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New York Federal Court Vacates Award Based on Evident Partiality
Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., No. 09 Civ. 9531 (SAS), 2010 U.S. Dist. LEXIS 15952 (S.D.N.Y. Feb. 23, 2010).
A New York federal court has vacated an arbitration award because two of the arbitrators did not fully disclose their involvement in an arbitration between two other parties that, according to the retrocessionaire, involved a common witness, similar issues, and a company that succeeded to the business of the cedent in this arbitration. The parties entered into a retrocessional casualty stop loss agreement covering a finite portion of the retrocedent’s casualty business. The arbitration clause required that the arbitrators be disinterested. A dispute arose and that parties proceeded to select the arbitration panel. All the panel members were ARIAS US certified and the court recounted the disclosure provisions in the ARIAS guidelines for arbitrator conduct.
In making the disclosures, neither the umpire nor the retrocedent’s party-appointed arbitrator disclosed their involvement in another arbitration involving a company that was not listed on the umpire questionnaire as an affiliate of the retrocedent, but apparently had been formed by the retrocedent, among others, prior to its public offering. Neither did the arbitrators disclose that a witness in the present arbitration was also a witness in the other arbitration. That other arbitration had somewhat similar issues concerning a finite retrocessional cover.
After an award was issued in favor of the retrocedent by a majority of the arbitration panel, the retrocessionaire petitioned to vacate the award for evident partiality based on the lack of disclosure of involvement in the other arbitration. In granting the application, the court applied both the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and the Federal Arbitration Act (“FAA”) to the motion to vacate the award. The court recounted the evident partiality standard that an arbitrator must investigate and disclose any nontrivial conflict that might exist so that the parties are not misled into believing that no nontrivial conflict exists.
The court first disposed of a statute of limitation argument concerning whether a “summons” was filed with in the three-month period to vacate an award. The court held that service of the petition gave the retrocedent notice and that the lack of service of a summons was excusable in the interest of justice based on the parties’ arbitration agreement.
The court found the failure by the umpire and the retrocedent’s party-appointed arbitrator to disclose the other arbitration and that there was a common witness that testified merely three months earlier, was material. The court stated that the two arbitrators put themselves in a position where they could receive ex parte information about a similar reinsurance arrangement, be influenced by credibility decisions made about the common witness, and influence each other’s thinking about this arbitration. The court found all these factors taken together amounted to a material conflict of interest, and thus met the evident partiality standard.
Illinois Federal Court Refuses to Disqualify Arbitrator and Grant’s Petition to Appoint Umpire and Compel Arbitration
Trustmark Ins. Co. v. Clarendon Nat’l Ins. Co., No. 09 C 6169, 2010 U.S. Dist. LEXIS 8078 (N.D. Ill. Feb. 1, 2010).
An Illinois federal court dismissed the cedent’s complaint and granted the reinsurer’s petition to appoint an umpire and compel arbitration in the second of a series of arbitrations over variable quota share treaties. After receiving a demand for arbitration on all contracts, the reinsurer appointed a single arbitrator for these disputes. While the reinsurer requested that all agreements be considered in a single arbitration, the cedent refused and the arbitration panel on the first set of contracts denied the consolidation request. A confidentiality agreement was signed by all arbitrators in the first arbitration.
When the reinsurer’s arbitrator contacted the cedent’s arbitrator about selecting an umpire for the second arbitration, the cedent objected to the reinsurer’s arbitrator’s service because of the confidentiality agreement in the first arbitration and that the arbitrator is no longer disinterested as required by the arbitration clause. This lawsuit followed seeking to disqualify the reinsurer’s arbitrator.
In dismissing the cedent’s claims and granting the petition to compel arbitration, the court noted that the issue of whether an arbitrator is disinterested is available for challenge only after an arbitration award issues. The court distinguished the decision in WellPoint, Inc. v. John Hancock Life Ins. Co., 576 F.3d 643 (7th Cir. 2009), stating that the issue in WellPoint was the power of the court to fill vacancies, not to challenge qualifications at the pre-award stage. Because the cedent’s challenge was premature, the complaint failed to state a claim upon which relief could be granted.
As to the confidentiality agreement, the court found that the arbitrator is still able to articulate the arbitrator’s viewpoints with reference only to the record in this arbitration and does not need to disclose confidential information as part of her duties in the second arbitration. The court distinguished Trustmark Ins. Co. v. John Hancock Life Ins. Co., summarized above, stating that in Hancock the arbitrator had already breached a confidentiality agreement and had rebutted the presumption that the arbitrator could disregard knowledge the arbitrator already had. Because no breach had occurred in this case, the strong presumption that arbitrators can disregard what they already know was still in effect.
The court went on to appoint an umpire chosen by lot based on the three candidates the reinsurer had proposed (and to which there had been no response by the cedent for over four months) and issued an order compelling arbitration before the panel.
Illinois Federal Court Disqualifies Party-Appointed Arbitrator for Not Being Disinterested; Finds Confidentiality Agreement Executed in Prior Arbitration Not Subject to Arbitration
Trustmark Ins. Co. v. John Hancock Life Ins. Co., No. 09C 3959, 2010 WL 309885 (N.D.Ill., Jan. 21, 2010).
An Illinois federal court granted the reinsurer’s motion for a preliminary injunction and disqualified an arbitrator from the arbitration panel where the arbitrator had signed a confidentiality agreement in an earlier arbitration between the parties.
The parties entered into the first arbitration to determine whether certain assumed contracts were properly included in the cession of retrocessional business in addition to direct business, which was not in dispute. As part of the first arbitration, each of the parties entered into a confidentiality agreement, which was also signed by each of the arbitrators as is the general practice in reinsurance arbitrations. The confidentiality agreement did not include an arbitration clause. The panel’s award was confirmed by the court along with its confidentiality under the parties’ confidentiality agreement.
When the parties again disagreed about the billings under the reinsurance agreement, the cedent, which had prevailed in the first arbitration, initiated a second arbitration, and appointed as its party-appointed arbitrator the same arbitrator it appointed in the first arbitration panel. The reinsurer responded to the appointment by expressing a concern that the arbitrator would be unable to honor the confidentiality agreement in the first arbitration. The arbitrator himself expressed that although he “would scrupulously abide by confidentiality,” he might “find it hard to segregate, difficult to deal with” the particular knowledge he had from the first arbitration.
The cedent then requested the panel to “expressly authorize the use of all materials from [the first arbitration] without limitation[,] so that the parties could avoid relitigating issues decided in the first arbitration.” The cedent’s arbitrator, who had signed the confidentiality agreement in the first arbitration, did not recuse himself from the deliberations concerning the panel’s authority to resolve any of the parties’ disputes over the confidentiality agreement. The second panel ultimately decided to extend the confidentiality agreement to the second panel. It also ruled that the reinsurer was precluded from relitigating a number of issues, including the claim regarding the coverage of retrocessional business. The panel’s rulings were 2-1 decisions.
In granting the reinsurer’s motion for an injunction, the court accepted the reinsurer’s position that as a party to the initial confidentiality agreement, the arbitrator was not a disinterested arbitrator within the meaning of the parties’ reinsurance contract. The court also found that the arbitrator had breached a duty to the reinsurer, who was the beneficiary of the confidentiality agreement. Turning to the question of whether the confidentiality agreement was subject to arbitration, the court found that the reinsurer could not be forced to arbitrate issues it had not agreed to arbitrate.