We recently critiqued ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___ (2009) (Raggi, J.), in which the United States Court of Appeals for the Second Circuit held that an arbitration panel was authorized to award under the bad faith exception to the American Rule attorney and arbitrator fees to a ceding company in a case where the parties had agreed that each “shall bear the expense of its own arbitrator. . . and related outside attorneys’ fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.” We believe that the majority opinion did not faithfully apply New York’s strict rules of contract interpretation and construction, which the parties expressly agreed would apply. You can find our critique here, and a report on the case here.
On May 4, 2009 the United States Supreme Court decided Arthur Andersen LLP v. Wayne Carlisle, ___ U.S. ___ (2009), holding that a nonsignatory to a contract containing an arbitration clause may invoke Section 3 of the Federal Arbitration Act — which authorizes courts to stay litigation in favor of arbitration — if state contract law allows it to enforce the contract. The case is significant in its own right and one we intend to discuss in a subsequent post. It further undermines the rationale of ReliaStar because the Court makes what may be its strongest statement to date about state contract law governing the scope, validity, and revocability of arbitration agreements falling under the Federal Arbitration Act:
Neither [Section 2 nor 3 of the FAA]. . . purports to alter background principles of state contract law regarding the scope of agreements (including the questions of who is bound by them). Indeed [Section] 2 explicitly retains an external body of law governing revocation (such grounds ‘as exist at law or in equity’). And we think [Section] 3 adds no substantive restriction to [Section] 2′s enforceability mandate. State law, therefore, is applicable to determine which contracts are binding under [Section] 2 and enforceable under [Section] 3 if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. . . .
Slip op. at 6-7 (citations, quotations and footnote omitted; emphasis in original).
The “scope of agreement” question addressed by ReliaStar concerned the scope of the parties’ agreed prohibition on fee shifting. Applicable New York rules of contract interpretation and construction required that agreement to be enforced as written. The dictum in Arthur Andersen underscores that the ReliaStar majority should have analyzed the contract like the New York Court of Appeals would have analyzed any other contract, concluded it was clear and unambiguous, and enforced it accordingly.
Tags: Arbitrator Fees, Arthur Andersen LLP v. Wayne Carlisle, Attorney Fees, choice of law, FAA Section 2, FAA Section 3, Federal Arbitration Act, New York Court of Appeals, ReliaStar Life Ins. Co. v. EMC National Life Co., Second Circuit, state law, United States Court of Appeals for the Second Circuit, United States Supreme Court