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

July 14th, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Consolidation of Arbitration Proceedings, Reinsurance Arbitration, 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 V.B

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

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