeal, the Second Circuit affirmed. The court made two significant findings. First, the court agreed that the district court had properly concluded that the dispute was subject to determination under the arbitration provision in the underlying contract. Because the broad arbitration clause was not restricted to the immediate parties, the court held that it was effectively incorporated by reference into the performance bond. The court found the language of the arbitration provision sufficiently broad to bind the surety even though it was a nonsignatory to the underlying contract.

Second, the court held that the question of arbitrability was for the arbitrator to decide. This was because the contract used "any and all" language when describing the disputes to be resolved, which was "clearly and unmistakably" broad enough to require the issue of arbitrability to be decided by the arbitrator and not the court.

Illinois Federal Court Determines Questions of Arbitrability Can Be Delegated to Arbitrators

Nandorf, Inc. v. Applied Underwriters Captive Risk Assur. Co., No. 18-cv- 05285, 2019 U.S. Dist. LEXIS 161473 (N.D. Ill. Sept. 23, 2019).

An Illinois federal court addressed whether the arbitrator or a court should decide whether a dispute between a reinsurer and a cedent was arbitrable. The cedent sued to enjoin arbitration on various grounds, and the reinsurer filed a motion to compel arbitration. The reinsurance contract between the parties contained a broad arbitration provision covering all disputes arising from or relating to the contract, with any dispute to be determined exclusively in the British Virgin Islands, governed by substantive Nebraska law.

The court first determined that it could not compel arbitration in the British Virgin Islands because it lacked the power to compel arbitration outside of the Northern District of Illinois. Accordingly, the court converted the reinsurer's motion to compel into a motion to dismiss the cedent's suit. Next, the court carefully analyzed the arbitration provisions of the reinsurance contract, the American Arbitration Association Rules, and decisions from numerous other federal district and appellate court setting forth a "consensus view" that the question of arbitrability could be delegated to arbitrators. Applying this consensus view, the court determined that the parties had clearly and unequivocally delegated the question of arbitrability to the arbitrator.

The court then rejected the cedent's argument that Nebraska's Uniform Arbitration Act (NUAA) reverse-preempted the Federal Arbitration Act (FAA), which would render the reinsurance contract's arbitration provisions unenforceable. The court noted a split of authority, with the Fourth Circuit and Nebraska and California state courts holding that the NUAA preempted the reinsurance contract's arbitration provisions, while the Third and Sixth Circuits, as well as various federal district courts, held that the NUAA did not preempt the same provisions. The court determined that letting the NUAA preempt the express terms of the reinsurance contract would run afoul of the Supreme Court's determination in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). The court also ruled that choice of law clauses in contracts containing arbitration provisions should be read to encompass substantive state principles without including special rules limiting the authority of arbitrators.

New York Federal Court Holds Arbitration Panel Was Not Functus Officio

Chicago Ins. Co. v. General Reins. Corp., 18-CV-10450 (JPO), 2019 U.S. Dist. LEXIS 182764 (S.D.N.Y. Oct. 22, 2019).

The parties arbitrated over a billing on a settlement of asbestos-related losses submitted by the cedent and disputed by the reinsurers. The arbitration panel issued a final award on the billing, but specifically retained jurisdiction to resolve any dispute arising out of the final award.

Several months after the final award, the cedent submitted a new billing, which stated that it was based on the protocols set forth in the final award. The reinsurers rejected the new billing and alerted the original arbitration panel of the dispute. The umpire of that original panel wrote the parties confirming that the panel had retained jurisdiction to resolve any dispute arising out of the final award and that the new dispute over the current billing clearly arose out of that final award. That decision was made by the umpire and the reinsurers' arbitrator, but not the cedent's arbitrator, who stated that he would not be participating because of a lack of jurisdiction to do so.

The cedent commenced a new arbitration to resolve the dispute over the new billing. The reinsurers declined to participate. The cedent filed a motion to compel arbitration and stay the original panel from acting and the reinsurers filed a cross-petition to stay the new arbitration and for a declaration that the original arbitration panel had jurisdiction to resolve the new dispute.

In resolving this dispute in favor of the reinsurers, the district court looked to Section 4 of the Federal Arbitration Act (FAA). Under Section 4, a party aggrieved by the alleged failure to arbitrate under a written agreement for arbitration may petition the court for an order directing that arbitration proceed in the manner provided for under the agreement. The court noted that the cedent argued that the original panel was functus officio after it issued its final award and that a new arbitration must take place. The court rejected this argument, finding that the functus officio doctrine was largely irrelevant here because the original arbitration panel explicitly retained jurisdiction. Moreover, said the court, the cedent consented to the panel retaining jurisdiction. Because the panel retained jurisdiction, held the court, "the arbitrators' duties have definitionally not come to an end if the current dispute 'arises out' of the Final Award."

The court considered this arbitrability issue to be a gateway issue that was for the court to determine. The court then found that the new dispute arose out of the final award based on the cedent's billing based on the protocols set forth in the final award. The court held that based on the cedent's claim that the new billing flowed from the final award, a majority of the panel determined that the current dispute clearly fell within their reserved jurisdiction. The court determined that the best persons to interpret what was meant by the final award was the majority that authored the award and determined that the panel retained jurisdiction to adjudicate the propriety of the new bill in light of the final award. As the court said, "[t]he panel majority's determination merits some solicitude."

The court concluded that given the cedent's repeated statements that the final bill arose from protocols set forth in the final award coupled with the panel majority's assertion of jurisdiction, it was clear that the new dispute arose out of the final award and that the original panel retained jurisdiction. Thus, the panel was not functus officio and the court denied the cedent's petition to compel and granted the reinsurers' cross-petition to stay arbitration and for declaratory relief.

The cedent moved to stay the order and the court denied the motion. 2019 U.S. Dist. LEXIS 197949 (S.D.N.Y. Nov. 14, 2019).

New York Appeals Court Denies Petition to Vacate Arbitration Award

In re McKenna, Long & Aldridge, LLP v. Ironshore Spec. Ins. Co., No. 65140717 (N.Y. App. Div., 1st Dep't Oct. 17, 2019).

In a non-reinsurance case, petitions to vacate a final arbitration award in favor of an insurer were denied by the motion court and affirmed on appeal. The parties seeking to vacate the award argued that the arbitration panel exceeded its authority in making the award or issued the award in manifest disregard of the law. In affirming the denial of the petitions to vacate, the court stated that the language of the arbitration clause referring to "any controversy, claim or dispute arising in connection with [the insurance] policy" reflected "such a broad grant of power to the arbitrators as to evidence the parties' clear intent to arbitrate issues of arbitrability."

Although hard to tell from this opinion, it appears that one of the parties, who was held by a federal court to be an intended thirdparty beneficiary of the insurance policy, argued that it could not be compelled to arbitrate. The panel's final award clearly affected that party, which is why the petition to vacate was filed. In affirming, the appellate court upheld the arbitrators' decision to rule on whether that party was subject to the arbitration clause in the policy based on the broad arbitration provision.

As to manifest disregard of the law, the court held that the petitioners failed to show that the arbitration panel knew of a governing legal principle that was well defined, explicit and clearly applicable, yet refused to apply it or ignored it altogether. The court found that the arbitration panel carefully considered the operative language in the relevant agreements and the law before reaching its conclusions. For example, the court found that, contrary to the arguments, the panel considered the applicability of Delaware law and a specific case and distinguished the case, concluding that it was not applicable. Notably, and consistent with cases under the FAA, the court concluded that the panel's determination, at worst, was a mistake of law, which does not constitute manifest disregard and is not a ground for vacating an arbitration award.

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