Introduction
On April 9, 2009 the United States Court of Appeals for the Second Circuit decided a case that may significantly expand the power of arbitrators to award attorney and arbitrator fees in cases involving reinsurance and other contracts. The Court 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 “[e]ach party 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.” ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___, ___ (2009) (Raggi, J.). This post briefly discusses the majority and dissenting opinions. Our critical analysis will be provided in a subsequent post.
Facts
In December 1997 ReliaStar Life Insurance Co. (“ReliaStar”) entered into a two coinsurance agreements with EMC National Life Co. (“EMC”), one reinsuring business in force as of January 1, 1998, another reinsuring business written on or after January 1, 1998 (the “Reinsurance Agreements”). In life reinsurance parlance, the term “coinsurance” refers to a form of proportional reinsurance, and should not be confused with its direct insurance counterpart (which, in any event, has various meanings depending on the type of direct insurance involved).
The Reinsurance Agreements contained broad, identical arbitration clauses, which required arbitration “[i]n the event of any dispute or differences arising hereafter between the parties with reference to any transaction under or relating in any way to this Agreement. . . .” Section 10.3 of the arbitration agreements (the “Fee and Expense Provision”) said that “[e]ach party 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.” Section 10.4 contained a choice-of-law clause, which said “[a]ny arbitration instituted pursuant to this Article shall be held in New York, New York, or another site mutually agreed upon by the parties and the laws of the State of New York and to the extent applicable, the Federal Arbitration Act, shall govern the interpretation and application of this Agreement.”
The parties submitted to arbitration a dispute concerning the alleged termination of the Reinsurance Agreements. After discovery and a hearing, the panel issued an interim award finding that the Reinsurance Agreements remained in force and directing EMC to pay Reliastar more than $21 million in overdue balances, plus interest. A majority of the panel, without explanation, awarded ReliaStar attorney and arbitrator fees and costs.
The parties agreed that EMC could move for reconsideration of the fee and cost ruling and, if necessary, challenge it in court. After further briefing, a majority of the panel entered a final award in favor of Reliastar (the “Final Award”), requiring EMC to pay arbitrator and attorney fees in the amount of $3,169,496, and costs in the amount of $691,903.75 (the “Fee and Cost Ruling). The majority explained that it awarded fees because EMC’s conduct in the arbitration was allegedly “‘lacking in good faith.'” Slip op. at 5.
Reliastar petitioned the United States District Court for the Southern District of New York for an order confirming the Final Award and EMC counter-petitioned for an order vacating the Fee and Cost Ruling. The District Court vacated the Fee and Cost Ruling and confirmed the balance of the Final Award.
The Majority Opinion
The Second Circuit reversed the District Court’s order vacating the Fee and Cost Ruling. The Court explained its reasoning in two steps.
First, the Court said that the parties’ broad arbitration clause conferred upon the panel the “inherent authority. . . to sanction a party that participates in the arbitration in bad faith and that such a sanction may include an award of attorney’s or arbitrator’s fees.” For this conclusion the Court relied on Synergy Gas Co. v. Sasso, 853 F.2d 59, 65-66 (2d Cir. 1988), and the Ninth Circuit’s decision in Todd Shipyards v. Cunard Line, Ltd., 943 F.2d 1056, 1064 (9th Cir. 1991), both of which found arbitrators were authorized to award attorney fees against parties that had allegedly arbitrated in bad faith. The Court explained that the arbitrators’ power under a broad arbitration clause to award fees and costs was necessary to ensure the effectiveness of arbitration as a dispute resolution mechanism:
[T]he underlying purposes of arbitration, i.e., efficient and swift resolution of disputes without protracted litigation, could not be achieved but for good faith arbitration by the parties. Consequently, sanctions, including attorney’s fees, are appropriately viewed as a remedy within an arbitrator’s authority to effect the goals of arbitration.
Slip op. at 10-11.
Second, the Court concluded that the Fee and Expense Provision did not limit the panel’s broad authority to award arbitrator and attorney fees as a sanction for bad faith conduct. Ostensibly applying New York rules of contract interpretation, the Court said that the Fee and Expense Provision “simply states the general American Rule that each party will bear its own attorneys fees and extends that principle to apply also to the fee of the arbitrator selected by each party.” Slip op. at 11. But the Court found that the provision said nothing about how fees were to be allocated in the event a party acted in bad faith. The Court therefore construed the Fee and Expense Provision to limit the panel’s authority to shift fees and expenses only in cases where the parties arbitrated in good faith. Because the broad grant of authority in the arbitration clause authorized the arbitrator to award fees and costs in situations where the arbitrators determined one of the parties acted in bad faith, construing the limitation as applicable only where the parties acted in good faith meant that the arbitrators had the authority to award fees and costs to ReliaStar.
The Court concluded that “because the [arbitration] agreement[s] in this case conferred broad authority on the arbitrators, because inherent in such authority is the power to sanction bad faith conduct, and because bad faith is a well-recognized exception to the American Rule for attorney’s fees, we conclude that the simple statement of that rule in [the Fee and Expense Provision]. . . is insufficient by itself to swallow the exception.” Slip op. at 13. The Court said its holding did not preclude parties from limiting a panel’s authority to award fees and costs, provided “they explicitly and clearly state that intent as part of their agreement to arbitrate.” Slip op. at 14.
The Court rejected EMC’s argument that the Court’s construction would render the Fee and Expense Provision superfluous in that the American Rule would be applicable even in the absence of the provision. According to the Court, “[p]arties to commercial arbitration agreements may choose explicitly to reference the American Rule for any number of reasons unrelated to the scope of the arbitrators’ sanction authority.” The Court said the parties might have chosen to restate the American Rule because: (a) not all arbitrators are attorneys, and thus may not be familiar with the American Rule; and (b) some arbitrators may hail from “English Rule” jurisdictions “in which the prevailing party’s fees are routinely paid by an unsuccessful opponent.” Slip op. at 13.
The Dissenting Opinion
Dissenting Judge Pooler disagreed with much of the majority’s reasoning. The dissent raised three key points, among others.
First, the Fee and Expense Provision was unambiguous and should not have been the subject of “construction” by the majority. According to Judge Pooler, the Fee and Expense Provision “is no more susceptible to construction than is Article II, Section I of the U.S. Constitution which provides that no person shall be eligible to be President ‘who shall not have attained to the Age of thirty five years.'” Slip op. at 17.
Second, the majority erred by construing the arbitration clauses’ broad but general grant of authority as a limitation on the specific Fee and Expense Provision. Citing Katz v. Feinberg, 290 F.2d 95, 96 (2d Cir. 2002) (per curiam), the dissent said that “the majority’s conclusion contradicts this Court’s recognition of the dominance of specific over general arbitration provisions.” Id. (quotation omitted) The Fee and Expense Provision was a specific provision that dealt directly with the parties’ responsibility for attorney and arbitrator fees, whereas the arbitration clauses’ broad grant of authority was a general provision that should not, according to the dissent, have been interpreted to override the specific one.
Third, the dissent rejected as “pure surmise” the majority’s characterization of the Fee and Expense Provision as a “boilerplate” restatement of the American Rule. According to the dissent, the “Court ha[d] no basis upon which to conclude that the parties’ inclusion of [the Fee and Expense Provision]. . .in their agreement was a matter of little consequence to them.” Slip op. at 23-24. The dissent explained that the parties may have intended the Fee and Expense Provision to discourage litigants from vigorously pursuing questionable claims:
the explicit provision for the American Rule in an arbitration agreement might be a consideration in a party’s strategic approach to an arbitration proceeding. . . . [A] party may believe that its position in the dispute to be arbitrated is unlikely to prevail and knowing that it will bear its own attorney’s fees might inform its attorneys to refrain from exerting undue efforts on the case.
Slip op. at 24. Incorporation of the bad faith exception to the American Rule would not, of course, be necessary to accomplish that goal.
Critical analysis to follow. . . .
Tags: Arbitrability, Arbitration, Arbitrator Fees, Attorney Fees, coinsurance, costs, EMC, fees, life insurance, National Travelers, reinsurance, ReliaStar
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