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How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

June 4th, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Consolidation of Arbitration Proceedings, Reinsurance Arbitration, Uncategorized, United States Supreme Court Comments Off on How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice? By Philip J. Loree Jr.

Part III

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 (7th 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

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