I. Introduction
The United States Court of Appeals for the Second Circuit has held that, “absent special circumstances,” a new panel must be convened when a party-appointed arbitrator dies before the panel renders a final award. See Marine Products Export Corp. v. M.T. Globe Galaxy, 977 F.2d 66, ___ (1992). But in Insurance Co. of North Am. v. Public Serv. Mut. Ins. Co., ___ F.3d. ___, slip op. (2d Cir. June 23, 2010) the Court held that when a vacancy is caused by an arbitrator’s resignation, a new panel need not be convened and the trial court may either appoint an arbitrator pursuant to 9 U.S.C. § 5, or direct one of the parties to do so.
II. Background
Public Service Mutual arose out of a reinsurance dispute involving pollution claims. The parties convened a tri-partite arbitration panel, discovery ensued, and the arbitrators, in a 3-0 decision, granted summary judgment to Public Service Mutual Insurance Company (“Public Service Mutual”) on one of INA’s defenses. INA moved for reconsideration and the panel set a briefing schedule.
While the motion for reconsideration was pending INA’s party-appointed arbitrator advised the parties that he had been diagnosed with cancer and would be undergoing treatment for approximately six weeks. He resigned from the panel, saying it was doubtful he could continue to perform his panel responsibilities in a timely and professional manner, and the parties accepted his resignation.
The parties and the panel disagreed on how best to proceed, and the remaining panel members directed INA to appoint a replacement arbitrator. INA questioned whether that ruling complied with Second Circuit precedent, and Public Service Mutual responded by saying it was unwilling to convene a new panel, and that either INA or a court should appoint a replacement arbitrator. Public Service Mutual copied INA’s former party-appointed arbitrator on its e-mail response.
INA objected to Public Service Mutual copying its party-appointed arbitrator on further e-mails, stating, “[s]o that [INA’s party-appointed arbitrator] need not be bothered further, [INA] will agree that [Public Service Mutual] has not waived any rights by failing to include him in further communications and hopefully, out of simple human decency, [Public Service Mutual] will refrain from copying him.” Thereafter, Public Service Mutual did not copy INA’s former party-appointed arbitrator on communications.
INA petitioned the United States District Court for the Southern District of New York for an order staying the arbitration, disqualifying the remaining panel members and compelling arbitration before a new panel. Public Service Mutual cross-petitioned for an order compelling INA to arbitrate before the remaining panel and a substitute for INA’s party-appointed arbitrator and confirming the prior panel’s summary judgment ruling.
The District Court (Harold Baer, J.) granted INA’s petition, relying on the Marine Products rule that, absent special circumstances, the death of an arbitrator prior to a final award or partial final award requires the parties to rearbitrate the matter before a new panel. The district court acknowledged the potential for abuse where an arbitrator’s resignation was the cause for the vacancy, but concluded that it would be “unfair to force INA to submit its motion for [re]consideration [to] a panel comprised of two arbitrators who heard argument on, and ultimately decided, the summary judgment motion for which reconsideration is requested and one arbitrator who did not.” Public Service Mutual and INA filed appeals and cross-appeals.
Shortly after filing its notice of appeal, Public Service Mutual learned that INA’s former arbitrator’s health had improved to the extent that he was seeking work as an arbitrator again. Public Service Mutual, copying the other panel members and INA’s counsel, wrote to INA’s former arbitrator, telling him that it had learned about his recovery and requesting that he rejoin the panel. INA said it would not agree to its former arbitrator rejoining the panel. After further correspondence, INA’s former arbitrator said that he was “not willing to put [his] name name forward [to rejoin the panel] because I believe that I have no right to do so. I stepped down from the panel on 5/2/2008 and am unwilling to attempt to change my status.”
Public Service Mutual later learned that INA’s former arbitrator had attended an arbitrator conference held in New York City in November 2008 (probably the ARIAS-U.S. fall event), and that INA’s counsel had also attended. The conference had taken place one week before the oral argument that resulted in the district court’s decision holding that the arbitration panel had to be reconvened. Public Service Mutual filed a Rule 60(b) motion based on the newly discovered evidence that INA’s former arbitrator had recovered from his illness and was actively seeking work.
On July 29, 2009 the district court granted Public Service Mutual’s motion. The Court found that Public Service Mutual’s ignorance of the changed circumstances concerning INA’s former arbitrator was justified because INA had insisted that Public Service Mutual not contact him. The Court said “INA cannot have it both ways. Having instructed [Public Service Mutual] not to contact [INA’s former arbitrator] and agreed that [Public Service Mutual] would not waive any rights by complying with [INA’s] request, INA cannot now claim that [Public Service Mutual] failed to exercise reasonable diligence to determine the condition of [INA’s former arbitrator’s] health in November 2008.” The district court also stated that, if INA knew that its former arbitrator had recovered it was “disingenuous” for it to have advocated the “seriousness” of the illness at oral argument.
Based on the newly discovered evidence the district court concluded that it was authorized to reappoint INA’s former arbitrator, reappointed him, and directed INA to appoint a replacement in the event that INA’s former arbitrator was unwilling to serve. According to the court, that INA’s former arbitrator was actively seeking appointment as an arbitrator was a “special circumstance” permitting it to depart from the “general rule” requiring the parties to convene a new panel upon the death of an arbitrator prior to a final (or partial final) award.
III. The Second Circuit Holds that the Marine Products Rule Does Not Apply When an Arbitrator Resigns
The Second Circuit affirmed the district court’s decision. It reaffirmed the Marine Products rule that a panel must be reconvened if an arbitrator dies before the panel renders a final award. But it held that “in dealing with vacancies resulting from resignations, the Marine Products rule does not apply, and district courts should use their power pursuant to 9 U.S.C. § 5 in deciding how to proceed.” Slip op. at 18.
According to the Court, “[t]he rationale behind the Marine Products rule is that it is unfair to require a party to continue an arbitral proceeding after its chosen arbitrator has died, because the party would be disadvantaged by having a substitute join the remaining panel members after they had ‘worked together and been exposed to each other’s influence,’ and after the deceased arbitrator has had some subtle and unknowable effect on them. Slip op. at 11 (quoting Cia de Navegacion Omsil, S.A. v. Hugo Nev Corp., 359 F. Supp. 898, 899 (S.D.N.Y. 1973)). The rule’s premise is “that the unfairness to a party of having a substitute arbitrator appointed who will likely be disadvantaged because of his or her absence during previous deliberations outweighs the necessary waste and expense of commencing an arbitration completely anew.” Slip op. at 16.
But the delicate balancing act the rule strikes is upset when the vacancy is precipitated by resignation rather than death. For the opportunities for manipulation would be greater (and the corresponding risk to the manipulator considerably lesser) if resignation of a party-appointed arbitrator meant that the arbitration had to start anew. “[It] would be tempting,” said the Court, “for a party to pressure its party-appointed arbitrator, implicitly or explicitly, to resign following an adverse ruling so that it could have another shot at winning before a new panel.” Slip op. at 16-17. But in the case of death, the risk of manipulation and the certainty that waste will result from duplicate proceedings is already present — it is just that in the case of resignation the risk of manipulation is much greater, outweighing the risk that one of the parties will be prejudiced.
The Court said its decision to limit the Marine Products rule to vacancies caused by death was buttressed by decisions in the Seventh and Eighth Circuits that have declined to follow Marine Products in cases involving resignations. In WellPoint, Inc. v. John Hancock Life Ins. Co., 576 F.3d 643, 646-47 (7th Cir. 2009) (blogged here) the court “‘rejected Marine Products outright, stating that there was ‘no such inflexible and wasteful rule [requiring that a new arbitral panel be convened as a result of a vacancy] in the law of arbitration.'” Slip op. at 17 (quoting WellPoint, 576 F.3d at 646-47). And in National Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462, 465-66 (8th Cir. 2003), the court “similarly declined to adopt the Marine Products rule, noting that requiring a new panel to be commenced when an arbitrator resigns ‘would vitiate Section 5 [of the Federal Arbitration Act].'” Slip op. at 17-18 (quoting Transamerica, 328 F.3d at 465-66).
The Court also rejected INA’s argument that Public Service Mutual was not justifiably ignorant of INA’s former arbitrator’s condition. INA said that Public Service Mutual did not attempt to monitor INA’s former arbitrator’s condition, that Public Service Mutual could have discovered that he attended the November 2008 arbitration conference, and that Public Service Mutual could have contacted him, either on its own behalf or in conjunction with INA. But the Court disagreed:
Following [INA’s former arbitrator’s] resignation to battle cancer, [Public Service Mutual] was not required to investigate his progress against the disease. This is especially true given that INA was treating [its arbitrator’s] resignation as final, insisting on constituting a new panel without reappointing [him], and relying on case law that is directly applicable to the death of an arbitrator. Moreover, INA had chastised [Public Service Mutual] for contacting [him] shortly after his resignation, asserting that it was ‘both legally improper and morally repugnant to continue to involve [him],” and agreeing that [Public Service Mutual] would not ‘waive[] any rights by failing to include him in further communications.’ While INA is correct that this message did not purport to bar [Public Service Mutual] from ever contacting [him] in the future, [Public Service Mutual] was not required to monitor [his] health under these circumstances. Due diligence does not require a party to monitor an arbitrator’s battle against cancer following his resignation.
Slip op. at 20-21 (emphasis in original).
IV. Analysis
The Marine Products rule is a default rule that applies when the parties do not provide for the contingency of the death of an arbitrator. Whether or not the rule is necessary and appropriate is open to debate.
When the parties do not provide for the contingency of a vacancy on an arbitration panel, Section 5 of the Federal Arbitration Act provides a default rule, allowing a court to fill a “vacancy,” irrespective of whether the vacancy was caused by death or resignation of an arbitration. Federal Arbitration Act Section 5 contemplates that, upon death of an arbitrator, the vacancy can be filled by the court, and that the arbitration may continue from where the prior panel left off:
If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator . . . or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator . . .who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein. . . .
9 U.S.C. § 5 (emphasis added).
But the Marine Products rule goes farther than Section 5 by requiring the arbitration to start anew when an arbitrator dies (except where the death occurs after the panel has issued a partial final award). And while the rule serves a laudable purpose by protecting against potential prejudice to the party whose arbitrator dies, default rules are generally not supposed to provide the maximum amount of protection to a contracting party that fails to provide for a foreseeable contingency. But that is what the Marine Products rule does.
Given that Section 5 provides an adequate statutory default rule that allows the appointment of a substitute arbitrator in the event of a vacancy, the necessity for the Marine Products rule is questionable. Even though a party might be disadvantaged by having a court direct the replacement of a deceased arbitrator, the specter of such disadvantage would probably encourage parties to provide in advance for the contingency of death.
Be that as it may, the Second Circuit did not jettison the Marine Products rule — doing so would have required it to overrule Marine Products, and parties to arbitration agreements who were aware of the rule at the time of contracting might have relied on it in deciding not to provide for what happens in the event of an arbitrator’s death. But it is significant that it did not extend the rule to apply to vacancies caused by resignations.
Extending the Marine Products rule to resignations would have rendered Section 5 superflous in that virtually any vacancy would require an arbitration to begin anew, resulting in wasted time and resouces. Section 5 does not contemplate a do over in the event of a vacancy. And, as the Second Circuit recognized, requiring a do over in the event of a resignation would encourage implicit or explicit manipulation by parties that were not happy with prior panel rulings.
So putting aside whether the Second Circuit correctly affirmed the Marine Products rule in situations where vacancies are caused by death, it acted wisely by not extending the rule to vacancies caused by resignation. Perhaps the Second Circuit’s decision, in conjunction with those in the Eighth and Seventh Circuits, will encourage parties to agree to what should happen in the event of a resignation, and perhaps also what should occur in the event of an arbitrator’s death.
Tags: Arbitrator Resignation, Cia de Navegacion Omsil S.A. v. Hugo Nev Corp., Death of Arbitrator, Insurance Co. of North Am. v. Public Serv. Mut. Ins. Co., Marine Products Export Corp. v. M.T. Globe Galaxy, Marine Products Rule, Section 5, United States Court of Appeals for the Second Circuit
