"Insurance - Interplay: Courts and Arbitration Panels," Crowell & Moring's Litigation Forecast 2016
Contributor: Harry Cohen.
Despite more than half a century passing since their enactment, the parameters of the grounds for vacating arbitration awards set forth in Section 10 of the Federal Arbitration Act (FAA) remain elusive.
Corruption, fraud, “undue means,” “evident partiality,” misconduct in refusing to hear pertinent evidence, and a check on the arbitrators’ “powers” underpin the vacatur grounds in Section 10. Yet litigants are often left to wonder exactly how courts will apply each of these factors to the particular circumstances leading to a challenged arbitration award. While Congress designed Section 10 to preserve due process in arbitration, the cases that followed seemed driven by courts’ hesitation to intrude into the arena of private dispute resolution.
THE "PAYMENT PROTOCOL"
The First Circuit U.S. Court of Appeals, in First State Insurance Co. v. National Casualty Co., recently shed light on the application of Section 10, specifically addressing the power of an arbitration panel to issue equitable relief when “interpreting” the underlying reinsurance agreement at issue. In First State, the arbitration panel included in its award a “payment protocol” that governed the reinsurer’s obligation to pay claims on a going-forward basis. The reinsurer sought to vacate on the basis that the panel had exceeded its powers by effectively rewriting the parties’ reinsurance agreement to contain terms to which the parties never agreed.
Focusing on the arbitration panel’s inherent authority to “interpret” the underlying contract, the First Circuit rejected the reinsurer’s argument. The Court framed the sole inquiry as “whether the arbitrators ‘even arguably’ construed the underlying agreements and, thus, acted within the scope of their contractually delineated powers.” The Court explained that “as long as an arbitration award ‘draw[s] its essence’ from the underlying agreement, it will withstand judicial review—and it does not matter how ‘good, bad, or ugly’ the match between the contract and the terms of the award may be.
Indeed, the Court expressed indifference to whether the result was reasonable, equitable, or objectively appropriate, clarifying that “whether the arbitrators were [in fact] correct either in their interpretation of the underlying agreements or in their implementation of a particular payment protocol is not within our purview.”
“While First State illustrates the First Circuit’s deference to the arbitration process, First State should not be read as providing arbitrators carte blanche to resolve disputes,” says Harry Cohen, a partner in Crowell & Moring’s Insurance/Reinsurance Group. As the U.S. Supreme Court made clear in Stolt-Nielsen v. Animal Feeds International Corp., courts will vacate arbitration awards when “arbitrators stray…from interpretation and application of the agreement and effectively dispense their ‘own brand of industrial justice.’” Just such a scenario occurred in, for example, PMA Capital Ins. Co. v. Platinum Underwriters Bermuda Ltd., where the Third Circuit vacated an arbitration award as exceeding the panel’s authority because the parties’ reinsurance contract “require[d] the enforcement” and did not permit the “elimination” of its provisions.
“In the coming year, we expect to see continued deference by the courts to the interpretive powers of arbitrators as courts work to balance litigants’ rights under FAA Section 10 with their decisions to employ a private means of resolving disputes,” says Cohen. “Where that balance is struck,” Cohen adds, “will depend on the particular issues, facts, and circumstances and, to some extent, on the manner in which the arbitrators express the results they reach."