We have written extensively on Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., No. 08-1198, a case pending before the United States Supreme Court in which a decision is expected in the not too distant future. Stolt-Nielsen presents the question whether a court or arbitration panel may, consistent with the Federal Arbitration Act, impose class arbitration on a party whose arbitration agreements are silent on that subject. The answer to that question will likely answer a related question that is of special concern to those involved in reinsurance arbitration: Can a panel or court impose consolidated arbitration on a party whose arbitration agreements are silent on that subject? You can read our prior posts on Stolt-Nielsen here, here, here, here, here, here, here, here, here, here, here, here, here and here. (Certain of these posts contain links to articles on Stolt-Nielsen we wrote for Karl Bayer’s Disputing blog.)
But those posts principally concern the legal issues raised by the case, discuss various ways it might be decided, and argue that the correct answer to the question is that a court or arbitration panel cannot, consistent with the Federal Arbitration Act, impose class or consolidated arbitration in the face of silence. To date we have not discussed in any detail the practical implications that the case may have on reinsurance arbitration, if any. So today let’s look at what those implications may be.
Class actions or class arbitrations arising out of reinsurance contracts are, for all practical purposes, nonexistent. But companies, particularly cedents, frequently seek to consolidate arbitration proceedings, whether that means arbitrating with all or most reinsurers on a treaty placement or with one, some or all reinsurers on multiple placements.
Reinsurance lawyers with about eight or more years of experience will recall the days when the general rule was that courts could not compel consolidated arbitration proceedings absent contract language or perhaps a state statute authorizing consolidated arbitration. Some exceptions to this rule evolved to address unique factual situations, but for the most part the norm was that consolidated arbitration could not be compelled absent the consent of the parties or state statutory authorization. That doesn’t mean there were 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 frequently agree to a consolidated proceeding in which one law firm would represent all (or virtually all) solvent slip participants).
All of this changed when the United States Supreme Court issued its plurality decision in 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 arbitration; 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.
Based on a plurality opinion written by Associate Justice Stephen G. Breyer, and joined by Associate Justices David H. Souter, Antonin G. 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 arbitration or were, as the South Carolina Supreme Court concluded, silent on that point. The Court therefore never reached the issue whether imposing class arbitration on the parties when the contract was silent was consistent with the Federal Arbitration Act.
The plurality in Bazzle determined that the issue before it – whether the parties’ contracts authorized or precluded class arbitration – was a question of procedural arbitrability. The plurality characterized the question as concerning “what kind of arbitration proceeding the parties agreed to.” 539 U.S. at 452-53. It was, indeed, a “gateway” question; it was –- according to the plurality decision — simply not the type of “gateway” question that courts get to decide because it involved a disputed issue of contract interpretation.
Although the reasoning of the plurality opinion was endorsed by only four Justices, it proved highly influential in the lower courts, and most courts read it as authorizing arbitrators to decide whether arbitration proceedings could proceed on a class or consolidated basis, even under multiple contracts to which not all parties were signatories. Parties began to agree to consolidated reinsurance arbitration proceedings, believing that arbitrators would order consolidation if one of the parties opposed it. And where parties did not agree post dispute to consolidation, reinsurance arbitrators frequently granted it.
But this all may change, depending on what the Court decides in Stolt-Nielsen. For example, the Court may rule that, in the absence of some indicia of an affirmative agreement to consolidate proceedings, neither courts nor arbitrators may order consolidated proceedings. The Court may also rule that courts must decide whether there is or may be some affirmative agreement to class arbitration. Or the Court may rule that class arbitration cannot be ordered absent an affirmative agreement by the parties unless the parties to each contract are also parties to every other contract.
On the other hand, the Court may not reach the question presented, in which case things will likely proceed as they have in the recent past. Or a majority of the Court may rule that, under a broad arbitration clause, arbitrators are authorized to order class arbitration, effectively endorsing what a number of lower courts have ruled since Bazzle.
There are a number of different ways the Court might decide Stolt-Nielsen, but the bottom line is this: there is a good chance that Stolt-Nielsen will materially change the law on consolidation of arbitration proceedings. And the change could have tactical implications for reinsurance dispute resolution.
Stolt-Nielsen has been fully submitted since December 9, 2009, so a decision could come down any Monday the Court is in session over the next several weeks, and will almost certainly be handed down no later than the end of the term in late June. All we can say at this point is that you will surely hear about the decision here at Forum. . . .
Tags: Consolidation of Arbitration Proceedings, Federal Arbitration Act, Green Tree Financial Corp. v. Bazzle, Reinsurance Arbitration, Stolt Nielsen S.A. v. Animalfeeds Int'l Corp., United States Supreme Court
