Reduced dispute frequency is good news for the industry, but it doesn’t mean that industry executives should assume that reinsurance disputes are a thing of the past, ignore important developments that bear on their resolution, or become less proactive in their efforts to prevent them.  Keeping apprised of recent, pertinent reinsurance- and dispute-resolution-related legal, regulatory and economic developments is particularly important today, because there have been – and will likely continue to be – many that may bear on the nature and frequency of future reinsurance disputes.

To that end, a number of experienced industry executives and  in-house counsel, and a small group of outside counsel, have joined forces with HarrisMartin Publishing to put together a two-day conference designed to survey important, recent developments concerning reinsurance and reinsurance dispute resolution.  The conference — entitled “Reinsurance Summit:  Fresh Perspectives on the Reinsurance Front” — is scheduled to take place at the Lowes Philadelphia Hotel on September 22-23, 2011.

It promises to be an excellent opportunity to keep abreast of what’s happening in the world of reinsurance and reinsurance-dispute-resolution, network with friends and colleagues, and earn CLE credits if you need them.  Admission is $895.00, but HarrisMartin is offering a $100.00 discount to those who register by September 2, 2011.  Registration, CLE and hotel information is here (HarrisMartin has negotiated a reduced, $199.00 per night hotel rate for conference attendees).

Here’s the program as described by HarrisMartin:

Day 1, Thursday, September 22, 2011

8:15 a.m. – 8:30 a.m.

WELCOME BY CO-CHAIRS

Edward K. Lenci, Hinshaw & Culbertson LLP, NewYork

Leslie J. Davis, Vice President & Assistant General Counsel, General Re, and Senior Vice President & General Counsel, US Aviation Underwriters, Stamford, CT

Wendy R. Taylor, Vice President and Associate Counsel, Chubb & Son, a division of Federal Insurance Company, Warren, NJ

8:30 a.m. – 9:45 a.m.

STATUTORY AND REGULATORY UPDATE: DODD-FRANK, THE NON-ADMITTED AND REINSURANCE REFORM ACT,  AND THE FEDERAL INSURANCE OFFICE

• Title V of the Dodd Frank Act: A discussion of the major interests lobbying for this legislation and against it, how and when the reinsurance provisions will be implemented and enforced, and the likely practical impact on reinsurance transactions.

• The Non-admitted and Reinsurance Reform Act: A discussion of issues relating to preemption, the future role of the NAIC, the changes to the significance of an insurer’s state of domicile, and how states and ceding companies may respond.

• The Federal Insurance Office: A discussion of this new office, “covered agreements,” the influence of Solvency II and international governing bodies, and the impact on state law, including a discussion of federalism and constitutionality.

Moderator:

A. Lindsay Doering, Law Office of A. Lindsay Doering, Philadelphia

Panel:

Patrick H. Cantilo, Cantilo & Bennett LLP, Austin, TX

Kimberly M. Welsh, Vice President and Assistant General Counsel, Reinsurance Association of America, Washington, D.C.

Daniel Schelp, Managing Attorney, National Association of Insurance Commissioners

9:45 a.m. – 10:45 a.m.

THE JUDICIAL SCRUTINY OF ARBITRAL AWARDS

Over the last few years, courts, including the U.S. Supreme Court, have decided a number of controversial cases concerning the power of courts to vacate arbitral awards on the grounds of excess-of-powers, evident partiality and procedural misconduct. Several of those cases involved arbitrations concerning reinsurance disputes. This panel will discuss recent developments pertinent to judicial review of arbitral awards, including outcome-based review, arbitral authority to award attorney fees and costs, adequacy of arbitrator disclosures, arbitrator qualifications, and arbitral “due process.” Among the controversial cases the panel will discuss are:

• Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp. (U.S. Supreme Court)

• AT&T Mobility v. Concepcion (U.S. Supreme Court)

• Reliastar Life Ins. Co. v. EMC Nat’l Life Co. (2nd Circuit)

• PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd. (3rd Circuit)

• Dealer Computer Services, Inc. v. Dub Herring Ford, et al. (6th Circuit)

• Trustmark Ins. Co. v. John Hancock Life Ins. Co. (7th Circuit)

• Scandinavian Re Co. Ltd. v. St. Paul Fire & Marine Ins. Co. (S.D.N.Y.) (appeal pending)

• Amerisure Mut. Ins. Co., et al. v. GLOBAL Reins. Corp. of Am. (Ill. App. 1st Dist.)

Panel:

Philip J. Loree Jr., Loree & Loree, Manhasset, NY

John M. Nonna, Dewey & LeBoeuf LLP, NewYork

Richard Faulkner, Blume, Faulkner, Skeen & Northam, PLLC, Richardson, TX

10:45 a.m. – 11:00 a.m.

REFRESHMENT BREAK

11:00 a.m. – 12:00 p.m.

REINSURANCE CONTRACT WORDING: BE CAREFUL WHAT YOU ASK FOR!

Reinsurance contract wording is changing, due in part to the increasingly global nature of reinsurance and the competing regulatory requirements of different jurisdictions around the world. As a result, seemingly straightforward requests may have unintended consequences. Some of the complex clauses and issues that this panel will discuss include:

• Governing Law, Jurisdiction and Venue: Enforceability of choice of law; the legacy of Wasa v. Lexington; the impact on arbitrators’ power; application of procedural law; and the possible collision of governing law with the negotiated and paid for coverage for punitive damages, ECO/XPL.

• Economic and Trade Sanctions: The recent rise in demand for sanction exclusionary language and the ramifications of wordings currently circulating, including a comparison of the traditional territorial exclusion, the US/OFAC exclusionary wording and the London Market exclusionary wording; the counter forces of anti-blocking legislation; and highlights of trade sanction programs, including discussion of particular countries and jurisdictions).

• Claims Cooperation: An examination of different clauses, why they are requested, how they help or hinder the parties, and the differences between the U.S. and U.K/Europe.

• Commutations and Sunset: Loss notice provisions; Mandatory or permissive commutations; formalized contractual commutation methodologies; appraisal provisions; actuarial arbitrations.

Panel:

Wendy R. Taylor, Vice President and Associate Counsel, Chubb & Son, a division of Federal Insurance Company, Warren, NJ

Myra E. Lobel, Managing Director, Guy Carpenter & Company LLC, NewYork

David A. Silva, Mound CottonWollan & Greengrass, New York

David N. Kragseth, Senior Contract Wording Specialist, Munich Reinsurance America, Inc., Princeton, NJ

12:00 p.m. – 1:30 p.m.

LUNCH

1:30 p.m. – 2:30 p.m.

WHAT, EXACTLY, IS BAD FAITH IN REINSURANCE?

The duty of utmost good faith is a two-way street. Two in-house attorneys will explore the duties and obligations of cedents and reinsurers with respect to underwriting, presentation and acceptance of the risk, renewals, claim handling, claim presentation, and arbitration or litigation.

Panel:

Leslie J. Davis, Vice President & Assistant General Counsel, General Re, and Senior Vice President & General Counsel, US Aviation Underwriters, Stamford, CT

Susan Grondine-Dauwer, General Counsel,R&Q USA, Boston

Jeanne M. Kohler, Edwards Angell Palmer & Dodge LLP, New York

2:30 p.m. – 2:45 p.m.

REFRESHMENT BREAK

2:45 p.m. – 3:45 p.m.

DISPUTE RESOLUTION ALTERNATIVES: LITIGATION, MEDIATION, ARBITRATION

In-house counsel will share insights and address the “pros and cons” of the litigation, arbitration and mediation of reinsurance disputes as well as alternative arbitral rules and fora, such as offered by AIRROC.  Moderated by Bina T. Dagar, this panel will deliver a balanced view of cedent and assumed perspectives to ADR. The discussions will include:

• Options available to resolve reinsurance disputes

• Benfits and challenges posed by each alternative

• Ad Hoc vs. institutional arbitration/mediation

• Organizations as clearinghouses – ReMedi, AAA, AIRROC, ARIAS, CPR and JAMS

Attendees will be asked to complete a Zoomerang survey ahead of the Conference to be incorporated into the presentation.

Moderator:

Bina T. Dagar, Ameya Consulting, LLC, Livingston,NJ

Panel: Steven Agosta, General Counsel, XLRe America, Stamford, CT

Scott P. Birrell, Vice President and Associate General Counsel, Travelers Insurance Co., Hartford, CT

Anthony Vidovich, Vice President & Assistant General Counsel, Director of Reinsurance Law, The Hartford, Hartford, CT

Michael Zeller, Vice President, Reinsurance Services Division, AIG, Inc., New York

3:45 p.m. – 5:30 p.m.

THE VERY MODEL OF A REINSURANCE ARBITRATOR: INDUSTRY EXECUTIVES SPEAK OUT

The in-house counsel on our faculty will serve on this panel, to be moderated by Fritz K. Huszagh of Hinshaw & Culbertson in Chicago. Among the issues the panelists will address, from the insurers’ and reinsurers’ perspectives, in this potentially lively session are:

• What qualifications should an ideal arbitrator and umpire have?

• What disclosures should they make?

• Is there any value to “certification” of arbitrators and umpires?

• If so, what factors should be considered in the certification process?

• Should arbitrators accept conflicting assignments?

• What is a fair fee for arbitrators and umpires?

• Which expenses are proper and which are not?

• Should arbitrators and umpires be paid non-refundable retainers?

• Should they be paid hearing cancellation fees?

Moderator:

Fritz K. Huszagh, Hinshaw & Culbertson, Chicago

Panel:

Steven Agosta, General Counsel, XL Re America, Stamford, CT

Scott P. Birrell, Vice President and Associate General Counsel, Travelers Insurance Co., Hartford, CT

Ali E. Rifai, General Counsel, Zurich Insurance CMB Division, and former Interim General Counsel, Zurich Insurance Middle East Region

Susan Grondine-Dauwer, General Counsel, R&Q USA, Boston

Leslie J. Davis, Vice President & Assistant General Counsel, General Re, and Senior Vice President & General Counsel, US Aviation Underwriters, Stamford, CT

Thomas Freudenstein, COO, GLOBAL Reinsurance Corporation of America and Director and Attorney at GLOBALE Rückversicherungs-AG, New York and Cologne, Germany

Myra E. Lobel, Managing Director, Guy Carpenter & Company LLC, NewYork

Anthony Vidovich, Vice President & Assistant General Counsel, Director of Reinsurance Law, The Hartford, Hartford, CT

Michael Zeller, Vice President, Reinsurance Services Division, AIG, Inc., NewYork

5:30 p.m. – 7:00 p.m.

NETWORKING COCKTAIL RECEPTION

Day 2, Friday, September 23, 2011

7:30 a.m. – 8:30 a.m.

CONTINENTAL BREAKFAST

8:30 a.m. – 9:30 a.m.

ETHICAL CONSIDERATIONS FOR LAWYERS SERVING AS UMPIRES AND ARBITRATORS

An interactive talk on how state rules concerning the ethical obligations of lawyers impact lawyers who are serving as umpires and arbitrators.

Daniel E. Tranen, Hinshaw & Culbertson LLP,Boston

9:30 a.m. – 12:30 p.m.

DEVELOPMENTS IN REINSURANCE AROUND THE WORLD

In an ever-increasingly globalized economy, businesspersons and lawyers need to know what’s happening around the world. Each panelist will cover a different region of the world, providing crucial information about current market trends, governmental regulations, resolution of disputes and the like. (A Refreshment break will be held during this panel from 10:30 – 10:45 a.m.)

Panel:

UK: Peter W. Ambler, Managing Director, Towers Watson (Re)Insurance Brokers Ltd., London

Europe: Thomas Freudenstein, COO, GLOBAL Reinsurance Corp. of America and Director and Attorney at GLOBALE Rückversicherungs-AG, New York & Cologne, Germany

Latin America: M. Machua Millett, Senior Vice President, Senior Advisory Specialist and Global GPL Team Leader, Marsh USA Inc., Boston

Middle East: Ali E. Rifai, General Counsel, Zurich Insurance CMB Division, and former Interim General Counsel, Zurich Insurance Middle East Region

Canada: Stuart S. Carruthers, Stikeman Elliott, Toronto

I hope to see you there!

The article is reprinted below with permission, and I would like to thank Elaine Song, a member of the New York Law Journal’s editorial staff, for her assistance and work in getting this published in New York’s leading legal trade publication.  

Reprinted with permission from the May 18, 2011 edition of the New York Law Journal© 2010 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com:

Outside Counsel

Arbitrator Evident Partiality Standard Under Scrutiny in ‘Scandinavian Re’

Philip J. Loree Jr. ContactAll Articles

New York Law Journal

May 18, 2011

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Philip J. Loree Jr.

Section 10(a)(2) of the Federal Arbitration Act (FAA) authorizes federal district courts to vacate arbitration awards “where there was evident partiality…in the arbitrators….”¹ Just as 28 U.S.C. §455 imposes impartiality requirements on federal judges, so too does Section 10(a)(2) on arbitrators.

To implement Section 10(a)(2)’s arbitral impartiality standards, courts have imposed on neutral arbitrators a duty to disclose circumstances that establish evident partiality. The scope of the duty to disclose relationships and interests that disqualify a neutral on evident partiality grounds, and what types of interests and relationships can establish evident partiality, are topics muddled by unclear, semantically malleable standards, which sometimes baffle judges, arbitrators, and in-house and outside counsel.

The pending appeal in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.² presents the U.S. Court of Appeals for the Second Circuit with an opportunity to provide additional, meaningful guidance on arbitral impartiality standards, including arbitrator disclosure obligations. There the district court vacated a final arbitration award on evident partiality grounds even though none of the arbitrators had personal or financial relationships with the parties or interests in the outcome. The district court said the award had to be vacated because two of the arbitrators did not disclose to the parties facts about their involvement in an allegedly related proceeding—facts that would have no bearing on whether a similarly situated federal judge was impartial under much stricter judicial impartiality standards.

The question the court will decide is whether FAA Section 10(a)(2) authorized the district court to vacate the award under these circumstances. The answer should be “no,” and here’s why.

The District Court Decision

Scandinavian Re arose from a petition to vacate a final award issued by three experienced, well-known and respected industry arbitrators appointed to resolve a reinsurance dispute. The district court vacated the award because two arbitrators (one neutral, one party-appointed) did not disclose their temporally overlapping service on another arbitration panel hearing a case the district court characterized as concerning: (a) a common witness; (b) “similar” issues; (c) “similar” contract terms; (d) “the same type of reinsurance business”; and (e) a party that was the successor-in-interest to reinsurance business the prevailing party in the Scandinavian Re arbitration had assumed. (The parties dispute the accuracy of these findings, but, as we shall see, that doesn’t matter.)

The district court held that the arbitrators’ undisclosed, overlapping service in the other arbitration created “a material conflict of interest” establishing evident partiality:

[T]he Scandinavian Re Arbitration and the [other arbitration] were presided over by two common arbitrators, overlapped in time, shared similar issues, involved related parties, included…a common witness that supported interpreting [the agreement in the other arbitration] as written but interpreting the Scandinavian Re Agreement in light of Scandinavian Re’s intent at the time it entered into the agreement. Additionally, [another witness] was employed by [a party in the other arbitration which had purchased reinsurance business originally assumed by the prevailing party in the Scandinavian Re arbitration] at the time she appeared as a witness in the Scandinavian Re Arbitration. By participating in both [arbitrations, the arbitrators] placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness'] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration. By failing to disclose their participation in the [other arbitration], [the two arbitrators] deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy….³

Analysis

The case turns on whether the Scandinavian Re arbitrators met arbitral impartiality standards, which are more demanding than judicial impartiality standards.⁴ While federal judges are disqualified for partiality “in any proceeding in which [their] impartiality might reasonably be questioned”—a/k/a the “appearance of bias” standard—in the Second Circuit “an arbitrator is disqualified [for evident partiality] only when a reasonable person, considering all of the circumstances, ‘would have to conclude that [the] arbitrator was partial to one side.’”⁵

Conventional wisdom suggests the Second Circuit should simply determine whether “a reasonable person…would have to conclude” the arbitrators were partial. But the Second Circuit can (and should) decide Scandinavian Re under explicitly defined standards set forth by statute and interpreted by U.S. Supreme Court and other federal courts: the judicial impartiality standards.

Chief Judge Frank H. Easterbrook of the U.S. Court of Appeals for the Seventh Circuit has demonstrated that initially considering whether arbitrators met judicial impartiality standards can greatly simplify the resolution of many evident partiality (and certain contractual, arbitrator-qualification) questions, because doing so not only avoids the philosophical debate and policy-oriented analysis that the “reasonable person would have to conclude” test invites, but in many cases, including Scandinavian Re, can provide added assurance about the validity of the outcome. For if arbitrators satisfy judicial impartiality standards, they necessarily satisfy arbitral ones, which are less demanding.⁶

What Are the Judicial Standards? The statute, 28 U.S.C. Section 455, sets forth the judicial impartiality standards that a federal judge must meet in each case over which he or she presides. Section 455(a) describes a “catchall,” “appearance of bias” impartiality standard: “(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.”⁷ Section 455(b) sets out specific circumstances under which a judge is disqualified from hearing a case because of actual bias or prejudice or certain personal, financial or professional relationships or interests that are presumed to conflict with the parties’ interest in having an impartial decision maker.⁸

Judges who do not meet these demanding judicial impartiality standards in any given case are obligated to recuse themselves, that is, to step aside and let another judge hear the matter. If they do not do so, and an appellate court rules they should have, then their orders and judgments may be vacated.

Were the ‘Scandinavian Re’ Arbitrators Disqualified Under §455(b)? The best way to assess impartiality under §455 is to consider first whether the arbitrators—were they federal judges—would have been disqualified on §455(b) grounds. The only §455(b) ground that might provide even a barely plausible basis for challenging impartiality in a case like Scandinavian Re is §455(b)(1), which requires judges to disqualify themselves “[w]here [they have]…a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding.”⁹ But the Scandinavian Re arbitrators did not violate subsection 455(b)(1).

In Liteky v. United States,¹⁰ the Supreme Court explained that predispositions judges reach based on information obtained in an adjudicative capacity do not evidence Section 455(b)(1) “bias” or “prejudice,” except in extraordinary circumstances. The Court said the terms “bias” and “prejudice” “connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess…or because it is excessive in degree….”¹¹ Under the so-called “extrajudicial source doctrine,” alleged “bias” or “prejudice” generally cannot be based on knowledge obtained from participation in judicial proceedings, or on predispositions reasonably formed as a result, because there is nothing wrongful or inappropriate about judges having such knowledge or predispositions.¹²

Knowledge obtained from other proceedings; judicial opinions reached during those proceedings concerning applicable law and its application to facts; and judicial views formed during those proceedings concerning a party’s or witness’ credibility or character may cause a judge to be favorably or unfavorably disposed to a particular position, party or witness. But absent “deep-seated favoritism or antagonism that would make fair judgment impossible,” those predispositions are not “wrongful” or “inappropriate” and thus do not establish bias or prejudice.¹³

Assuming for argument’s sake that the district court’s factual findings were accurate, at most the Scandinavian Re arbitrators served in two proceedings featuring a common witness, some similar issues and contract terms, the same type of reinsurance business, and a related party. Even if there were no “extrajudicial source doctrine,” those facts would hardly suggest §455(b)(1) “bias” or “prejudice.”

But assuming (in the absence of evidentiary support) the arbitrators’ service in the other arbitration influenced their thinking in the Scandinavian Re arbitration, there is nothing wrongful or inappropriate about a judge—or by extension, an arbitrator—having or using in proceeding B knowledge or experience properly obtained in an adjudicative capacity from proceeding A.¹⁴ And nobody—including the district court judge—says that the arbitrators’ participation in the other arbitration resulted in “deep-seated favoritism or antagonism that would make fair judgment impossible.”¹⁵

The Scandinavian Re arbitrators also had no “personal knowledge of disputed evidentiary facts concerning the proceeding,” Section 455(b)(1)’s other basis for disqualification. Perhaps the arbitrators had already heard in one proceeding testimony on factual issues common to both, including testimony from a common witness. Perhaps they were already familiar with the relevant contract wording, which allegedly was similar.

But that doesn’t mean they obtained personal knowledge of the facts established or advocated in the other arbitration and thus could testify as fact witnesses in that arbitration, let alone in the Scandinavian Re arbitration. No one claims they were involved in or had personal knowledge of the disputed transactions; whatever knowledge they had was obtained solely in an adjudicative capacity.

Were the ‘Scandinavian Re’ Arbitrators Disqualified Under §455(a)? The only remaining question is whether the arbitrators were disqualified under §455(a)’s catchall, “appearance of bias” standard. Liteky provides an easy answer: A judge’s “impartiality” cannot “reasonably be questioned” where, as in Scandinavian Re, the alleged impartiality is based on knowledge obtained or opinions or views formed by the judge in the ordinary course of legitimately discharging his or her adjudicative responsibilities in another proceeding.¹⁶

Was There Any Legitimate Basis for the District Court’s Decision? The answer is “no.” Even if the strict judicial impartiality standards applied to the Scandinavian Re arbitrators, they satisfied them, and that necessarily means they satisfied the more lenient ones imposed by §10(a)(2).

The district court’s conclusion that the arbitrators had a “material conflict of interest” was therefore misplaced. The district court said the arbitrators “placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re arbitration, be influenced by recent credibility determinations they made as a result of [the common witness'] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.”¹⁷ But a decision maker cannot have a “conflict of interest” unless he or she has a personal or financial interest in the outcome of the matter that conflicts with the parties’ interest in the decision maker’s impartiality.¹⁸ Liteky forecloses any argument that a decision maker’s discharge of legitimate adjudicative functions in matter A can create an “interest” in the outcome of related matter B, let alone a conflicting one.¹⁹

The risk that the arbitrators might “influence each other’s thinking on” allegedly similar, common issues likewise does not create a conflict of interest or otherwise establish evident partiality. That risk is present to some degree in appellate courts that use rotating, three-judge panels, and is particularly high in the U.S. Supreme Court, where the same nine justices generally hear each case. But nobody thinks that federal judges or Supreme Court justices must recuse themselves in matter B simply because they served together on the Court when it heard related matter A, and thus might influence each other’s thinking in matter B.

But Didn’t the Arbitrators Fail to Disclose Their Service on the Other Arbitration Panel? Some may think that the Second Circuit should affirm the district court because the arbitrators did not disclose their involvement in the other arbitration. They may think that the arbitrators’ failure to disclose their service amounted to evident partiality because it allegedly evidenced some deceptive motive on the arbitrators’ part that somehow spoiled the award. Alternatively, some may, like the district court judge, think that the arbitrators’ nondisclosure somehow “deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy,”²⁰—even though an evident-partiality conclusion does not follow from that doubtful premise.

These arguments are misplaced for several reasons, but it is enough to say that accepting them would impose on arbitrators impartiality standards far more onerous than those federal judges must meet.

In the Second Circuit, courts may vacate awards for evident partiality where arbitrators fail to disclose a “material relationship with…a party” or a material interest—financial or personal—in the outcome of the arbitration.²¹ There is nothing controversial about that, for an arbitrator’s material relationship with a party or person or material financial interest in the outcome would establish partiality under both judicial and arbitral impartiality standards.

But in Scandinavian Re the undisclosed circumstances provided no basis for disqualification under Sections 455(a) or (b), which means that not even a federal judge would have been obligated to disclose them.²² The Scandinavian Re arbitrators were not required to disclose anything that a similarly situated federal judge would not have to disclose, and the Second Circuit should so rule.

Philip J. Loree Jr. is a partner at Loree & Loree in Manhasset.

Endnotes:

1. 9 U.S.C. §10(a)(2).

2. No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010).

3. Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., No. 09 Civ. 9531(SAS), 2010 WL 653481, at *8 (S.D.N.Y. Feb. 23, 2010), appeal pending No. 10-910-cv (2d Cir.).

4. See Applied Indus. Materials Corp. v. Ovalar, 492 F. 3d 132, 137 (2d Cir. 2007); Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83-84 (2d Cir. 1984).

5. Ovalar, 492 F.3d at 137 (quoting Morelite, 748 F.2d at 84 (emphasis added)).

6. See Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011) (Easterbrook, C.J.); Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617 (7th Cir. 2002) (Easterbrook, J.).

7. 28 U.S.C. §455(a).

8. 28 U.S.C. §455(b).

9. 28 U.S.C. §455(b)(1).

10. 510 U.S.540, 550 (1994) (Scalia, J.).

11. See 510 U.S. at 550 (emphasis in original).

12. 510 U.S. at 550.

13. 510 U.S. 550-51 & 555-56 (citations omitted).

14. See 510 U.S. at 550.

15. 510 U.S. at 555.

16. 510 U.S. at 552.

17. 2010 WL 653481 at *8.

18. See, generally, Trustmark, 2011 WL 285156, at *3.

19. See Liteky, 510 U.S. at 550-51 & 552-55; Trustmark, 2011 WL 285156, at *3.

20. See 2010 WL 653481, at *8.

21. Applied Indus. Materials, 492 F.3d at 137 (material financial relationship with a party); see also Pitta v. Hotel Assoc. of New York City, 806 F.2d 419, 423-24 (2d Cir. 1986) (material personal interest in the outcome); Morelite, 748 F.2d at 84-85 (father-son relationship with a party).

22. See Sphere Drake, 307 F.3d at 622.

I.       Introduction

Parts I and II of this three-part post discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7^th Cir. Jan. 31, 2011), and said that Trustmark, in conjunction with  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.),  demonstrates that the district court should not have vacated on evident partiality grounds the arbitration award in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010).     This Part III.A explains some of the reasons why that is so.    

II.        Background:  Scandinavian Re

In Scandinavian Re the district court vacated the award on alleged Federal Arbitration Act Section 10(a)(2) “evident partiality” grounds on the theory that  two arbitrators (one neutral, one party-appointed) did not disclose their temporally-overlapping service on another arbitration panel hearing a dispute that the district court characterized as involving:  (a) a common witness; (b) one or two “similar” issues; (c) “similar” contract terms; (d) “the same type of reinsurance business”; and (e) a party that had succeeded to reinsurance business assumed by the party in whose favor the award was made.  The parties dispute whether the two arbitrations involved “similar” issues and contract terms, or even the “same type of reinsurance business,” but irrespective of how the United States Court of Appeals for the Second Circuit ultimately resolves those disputes, it will not change the outcome warranted by Trustmark and Sphere Drake.  This post therefore assumes – and for the sake of argument only — that the district court accurately portrayed the facts.      

According to the district court, the arbitrators’ overlapping service in the other arbitration created “a material conflict of interest”:

[T]he Scandinavian Re Arbitration and the [other] arbitration were presided over by two common arbitrators, overlapped in time, shared similar issues, involved related parties, included.  .  .  a common witness that supported interpreting [the agreement in the other arbitration] as written but interpreting the Scandinavian Re Agreement in light of Scandinavian Re’s intent at the time it entered into the agreement.  Additionally, [another witness] was employed by [the party in the other arbitration that had succeeded to business assumed by the prevailing party in the Scandinavian Re Arbitration] at the time she appeared as a witness in the Scandinavian Re Arbitration.  By participating in both the Scandinavian Re Arbitration and [the other arbitration], [the two arbitrators] placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness’] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.  By failing to disclose their participation in the [other arbitration], [the two arbitrators] deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy.  .  .  .  

2010 WL 653481 at *8. 

II.      Applying Trustmark/Sphere Drake to the Scandinavian Re Facts

Scandinavian Re turns on whether the arbitrators displayed “evident partiality” within the meaning of Federal Arbitration Act Section 10(a)(2).  9 U.S.C. § 10(a)(2).  Section 10(a)(2) does not define “evident partiality,” but both the Second and Seventh Circuits have declared that “arbitrators are not subject to the same standards of impartiality as [federal] judges.”   Applied Indus. Materials Corp. v. Ovalar, 492 F. 3d 132, 137 (2d Cir. 2007); see also Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83-84 (2d Cir. 1984)); Sphere Drake, 307 F.3d at 621. 

A.    The Trustmark/Sphere Drake Analytical Framework

 Trustmark and Sphere Drake demonstrate that evident-partiality cases like Scandinavian Re can frequently be disposed of by assessing whether the asserted basis for evident partiality would, under the strict standards of impartiality applicable to federal judges (the “Judicial Impartiality Standards”), disqualify a judge from hearing the matter were it pending in federal court.  If the answer is “no,” then the evident partiality challenge must fail.     

Trustmark’s analytical framework is based on Sphere Drake.  There the Court rejected an evident partiality challenge based on a non-neutral, party-appointed arbitrator’s alleged failure to disclose (or fully disclose) his prior legal representation of one of the parties in a four-year-old, unrelated matter.  The Court said that the non-neutral arbitrator satisfied Judicial Impartiality Standards, and, even assuming he were a neutral, his award could not be vacated for evident partiality.  See 307 F.3d at 621-22.  The arbitrator’s failure to disclose was irrelevant, because not even a federal judge would have been required to disclose anything under Judicial Impartiality Standards.  See 307 F.3d at 622. 

B.      Did the Scandinavian Re Arbitrators Meet Judicial Impartiality Standards?

 1.      What Are those Standards?   

28 U.S.C. Section 455 sets forth the Judicial Impartiality Standards, which federal judges must meet in each case over which they preside.   Section 455(a) describes a “catchall” impartiality standard:  “(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.”  Section 455(b) sets out specific circumstances under which a judge is disqualified from hearing a case because of actual bias or prejudice or certain interests or relationships:    

 (1) Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding;

(2) Where in private practice he served as lawyer in the matter in controversy, or a lawyer with whom he previously practiced law served during such association as a lawyer concerning the matter, or the judge or such lawyer has been a material witness concerning it;

(3) Where he has served in governmental employment and in such capacity participated as counsel, adviser or material witness concerning the proceeding or expressed an opinion concerning the merits of the particular case in controversy;

(4) He knows that he, individually or as a fiduciary, or his spouse or minor child residing in his household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding;

(5) He or his spouse, or a person within the third degree of relationship to either of them, or the spouse of such a person:

(i) Is a party to the proceeding, or an officer, director, or trustee of a party;

(ii) Is acting as a lawyer in the proceeding;

(iii) Is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding;

(iv) Is to the judge’s knowledge likely to be a material witness in the proceeding.

Judges who do not meet these demanding Judicial Impartiality Standards in any given case are obligated to recuse themselves, that is, step aside and let another judge hear the case. If they do not do so, and it turns out an appellate court thinks they should have, then their orders and/or judgments may be vacated, and the parties may need to relitigate the case before a properly-qualified judge.   

2.      Did the Scandinavian Re Arbitrators Meet the Requirements of 28 U.S.C. § 455(b)? 

The most efficient way to analyze impartiality questions under Section 455 is to start with the specific (Section 455(b)) and move to the general (Section 455(a)).  There is nothing in Section 455(b) that even arguably suggests that the arbitrators in Scandinavian Re would be subject to disqualification if that rule applied to them.   

Subsection 455(b)(1) is the only one that might provide even a barely plausible basis for challenging an arbitrator in a case like Scandinavian Re.  But even assuming the accuracy of the district court’s factual findings, the Scandinavian Re arbitrators did not violate subsection 455(b)(1).        

First, there is no evidence of any “bias” or “prejudice,” both of which terms have a “pejorative connotation.” See Liteky v. United States, 510 U.S.540, 550 (1994) (Scalia, J.).  Under the “extrajudicial source doctrine,” “bias” or “prejudice” generally cannot be based on knowledge obtained from participation in judicial proceedings, or on predispositions legitimately reached as a result, because there is nothing wrongful or inappropriate about judges having that kind of knowledge or developing those predispositions.  As the United States Supreme Court pointed out in Liteky:    

Not all unfavorable disposition towards an individual (or his case) is properly described by th[e] [terms ‘bias or prejudice’].  One would not say, for example, that world opinion is biased or prejudiced against Adolf Hitler.  The words connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved or because it rests upon knowledge that the subject ought not to possess (for example, a criminal juror who has been biased or prejudiced by receipt of inadmissible evidence concerning the defendant’s prior criminal activities), or because it is excessive in degree (for example, a criminal juror who is so inflamed by properly admitted evidence of a defendant’s prior criminal activities that he will vote guilty regardless of the facts).  The ‘extrajudicial source’ doctrine is one application of this pejorativeness requirement to the terms ‘bias’ and ‘prejudice’ as they are used in [§].  .  .  455(b)(1) with specific reference to the work of judges. 

510 U.S. at 550 (emphasis in original).

Knowledge obtained from other proceedings; judicial opinions reached during those proceedings concerning applicable law and its application to facts; and judicial views formed during those proceedings concerning a party’s or witness’ credibility or character, may cause a judge to be favorably or unfavorably disposed to a particular position, party or witness.  But in the vast majority of cases those predispositions are in no way “wrongful” or “inappropriate”: 

The judge who presides at a trial may, upon completion of the evidence, be exceedingly ill disposed towards the defendant, who has been shown to be a thoroughly reprehensible person.  But the judge is not thereby recusable for bias or prejudice, since his knowledge and the opinion it produced were properly and necessarily acquired in the course of the proceedings, and are indeed sometimes (as in a bench trial) necessary to completion of the judge’s task.  .  .  .  Also not subject to deprecatory characterization as ‘bias’ or ‘prejudice’ are opinions held by judges as a result of what they learned in earlier proceedings.  It has long been regarded as normal and proper for a judge to sit in the same case upon its remand, and to sit in successive trials involving the same defendant.

.  .  .  . 

[J]udicial rulings alone almost never constitute a valid basis for a bias or partiality motion.  In and of themselves (i.e., apart from surrounding comments or accompanying opinion), they cannot possibly show reliance upon an extradjudicial source; and can only in the rarest circumstances evidence the degree of favoritism or antagonism required.  .  . when no extrajudicial source is involved.  .  .  .  [In addition,] opinions formed by the judge on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality motion unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible. .  .  . 

510 U.S. 550-51 & 555-56 (citations omitted; emphasis in original). 

Even assuming the correctness of the district court’s factual findings, at most the Scandinavian Re arbitrators served in two proceedings featuring a common witness, some similar issues and contract terms, the same type of reinsurance business, and a related party.  The source of any alleged “bias” or “prejudice” was not “extradjudical,” and therefore it was presumptively proper and appropriate for the arbitrators to have whatever knowledge they obtained from their participation in the other proceeding, and any predispositions resulting from it.  See 510 U.S. at 550.  And that presumption was not rebutted, because there was no evidence of “deep-seated favoritism or antagonism that would make fair judgment impossible.”  Id.  Judges serve in related proceedings all the time – even simultaneously.  They likewise hear cases involving identical issues, even ones involving one or more common parties.  But nobody legitimately considers such service wrongful or inappropriate, let alone a basis for disqualification.    

Second, the Scandinavian Re arbitrators had no “personal knowledge of disputed evidentiary facts concerning the proceeding,” Section 455(b)(1)’s other ground for disqualification.  Perhaps the arbitrators had already heard in one proceeding testimony on factual issues allegedly common to both, including testimony from a common witness.  Perhaps they were already quite familiar with the relevant contract wording, which allegedly was similar. 

But that doesn’t mean they obtained personal knowledge of the facts established in the other proceeding and thus could testify as fact witnesses.  No one claims they were involved in the underlying transactions that gave rise to either dispute; their involvement was solely in an adjudicative capacity.  As Chief Judge Easterbrook put it in Trustmark:

[J]udges regularly hear multiple suits arising from the same controversy.  The district judge who resolved this very dispute also entered the order enforcing the 2004 award. If knowing about what happened in 2004 is an impermissible “interest,” or makes the person a “fact witness” about what had occurred in 2004, then the district judge should have stepped aside from the current suit. Yet that was not required.  .  .  .

2011 WL 285156, at *3.

3.      Were the Scandinavian Re Arbitrators Subject to Disqualification Under § 455(a)?  

Having determined the arbitrators were not subject to disqualification under Section 455(b) (assuming it applied to them), the only remaining question is whether they were subject to disqualification under Section 455(a)’s catchall standard, which requires disqualification where a judge’s “impartiality might reasonably be questioned.”  28 U.S.C. § 455(a).  Liteky provides a refreshingly straightforward answer:  a judge’s “impartiality” cannot “reasonably be questioned” where, as in Scandinavian Re, the alleged impartiality is based on knowledge obtained, or opinions or views formed, by the judge in the ordinary course of legitimately discharging his or her adjudicative responsibilities in another proceeding:    

[T]he pejorative connotation of the terms ‘bias’ and ‘prejudice’ demands that they be applied only to judicial predispositions that go beyond what is normal and acceptable.  We think there is an equivalent pejorative connotation, with equivalent consequences, to the term ‘partiality.’  See American Heritage Dictionary 1319 (3d ed. 1992) (‘partiality’ defined as ‘[f]avorable prejudice or bias’).  A prospective juror in an insurance claim case may be stricken as partial if he always votes for insurance companies; but not if he always votes for the party whom the terms of the contract support.  ‘Partiality’ does not refer to all favoritism, but only to such as is, for some reason, wrongful or inappropriate.  Impartiality is not gullibility.  Moreover, even if the pejorative connotation of ‘partiality’ were not enough to import the ‘extrajudicial source’ doctrine into § 455(a), the ‘reasonableness’ limitation (recusal is required only if the judge’s impartiality ‘might reasonably be questioned’) would have the same effect.  To demand the sort of ‘child-like innocence’ that elimination of the ‘extrajudicial source’ limitation would require is not reasonable. 

510 U.S. at 552. 

IV.  Was There any Legitimate Basis for the District Court’s Decision to Vacate the Scandinavian Re Arbitration Award?

The answer is “no.”  Even if the strict Judicial Impartiality Standards applied to Scandinavian Re arbitrators, they satisfied them, and that means they necessarily satisfied the more lenient ones imposed by Section 10(a)(2). 

A.  There Was No “Conflict of Interest”

The district court’s conclusion that the arbitrators had a “conflict of interest” was misplaced.  The district court said the arbitrators “placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness’] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.”  2010 WL 653481 at *8.  But a judge or arbitrator cannot have a “conflict of interest” unless he or she has an interest in a matter — whether imposed by law, or created by economic, social or professional circumstances or relationships — which is at odds with his or her legal or contractual obligations with respect to that matter.  Trustmark and Liteky foreclose any argument that an arbitrator’s discharge of legitimate adjudicative functions in matter A can create an “interest” in the outcome of related matter B, let alone a conflicting one.        

Likewise, the risk that that the arbitrators might “influence each other’s thinking on” allegedly similar common issues does not create a conflict of interest or otherwise establish evident partiality.  That risk is usually present to some degree on three-judge appellate panels, and is particularly high in the United States Supreme Court, where the same nine Justices generally hear each case.  But nobody thinks that Circuit Judges or Supreme Court Justices should recuse themselves in matter B because they served together in related matter A, and thus might, in matter B, influence the thinking of judges or justices who had not heard matter A.  

B.    But What About the Arbitrators’ Failure to Disclose their Contemporaneous Involvement in the Two Arbitrations? 

Some practitioners and business people may think that the Second Circuit should affirm the district court in Scandinavian Re because the arbitrators did not disclose their involvement in the other proceeding.  They may think that even though the arbitrators could have served as judges, their failure to disclose their overlapping service in the other proceeding evidenced some sinister motive that somehow spoiled the award.  Alternatively, some may concur with the district court’s conclusion that the arbitrators’ nondisclosure somehow “deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy.”  See 2010 WL 653481, at *8. 

These arguments are misplaced for several reasons, but it is enough to say that accepting them would impose on arbitrators ethical standards far more onerous than those imposed on federal judges.  Where, as in Scandinavian Re, there is no basis on which the judge’s “impartiality might reasonably be questioned,” the judge is not required to disclose anything, and there is no basis for challenging impartiality.  See Sphere Drake, 307 F.3d at 622; see also Section III.A, above.  Obviously the Scandinavian Re arbitrators did not have to disclose anything that a similarly-situated federal judge would not have to disclose.      

Part III.B will explain why the United States Court of Appeals for the Fifth Circuit should reverse in Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, 2010 WL 5464266 (S.D. Tex. December 29, 2010).

[Editor's Note:  Karl Bayer's and Beth Graham's  Disputing blog has published as a guest post materially identical versions of Parts I-III.A of this post, which you can read here, here and here.]

A.   Introduction

As was evident from Parts V.A and V.B (here and here), Stolt-Nielsen has dramatically changed the legal landscape on consolidated arbitration.  In this Part V.C. we explore the practical and strategic implications of that change.

B.   Reinsurers Will Likely Regain the Tactical Advantage They Had Pre-Bazzle   

For the last several years since Bazzle, cedents and reinsurers have treated consolidation of arbitration proceedings largely as a given.  Courts would usually delegate the consolidation question to the arbitrators, and, in turn, arbitrators would usually order consolidation.  After a while, consolidation became something that the parties frequently agreed upon, because in most cases there was little or no point in opposing it.  (See Part III, here.) 

The advent of large, consolidated proceedings redounded mostly to the cedents’ benefit.   In the consumer-class-arbitration context, the theme is usually the many against the one — the consumers versus the company.  But in reinsurance arbitration the tables are turned, and the theme is usually the one against the many – the cedent versus the reinsurers participating in one or more treaties.   

Consolidated arbitration allowed a cedent to, among other things, aggregate its claims against several reinsurers participating in a multi-year treaty program.  Without consolidated arbitration the dollar amounts associated with each claim might be too small to warrant a serious collection effort.  But the ability to aggregate ensured that even relatively small balances could be pursued. 

Collections were fairly straightforward, and reinsurers who might otherwise have multiple chances before multiple panels to assert certain defenses were forced to make their arguments before a single arbitration panel.    The ability of cedents to compel consolidated arbitration probably contributed to reinsurers settling certain claims that they might otherwise have disputed. 

Now that courts may be the gatekeepers when a party demands consolidated arbitration, and now that the Supreme Court has imposed some fairly strict standards for establishing consent to class or consolidated arbitration, reinsurers probably have regained the tactical advantage.  And the strategy adapted may well be of the “divide and conquer” variety – reinsurers may in appropriate cases force the cedent to commence multiple proceedings and, among other things, obtain multiple bites at the apple on their defenses before multiple panels. 

Some of the tactical and strategic advantages that may inure to reinsurers’ benefit in light of Stolt-Nielsen are summarized below.  Assume for discussion purposes that there are multiple reinsurers participating in various years and layers of a multi-year treaty program, and many of the reinsurers are disputing various claims made by the cedent and allocated to various years and layers of the program.  Assume also that most of the claims have been outstanding for some time:

1.  The Disputed Amounts Per Arbitration Will Be Lower.  If the ceding company is unable to aggregate all of its claims into a single arbitration proceeding, then the arbitrators’ focus will generally be only on the amount owed for that claim under the contract that is the subject of the arbitration, even if the reinsurer owes additional amounts under other contracts that might otherwise have been the subject of a consolidated arbitration.  If the amount in arbitration is not particularly high, the arbitrators may be less inclined to award interest if the cedent wins, even if the amount has been outstanding for some time.  And it will generally be more difficult for the cedent to paint the reinsurer as recalcitrant because the cedent will not necessarily be allowed to complain about the aggregate amount the reinsurer owes for all claims under the treaty program.    

2.  The Cedent Will Have to Invest More Time and Effort into Collection.   Pursuing separate arbitration proceedings increases time and monetary costs significantly.  Depending on economic conditions, and on the odds of multiple arbitration panels imposing relatively high rates of pre-award interest, time tends to be on the side of the party holding the money, which is usually the reinsurer.  The longer it takes the cedent to collect what it is entitled to for its claims (if anything), the better off economically the reinsurer may be. 

The more time and money that must be spent on collection, the less valuable the cedent’s claim is.  While the reinsurer will also incur costs, the importance of resisting payment of the claim may transcend the dollar value of the controversy over that claim, especially when the reinsurer has good defenses.  There may also be other considerations justifying the higher cost, such as the reinsurer’s desire for a broad commutation, or the reinsurer’s belief that the tactical advantages of separate arbitration proceedings outweigh the additional cost.   

These time and money costs may increase the likelihood that reinsurers can negotiate favorable settlements and perhaps even commutations of the contract or multiple contracts (if that is what they desire). 

3.  Reinsurers Get Multiple Bites at the Proverbial Apple.   All other things being equal, the outcome of a close-call dispute may be determined by the institutional predispositions of the umpire.  If a reinsurer loses its dispute over claim A in arbitration 1 because it lost the coin toss, it may prevail on claim B in arbitration 2 if it wins the toss, even if the claims involve the same or similar issues.  While the cedent might make an issue-preclusion argument in arbitration 2, such matters are generally in the discretion of the arbitration panel, and the more sympathetic panel in arbitration 2 may simply decide the issues de novo.  (Of course, the reinsurer might lose the coin toss again in arbitration 2, but it has even odds of winning each time the coin is tossed, and the more frequently the coin is tossed, the more likely the reinsurers will enjoy the benefit of those odds.)  

Multiple arbitrations thus allow reinsurers more than one chance to prevail on a given defense, and that can be an important consideration in close-call disputes.  It also effectively spreads arbitration risk by reducing the amount at stake each time the reinsurer asserts the defense.  

4.  The Reinsurer’s Odds of Prevailing May Increase if it is Able to Arbitrate Separately the Claims on Which it has Stronger Defenses.  If the reinsurer is disputing in good faith multiple claims arising out of different contracts, and — as is often the case — its defenses on some are better than on others, the reinsurer will probably benefit by arbitrating those stronger claims separately from the ones to which its defenses are weaker. 

5.  Reinsurers are Less Likely to Be Prejudiced by Taking Claims Positions Inconsistent with those of Other Reinsurers.  Reinsurers subscribing to a given treaty or group of treaties can and often do take inconsistent claims positions for various reasons.  For example, a reinsurer in runoff may take positions in good faith that are inconsistent with those of active writers, whose claims positions may be influenced by ongoing , new-business-driven relationships with cedents.  Or claims positions of both runoff and actively-writing reinsurers may be influenced by the extent to which they cede reinsurance to others, and whether they do so as direct writers. 

But when reinsurers must participate in consolidated proceedings with other reinsurers, their inconsistent positions can be used against them by the cedent, even if there is a good faith basis for those inconsistent positions.  For example, a consolidated arbitration may include several claims, and not all reinsurers may dispute each claim.  If the issue is, say, allocation, the arbitrators may conclude that a cedent may allocate a claim in any way that is reasonable and is not designed to maximize reinsurance recoveries.  So if reinsurer A disputes the allocation of claim 1, but reinsurer B does not, that may strongly suggest that the allocation is reasonable, even though reinsurer B’s motivation for paying claim 1 was not necessarily based on the allocation being reasonable.  It is usually (but not always) hard for A to establish that B’s payment of the claim was principally motivated by considerations having little or no bearing on whether the allocation was reasonable.   All other things being equal, reinsurer A has a better chance of persuading the arbitration panel that cedent’s allocation of claim 1 was unreasonable if reinsurer B  is not a party to the arbitration. 

C.   How Changed Law on Consolidation May Affect Tactical and Strategic Considerations

The above are only some examples of tactical benefits reinsurers may achieve if courts order consolidation less frequently than arbitrators did, and reinsurers do not agree to consolidation.  In view of those potential benefits, we would not be surprised to see reinsurers begin to dispute with renewed vigor cedent efforts to consolidate disputes.  If reinsurers are successful (and they probably will be) then they may gain a significant edge in arbitration.  Success on the arbitration front may cause some reinsurers to dispute claims more readily than before, which may increase the frequency of reinsurance arbitration.       

Cedents understandably may complain, but one cannot fault reinsurers from taking advantage of what the law as applied to their contracts may allow them to do.  Arbitration is, after all, a matter of contract, and contracts allocate risks.  Arbitration agreements allocate dispute-resolution risk, and, like other contracts, may do so in a way that later turns out to be more beneficial to one of the parties at the expense of the other.  Sophisticated parties that sign on to such contracts cannot complain that the deal turned out to be less advantageous than they thought it would be, even if the risks that they now must bear were not necessarily known or ascertainable at the time of contracting. 

But cedents will be able to do more than complain.  They will no doubt adjust their collection strategy and tactics to meet those of the reinsurers.  Part of that may involve savvy negotiation; picking one’s battles well; making wise business decisions about collection-related expenses; standing on principle from time-to-time; and seeking to eliminate – e.g., though interest and costs awards — the economic incentives of piecemeal arbitration. 

Cedents can also begin insisting on provisions in their contracts authorizing consolidated arbitration.  While that will not immediately increase the number of consolidated proceedings, over time, as new contracts mature and new disputes develop, it may be that consolidated arbitration once again becomes the norm.

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 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

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

In this part IV of our Nuts & Bolts vacatur feature, we focus on Section 10(a)(3) of the Federal Arbitration Act, which provides in pertinent part (with bracketed numbering and text added for convenience): 

[An arbitration award may be vacated:]

where the arbitrators were guilty [(1)] of misconduct [(a)] in refusing to postpone the hearing, upon sufficient cause shown, or [(b)] in refusing to hear evidence pertinent and material to the controversy; or [(2)] of any other misbehavior by which the rights of any party have been prejudiced[.]

Section 10(a)(3) might be referred to as a procedural due process provision, and courts sometimes suggests it defines the level of due process that must be present in an arbitration for a court to confirm the award without violating constitutional due process requirements.   We do not find that line of reasoning to be particularly helpful, and its validity is debatable.  But Section 10(a)(3) certainly prescribes a baseline level of procedural protection to parties who agree to arbitrate without expressly specifying procedural protections.  And it imposes a no-harm-no-foul rule:  procedural misconduct or misbehavior — including not following agreed procedural rules — does not undermine an award unless the misconduct or misbehavior prejudiced the challenging party.   

II.  Grounds for Vacatur under Section 10(a)(3)

Section 10(a)(3) says a court for may vacate an arbitration award for “misconduct” or “misbehavior.”  It specifies only two types of misconduct:  “refusing to postpone the hearing, upon sufficient cause shown” and “refusing to hear evidence pertinent and material to the controversy.”  But it contains a catch-all provision that authorizes vacatur when the arbitrators are “guilty.  .  .  of any other misbehavior by which the rights of any party have been prejudiced.”    We have discussed in a prior posts the Ninth Circuit’s recent decision rejecting certain Section 10(a)(3) challenges to a reinsurance arbitration award.  (Post here.)

The key to Section 10(a)(3) is whether the challenging party has been denied a “fundamentally fair hearing” or has otherwise been prejudiced.  And in evaluating whether that standard has been met, courts assume that when parties agree to arbitrate they trade-off some of the procedural “niceties” that apply in court.  So what might be considered the denial of a fundamentally fair hearing in court might be considered fair in arbitration.  For example, parties in arbitration are not entitled to the same discovery rights they might have in court, arbitrators are generally not bound to follow procedural and evidentiary rules strictly, and arbitrators generally have a great deal of leeway to formulate their own procedural rules, provided they do not conflict with the parties’ agreed rules (if any).       

A. Misconduct:  “Refusing to Postpone the Hearing Upon Sufficient Cause Shown”

An arbitrator’s refusal to grant a continuance can be a ground for vacatur, provided the party requesting it showed the arbitrator “sufficient cause” for it to be granted.  But this ground for vacatur is no panacea for those seeking to delay the day of reckoning, and arbitrators should not consider it as such.    

When courts evaluate claims premised on this ground, they usually accord the arbitrators a great deal of deference in determining what is “sufficient cause shown.”  Courts are not likely to deem “sufficient cause” was shown when the need for a continuance was the fault of the party that unsuccessfully sought it.  

But when the denial of a continuance prejudiced the challenging party, and the need for it was not of the challenger’s own making, then courts may grant relief.  For example, if a party who otherwise acted prudently could not produce an important witness at the hearing because the arbitrators denied a continuance, then this branch of Section 10(a)(3) may authorize a court to vacate the award.  The key questions are whether the arbitrator acted arbitrarily and whether the challenging party was prejudiced as a result.          

B.  Misconduct:  “Refusing to Hear Evidence Pertinent and Material to the Controversy” 

When parties agree to arbitrate, the law presumes they intended that the arbitrators would allow them to present material and pertinent evidence supporting their position.  That does not mean that a party is entitled to present cumulative testimony or seek the broad discovery permitted by the Federal Rules of Civil Procedure. 

If arbitrators exclude evidence which, if admitted and credited, would have justified a different outcome, then a court may grant relief.  Again, the touchstone is prejudice:  would the outcome have been different had the arbitrator admitted and credited the evidence?  Even if the outcome would not necessarily have been different, was the challenging party afforded a fundamentally fair hearing even though the arbitrators would not hear the proferred evidence?  

Burlage v. Superior Court of Ventura Cty., 178 Cal. App. 4th 524 (2d Dist. Oct. 20, 2009), rev. denied, No.  S178328 (Cal. Sup. Ct. Jan. 21, 2010), is an excellent example of the type of case where relief for excluding material evidence was warranted and granted.  As explained in prior posts (here and here), a seller and buyer entered into a contract to purchase land.  Seller knew that the land — including a swimming pool and a fence — encroached on an enjoining property but did not tell buyer.  A dispute arose between the parties concerning the encroachment, and buyer claimed that seller had defrauded it.  The dispute was submitted to arbitration as required by the arbitration agreement in the contract of sale. 

After the escrow closed, but before the arbitration hearing, the title insurer paid the adjoining landowner $10,950 for a lot-line adjustment that gave buyer title to the encroaching land.  But despite this buyer sought damages for alleged diminution in value of the property, and for the cost of moving the pool and fence that were situated on previously encroaching land that buyer now owned because of the lot-line adjustment. 

Seller sought to introduce evidence of the lot-line adjustment, and buyer moved to exclude it.  Buyer said that damages must be ascertained from the date of the escrow closing, a contention the seller disputed.  The arbitrator granted the motion, ruling that damages were to be fixed as of the date of the escrow closing, and excluded evidence of the effect of the lot-line adjustment had on buyer’s damages claim. 

At the hearing buyer’s experts testified that, as of the date of the closing, it would have cost approximately $100,000 to fix the problem.  The arbitrator’s prior ruling precluded the seller from rebutting that expert testimony by showing either:  (a) that there were no damages; or (b) that damages were limited to the amount of money the title company paid to fix the encroachment problem.  After the hearing the arbitrator ruled that:  (a) seller knew that the pool and fence encroached on adjoining land; (b) seller did not disclose this fact to buyer; and (c) the encroachment materially affected the property’s value.  The arbitrator awarded buyer $552,750 in compensatory damages, $250,000 in punitive damages, and $732,570 in costs and attorney fees. 

The trial court vacated the award and the Court of Appeal, Second District, affirmed 2-1.  The court held that the evidence the seller sought to introduce was material, its exclusion was prejudicial and vacatur was therefore warranted under California’s version of Section 10(a)(3), Cal. Civ. Code § 1286.2(a)(5):  

What could be more material than evidence that the problem was “fixed” and there are no damages?  Yet, the Burlages presented expert testimony about the effect of what had become a nonexistent encroachment.  Their experts testified about the cost to move a pool and fence, neither of which had to be moved.  Spencer was not even permitted to refute the Burlages’ expert who opined that the encroachment reduced the value of the property $100,000.  Spencer could not show that the title company solved the encroachment issue through a payment of approximately one-tenth that amount.

Without this crucial evidence, the arbitration assumed the nature of a default hearing in which the Burlages were awarded $1.5 million in compensatory and punitive damages they may not have suffered. An arbitrator must consider this evidence to make an informed decision.

178 Cal. App. 4th. at 530. 

But Section 10(a)(3) is not supposed to be a license for courts to second guess evidentiary and merits rulings by arbitrators.  For example, sometimes the question whether evidence is “pertinent and material” depends on the resolution of a legal question pertaining to the merits.  Suppose the parties disputed whether the law of State X permitted consequential damages for breach of contract in light of the circumstances presented.  And suppose the arbitrator rules that, under the facts at hand, the law of State X does not permit consequential damages, and subsequently refuses to hear evidence of consequential damages.  Assuming the basis for the arbitrator’s ruling on the legal question was at least barely colorable, then the plaintiff should not have any basis for vacating the award under Section 10(a)(3). 

Some might say that the Burlage case was wrongly decided for this very reason:  The arbitrator ruled that damages were to be “fixed” as of the date of the escrow closing in the sense that mitigation-of-damages evidence could not be introduced, and the arbitrator’s exclusion of the subsequently occurring lot-line-adjustment evidence was simply a logical consequence of that ruling.  But evidence of what subsequently transpired was material to the controversy over the amount of damages.   The amount the title company actually paid the adjoining landowner for the lot-line adjustment after the closing is highly probative of the amount it would have cost as of  the closing.  If the title company was able to resolve the encroachment problem for approximately $11,000 shortly after the closing, then it is more probable than not that buyer could have done the same thing at the time of the closing, even if it did not have title insurance.  And $11,000 is a whole lot less than the more than $1.5 million in damages and fees that the arbitrator awarded.

C.  Other Misbehavior that Prejudiced one of the Parties’ Rights

Section 10(a)(3)’s catchall provision allows vacatur where the arbitrators engaged in “misbehavior” that “prejudiced” one of the parties.  Misbehavior does not necessarily connote intentional wrongdoing by the arbitrators.  It encompasses procedural misconduct as well as procedural error, other than the two types discussed in Section A., above.  It also includes ex parte contacts.  But, as with “misconduct,” the no harm no foul rule applies:  The challenger must show prejudice.

One example of a case that may warrant relief under the catchall provision can arise when arbitrators change the rules midstream without affording the parties sufficient notice to adjust their case-presentation strategy accordingly.  Suppose an arbitrator rules that a party does not have to present evidence in a particular form to support his or her position, or that the elements of a party’s claim or defense are X, Y and Z.  Suppose the party relies on these rulings, but that the arbitrator, after the close of the hearing, rules that the party had to present evidence in a different form, or that the elements of one of the claim or defense were A, B and C, rather than X, Y and Z.   If the arbitrator issues an adverse award based on such a ruling, then the aggrieved party should be able to vacate it under the catchall provision of Section 10(a)(3).  

D.  A Word to Arbitrators

Lawyers appearing in arbitration proceedings will sometimes attempt to bolster their procedural arguments by suggesting that a ruling other than in their client’s favor will lead to vacatur under Section 10(a)(3).  For the most part, such claims should be taken with a grain of salt, since, as explained above, Section 10(a)(3) reaches only serious procedural errors that prejudice a party. 

In response to such claims, however, certain arbitrators attempt to insulate themselves against putative Section 10(a)(3) claims by simply granting virtually every request for procedural relief made by the parties.  That knee-jerk approach simply multiplies time and money costs, depriving the parties of one of the key benefits of arbitration. 

The better approach is to make the tough calls, actively manage the proceedings and move things along.  To do this effectively, while minimizing the chances that they may commit the type of procedural error that might spoil an award, arbitrators should familiarize themselves with the law interpreting Section 10(a)(3).

In part V of our Nuts & Bolts vacatur series we shall discuss Section 10(a)(4), which authorizes vacatur “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.”

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.  .  .  .