Part V.A
A. Introduction
In this Part V.A of our consolidated-reinsurance-arbitration series, we delve into Stolt-Nielsen’s legal implications on consolidated reinsurance-arbitration practice, focusing on how courts are likely to decide the allocation-of-power question: Who gets to decide whether the parties consented to consolidated arbitration? In Part V.B we shall examine Stolt-Nielsen’s other specific legal and practical implications, focusing on what a party will likely need to show to obtain consolidated arbitration and how frequently consolidated arbitration is likely to be granted after Stolt-Nielsen.
B. Who Gets to Decide Whether the Parties Consented to Consolidated Arbitration?
Readers will recall from Part III (here) that courts interpreted Bazzle as governing the allocation-of-power issue. Now that the Court has said Bazzle never commanded a majority on that issue, and that it remains open, courts must reconsider it not only in the class-, but in the consolidated-arbitration context.
Consolidated arbitrations, like class arbitrations, raise two types of questions: Common-dispute and party-consent questions. We think that courts will likely conclude that both are questions of arbitrability for the court to decide in the first instance, unless the parties clearly and unmistakably agree otherwise. Arbitrators may play a role in resolving contractual ambiguities identified by the court.
1. Who Gets to Decide Common-Dispute Questions?
All consolidated-arbitration questions concern whether at least one arbitration agreement encompasses not only disputes concerning one, but all other contracts at issue. We call this the “common-dispute” question.
In some consolidated-arbitration disputes the “common dispute” question is the only one presented. Suppose reinsurer R enters into two treaties with cedent C, Contracts A and B, each of which incept on the same date and are in force for one year. Contract A’s limits are $1 million per occurrence excess a $500,000 retention. Contract B has per occurrence limits of $2 million excess of $1.5 million. Both contain broad arbitration clauses under which the parties agreed to arbitrate “any dispute arising out of or relating to this contract.”
C pays a $3 million claim and seeks $1,000,000 from Contract A and $1.5 million from Contract B. R says the claim should have been horizontally allocated over a six-year period. R is not a party to any of C’s contracts covering the five-year period subsequent to the inception of contracts A and B.
C demands a consolidated arbitration under Contracts A and B, seeking $2.5 million. R opposes consolidation, forcing C to bring a motion to compel consolidated arbitration.
The consolidated-arbitration decision maker in this hypothetical need only resolve whether the claim “arises out of or is related to” Contracts A, B, or both. There is no issue concerning the parties with whom R agreed to arbitrate because R agreed to arbitrate with C under both contracts.
Under the Supreme Court’s Federal Arbitration Act jurisprudence the court would ordinarily decide this type of question. Questions concerning the scope of an arbitration agreement itself are ordinarily for the court, including whether “an arbitration clause in a concededly binding contract applies to a particular type of controversy. . . .” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002). When a court decides that type of question, it – not the arbitration panel – applies state law rules of contract interpretation to the scope provision of the arbitration agreement (and sometimes other provisions, as well) to determine what the parties agreed to submit to arbitration. See, generally, Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 58-63 (1995).
To the extent there is ambiguity as to whether the disputes are encompassed by at least one of the arbitration clauses, the court would be aided by the presumption of arbitrability, under which any ambiguities as to the scope of the arbitration clauses themselves would be resolved in favor of arbitration. See, e.g., 514 U.S. at 62. That would presumably mean a finding that one or both of the arbitration clauses covered the disputes.
While common-dispute issues will typically raise scope questions, depending on the facts, there may be other, interrelated issues concerning contract interpretation that are ordinarily for the arbitrators to decide. Suppose a dispute arises over a horizontal, even, pro-rata allocation of a continuing occurrence to a continuous, excess-of-loss treaty that was in effect for five years, but which was also subject to annual resigning. Depending on the facts, a question might arise as to whether the dispute arose under one contract or five. Resolution of that question might require interpretation of the treaty language, the slips, the placing information and other matters, all in light of reinsurance custom and practice.
Whether or not the number of contracts question is one of arbitrability or simply contract interpretation and construction is not necessarily clear. But a court might well conclude that it is one for the arbitrators.
The arbitrators – as experts in reinsurance custom and practice – are presumably better equipped to resolve the dispute than most judges, and the parties probably expected that the arbitrators would decide the question if it arose. It might also be intertwined with the merits (e.g., the number of per occurrence limits and retentions that apply). Were the court to decide the issue, the court might be deciding a matter the parties agreed to arbitrate. And, depending on how the arbitrators rule on the matter, they might moot the controversy over consolidation, saving the court valuable time and resources.
2. Who Gets to Decide Party-Consent Questions?
Not all putative consolidated arbitrations involve simply multiple contracts between the same parties. Additional parties may be involved that are not parties to all other agreements. One or more parties to one contract may be parties to all or none of the other contracts. Or there may be one treaty under which the cedent is seeking consolidated arbitration against all participating reinsurers. Consolidated-arbitration disputes of this variety raise “party-consent” questions.
Party-consent questions make consolidated-arbitration disputes look much more like class-arbitration disputes. For what typically distinguishes class from bilateral arbitration is the presence of not only multiple, bilateral contracts involving the same parties, but multiple bilateral contracts involving multiple parties.
What principally motivated the Stolt-Nielsen Court to hold that class arbitration cannot be imposed without a contractual basis other than a broad arbitration clause was the Federal Arbitration Act rule of “fundamental importance” that parties may “specify with whom they chose to arbitrate.” See Stolt-Nielsen, slip op. at 19-20 (emphasis in original). A reasonable corollary is that a party may not be compelled under the FAA to submit to a consolidated arbitration presenting party-consent issues absent a contractual basis other than the parties’ broad arbitration clause.
Suppose that R and C are parties to Contracts A, B and C, a consecutive series of one-year “First Excess of Loss Treaties,” each with per occurrence limits of $1,000,000 excess of $500,000. While R and C are the only parties to Contract A, R and R1 are the reinsurers participating in Contract B, and R1 and R2 are the reinsurers participating in Contract C. The contracts contain identical, tri-partite arbitration clauses providing, among other things, that the parties agree to arbitrate any dispute “arising out of or relating to” the contract.
C bills R, R1 and R2 for their respective shares of a $3 million claim it has allocated on an even, pro-rata basis over the three contract years. The reinsurers object, arguing that the loss should have been allocated over a six-year period.
C demands a consolidated arbitration against R, R1 and R2 under Contracts A, B and C. The reinsurers object and C moves to compel arbitration.
To decide whether the parties consented to consolidated arbitration, the decision maker must not only resolve the common-dispute question, but also find some contractual basis under at least one of the arbitration agreements to conclude that: (a) R agreed not only to arbitrate with C in a bilateral arbitration, but in a consolidated arbitration involving R1 and R2; and (b) both R1 and R2 agreed to arbitrate with C in a consolidated proceeding to which R and they are all parties. Under Stolt-Nielsen the contractual basis must be something other than the contracts’ broad arbitration clauses.
Courts considering the allocation-of-power question after Stolt-Nielsen will likely conclude that these party-consent issues should be decided by the court in the first instance. A classic arbitrability question is whether “the parties are bound by a given arbitration clause. . . .” See Howsam v. Dean Witter Reynolds, Inc.,, 537 U.S. 79, 83 (2002).
Party-consent issues concern whether all of the parties are “bound by a given arbitration clause” to arbitrate together in a single, consolidated proceeding. R was bound to arbitrate with C under Contracts A and B, but not Contract C; R1 was bound to arbitrate with the C under Contract B and C, but not A; and R2 was bound to arbitrate with C under Contract C, but not Contracts A and B. Furthermore, R is not a party to Contract C, or any other contract with R2; and R1 was a party to only one contract with R (Contract B) and one contract with R2 (Contract C). Even assuming that the arbitration clause of each contract encompasses disputes arising out of each of the others (the common-dispute question), nothing indicates that R, R1, and R2 agreed to arbitrate together in a single arbitration with C.
The party-consent question is also a question for the court under Section 4 of the Federal Arbitration Act. Section 4, though a procedural statute technically applicable only in federal court, reflects an allocation of power between courts and arbitrators that is derived from the substantive enforceability command of Section 2 (which is applicable in both state and federal courts). See Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 447 (2006); Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967). Section 4 provides that “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction. . . of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C § 4 (emphasis added). On hearing a motion to compel, the court must “make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement” if “the making of the agreement for arbitration or the failure to comply therewith is not in issue. . . .” Id. (emphasis added)
When one party demands consolidated arbitration involving party-consent issues and another objects because it contends it never agreed to arbitrate in a single proceeding with all of the parties, a question arises whether there has been a failure, neglect or refusal to perform one or more arbitration agreements. And that question implicates whether the resisting party is bound by an arbitration agreement requiring it to arbitrate with all of the parties, or whether certain parties to the proposed consolidated arbitration may invoke the benefit of one or more arbitration clauses to which they are not parties.
Faced with that question, the court must resolve it and ensure that arbitration proceeds in the manner provided by the parties’ agreements and in accordance with their terms. That necessarily requires the court to determine whether the agreements permit, forbid or are silent on consolidated arbitration involving party-consent issues, or whether they are ambiguous on that score.
Outside of the class or consolidated arbitration context, when a party contends on a Federal Arbitration Act Section 4 or 3 motion that a nonsignatory is subject to the arbitration clause, or cannot invoke the clause, the court determines whether there is a state law basis for requiring the nonsignatory to arbitrate or allowing it to invoke the arbitration clause. If there is such a state law basis, the court enforces the arbitration agreement accordingly. But it does not refer the question to the arbitrators. See Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896, 1901-02 (2009); Ross v. American Express Co., 547 F.3d 137, 143 & n.3 (2d Cir. 2008); Ross v. American Express Co., 478 F.3d 96, 99 (2d Cir. 2007); Astra Oil Co. v. Rover Navigation, Ltd., 344 F.3d 276, 279-80 & n.2 (2d Cir. 2003); Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773, 776-80 (2d Cir. 1995).
When the question arises under Section 9 of the Federal Arbitration Act whether a third-party is bound by an arbitration award or is entitled to a benefit under it, then the court likewise decides the question. Courts do not hesitate to vacate awards that purport to bind or confer a benefit in favor of a non-party to an arbitration agreement. See, e.g., Nationwide Mutual Ins. Co. v. Home Ins. Co., 330 F.3d 843, 846-47 (6th Cir. 2003); Orion Shipping & Trading Co., Inc. v. Eastern States Petroleum Corporation Of Panama, S.A., 312 F.2d 299, 300-01 (2d Cir. 1963). But courts do not remand such cases back to the arbitrators to determine whether the non-party really was a party, or was otherwise bound by or entitled to invoke the arbitration clause.
We do not perceive a meaningful distinction between the party-consent questions presented by the motion to compel a consolidated arbitration in our party-consent hypothetical and those presented in the cases cited above. The questions are essentially the same and the key, underlying purpose of the Federal Arbitration Act that the cases serve is the same – to enforce the parties’ arbitration agreements as written.
We therefore think that courts that consider the party-consent issue in a dispute over consolidated arbitration will likely conclude that it presents an issue of arbitrability for courts – not arbitrators to decide. But there is another important consideration that augurs in favor of allocating the power to the court.
Party-consent questions raise important issues arising out of the parties’ arbitrator-selection provisions. One of Stolt-Nielsen’s Federal Arbitration Act rules of “fundamental importance” is that parties may “choose who will resolve specific disputes.” Slip op. at 19 (emphasis in original). Assuming there is otherwise a contractual basis for imposing consolidated arbitration in a multi-party dispute, there must also be contractual basis for the arbitrator-selection method that the decision maker imposes. So the decision maker in our party-consent hypothetical would have to find a contractual basis under at least one of the arbitration clauses under which R, R1 and R2 collectively agreed to appoint on their behalf only one party-appointed arbitrator, who, along with C’s party-appointed arbitrator, would select a single umpire to preside over a consolidated proceeding. Otherwise, the decision maker would be imposing on the parties a method of arbitrator selection to which they never agreed.
Just as courts make the call on arbitrator-selection questions in other contexts, so too should they make them in consolidated-arbitration disputes presenting party-consent issues. The parties’ rights to choose what decision makers will resolve what disputes is a vitally important issue that has, by statute and treaty, been committed to the courts to decide. As Circuit Judge Richard A. Posner wrote, “Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.” Lefkovitz v. Wagner, 395 F.3d 773, 780 (7th Cir.), cert. denied, 546 U.S. 812 (2005). Federal Arbitration Act § 5 provides that, “[i]f in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed. . . .” Article V(1)(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ( here) provides a defense to recognition and enforcement of an award where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.” And courts will not hesitate to vacate domestic or non-domestic awards if arbitrator selection procedures were not followed. See, e.g., Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986).
As we shall discuss in more detail in Part V.B, we think that in many cases courts will find that there is no express or implied contractual basis for imposing consolidated arbitration on the parties in cases involving party-consent questions. But there are many variants on how consolidated-arbitration disputes may arise and some arbitration clauses expressly provide for some form or another of consolidated arbitration. Ambiguities may arise, as they did in Bazzle.
We think that, at least in certain cases, those ambiguities might be for the arbitrators to resolve, assuming the issues they raise fall within the scope of the parties’ arbitration agreements. But the court should, at a minimum, determine whether the contract unambiguously forbids or permits consolidated arbitration or is ambiguous or silent on that score.
Stay tuned for more….
Editor’s Note: Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series:
Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C
Tags: allocation of power, Arbitrability, Class Arbitration, Consolidated Arbitration, Consolidated Reinsurance Arbitration, Federal Arbitration Act, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Green Tree Financial Corp. v. Bazzle, Howsam v. Dean Witter Reynolds Inc., Mastrobuono v. Shearson Lehman Hutton Inc., Power of Arbitrators, Practice and Procedure, Reinsurance Arbitration, Stolt Nielsen S.A. v. Animalfeeds Int'l Corp.
