A.   Introduction

In Part V.A of our Stolt-Nielsen reinsurance-arbitration practice series (here), we said that after Stolt-Nielsen courts will likely get to decide in the first instance whether the parties consented to consolidated arbitration.  If we are correct, that will be a fundamental change because courts will presumably construe the terms of the parties’ contracts more strictly than many arbitrators might, and those constructions will be subject to appellate review. 

In this Part V.B we consider what a party will likely need to show to persuade a court to consolidate arbitrations, and explain why we believe that courts will not frequently order consolidation.  In Part V.C. we shall explain the strategic and practical implications of the changes that Stolt-Nielsen will likely bring about in consolidated reinsurance-arbitration practice.         

 B.   What Will One Have to Show to Establish Consent to Consolidated Arbitration?

What a party must show to establish consent to consolidated arbitration will depend  on whether the dispute involves (a) multiple, bilateral contracts between the same parties; (b) multiple, bilateral contracts between a cedent and different reinsurers; (c) one or more multilateral contracts between a cedent and the same group of multiple reinsurers; (d) multiple, multilateral contracts between a cedent and different groups of reinsurers; or (e) some combination of (a) or (b) and (c), or (d).  While a party may show consent to consolidated arbitration in Scenario (a) by demonstrating that at least one of the arbitration clauses is broad enough to encompass the multi-contract dispute (see Part V.A, here), the party seeking consolidation must show more to establish consent in Scenarios (b) through (e).   Our focus here will be establishing consent in those Scenarios.   

1.      Scenario (b):  Multiple, Bilateral contracts Between a Cedent and Different Reinsurers

Scenario (b) may arise where a cedent seeks consolidated arbitration of a dispute arising out of a group of separate, bilateral facultative or treaty reinsurance contracts between the cedent and different reinsurers.  Suppose that Cedent C entered into a series of three consecutive, one-year bilateral facultative reinsurance agreements, Contracts 1, 2 and 3, with three different reinsurers, Reinsurers 1, 2 and 3.  Cedent C has billed each reinsurer for a portion of the settlement of an environmental claim that it has allocated to the three-year period covered by the contracts. 

Cedent C can easily demonstrate that it agreed to separate, bilateral arbitrations with R1, R2 and R3 and vice-versa, and that the dispute over each reinsurer’s share of the settlement falls within the scope of its arbitration agreement with that reinsurer.  But Stolt-Nielsen requires more. 

Cedent C must somehow demonstrate that each of the reinsurers consented to arbitrate in a single proceeding to which each of the other reinsurers are parties.  And since most reinsurance arbitration agreements provide for tri-partite arbitration — with each of the parties appointing an arbitrator, who in turn appoint a neutral  umpire — the reinsurers must agree to act as a single party for the purposes of arbitrator selection. 

If the reinsurers had contemplated consolidated arbitration involving nonparties to their contracts each presumably would have included a provision in their arbitration agreement that allowed for that.  Consider, for example, the relevant terms of Brokers and Reinsurance Markets Association standard arbitration clause 6K:

As a condition precedent to any right of action hereunder, any dispute arising out of this Contract, whether arising before or after termination, shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire,  meeting in (City, State), unless otherwise agreed. 

.  .  .  .

If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article, and communications shall be made by the Company to each of the reinsurers constituting the one party, provided that nothing therein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint. 

(A compilation of BRMA standard contract provisions can be found here.) 

This clause, of course, was designed for use in multilateral reinsurance treaties – not bilateral facultative certificates — otherwise the phrase “provided that nothing .  .  .  shall.  .  .  be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint[,]” would be unnecessary.  But if this provision, or something very much like it, was included in each of the arbitration agreements in our hypothetical, then it would least arguably establish consent to consolidated arbitration on the part of R1, R2 and R3. 

Note that the last paragraph uses “reinsurer” and “reinsurers” in the lower case in the first part of the provision, but uses “Reinsurer” in the upper case in the last part:  “nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint.”  If “Reinsurer” in the upper case is defined elsewhere as denoting a reinsurer that is a party to the contract, then “reinsurer” or “reinsurers” in the lower case could – and perhaps should – be construed to refer to any reinsurer, irrespective of whether it is a party to the contract containing an arbitration clause.  A court could therefore construe the provision as consent to consolidated arbitration involving nonparties to the contract.  Or a court might conclude that the provision was ambiguous, and direct an arbitration panel to determine whether “reinsurer” and “reinsurers” in the lower case includes reinsurers that are not parties to the contract (an issue could arise whether that should be determined by three separate arbitration panels or a court).   

But suppose our hypothetical agreements did not expressly authorize consolidated arbitration.  Unless all three reinsurers unreservedly appointed the same arbitrator in response to the arbitration demand, there would be nothing to suggest the parties agreed to consolidation.  

Indeed, a persuasive argument might be made that the agreements prohibited arbitration, because many arbitrator selection provisions expressly say each party gets to appoint its own arbitrator.  Consider BRMA clause 6l: 

 Should an irreconcilable difference of opinion arise between the parties to this Contract as to the interpretation of this Contract or transactions with respect to this Contract, such difference will be submitted to arbitration upon the request of one of the parties, one arbiter to be chosen by the Company and one by the Reinsurer and an umpire to be chosen by the two arbiters before they enter into arbitration. 

.  .  .  . 

Assuming “Company” is defined as the cedent and ”Reinsurer” is defined only as a reinsurer that is a party to the contract, this provision entitles each of two parties to appoint their own arbitrator.  It is not susceptible of an interpretation that would require a reinsurer that is a party to the contract to appoint an arbitrator with the advice and consent of any non-parties, let alone one that would act on behalf of the reinsurer and those non-parties.   

So if our hypothetical arbitration agreements contained arbitrator selection provisions like this one, then R1 would be entitled to appoint arbitrator A under Contract 1, R2 would be entitled to appoint arbitrator B under Contract 2, and so on.  The provision would therefore effectively prohibit consolidated arbitration, which would require R1, R2 and R3 to appoint a single arbitrator to act on their collective behalf, all in derogation of the arbitration agreements.        

The provision may also effectively prohibit consolidation because the arbitration clause expressly applies to “irreconcilable difference[s] of opinion.  .  . between the parties to this Contract.  .  .  .”  (Emphasis added)  That strongly suggests that the parties did not agree to arbitrate disputes between the parties to the contracts and parties to other contracts.  While a semantic argument may be made that “between the parties to this Contract” is not the same as “between the parties to this Contract  and no others,” requiring the parties to affirmatively exclude the existence of an agreement to arbitrate with third parties when the agreement to arbitrate does not provide for arbitration with them in the first place would contradict the letter and spirit of Stolt-Nielsen and its “FAA rules of fundamental importance.”  As discussed in Part IV, here, those rules require affirmative consent to class or consolidated arbitration, not intent to exclude class or consolidated arbitration. 

Let’s assume that our hypothetical agreements are silent on consolidated arbitration in the sense that they neither authorize nor prohibit it.    The question before the court would then be whether it could imply consent to consolidation.    

As discussed in Part IV, here, the Stolt-Nielsen Court considered whether consent to class arbitration might be implied as a matter of law.  The Court did so from the standpoint of the procedural arbitrability doctrine, explaining that “in certain contexts, it is appropriate to presume that parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt such procedures as are necessary to give effect to the parties’ agreement.”  Stolt-Nielsen, slip op. at 20-21 (citations omitted; emphasis added).  The Court said that such a presumption was grounded “in the background principle that ‘[w]hen the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.’”  Slip op. at 21 (quoting Restatement Second of Contracts § 204 (1979)).

While the Court could and should have concluded its analysis at that point — the parties’ agreements were undisputedly bilateral, and could be given effect by ordering bilateral arbitration, rendering it unnecessary to imply consent to class arbitration – the Court went on to explain that class arbitration “changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”  Slip op. at 21.  For, in what the Court termed “bilateral arbitration,” the “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution:  lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”  Slip op. at 21 (citations omitted).

In reaching that conclusion the Court said that “the relative benefits of class-action arbitration are much less assured, giving reason to doubt the parties’ mutual consent to resolve disputes” in that manner.  Slip op. at 21-22.  The Court emphasized “just some of the fundamental changes brought on” by class arbitration:

1.  “An arbitrator chosen according to an agreed upon procedure .  . . no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties[;]”

2.  Under the AAA Class Arbitration Rules the “presumption of privacy and confidentiality” that ordinarily applies in bilateral arbitration does not apply in class arbitration, “thus frustrating the parties’ assumptions when they agreed to arbitrate[;]”

3.  A class arbitration award does not simply purport to bind the parties to a single arbitration agreement, but “adjudicates the rights of absent parties as well[;]” and

4. “[T]he commercial stakes of class-action arbitration are comparable to those of class-action litigation, even though the scope of judicial review is much more limited.” 

Slip op. at 22-23.  

These considerations are not fully applicable to consolidated arbitration: 

1.  As in class arbitration, in consolidated arbitration an arbitrator chosen according to an agreed upon procedure no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes .  Unlike class arbitration, however, consolidated arbitration generally involves disputes ranging from a few to perhaps tens of parties, not “hundreds or perhaps even thousands of parties.” 

2. Unlike class arbitration governed by the AAA Class Arbitration Rules, the presumption of confidentiality can be maintained in consolidated reinsurance arbitrations.  But reinsurers forced to participate in consolidated arbitration must sacrifice some of that confidentiality vis-à-vis their fellow reinsurers. 

3.   A consolidated arbitration award does not simply bind parties to a single arbitration agreement, but, unlike a class arbitration award, it does not purport to “adjudicate[] the rights of absent parties.  .  .  .”   

4.  Like those of class arbitration, the commercial stakes of consolidated arbitration are comparable to those of consolidated litigation, even though the scope of judicial review is much more limited.  But generally those commercial stakes are not as high as those of class arbitration. 

Even though the considerations the Court cited are not fully applicable to consolidated arbitration, there are a number of significant reasons why implying consent to consolidated arbitration may materially alter the nature of what would otherwise be bilateral arbitration, thereby frustrating the parties’ expectations.  A non-exhaustive list of these would include:    

1.  In consolidated arbitration, the reinsurers are forced to agree collectively on a single, party-appointed arbitrator to resolve multiple disputes even though most arbitrator selection provisions would allow each reinsurer to choose what it –  and no one else – concludes to be the most suitable party-appointed arbitrator for a given dispute.   Most arbitrator selection provisions also allow the parties considerable input in selecting the most suitable umpire candidates for a particular dispute.  These arbitrator-selection rights are considerably watered down – if not eliminated — when a group of reinsurers is required to select collectively a single party-appointed arbitrator and to agree collectively on a list of suitable umpire candidates.       

2.  Consolidated proceedings are an incident of litigation that the parties could have taken advantage of had they not agreed to arbitrate.  Parties who agree to arbitration typically sacrifice the procedural niceties of court adjudication for the informality, efficiency, speed and confidentiality of bilateral arbitration.    

3.   Consolidated proceedings may be more efficient from the standpoint of the institution or persons hearing the matter, that is, the court or the arbitration panel.  Judicial efficiency is important from a public policy standpoint because it is publicly funded.  But arbitration is privately funded, and multiple, private arbitration proceedings do not usually impose a significant extra burden on the public fisc (other than the relatively modest increased cost associated with multiple summary-enforcement proceedings, which may or may not be necessary, or which may not be contested). 

4.  To the extent that consolidated arbitration promotes efficiency it does so principally for the benefit of the cedent, which is spared the expense of multiple proceedings.  But each individual reinsurer may incur more time and monetary costs in a multi-party, consolidated proceeding than it might incur in bilateral arbitration. 

5.  Consolidated arbitration tends to tactically benefit the cedent at the expense of the reinsurer for the reasons to be set forth in Part V.C.  To the extent cedents may be tactically disadvantaged by having to commence multiple, bilateral proceedings, they may avoid that disadvantage by not agreeing to arbitrate or insisting on a provision authorizing consolidation. 

These and other considerations may convince courts not to imply consent to consolidated arbitration in the face of silence. 

2.      Scenarios (c) through (e)  

Scenarios (c) through (e) arise where there are:

1. One or more multilateral contracts between a cedent and the same  group of multiple reinsurers (Scenario (c));
2. Multiple, multilateral contracts between a cedent and different groups of reinsurers (Scenario (d)); or
3. Some combination of Scenarios (a), (b), (c) or (d) (Scenario (e)). 

As in Scenario (b), to establish consent to consolidated arbitration in any of these scenarios a cedent would have to show that all of the reinsurers consented to consolidation.  For essentially the same reasons discussed in Section B.1., above, cedents will likely have difficulty doing so in the absence of a provision authorizing consolidation.    

C.   How Frequently will Courts Consolidate Arbitrations or Direct Arbitrators to Determine Whether the Parties Consented to Consolidation? 

The answer is probably “not very.”  If courts decide whether the parties consented to consolidated arbitration, they are likely to apply state law principles of contract construction fairly strictly – at least more strictly than many arbitrators have.  Their decisions will also be subject to appellate review, which will presumably make it more likely that any decision imposing consolidation will have a sound basis in applicable law and the parties’ agreement. 

For the reasons discussed in Section B.1., above, there will probably be a number of cases where the agreements are not susceptible to an interpretation permitting consolidated arbitration or where they effectively prohibit it.  Where the agreements are silent, many courts may conclude that there is no sound basis for implying consent to consolidation.  

That does not mean that courts will never find consent to consolidated arbitration.  In Scenario (a) cases – where there are multiple, bilateral contracts between the same parties – courts may find that the parties’ arbitration clauses are broad enough to encompass a consolidated proceeding.  There may also be cases where state arbitration law permits courts or arbitrators to impose consolidated arbitration where the agreements are silent on that score.  If the parties clearly and unambiguously agreed that state arbitration law governs, then courts may find that the parties consented to the application of that state law.  And certain agreements provide for consolidated arbitration of one form or another or have language that is ambiguous as to whether consolidated arbitration is permitted.  In those cases, courts will likely either compel consolidated arbitration or submit the construction question to arbitrators, who may in turn order consolidation.    

But Stolt-Nielsen has changed the legal landscape on consolidated arbitration fairly dramatically, and on balance we think that courts will not readily consolidate arbitrations in the way that arbitrators have under the Bazzle regime.  In Part V.C, we explore the practical and strategic implications of this change.

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V.B, and Part V.C

Jay debunks the media hype surrounding the United States Supreme Court’s recent decision in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010), and argues (persuasively) that the case is a reasonable, natural and modest interpretation of the Court’s prior Federal Arbitration Act jurisprudence.  With one minor caveat we agree wholeheartedly with his insightful and pragmatic view of the case.

Our view of the decision may differ very slightly in that we believe that its scope is broader than the holding might suggest.  Jay is absolutely correct when he says that the decision permits parties to challenge delegation agreements (agreements to arbitrate arbitrability) on unconscionability grounds.  He says that there may be “dozens” of grounds on which to make such a challenge, and we think he is right about that, too. 

But we think that it will be very difficult to mount a successful challenge specifically directed at a delegation agreement.  And if we are right about that, then the practical effect of the decision will be that delegation agreements will usually be enforced, enabling arbitrators to decide most unconscionability challenges.  The scope of the decision is, in our view, therefore quite broad. 

We nevertheless agree with Jay that the decision makes perfect sense in light of the Court’s prior Federal Arbitration Act jurisprudence, and apart from our caveat about the decision’s scope, we are otherwise on the same page as Jay.  Of course, it may turn out that challenges to delegation agreements prove more successful than we think they will.

Jay is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel.  He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators.   He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates. 

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School.  An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court.  He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR.  You can visit his website here.

We hope you enjoy Jay’s article.

Despite all the alarmist reaction already showing up in the press, the holding in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010) is both modest and predictable.   Arbitration agreements always do one thing:  take decisions from judges and give them to arbitrators.  Ever since 1925, such agreements have always been enforced to exactly the same extent as any other agreement is enforced.   Not less so, but also not more so.  Are they enforced even when the decision in question is the “gateway” decision of whether the parties must arbitrate their dispute?  Yes, as long as the agreement delegating even that decision to the arbitrator is explicit and unmistakeable.  Is that news? No. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (dictum).

Should it matter that this delegation language is physically located within the challenged arbitration agreement itself?  No.  (If the answer were “Yes,” any contract drafter could “solve” the problem by plucking out the delegation provision and pasting it onto another sheet of paper to be separately executed as the “delegation agreement.”)  What does matter is whether the challenge brought against the arbitration agreement is the kind that goes to the enforceability of the delegation provision itself.  Are there such challenges in theory?  Sure, dozens of them.  Does that fact put severe brakes on the implications of the Rent-a-Center holding for other cases?  Yes, that’s the point.  Were there any such challenges in the Rent-a-Center case?  No.  None whatsoever.  As the Court noted, the party challenging arbitration in this particular case did not even attempt to raise one.  Would the Court have been open to listening to such a challenge?  Yes.  Not just by implication.  It expressly said it would.

Some of the alarmist commentary stands on the cynical premise that law is pure politics, such that the statement “the outcome of this case is pro-business” is thought to serve as a principled basis the court should have used to distinguish the precedent it is required to honor.  Some of these commentaries, remarkably enough, even come from lawyers.

The more sophisticated of the alarmist commentaries made a more sophisticated mistake.  They took the way Justice Scalia framed the issue in the first sentence of the decision, and leaped to the conclusion that that sentence could serve as the entire holding.

Justice Scalia said:  “We consider whether.  .  .  a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”

His answer (the holding) was not exactly “It may not.”  His answer was really, “It may not, unless, of course, the provision assigning the decision to the arbitrator is itself subject to any challenge whatsoever  (including unconscionability) recognizable to anyone familiar with the common law of contracts.

To which I would only add the not very dramatic commentary:  “Nothing very remarkable about that.”

EDITOR’S NOTE: John (Jay) McCauley is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel.  He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators.   He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates. 

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School.  An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court.  He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR.  You can visit his website here.

Our post introducing Jay is here.

In a 5-4 opinion by Associate Justice Antonin Scalia, joined in by Chief Justice John G. Roberts, Jr. and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr , the Court held that the employee had to arbitrate its claim that certain provisions of an arbitration agreement were allegedly unconscionable because the parties clearly and unmistakably agreed to arbitrate arbitrability questions, and the employee did not specifically claim that that agreement was unconscionable.  The Court said that the parties’ clear and unmistakable agreement to arbitrate arbitrability was, as a matter of federal law, severable from the other provisions of the arbitration agreement, including the ones the employee said were unconscionable.  

Prior to the decision we had advocated in the Forum (here and here), and in our cover story published in the March 2010 issue of Alternatives to the High Cost of  Litigation (blogged here), that the Court should resolve the case in favor of Rent-A-Center using a severability analysis of sorts derived from Buckeye Check Cashing v. Cardegna, 546 U.S. ___ (2006) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).   And that’s exactly what happened, even though neither side advocated or addressed the severability argument before the Court, a point made by Associate Justice Stevens’ dissenting opinion, which was  joined in by Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor.  See Dissenting Op. at 1.  (The district court’s analysis, however, which was reversed by the Ninth Circuit, was, according to the Court, consistent with the Buckeye Check Cashing and Prima Paint severability principle.  See Slip op. at 9.) 

Readers may recall that before certiorari was granted in Rent-a-Center  we argued: 

There is logic to the rule adopted by the [Court of Appeals for the Ninth Circuit].  .  .  in that unconscionability is a state law defense that goes to the enforceability of an agreement.  When a party challenges the enforceability of an arbitration agreement, the court ordinarily decides it – unless the parties clearly and unmistakably agree otherwise.  And while the parties clearly and unmistakably agreed to arbitrate arbitrability,  that agreement was – as is often the case – simply a component of the rest of the arbitration agreement.  If the entire arbitration agreement is unenforceable because of unconscionability, then so too must be the agreement to arbitrate arbitrability. 

The problem with the majority’s logic is that it does not distinguish between the enforceability of the clear and unmistakable agreement to arbitrate arbitrability and the enforceability of the parties’ agreement to arbitrate all other disputes.  The Rent-A-Center parties envisioned that a dispute concerning the enforceability of their agreement to arbitrate all other disputes would be decided by the arbitrators.  That is what the parties’ agreement said, and the United States Supreme Court has said that parties can enter into such agreements, provided they are clear and unmistakable. 

We think courts would better advance the purposes of the Federal Arbitration Act by engaging in a severability analysis of sorts when confronting questions like the one in Rent-A-Center.   When parties agree not only to arbitrate the merits of controversies unrelated to the arbitration clause, but also clearly and unmistakably agree to arbitrate arbitrability, the latter agreement is tantamount to an arbitration agreement within an arbitration agreement.  One agreement concerns who decides disputes concerning the existence, formation or enforceability of the other agreement.  And the other agreement concerns the parties’ obligation to arbitrate all other disputes.  Each should be analyzed separately under Federal Arbitration Act Section 2. 

What the court did in Rent-A-Center was assume that, if any part of the arbitration agreement was unenforceable for any reason, then the entire arbitration agreement – including the clear and unmistakable agreement to arbitrate arbitrability – must fail.  Perhaps ironically, the Court found support for this analysis in the Prima Paint/Buckeye Check Cashing line of cases that hold that an enforceability challenge directed at the contract as a whole – as opposed to the arbitration agreement specifically – must be decided by the arbitrators rather than the court.  Because the challenge here was to a stand-alone arbitration agreement that included a clear and unmistakable agreement to arbitrate arbitrability, the Court simply assumed that Federal Arbitration Act Section 2 required the Court to decide it.  But doing so was inconsistent with the parties’ clearly expressed intent that the arbitrators would decide arbitrability questions, at least arbitrability questions that did not concern the enforceability of the parties’ agreement to arbitrate arbitrability. 

The Court should have limited its inquiry to whether the parties’ agreement to arbitrate arbitrability was substantively unconscionable.  If not, then the Court should have directed that the arbitrators decide the question whether the remainder of the arbitration clause was substantively unconscionable.  Had the Court looked at the problem from that perspective, we believe it would have concluded that the unconscionability defense did not apply to the parties’ clear and unmistakable agreement to arbitrate, and that, accordingly, the arbitrators had to decide whether the challenge to the remainder of the arbitration clause had merit.  

.  .  .  . 

So we think the Court should have enforced the agreement to arbitrate arbitrability by committing to the arbitrators the question whether the parties’ agreement to arbitrate all other claims was unconscionable because it was allegedly one-sided.  Had it done so, it would have given full force and effect to the parties’ clearly expressed intentions, the pro-enforcement policies of Federal Arbitration Act Section 2, and the letter and spirit of First Options.

(See Jackson v. Rent-A-Center West, Inc.: Who Gets to Decide Whether an Arbitration Agreement is Unconscionable when the Parties Clearly and Unmistakably Say the Arbitrators Decide Arbitrability?, Loree Reinsurance and Arbitration Law Forum (Sept. 23, 2009) (emphasis added)). 

In a similar vein, the Supreme Court explained:  

The Agreement here contains multiple “written provision[s]” to “settle by arbitration a controversy.”  Two are relevant to our discussion.  First, the section titled “Claims Covered By The Agreement” provides for arbitration of all “past, present or future” disputes arising out of Jackson’s employment with Rent-A-Center.  Second, the section titled “Arbitration Procedures” provides that “[t]he Arbitrator . . . shall have exclusive authority to resolve any dispute relating to the . . . enforceability . . . of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.”  The current “controversy” between the parties is whether the Agreement is unconscionable.  It is the second provision, which delegates resolution of that controversy to the arbitrator, that Rent-A-Center seeks to enforce.  .  .  . 

The delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement.  .  .  . 

An agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement  just as it does on any other.  The additional agreement is valid under §2 “save upon such grounds as exist in law or in equity for the revocation of any contract,” and federal courts can enforce the agreement by staying federal litigation under §3 and compelling arbitration under §4.  The question before us, then is whether the delegation provision is valid under §2. 

.  .  .  . 

Here, the “written provision.  .  . to settle by arbitration a controversy,” 9 U.S.C. §2, that Rent-a-Center asks us to enforce is the delegation provision — the provision that gave the arbitrator “exclusive authority to resolve any dispute relating to the .  .  .  enforceability .  .  .  of this Agreement[.]“.  .  .  The “remainder of the contract[]” [as that term was used in Buckeye Check Cashing,] is the rest of the agreement to arbitrate claims arising out of Jackson’s employment with Rent-A-Center.  To be sure this case differs from Prima Paint, Buckeye, and [Preston v. Ferrer, 552 U.S. 346 (2008)] in that the arbitration provisions sought to be enforced in those cases were contained in contracts unrelated to arbitration — contracts for consulting services, check cashing services, and “personal management” or “talent agent” services.  In this case the underlying contract itself is an arbitration agreement.  But that makes no difference.  Application of the severability rule does not depend on the substance of the remainder of the contract.  Section 2 operates on the specific “written provision” to “settle by arbitration a controversy” that the party seeks to enforce.  Accordingly, unless Jackson challenged the delegation provision specifically, we must treat it as valid under §2 and must enforce it under §§3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator. 

Slip op. at 4-6 & 8 (citations and footnote omitted).  The Court concluded that the District Court correctly found that Jackson had challenged only the arbitration agreement as a whole, not the delegation provision specifically, and accordingly reversed the Ninth Circuit’s judgment.  See Slip op. at 9 & 12. 

The Supreme Court has now decided two arbitration cases this term – this one and Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., ___ U.S. ___, slip op. (April 27, 2010) – in favor of the party-autonomy principle inherent in the Federal Arbitration Act, even though the effect of those decisions may not necessarily lead to the fairest result for parties of limited bargaining power.  Both cases were decided 5-4 along ideological lines (with Justice Kennedy supplying the swing vote).  These decisions may provide  fodder for those in Congress that favor anti-arbitration legislation designed to protect consumers, employees and other claimants.  

 And, as most readers are aware, the United States Supreme Court recently granted certiorari in another Ninth Circuit case,  AT&T Mobility v. Concepcion, No. 09-893 (see report in our good friend Karl Bayer’s Disputing Blog here), a case that will test whether Stolt-Nielsen’s reasoning that consent to class arbitration cannot be implied applies in the adhesive context, and, if so, whether the FAA rules of “fundamental importance” discussed in Stolt-Nielsen supercede a state law invalidating class arbitration waivers on unconscionability grounds.   That will surely be a closely-watched case next term, and one you will hear more about in the future here at the Forum.

A.   Introduction

In this Part V.A of our consolidated-reinsurance-arbitration series, we delve into Stolt-Nielsen’s legal implications on consolidated reinsurance-arbitration practice, focusing on how courts are likely to decide the allocation-of-power question:  Who gets to decide whether the parties consented to consolidated arbitration?  In Part V.B we shall examine Stolt-Nielsen’s other specific legal and practical implications, focusing on what a party will likely need to show to obtain consolidated arbitration and how frequently consolidated arbitration is likely to be granted after Stolt-Nielsen.    

B.   Who Gets to Decide Whether the Parties Consented to Consolidated Arbitration?

Readers will recall from Part III (here) that courts interpreted Bazzle  as governing the allocation-of-power issue.  Now that the Court has said Bazzle never commanded a majority on that issue, and that it remains open, courts must reconsider it not only in the class-, but in the consolidated-arbitration context.   

Consolidated arbitrations, like class arbitrations, raise two types of questions:  Common-dispute and party-consent questions.  We think that courts will likely conclude that both are questions of arbitrability for the court to decide in the first instance, unless the parties clearly and unmistakably agree otherwise.   Arbitrators may play a role in resolving contractual ambiguities identified by the court.  

1.      Who Gets to Decide Common-Dispute Questions?

All consolidated-arbitration questions concern whether at least one arbitration agreement encompasses not only disputes concerning one, but all other contracts at issue.  We call this the “common-dispute” question.    

In some consolidated-arbitration disputes the “common dispute” question is the only one presented.  Suppose reinsurer R  enters into two treaties with cedent C, Contracts A and B, each of which incept on the same date and are in force for one year.  Contract A’s limits are $1 million per occurrence excess a $500,000 retention.  Contract B has per occurrence limits of $2 million excess of $1.5 million.  Both contain broad arbitration clauses under which the parties agreed to arbitrate “any dispute arising out of or relating to this contract.”

C pays a $3 million claim and seeks $1,000,000 from Contract A and $1.5 million from Contract B.  R says the claim should have been horizontally allocated over a six-year period.  R is not a party to any of C’s contracts covering the five-year period subsequent to the inception of contracts A and B. 

C demands a consolidated arbitration under Contracts A and B, seeking $2.5 million.  R opposes consolidation, forcing C to bring a motion to compel consolidated arbitration. 

The consolidated-arbitration decision maker in this hypothetical need only resolve whether the claim “arises out of or is related to” Contracts A, B, or both.   There is no issue concerning the parties with whom R agreed to arbitrate because R agreed to arbitrate with C under both contracts.     

Under the Supreme Court’s Federal Arbitration Act jurisprudence the court would ordinarily decide this type of question.  Questions concerning the scope of an arbitration agreement itself are ordinarily for the court, including whether “an arbitration clause in a concededly binding contract applies to a particular type of controversy. . . .”  Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).  When a court decides that type of question, it – not the arbitration panel – applies state law rules of contract interpretation to the scope provision of the arbitration agreement (and sometimes other provisions, as well) to determine what the parties agreed to submit to arbitration.  See, generally,  Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 58-63 (1995). 

To the extent there is ambiguity as to whether the  disputes are encompassed by at least one of the arbitration clauses, the court would be aided by the presumption of arbitrability, under which any ambiguities as to the scope of the arbitration clauses themselves would be resolved in favor of arbitration.  See, e.g., 514 U.S. at 62.  That would presumably mean a finding that one or both of the arbitration clauses covered the disputes. 

While common-dispute issues will typically raise scope questions, depending on the facts, there may be other, interrelated issues concerning contract interpretation that are ordinarily for the arbitrators to decide.  Suppose a dispute arises over a horizontal, even, pro-rata allocation of a continuing occurrence to a continuous, excess-of-loss treaty that was in effect for five years, but which was also subject to annual resigning.  Depending on the facts, a question might arise as to whether the dispute arose under one contract or five.  Resolution of that question might require interpretation of the treaty language, the slips, the placing information and other matters, all in light of reinsurance custom and practice. 

Whether or not the number of contracts question is one of arbitrability or simply contract interpretation and construction is not necessarily clear.  But a court might well conclude that it is one for the arbitrators. 

The arbitrators – as experts in reinsurance custom and practice – are presumably better equipped to resolve the dispute than most judges, and the parties probably expected that the arbitrators would decide the question if it arose.  It might also be intertwined with the merits (e.g., the number of per occurrence limits and retentions that apply).  Were the court to decide the issue, the court might be deciding a matter the parties agreed to arbitrate.  And, depending on how the arbitrators rule on the matter, they might moot the controversy over consolidation, saving the court valuable time and resources. 

2.      Who Gets to Decide Party-Consent Questions?

Not all putative consolidated arbitrations involve simply multiple contracts between the same parties.   Additional parties may be involved that are not parties to all other agreements.  One or more parties to one contract may be parties to all or none of the other contracts.  Or there may be one treaty under which the cedent is seeking consolidated arbitration against all participating reinsurers.  Consolidated-arbitration disputes of this variety raise “party-consent” questions. 

Party-consent questions make consolidated-arbitration disputes look much more like class-arbitration disputes.  For what typically distinguishes class from bilateral arbitration is the presence of not only multiple, bilateral contracts involving the same parties, but multiple bilateral contracts involving multiple parties. 

What principally motivated the Stolt-Nielsen Court to hold that class arbitration cannot be imposed without a contractual basis other than a broad arbitration clause was the Federal Arbitration Act rule of “fundamental importance” that parties may “specify with whom they chose to arbitrate.”  See Stolt-Nielsen, slip op. at 19-20 (emphasis in original).   A reasonable corollary is that a party may not be compelled under the FAA to submit to a consolidated arbitration presenting party-consent issues absent a contractual basis other than the parties’ broad arbitration clause. 

Suppose that R and C are parties to Contracts A, B and C, a consecutive series of one-year “First Excess of Loss Treaties,” each with per occurrence limits of $1,000,000 excess of $500,000.  While R and C are the only parties to Contract A, R and R1 are the reinsurers participating in Contract B, and R1 and R2 are the reinsurers participating in Contract C.  The contracts contain identical, tri-partite arbitration clauses providing, among other things, that the parties agree to arbitrate any dispute “arising out of or relating to” the contract. 

C bills R, R1 and R2 for their respective shares of a $3 million claim it has allocated on an even, pro-rata basis over the three contract years.  The reinsurers object, arguing that the loss should have been allocated over a six-year period.   

C demands a consolidated arbitration against R, R1 and R2 under Contracts A, B and C.  The reinsurers object and C moves to compel arbitration. 

To decide whether the parties consented to consolidated arbitration, the decision maker must not only resolve the common-dispute question, but also find some contractual basis under at least one of the arbitration agreements to conclude that:  (a) R agreed not only to arbitrate with C in a bilateral arbitration, but in a consolidated arbitration involving R1 and R2; and (b) both R1 and R2 agreed to arbitrate with C in a consolidated proceeding to which R and they are all parties.  Under Stolt-Nielsen the contractual basis must be something other than the contracts’ broad arbitration clauses.    

Courts considering the allocation-of-power question after Stolt-Nielsen will likely conclude that these party-consent issues should be decided by the court in the first instance.  A classic arbitrability question is whether “the parties are bound by a given arbitration clause.  .  .  .”  See Howsam v. Dean Witter Reynolds, Inc.,, 537 U.S. 79, 83 (2002).

Party-consent issues concern whether all of the parties are “bound by a given arbitration clause” to arbitrate together in a single, consolidated proceeding.  R was bound to arbitrate with C under Contracts A and B, but not Contract C; R1 was bound to arbitrate with the C under Contract B and C, but not A; and R2 was bound to arbitrate with C under Contract C, but not Contracts A and B.  Furthermore, R is not a party to Contract C, or any other contract with R2; and R1 was a party to only one contract with R (Contract B) and one contract with R2 (Contract C).   Even assuming that the arbitration clause of each contract encompasses disputes arising out of each of the others (the common-dispute question), nothing indicates that R, R1, and R2 agreed to arbitrate together in a single arbitration with C.  

The party-consent question is also a question for the court under Section 4 of the Federal Arbitration Act.  Section 4, though a procedural statute technically applicable only in federal court, reflects an allocation of power between courts and arbitrators that is derived from the substantive enforceability command of Section 2 (which is applicable in both state and federal courts).  See Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 447 (2006); Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967).  Section 4 provides that “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction.  .  .  of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.”  9 U.S.C § 4 (emphasis added).  On hearing a motion to compel, the court must “make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement” if “the making of the agreement for arbitration or the failure to comply therewith is not in issue. . . .” Id. (emphasis added)

When one party demands consolidated arbitration involving party-consent issues and another objects because it contends it never agreed to arbitrate in a single proceeding with all of the parties, a question arises whether there has been a failure, neglect or refusal to perform one or more arbitration agreements.   And that question implicates whether the resisting party is bound by an arbitration agreement requiring it to arbitrate with all of the parties, or whether certain parties to the proposed consolidated arbitration may invoke the benefit of one or more arbitration clauses to which they are not parties.  

Faced with that question, the court must resolve it and ensure that arbitration proceeds in the manner provided by the parties’ agreements and in accordance with their terms.  That necessarily requires the court to determine whether the agreements permit, forbid or are silent on consolidated arbitration involving party-consent issues, or whether they are ambiguous on that score. 

Outside of the class or consolidated arbitration context, when a party contends on a Federal Arbitration Act Section 4 or 3 motion that a nonsignatory is subject to the arbitration clause, or cannot invoke the clause, the court determines whether there is a state law basis for requiring the nonsignatory to arbitrate or allowing it to invoke the arbitration clause.   If there is such a state law basis, the court enforces the arbitration agreement accordingly.   But it does not refer the question to the arbitrators.  See Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896, 1901-02 (2009); Ross v. American Express Co., 547 F.3d 137, 143 & n.3 (2d Cir. 2008); Ross v. American Express Co., 478 F.3d 96, 99 (2d Cir. 2007); Astra Oil Co. v. Rover Navigation, Ltd., 344 F.3d 276, 279-80 & n.2 (2d Cir. 2003); Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773, 776-80 (2d Cir. 1995). 

When the question arises under Section 9 of the Federal Arbitration Act whether a third-party is bound by an arbitration award or is entitled to a benefit under it, then the court likewise decides the question.  Courts do not hesitate to vacate awards that purport to bind or confer a benefit in favor of a non-party to an arbitration agreement.  See, e.g.,  Nationwide Mutual Ins. Co. v. Home Ins. Co., 330 F.3d 843, 846-47 (6^th Cir. 2003); Orion Shipping & Trading Co., Inc. v. Eastern States Petroleum Corporation Of Panama, S.A., 312 F.2d 299, 300-01 (2d Cir. 1963).  But courts do not remand such cases back to the arbitrators to determine whether the non-party really was a party, or was otherwise bound by or entitled to invoke the arbitration clause. 

We do not perceive a meaningful distinction between the party-consent questions presented by the motion to compel a consolidated arbitration in our party-consent hypothetical and those presented in the cases cited above.  The questions are essentially the same and the key, underlying purpose of the Federal Arbitration Act that the cases serve is the same – to enforce the parties’ arbitration agreements as written. 

We therefore think that courts that consider the party-consent issue in a dispute over consolidated arbitration will likely conclude that it presents an issue of arbitrability for courts – not arbitrators to decide.  But there is another important consideration that augurs in favor of allocating the power to the court. 

Party-consent questions raise important issues arising out of the parties’ arbitrator-selection provisions.  One of Stolt-Nielsen’s Federal Arbitration Act rules of “fundamental importance” is that parties may “choose who will resolve specific disputes.”  Slip op. at 19 (emphasis in original).  Assuming there is otherwise a contractual basis for imposing consolidated arbitration in a multi-party dispute, there must also be contractual basis for the arbitrator-selection method that the decision maker imposes.   So the decision maker in our party-consent hypothetical would have to find a contractual basis under at least one of the arbitration clauses under which R, R1 and R2 collectively agreed to appoint on their behalf only one party-appointed arbitrator, who, along with C’s party-appointed arbitrator, would select a single umpire to preside over a consolidated proceeding.  Otherwise, the decision maker would be imposing on the parties a method of arbitrator selection to which they never agreed. 

Just as courts make the call on arbitrator-selection questions in other contexts, so too should they make them in consolidated-arbitration disputes presenting party-consent issues.   The parties’ rights to choose what decision makers will resolve what disputes is a vitally important issue that has, by statute and treaty, been committed to the courts to decide.  As Circuit Judge Richard A. Posner wrote, “Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”  Lefkovitz v. Wagner, 395 F.3d 773, 780 (7^th Cir.), cert. denied, 546 U.S. 812 (2005).  Federal Arbitration Act § 5 provides that, “[i]f in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”  Article V(1)(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ( here) provides a defense to recognition and enforcement of an award where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.”  And courts will not hesitate to vacate domestic or non-domestic awards if arbitrator selection procedures were not followed.  See, e.g.,  Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4^th Cir. 1994); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986).

As we shall discuss in more detail in Part V.B, we think that in many cases courts will find that there is no express or implied contractual basis for imposing consolidated arbitration on the parties in cases involving party-consent questions.  But there are many variants on how consolidated-arbitration disputes may arise and some arbitration clauses expressly provide for some form or another of consolidated arbitration.  Ambiguities may arise, as they did in Bazzle. 

We think that, at least in certain cases, those ambiguities might be for the arbitrators to resolve, assuming the issues they raise fall within the scope of the parties’ arbitration agreements.  But the court should, at a minimum, determine whether the contract unambiguously forbids or permits consolidated arbitration or is ambiguous or silent on that score.    

Stay tuned for more….

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

A.   Introduction

In Part I (here) we explained why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice.  And, after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards of review, we explained how the Court has established for itself and the lower courts a fairly searching standard of review.  Part II (here) explored the legal and practical implications of that standard of review.    

Part III (here) turned to the other key area that will likely change because of Stolt-Nielsen — consolidated reinsurance-arbitration practice — and discussed the state of consolidation law pre-Stolt-Nielsen.  This Part IV discusses Stolt-Nielsen’s rationale for finding that imposing class arbitration on parties whose agreements are silent on that point is inconsistent with the Federal Arbitration Act, and explores how the Court’s ruling may affect consolidated reinsurance-arbitration practice in general. 

B.   The Supreme Court’s Decides that Imposing Class Arbitration on Parties whose Contracts are Silent on that Score is Inconsistent with the Federal Arbitration Act

When we last left Stolt-Nielsen, the Court had determined  that the arbitrators exceeded their authority by issuing an award that was based on their own notions of public policy gleaned from other arbitral decisions imposing class arbitration in the face of silence.  When a court vacates an award it has to decide whether to remand the matter to the arbitrators, for Section 10(b) of the Federal Arbitration Act authorizes a court to “direct a rehearing by the arbitrators.”  The Court decided not to remand, because “there can be only one possible outcome on the facts,” that is, where the parties’ contracts are undisputedly silent on class arbitration, save for the parties’ agreement to a broad arbitration clause.   The Court then set about to explain why that was so. 

1.      The Supreme Court Says Bazzle did not Control the Outcome, But Leaves the Allocation-of-Power Question for Another Day

Before enunciating what it believed to be the rule of decision, the Court first addressed the extent to which, if at all, Bazzle dictated the outcome of the case.  The Court believed it appropriate to do so since the Bazzle opinions “apparently baffled” the parties, and were misunderstood by the panel. 

The arbitrators believed that Bazzle set forth a contract interpretation rule — specifically that “‘arbitrators must look to the language of the parties’ agreement to ascertain the parties’ intention whether they intended to permit or preclude class action.’”  Slip op. at 16 (quoting panel’s decision).   At least early in the proceedings the parties, too, apparently believed that Bazzle established a rule of contract interpretation. 

The Stolt-Nielsen entities thought the rule was that the arbitrators must find evidence that the parties consented to class arbitration.  AnimalFeeds believed that the rule was that class arbitration was permitted so long as the arbitrators found no evidence that the parties intended to preclude it.  And both parties apparently believed that Bazzle established an allocation-of-power rule under which arbitrators get to decide whether the parties agreed to class arbitration.  

But the Court declared that the panel and the parties were wrong on all counts as far as Bazzle was concerned.  The various Bazzle opinions, said the Court, “collectively addressed” three issues: 

1.  “[W]hich decision maker (court or arbitrator) should decide whether the contracts in question were ‘silent’ on the issue of class arbitration[];”

2.  “[W]hat standard the appropriate decision maker should apply in determining whether a contract allows class arbitration[];” and

3.  “[W]hether, under whatever standard is appropriate, class arbitration had been properly ordered in the case at hand.”

Bazzle, however, “did not yield a majority decision on any of the three questions.”  The Bazzle plurality addressed issue No. 1 — the allocation-of-power question — but Justice Stevens’ concurring opinion, which provided the necessary fifth vote for the Court’s judgment, did not endorse that, or any other aspect of the plurality’s rationale.  Justice Stevens’ concurring opinion said the matter was “arguably” for the arbitrators, but his preferred disposition was not to disturb the Supreme Court of South Carolina’s judgment, since Green Tree did not raise the allocation-of-power question before that court.  According to Stolt-Nielsen, Stevens therefore “bypassed” the allocation-of-power question, and “rested .  .  . on his resolution of the second and third questions,” stating that he would have affirmed the state court judgment because it was “correct as a matter of law.” 

The Court concluded that it need not decide the allocation-of-power question because the parties had submitted the class arbitrability question to arbitration and no one argued that doing so was “impermissible.”  And having determined that “Bazzle did not establish the rule to be applied in deciding whether class arbitration was permitted[,]” the Court proceeded to decide on a de novo basis what that rule was.  Slip op. at 16-17.

2.       The Supreme Court Rules that there are “FAA Rules of Fundamental Importance,” and that one of those Rules is that Parties Get to Choose with Whom they Must Arbitrate

By this time the Court had come full circle.  It started out by suggesting that the question before the panel was not one of arbitrability, and that it would therefore review the arbitration award under a Steelworker’s-Trilogy-type, outcome-based standard of review.  It ended up deciding the matter de novo as a matter of law, enunciating for the first time the standard the arbitrators should have applied. 

And that standard was not simply a restatement of the pre-Bazzle general rule that courts cannot compel class or consolidated arbitration unless the parties consent.  It was a federal substantive-law standard that will presumably displace inconsistent state law on contracts in general, and on arbitration agreements in particular.   

The Court acknowledged that “interpretation of an arbitration agreement is generally a matter of state law.”  Slip op. at 17 (citations omitted).   Yet in the next sentence it declared that “the FAA imposes certain rules of fundamental importance, including the basic precept that ‘arbitration is a matter of consent, not coercion.’”  Slip op. at 17 (citations omitted). 

The Court provided specific examples of these FAA rules of “fundamental importance”:  

1.  “parties are ‘generally free to structure their arbitration agreements as they see fit[;]‘”

2.  parties may “agree to limit the issues they choose to arbitrate[;]”

3.  parties may “agree on the rules under which any arbitration will proceed[;]“

4.  parties may “choose who will resolve specific disputes[;]” and

5.  parties may “specify with whom they chose to arbitrate.”

Slip op. at 19 (citations omitted; emphasis in original).

While these rules of party autonomy were derived from prior Court decisions, Stolt- Nielsen added a new one:  “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Slip op. at 20 (emphasis in original). 

And the Court admonished that it “falls to courts and arbitrators to give effect to these contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise:  to give effect to the intent of the parties.”

3.      The Supreme Court Rules that it was Undisputed that the Parties Did Not Agree to Class Arbitration and there was no Basis for Implying Such an Agreement 

Having set forth the governing principle, the Court considered whether the arbitrators’ decision complied with it.  The panel, stated the Court, based its conclusion on the parties’ broad arbitration clause and the absence of any intent “to preclude class arbitration,” even though the parties had stipulated “that they had reached ‘no agreement’ on class arbitration.”  Slip op. at 20.  The panel found that the agreements’ silence was “dispositive” even though “the parties are sophisticated business entities, even though there was no tradition of class arbitration under maritime law, and even though AnimalFeeds does not dispute that it is customary for the shipper to choose the charter party that is used for a particular shipment.   .  .  .”  The panel’s conclusion, the Court stated, was “fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”  Slip op. at 20.

The Court could have ended its analysis here, but did not.  It considered whether consent to class arbitration should be implied.  The Court considered the question from the standpoint of the procedural arbitrability doctrine, explaining that “in certain contexts, it is appropriate to presume that parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt such procedures as are necessary to give effect to the parties’ agreement.”  Slip op. at 20-21 (citations omitted; emphasis added). 

The Court explained that such a presumption was grounded “in the background principle that ‘[w]hen the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.’”  Slip op. at 21 (quoting Restatement Second of Contracts § 204 (1979)).

Again, the Court could and should have concluded its analysis at this point by simply stating that, since the parties’ contracts were indisputably bilateral, and could be given effect by ordering bilateral arbitration, it was unnecessary to adopt class-arbitration procedures “to give effect to the parties’ agreement.”  The Court might have added that implying consent to class arbitration would override the FAA rules of  “fundamental importance” discussed above, under which the parties may choose with whom they arbitrate, who the decision makers should be for a “specific dispute,” and whether class arbitration should proceed in the first place.    

But instead the Court went on to explain that class arbitration “changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”  For, in “bilateral arbitration,” the “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution:  lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”  Slip op. at 21 (citations omitted).

By contrast, “the relative benefits of class-action arbitration are much less assured, giving reason to doubt the parties’ mutual consent to resolve disputes” in that manner.  Slip op. at 21-22.  The Court cited “just some of the fundamental changes brought on” by class arbitration:

1.  “An arbitrator chosen according to an agreed upon procedure .  . . no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties[;]”

2.  Under the American Arbitration Association’s Class Arbitration Rules the “presumption of privacy and confidentiality” that ordinarily applies in bilateral arbitration does not apply in class arbitration, “thus frustrating the parties’ assumptions when they agreed to arbitrate[;]”

3.  A class arbitration award does not simply purport to bind the parties to a single arbitration agreement, but “adjudicates the rights of absent parties as well[;]” and

4. “[T]he commercial stakes of class-action arbitration are comparable to those of class-action litigation, even though the scope of judicial review is much more limited.” 

The opinion notes that the dissent “minimized these crucial differences” by contending that the question before the arbitrators was merely a procedural one, and said that if the matter “were that simple, there would be no need to consider the parties’ intent with regard to class arbitration.”  Slip op. at 23 (citations omitted).  (The dissent is briefly discussed in the cover article we recently published in the June 2010 issue of Alternatives to the High Cost of Litigation, blogged here.)

Concluding that the “FAA required more,” the Court stated that it sees “the question as being whether the parties agreed to authorize class arbitration,” and where, as here, “the parties stipulated that there was ‘no agreement’ on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration.”

4.      The Supreme Court Expresses no Opinion on what a Party Must Show to Establish Consent to Class Arbitration

Because the Court found the parties had stipulated that there was “no agreement” on class arbitration, there was no reason for the Court to discuss what a party must show to establish such an agreement.  The Court expressly acknowledged that fact, stating that it had “no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.”  Slip op. at 23 n.10.   

C.   How Does the Supreme Court’s Ruling Affect Consolidated Reinsurance-Arbitration Practice?

As we pointed out in Part III, Bazzle — a class arbitration case – drastically changed consolidated reinsurance arbitration practice.  So it would be unreasonable to assume that Stolt-Nielsen will not change the practice that evolved under Bazzle. 

Far from providing much meaningful guidance on how courts or arbitrators should handle consolidated arbitration practice, Stolt-Nielsen reopens consolidation-related questions that had – for better or worse – been resolved by post-Bazzle courts.  These questions must now be re-examined by courts – and perhaps by arbitrators as well. 

First, Stolt-Nielsen leaves undecided the crucial threshold allocation-of-power issue:  Who gets to decide whether the parties consented to consolidated arbitration?   As discussed in Part III, courts have presumed that five Justices of the Supreme Court had ruled in Bazzle that the question of whether class arbitration is appropriate is a question of procedural arbitrability.  But Stolt-Nielsen has undermined the reasoning of these courts by declaring that Bazzle did not command a majority of the Court on the allocation-of-power question or any other issue addressed by the various Bazzle opinions.   Stolt-Nielsen did not decide whether the question whether the parties consented to class arbitration was one for the courts or the arbitrators, leaving it to the lower courts to determine the allocation-of-power question insofar as it relates to both class and consolidated arbitration.   And Stolt-Nielsen – by eschewing the notion that class arbitration is a mere matter of procedure – has cast into serious doubt the related question whether consolidated arbitration is a procedural matter. 

Second, the Court has left open the question of what a party must show to establish consent to class or consolidated arbitration.  Where there is concededly no agreement on consolidated arbitration, presumably courts and arbitrators should not order it because doing so would  negate the consolidated-arbitration corollary of the Stolt-Nielsen class-arbitration FAA rule of fundamental importance:  a party may not be compelled under the FAA to submit to consolidated arbitration unless there is a contractual basis for concluding that the party agreed to do so.   

But the Court’s discussion of whether class arbitration could be implied in the face of silence, suggests that other courts may need to engage in a similar analysis of whether imposing consolidated arbitration would fundamentally alter the terms of the parties’ agreement.   And that analysis might or might not lead to the conclusion that imposing consolidated arbitration in the face of silence would be inconsistent with the FAA. 

In Part V we shall discuss the implications of the decision on consolidated reinsurance-arbitration practice, with a particular focus on how lower courts may reshape that practice in light of Stolt-Nielsen, and what the practical implications of that changed practice may be.

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

A.   Introduction

In Part I (here) we explained why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice.  And, after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards of review, we explained how Stolt-Nielsen has established for the lower courts a fairly searching standard of review.  Part II (here) explored the legal and practical implications of that standard of review.    

This Part III turns to the other key area that will likely change because of Stolt-Nielsen:  Consolidated reinsurance-arbitration practice. 

As most reinsurance practitioners know, there is a brief history relevant to this subject and that will be the focus of this post.  For to fully understand the implications of Stolt-Nielsen on consolidated reinsurance-arbitration practice, it is necessary to understand how the pre-Stolt-Nielsen practice evolved. 

Parts IV (here) and V (here, here and here) will address how Stolt-Nielsen will likely change consolidated reinsurance-arbitration practice, and what the implications of those changes are to the industry. 

B.   The Traditional Rule:  Consolidation of Arbitration Proceedings is Not Permitted Unless the Parties Consent or an Applicable State Statute Authorizes it

Before the United States Supreme Court decided Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the general rule was that courts could not compel consolidated arbitration absent the parties’ consent – if the parties’ contract was silent on consolidated arbitration, then the court could not compel it.  See, e.g., Glencore, Ltd. v. Schnitzer Steel Products, 189 F.2d 264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68 (2d Cir. 1993); Champ v. Siegal Trading Co., 55 F.3d 269 (7^th Cir. 1995).  At least one exception was recognized:  Courts could compel consolidated arbitration where authorized by state statute.  See New England Energy Inc. v. Keystone Shipping Co., 855 F.2d 1, 3 (1988), cert. denied, 489 U.S. 1077 (1989). 

Courts generally took for granted that they — not arbitrators — had the power to decide whether the parties agreed to consolidated proceedings.  Where the parties’ arbitration clauses were ambiguous, the court would make the call on whether the parties agreed to consolidation.  See Connecticut General Life Ins. v. Sun Life Assur., 210 F.3d 771, 774 (7th Cir. 2000) (Posner, J.). 

Since, as a practical matter, most reinsurance arbitration clauses are silent — not ambiguous — on the subject of consolidated arbitration, courts did not often compel consolidated arbitration.  That doesn’t mean there were few or no consolidated arbitrations — parties would not infrequently agree to them post-dispute (a good example is the London Market, where the company and Lloyds’ Market (or Equitas) would often agree to a consolidated proceeding in which one law firm would represent all (or virtually all) solvent slip participants).  

C.   The GreenTree Financial Corp. v. Bazzle Rule:  Arbitrators Get to Decide Whether the Parties Agreed to Consolidated Arbitration, Even Where the Parties’ Contracts are Silent on that Score

The legal landscape on consolidated arbitration changed fairly dramatically shortly after the United States Supreme Court decided Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).  Bazzle was an appeal from a judgment of the South Carolina Supreme Court concerning two, separate consumer class action arbitrations in which Green Tree Financial Corp. (“Green Tree”) was the sole defendant. The South Carolina Supreme Court held that: (1) the arbitration clauses in the materially identical form contracts between each individual consumer class member and Green Tree were silent on whether the arbitration might be heard as a class action; and (2) in the circumstances, South Carolina law interprets the contracts as permitting class arbitration. The Supreme Court granted certiorari to determine whether that holding was consistent with the Federal Arbitration Act:  Specifically, the Court set out to decide whether imposing class arbitration on parties whose contracts were silent on that point was consistent with the Federal Arbitration Act.

Based on a plurality opinion written by Associate Justice Stephen G. Breyer, and joined by Associate Justices David H. Souter, Antonin Scalia, and Ruth Bader Ginsburg, and an opinion by Associate Justice John Paul Stevens concurring in the judgment, the Court vacated the South Carolina Supreme Court’s judgment, and remanded the case to the arbitrator to determine whether the arbitration agreements prohibited class action arbitration or were, as the South Carolina Supreme Court concluded, silent on that point.

The Bazzle arbitration clauses stated, in pertinent part, that:

All disputes, claims or controversies arising from or relating to this contract or the relationships which result from this contract shall be resolved by binding arbitration by one arbitrator selected by us with consent of you. . . . . The parties agree and understand that the arbitrator shall have all powers provided by the law and the contract. These powers shall include all legal and equitable remedies, including, but not limited to, money damages, declaratory relief, and injunctive relief.

The Plurality Opinion

Green Tree argued that the arbitration clauses prohibited class arbitration. The four-Justice plurality said this raised a “preliminary question” that must be dealt with “at the outset, for if [Green Tree] is right, then the South Carolina court’s holding is flawed on its own terms; that court neither said nor implied that it would have authorized class arbitration had the parties’ arbitration agreement forbidden it.”  The plurality concluded that whether the contracts prohibited class arbitration was a “disputed issue of contract interpretation.” 539 U.S. at 450:

The class arbitrator was ‘selected by’ Green Tree ‘with consent of’ Green Tree’s customers, the named plaintiffs. And insofar as the other class members agreed to proceed in class arbitration, they consented as well.

Of course, Green Tree did not independently select this arbitrator to arbitrate its disputes with the other class members. But whether the contracts contain this additional requirement is a question that the literal terms of the contracts do not decide. The contracts simply say (I) ‘selected by us [Green Tree].’ And that is literally what occurred. The contracts do not say (II) ‘selected by us [Green Tree] to arbitrate this dispute and no other (even identical) dispute with another customer.’ The question whether (I) in fact implicitly means (II) is the question at issue: Do the contracts forbid class arbitration? Given the broad authority the contracts elsewhere bestow upon the arbitrator. . . (the contracts grant to the arbitrator ‘all powers,’ including certain equitable powers ‘provided by the law and the contract’), the answer to this question is not completely obvious.

539 U.S. at 451 (emphasis in original).

The plurality also decided that this disputed issue of contract interpretation fell within the scope of the parties’ broad arbitration agreement:

The parties agreed to submit to the arbitrator ‘[a]ll disputes, claims or controversies arising from or relating to this contract or the relationships which result from this contract.’ And the dispute about what the arbitration contract in each case means (i.e., whether it forbids the use of class arbitration procedures) is a dispute “relating to this contract” and the resulting “relationships.” Hence the parties seem to have agreed that an arbitrator, not a judge would answer the relevant question. And if there is doubt about that matter – about the scope of arbitrable issues – we should resolve that doubt in favor of arbitration.

539 U.S. at 451-52 (citations and quotations omitted).

The plurality also stated that it did not consider the issue to be one of arbitrability, which is for the court to decide unless the parties clearly and unmistakably agree otherwise.  Rather, it was one of procedural arbitrability, which is ordinarily for the arbitrators to decide under a broad arbitration agreement. While “courts assume that the parties intended courts, not arbitrators” to decide certain “gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy,” the Court found that the issue did not fall into “this narrow exception.” 539 U.S. at 452 (citations omitted).  According to the Court, “the relevant question . . . is what kind of arbitration proceeding the parties agreed to:”

That question does not concern a state statute or judicial procedures. It concerns contract interpretation and arbitration procedures. Arbitrators are well situated to answer that question. Given these considerations, along with the arbitration contracts’ sweeping language concerning the scope of the questions committed to arbitration, this matter of contract interpretation should be for the arbitrator, not the courts, to decide.

539 U.S. at 452-53 (citations omitted).

Justice Stevens’ Concurring Opinion

In a concurring opinion, Justice Stevens said he believed that “the decision to conduct class-action arbitration was correct as a matter of law, and because petitioner has merely challenged the merits of that decision without claiming that it was made by the wrong decision maker, there is no need to remand the case to correct that possible error.”  He would have simply affirmed the judgment of the South Carolina Supreme Court but recognized that were he to “adhere to [his]. . . preferred disposition of the case, . . . there would be no controlling judgment of the Court.  To “avoid that outcome, and because” the plurality opinion “expresse[d] a view of the case close to . . . [his] own,” he concurred in the judgment. 539 U.S. at 455 (citations omitted).

D.   Courts Construe Bazzle as Requiring Arbitrators to Decide Whether Parties Consented to Consolidated Reinsurance-Arbitration Proceedings

Although the reasoning of the plurality opinion was endorsed by only four Justices, a number of courts interpreted Justice Stevens’ concurrence as endorsing the plurality’s rationale that an arbitrator should decide whether class or consolidated arbitration was appropriate.  See, e.g., Certain Underwriters at Lloyds v. Westchester Fire Ins. Co., 489 F.3d 580, 586 n.2 (3rd Cir. 2007) (citing cases); but see Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 580-81 (7th Cir. 2006) (holding that Bazzle’s allocation-of-power rationale was endorsed by only four Justices, but that consolidation was a procedural matter presumptively for the arbitrators to decide). 

Given that reinsurance disputes frequently involve multiple contracts and/or multiple parties, parties sought consolidated reinsurance arbitration, arguing that Bazzle and Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) – the procedural arbitrability decision on which Bazzle heavily relied – established that consolidation was a procedural issue that was presumptively for the arbitrators to decide, even when the parties’ agreements were silent on consolidation.  And courts generally accepted that argument and turned consolidation questions over to arbitrators.  See, e.g., Westchester Fire, 489 F.3d at 590.  In turn, the arbitrators frequently (if not always) concluded that the parties had consented to consolidation, even if their agreements were silent on that point.     

So it came to be generally accepted that:  (a) arbitrators were presumptively authorized to decide whether the parties agreed to consolidated arbitration, even when it was undisputed that there was no such agreement; and (b) arbitrators would routinely order consolidated arbitration.  Accordingly, parties that ordinarily would have resisted consolidated arbitration began to agree to it, rather than incur the costs associated with unsuccessfully challenging it. 

But on June 15, 2009 the Supreme Court granted certiorari in Stolt-Nielsen to decide the question that the Court initially set out to decide in Bazzle:  “Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.”  And when on April 27, 2010 the Supreme Court answered that question in the negative, it changed, at least to some degree, consolidated arbitration practice. 

In Part IV (here) we discuss Stolt-Nielsen’s rationale for ruling that class arbitration could not be imposed in the face of the parties’ silence, and how the Court’s ruling may affect consolidated reinsurance-arbitration practice. 

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

A.     Introduction 

Shortly before the United States Supreme Court decided Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., ___ U.S. ___, slip op. (April 27, 2010), we wrote about the implications the case might have on reinsurance arbitration practice.  (See our post here.)  But since then, you have not heard much from us, other than our brief report (here) about the Supreme Court vacating and remanding to the United States Court of Appeals for the Second Circuit the American Express Merchants’ Litigation judgment for further consideration in light of Stolt-Nielsen.   One — but by no means the only — reason is that after Stolt-Nielsen was decided, we wrote a comprehensive article on it, which will be published in a subscription-only publication in June. 

But that article – while comprehensive in scope – is directed at folks interested in the Federal Arbitration Act in general, not necessarily those interested in reinsurance arbitration in particular.  And that’s what we want to cover in this multi-part series:  Stolt-Nielsen’s implications on reinsurance arbitration practice. 

Stolt-Nielsen affects reinsurance arbitration in two very important ways.   First, it has set a fairly liberal standard of review that now applies to commercial arbitration awards in cases where a party asserts that the arbitrators exceeded their powers under Federal Arbitration Act Section 10(a)(4) because of the award’s outcome.  That, as we shall see, has all sorts of implications for persons involved in reinsurance arbitrations.

Second, it has changed the rules applicable to consolidated-reinsurance-arbitration practice – or at least it requires a wholesale reevaluation of those rules.  That, too, has a number of important implications for reinsurance-arbitration practice.   

This Part I of the series explains why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice.  And, after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards of review, it explains how Stolt-Nielsen has established for the lower courts a fairly searching standard of review.  Part II (here) will delve into what the implications of that standard of review will likely be. 

Part III (here) will provide the background necessary to understand how Stolt-Nielsen affects the law applicable to consolidated reinsurance arbitration.  Part IV (here) will delve into the details of how Stolt-Nielsen changes – or at least requires reconsideration of – the legal status quo in this area.  And Part V will discuss the implications of all of this.   

We do not set out to discuss the background of Stolt-Nielsen in any detail or to provide a play-by-play of how the Court decided the case.  If you are a regular reader you probably already know the background in detail, and our upcoming article does a pretty good job of mapping out the Court’s reasoning.  Instead, we focus our attention on the aspects of the decision that are relevant to the two key subjects of discussion. 

But before we delve into what Stolt-Nielsen has to say about the standard of review, we pause briefly to address why the standard of review applicable to an outcome-based challenge is so important in reinsurance and other forms of commercial arbitration. 

B.     Why is the Outcome-Based Standard of Review under Section 10(a)(4) Important to Reinsurance Arbitration Practice? 

Those involved in, or who have responsibility for, reinsurance arbitrations have good reason to be concerned about the extent to which a Court can vacate an award based on its outcome.  For the standard of review is not merely legal “mumbo jumbo,” but delineates the degree of discretion that a judge has to vacate an arbitration award.  That degree of discretion effectively acts as a check on arbitral power and determines how final a final arbitration award really is. 

Reinsurance arbitrators should be (and usually are) interested in the standard of review because it bears on how much discretion they have to decide a case in a particular manner.  Since arbitrators have institutional, reputational and economic interests in ensuring that their awards will be confirmed, they need to know how much discretion a judge has to second-guess their decisions. 

Parties likewise have good reason to be concerned about the standard of review.  The end product of arbitration will (or, at least, should) determine their rights and obligations, making one or both parties winners or losers.  Winners want that determination to be final; losers do not – and the scope of the standard of review determines (however loosely) the odds that the loser might get another bite at the proverbial apple. 

Parties also have institutional interests in the standard of review because it factors into the risk-benefit calculus that informs their decision whether to arbitrate in the first place.  The less discretion a judge has to vacate an award, the greater the risk that a party who agrees to arbitrate might be saddled with an arbitration award that bears little or no resemblance to what one would expect given the clear and unambiguous language of the contract and applicable law, custom and practice.  The more discretion a judge has to overturn an award, the more likely it is that arbitration will be followed by litigation, thereby increasing costs. 

The risk of high expense is inversely proportional to the risk of a wacky but unreviewable outcome.  If reinsurers and cedents are going to make informed choices about arbitration, they need to know where along the continuum of standard-of-review choices the law has attempted to strike the balance between these risks.

Attorney interests are aligned with those of their clients.  But to advance their client’s interests attorneys need to know the contours of the standard of review so that they can tailor strategy to maximize the chances that the client will reap whatever benefits the standard of review may have to offer.  For example, if the standard of review provides the court with some discretion to vacate an award that conflicts with the clear and unambiguous terms of the reinsurance contract, and those terms support the client’s position, then the attorney must not only forcefully argue those terms are controlling, but also make clear (diplomatically, of course) that an award inconsistent with those terms will likely be vacated. 

C.     The Legal Landscape:  The Section 10(a)(4) Standard of Review Prior to Stolt-Nielsen

To better understand how Stolt-Nielsen changed the standard of review applicable to outcome challenges, it is helpful to review briefly the somewhat confused, pre-Stolt-Nielsen law on outcome-based standards of review. 

Section 10(a)(4) of the Federal Arbitration Act authorizes courts to vacate an arbitration award “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”  Prior to Hall Street Assoc. v. Mattel, Inc., 552 U.S. ___ (2008), courts interpreted Section 10(a)(4) in at least two different ways.  Some courts interpreted Section 10(a)(4) as limited to challenges based on whether the matter decided fell within the scope of the parties’ arbitration agreement or submission.  That begged the question whether, and, if so, to what extent, the outcome of a commercial arbitration award on an issue within the parties’ submission was subject to any review at all. 

The Supreme Court had provided only indirect guidance on the subject.   The Steel Workers’ Trilogy cases, and their progeny, had ruled that, in labor arbitration cases governed by Section 301 of the Labor Management Relations Act (“LMRA”), the outcome of an award was subject to review to determine whether it drew “its essence from” the parties’ agreement, and was not based on the arbitrators’ “own notions of industrial justice.”  United Paperworkers Int’l Union v. Misco,  484 U.S. 29, 38 (1987);  United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960).   And, as respects commercial arbitration awards, the Court suggested in dicta in Wilko v. Swan, 346 U.S. 427 (1953), overruled on other grounds, Rodriguez De Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989),  that an award could be vacated if it was in “manifest disregard of the law.”  This dicta was referred to with approval in First Options of Chicago v. Kaplan, 514 U.S. 938, 942 (1995).

Based on this somewhat obscure guidance, a number of courts that had interpreted Section 10(a)(4) of the Federal Arbitration Act as limited to challenges to arbitral authority developed independent grounds to review the outcomes of awards, whether for “manifest disregard of the law,” or failure of the award to draw its essence from the parties’ agreement, a standard that we shall refer to as “manifest disregard of the agreement.”  Some courts adopted both standards, some only one. 

But some other courts held that one or both of these “manifest disregard” standards were impliedly incorporated within Section 10(a)(4) and that vacatur under Section 10(a)(4) was not limited to situations where arbitrators ruled on an issue that was outside the scope of their authority.  These courts held that arbitrators exceeded their powers by manifestly disregarding the law, the agreement or both.   

Whether or not a court adopted one or both standards of review, and whether or not they deemed those standards of review to be within or without Section 10(a)(4), courts often articulated the standards of review differently, and applied them with varying degrees of strictness or laxity.  But for the most part, all courts were reluctant to grant relief based on them save in fairly unusual circumstances. 

In 2008 the Court decided Hall Street, which held that the Section 10 of the Federal Arbitration Act stated the exclusive grounds available to challenge a commercial arbitration award.  In dicta the Court discussed whether “manifest disregard of the law” might be encompassed within Section 10(a)(4), but did not decide whether that was so. 

Courts that had ruled that “manifest disregard of the law,” “manifest disregard of the agreement,” or both, were independent grounds for vacatur were forced to reconsider whether those standards were, in fact, independent, or whether they were subsumed within Section 10(a)(4).  This led to some conflicting authority, with some courts holding that one or both of those standards were subsumed within Section 10(a)(4) and others concluding that one or both of these outcome-based standards of review did not survive Hall Street .     

D.     What did Stolt-Nielsen Have to Say About the Outcome-Based Standard of Review? 

On June 15, 2009 the Supreme Court granted certiorari in Stolt-Nielsen to consider “[w]hether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.”  As readers will recall, the parties had submitted to an arbitration panel the question whether the arbitration clauses contained in a series of charter-party agreements permitted or precluded class arbitration.  The Second Circuit held that the arbitration panel had not manifestly disregarded the law by imposing class arbitration on the parties even though their arbitration agreements were concededly silent on that score. 

On April 27, 2010, in a 5-3 decision authored by Associate Justice Samuel A. Alito, Jr., and joined in by Chief Justice John G. Roberts Jr. and Associate Justices Antonin Scalia, Anthony M. Kennedy and Clarence Thomas, the Court held that:  (a) the arbitration panel exceeded its powers under FAA Section 10(a)(4) by imposing class arbitration on the parties, because the panel’s decision was based solely on the arbitrators’ own notions of public policy rather than on the FAA, federal maritime, or New York State law; and (b) it was inconsistent with the FAA to impose class arbitration on the parties because it was undisputed that the parties had never consented to class arbitration, and implying such an agreement in the circumstances would drastically alter the nature of the parties’ agreement to arbitrate on a bilateral basis.

Although the Court could probably have decided the matter as one of arbitrability – the Stolt-Nielsen parties appeared to have reserved their rights to de novo review of the question whether the arbitrators had the power to render a binding decision on whether class arbitration was permitted in the face of silence – the Court initially addressed the question from the standpoint whether the award should be vacated based on the outcome.  And that determination required the Court to state the applicable standard of review for an outcome-based challenge to a commercial arbitration award. 

 The Court imported into the commercial context the labor-arbitration “manifest disregard of the agreement,” standard and found that it was subsumed within Section 10(a)(4).  It said that it was not deciding whether the “manifest disregard of the law” standard survived Hall Street (i.e., whether it was also part and parcel of Section 10(a)(4)), but declared that if it did, then it was satisfied here. 

Borrowing from the Steelworkers’ Trilogy line of labor arbitration cases decided about 50 years ago, and more recent labor-arbitration cases, the Court declared, “’It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial justice’ that his decision may be unenforceable.” Slip op. at 7 (quoting Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509 (2001) (per curiam)(quoting Enterprise Wheel & Car Corp., 363 U.S. at 597 (1960))).  

“In that situation,” said the Court, “an arbitration decision may be vacated under § 10(a)(4) of the FAA on the ground that the arbitrator ‘exceeded [his] powers,’ for the task of an arbitrator is to interpret and enforce a contract, not to make public policy.”  Applying that standard to the facts, the Court “conclude[d] that what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration.”  Slip op. at 7.

The Court explained that AnimalFeeds had made three arguments, one of which was that “the clause should be construed to permit class arbitration as a matter of public policy.”  Slip op. at 8 (quotation omitted).  Of the remaining two arguments, the panel had rejected one and said nothing about the other.  This led the Court to conclude that the arbitrators had accepted AnimalFeeds’ invitation to base its decision on public policy grounds.

The Court found further evidence that the panel based its decision on public policy in that the panel looked to previous arbitral decisions by other panels that had addressed the question and:  (a) “[p]erceiv[ed] .  .  . consensus among arbitrators that class arbitration is beneficial in ‘a wide variety of settings;’” and (b) considered “only whether there was any good reason not to follow that consensus .   .  .  .”  Slip op. at 9 (quotations omitted). 

The Court also found it relevant that the panel was not persuaded by Stolt-Nielsen’s unrebutted expert testimony — including testimony that there had never been a class arbitration under the form of charter party agreement used — or by pre-Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) decisions holding that courts could not compel class or consolidated arbitration where the parties’ agreements were silent on that score.    Slip op. at 9; see, e.g., Glencore Ltd. v. Schnitzer Steel Products, 189 F.2d 264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68 (2d Cir. 1993); and Champ v. Siegal Trading Co., 55 F.3d 269 (7th Cir. 1995).

The Court said that because the parties had stipulated that they had reached no agreement on class arbitration, the arbitrators should have inquired whether the  FAA, maritime law, or New York Law contained a “default rule” that applied.  But instead, “the panel proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation.”

The Court was not persuaded by the “references to intent” in the panel decision, including a reference to the parties’ broad arbitration clause.  The Court pointed out that the parties stipulated, and the arbitration panel acknowledged, that the charter party agreement was silent on permitting or precluding class arbitration, and “that the charter party was ‘not ambiguous so as to call for parol evidence.’”  Slip op. at 11 (quoting panel decision).  The stipulation “left no room for an inquiry regarding the parties’ intent, and any inquiry into that settled question would have been outside the panel’s assigned task.”   Slip op. at 11.

The implications of the Court’s ruling on the standard of review are many, and shall be discussed in Part II (here).

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

But those posts principally concern the legal issues raised by the case, discuss various ways it might be decided, and argue that the correct answer to the question is that a court or arbitration panel cannot, consistent with the Federal Arbitration Act, impose class or consolidated arbitration in the face of silence.  To date we have not discussed in any detail the practical implications that the case may have on reinsurance arbitration, if any.  So today let’s look at what those implications may be. 

Class actions or class arbitrations arising out of reinsurance contracts are, for all practical purposes, nonexistent.  But companies, particularly cedents, frequently seek to consolidate arbitration proceedings, whether that means arbitrating with all or most reinsurers on a treaty placement or with one, some or all reinsurers on multiple placements. 

Reinsurance lawyers with about eight or more years of experience will recall the days when the general rule was that courts could not compel consolidated arbitration proceedings absent contract language or perhaps a state statute authorizing consolidated arbitration.  Some exceptions to this rule evolved to address unique factual situations, but for the most part the norm was that consolidated arbitration could not be compelled absent the consent of the parties or state statutory authorization.   That doesn’t mean there were no consolidated arbitrations — parties would not infrequently agree to them post-dispute (a good example is the London Market, where the company and Lloyds’ Market (or Equitas) would frequently agree to a consolidated proceeding in which one law firm would represent all (or virtually all) solvent slip participants).  

All of this changed when the United States Supreme Court issued its plurality decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).  Bazzle was an appeal from a judgment of the South Carolina Supreme Court concerning two, separate consumer class action arbitrations in which Green Tree Financial Corp. (“Green Tree”) was the sole defendant.  The South Carolina Supreme Court held that: (1) the arbitration clauses in the materially identical form contracts between each individual consumer class member and Green Tree were silent on whether the arbitration might be heard as a class arbitration; and (2) in the circumstances, South Carolina law interprets the contracts as permitting class arbitration.  The Supreme Court granted certiorari to determine whether that holding was consistent with the Federal Arbitration Act.

Based on a plurality opinion written by Associate Justice Stephen G. Breyer, and joined by Associate Justices David H. Souter, Antonin G. Scalia, and Ruth Bader Ginsburg, and an opinion by Associate Justice John Paul Stevens concurring in the judgment, the Court vacated the South Carolina Supreme Court’s judgment, and remanded the case to the arbitrator to determine whether the arbitration agreements prohibited class arbitration or were, as the South Carolina Supreme Court concluded, silent on that point. The Court therefore never reached the issue whether imposing class arbitration on the parties when the contract was silent was consistent with the Federal Arbitration Act.

The plurality in Bazzle determined that the issue before it – whether the parties’ contracts authorized or precluded class arbitration – was a question of procedural arbitrability.  The plurality characterized the question as concerning “what kind of arbitration proceeding the parties agreed to.”  539 U.S. at 452-53.  It was, indeed, a “gateway” question; it was –- according to the plurality decision — simply not the type of “gateway” question that courts get to decide because it involved a disputed issue of contract interpretation.

Although the reasoning of the plurality opinion was endorsed by only four Justices, it proved highly influential in the lower courts, and most courts read it as authorizing arbitrators to decide whether arbitration proceedings could proceed on a class or consolidated basis, even under multiple contracts to which not all parties were signatories.  Parties began to agree to consolidated reinsurance arbitration proceedings, believing that arbitrators would order consolidation if one of the parties opposed it.  And where parties did not agree post dispute to consolidation, reinsurance arbitrators frequently granted it. 

But this all may change, depending on what the Court decides in Stolt-Nielsen.  For example, the Court may rule that, in the absence of some indicia of an affirmative agreement to consolidate proceedings, neither courts nor arbitrators may order consolidated proceedings.  The Court may also rule that courts must decide whether there is or may be some affirmative agreement to class arbitration.  Or the Court may rule that class arbitration cannot be ordered absent an affirmative agreement by the parties unless the parties to each contract are also parties to every other contract.   

On the other hand, the Court may not reach the question presented, in which case things will likely proceed as they have in the recent past.  Or a majority of the Court may rule that, under a broad arbitration clause, arbitrators are authorized to order class arbitration, effectively endorsing what a number of lower courts have ruled since Bazzle.   

There are a number of different ways the Court might decide Stolt-Nielsen, but the bottom line is this:  there is a good chance that Stolt-Nielsen will materially change the law on consolidation of arbitration proceedings.  And the change could have tactical implications for reinsurance dispute resolution. 

Stolt-Nielsen has been fully submitted since December 9, 2009,  so a decision could come down any Monday the Court is in session over the next several weeks, and will almost certainly be handed down no later than the end of the term in late June.  All we can say at this point is that you will surely hear about the decision here at Forum.  .  .  .