Arbitration in the Courts

December 2023 | Volume 12
Where Advocacy Meets Business

Southern District of New York twice finds that, under the McCarran Ferguson Act, Louisiana statute barring arbitration of insurance disputes reverse-preempts the New York Convention:

Arbitration agreements were not “forum selection clauses” exempted from Louisiana statute’s proscription on arbitrating insurance disputes.

Certain Underwriters at Lloyds, London et al v. Mpire Properties, LLC, No. 22-CV-9607, 2023 WL 6318034 (S.D.N.Y. Sept. 28, 2023).

Certain Underwriters at Lloyds, London et al. v. 3131 Veterans Blvd LLC, No. 22-CV-9849, 2023 WL 5237514 (S.D.N.Y. Aug. 15, 2023).

Under the Supremacy Clause of the U.S. Constitution, the Federal Arbitration Act (“FAA”) and the New York Convention (codified in Chapter 2 of the FAA) generally preempt state laws invalidating arbitration agreements.  However, the McCarren-Ferguson Act (MFA), another federal statute, provides that “the business of insurance” is “subject to the laws of the several States,” and that “no Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance[.]”  In other words, the MFA “reverse-preempts” federal laws that conflict with state laws regulating insurance, unless the federal law is specifically addressed to the business of insurance.

Several states have enacted statutes declaring that insurance disputes are not arbitrable.  Courts have held that, under the MFA, these state laws invalidate domestic arbitration agreements governed by FAA Chapter 1.  But there is a circuit split over whether MFA reverse-preemption applies where state laws purport to invalidate international arbitration agreements governed by the New York Convention.  On the one hand, the First, Fourth, Fifth, and Ninth Circuits have held that the MFA does not reverse preempt the Convention, and therefore state laws prohibiting the arbitration of insurance disputes are inapplicable to arbitration clauses in policies issued by foreign insurers.  See, e.g. Green Enterprises, LLC v. Hiscox Syndicates Limited at Lloyd’s of London, 68 F.4th 662, 668 (1st Cir. 2023); ESAB Group, Inc. v. Zurich Ins. PLC, 685 F.3d 376, 385 (4th 2012); Safety Nat. Cas Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714, 725 (5th Cir. 2009); CLMS Management Services Limited Partnership v. Amwins Brokerage of Georgia, LLC, 8 F.4th 1007, 1012 (9th Cir. 2021).  The Second Circuit, however, has held that state insurance laws do reverse-preempt the New York Convention, because the Convention is not self-executing, but rather it is incorporated into domestic law by Chapter 2 of the FAA, which is an “Act of Congress” under the MFA.  See Stephens v. American Intern. Ins. Co., 66 F.3d 41, 45 (2d Cir. 1995).

This circuit split was on display in two recent decisions from the SDNY, which held that Louisiana Revised Statute § 22:868, which invalidates arbitration clauses in insurance policies, reverse-preempts the FAA and the New York Convention, and therefore precludes the arbitration of insurance disputes under policies issued in Louisiana by foreign insurers.

The two cases, Mpire and 3131 Veterans Boulevard, arose from essentially the same basic facts.  In each case, a Louisiana policyholder disputed its insurers coverage determinations regarding property damage caused by Hurricane Ida.  Both policies were issued by a combination of foreign and domestic insurers, and each contained an arbitration provision.  The policyholder in each case sued only its domestic insurers in Louisiana state court (waiving its claims against the foreign insurers’ share of the policy).

In both cases, the insurers petitioned the SDNY to enjoin the Louisiana actions and compel arbitration.  In opposing the motions, the policyholders argued that Louisiana Revised Statute § 22:868, which invalidates any policy provision “depriving the courts of this state of the jurisdiction or venue of action against the insurer,” rendered the arbitration provisions unenforceable.

Each court rejected the insurers’ argument that § 22:868 permitted arbitration in these cases under an exception permitting “a forum or venue selection clause” in surplus lines policies.  As the policies at issue were surplus lines policies, the insurers argued that the arbitration agreements were enforceable because they were a form of “forum-selection clause.”  In each case, the court disagreed, holding that, under Louisiana law, an arbitration agreement is not a form of forum-selection clause, because a forum-selection clause, unlike an arbitration clause, does not “have the effect of excluding judicial remedies.”

The insurers next argued that, even if the statute applied to arbitration clauses in surplus lines policies, MFA reverse-preemption was inapplicable because the arbitration agreements fell under the New York Convention.  Here the insurers argued that under a doctrine known as Grigson estoppel, the arbitration agreements fell under the Convention, notwithstanding the policyholders’ decision to proceed only against the domestic insurer-signatories, because its signatories included foreign insurers. (For a discussion of Grigson estoppel see Port Cargo Serv., LLC v. Certain Underwriters at Lloyd’s, 2018 WL 4042874 (E.D. La. 2018).)

In each case the court rejected this argument.  Assuming, but not deciding, that the Convention applied, the court held that it was bound by Second Circuit precedent holding that state insurance laws reverse-preempt the Convention under the MFA.  Accordingly, § 22:868 would invalidate the policies’ arbitration provisions, even if they fell within the Convention.

These decisions are now on appeal to the Second Circuit, which will have the opportunity to reconsider its prior holding that the MFA reverse-preempts the New York Convention.  If the Second Circuit affirms its prior holding and preserves the circuit-split on this important question, the issue could come before the Supreme Court.

Read the court’s full decisions here and here.

Don’t I know you?

Eleventh Circuit refuses to vacate award based on arbitrators’ non-disclosure of professional experience with co-arbitrators and counsel.

Grupo Unidos por el Canal, S.A. v. Autoridad del Canal de Panama, 78 F.4th 1252 (11th Cir. 2023).

Federal Arbitration Act (FAA) § 10 provides that arbitral awards issued in the US may be vacated “where there was evident partiality or corruption in the arbitrators.”  A movant may prove evident partiality by showing either (1) an arbitrator has an actual conflict of interest or (2) an arbitrator failed to disclose information that would lead a reasonable person to believe that a conflict exists.  Like all grounds for vacating an award, the evident partiality prong is strictly construed.  To warrant vacatur, the “alleged partiality must be direct, definite and capable of demonstration rather than remote, uncertain and speculative.”  Challenges based on evident partiality rarely succeed.

Certain international arbitrators are in such high demand that they may serve together as co-arbitrators, and experienced counsel may appear before them in more than one case.  In some cases, parties have argued that an arbitrator’s failure to disclose such relations warrants vacatur of an award for arbitrator bias.  This was the case in Grupo Unidos, where the Eleventh Circuit Court of Appeals confirmed that the failure to disclose such professional contacts, without more, does not demonstrate evident partiality warranting vacatur of an award.

The dispute in Grupo Unidos arose from a five-year arbitration between Grupo Unidos por el Canal, a consortium of European companies hired to design and construct a new set of locks to expand the Panama Canal, and the Canal’s operator, Autoridad del Canal de Panama.  After extensive proceedings – which included over 3,500 pages of pleadings, 78 fact witnesses, 63 expert witnesses, over 3,500 exhibits, a 20-day merits hearing, and 1,290 pages of post-hearing briefing – the three-arbitrator panel issued a partial award of more than $238 million in favor of the Autoridad.

Following the partial award, Grupo Unidos sought a series of additional disclosures from the arbitrators.  After the arbitrators made the additional disclosures and issued a Final Award, Grupo Unidos moved to vacate the award for evident partiality based on four of these disclosures: (i) a co-arbitrator’s nomination of the tribunal’s president to serve as president of another tribunal in an unrelated arbitration while the Panama Canal arbitration was pending; (ii) an arbitrator’s service as co-arbitrator with counsel for the Autoridad in an unrelated arbitration while the Panama Canal arbitration was pending; (iii) an arbitrator’s service on a tribunal with one of the Autoridad’s counsel in an unrelated arbitration that ended before the Panama Canal arbitration commenced; and (iv) an arbitrator’s service on the tribunal in an unrelated case where one of the Autoridad’s counsel represented a party.

The Eleventh Circuit refused to vacate the award based on these nondisclosures.  The court considered it “well-taken” that “arbitrators should err on the side of greater, not lesser, disclosure.”  But to vacate the award on these facts, the court “would need to hold, in essence, that mere indications of professional familiarity are reasonably indicative of possible bias.”

In the first three instances, the court held that a reasonable person would not suspect bias based on the non-disclosure of co-service on arbitral tribunals in unrelated proceedings, because there were sound and impartial reasons for the various appointments.  This included, among other things, these individuals’ extensive expertise and experience in resolving complex construction disputes.  The court concluded that “such familiarity due to confluent areas of expertise does not indicate bias.”

The court likewise held that the remaining failure to disclose that a party’s counsel’s appearance before one of the arbitrators in a prior, unrelated arbitration did not demonstrate evident partiality. According to the court, repeated appearances by experienced counsel before experienced arbitrators were common and anticipated, and such “repeated appearances establish only familiarity, and familiarity does not indicate bias.”

In sum, the court observed that it was “little wonder, and of little concern,” that leading arbitrators and counsel in a small professional community “would cross paths in their work.”

Read the court’s full decision here.

Southern District of New York Confirms Award Enjoining Parallel Arbitration:

Agreement and AAA Commercial Rules granted arbitrators broad authority to grant injunctive relief, including the power to enjoin parallel arbitrations seeking to circumvent the arbitration agreement and undermine the panel’s authority.

Telecom Business Solution, LLC v. Terra Towers Corp., et al., No. 22-CV-1761, 2023 WL 5748199 (S.D.N.Y. Sept. 6, 2023).

One way parties may attempt to circumvent an unfavorable award is by initiating parallel proceedings before a court or arbitral tribunal they expect will rule in their favor. The question then arises of whether arbitrators are empowered to enjoin parallel proceedings to thwart such gamesmanship and preserve the integrity of the arbitration. In Telecom Business Solution, the SDNY was asked to confirm an award ordering the respondents to terminate parallel arbitration proceedings directly aimed at undermining the ongoing arbitration.

The case arose from a dispute between the shareholders of Continental Towers LATAM Holdings Ltd. regarding the sale of the company.  Specifically, the minority shareholders alleged that the majority shareholders had prevented the sale of the company by wrongfully restricting the minority shareholders’ right to sell their shares.  They therefore invoked the arbitration clause in the shareholders’ agreement and initiated an arbitration in New York under the Commercial Rules of the American Arbitration Association, seeking an award requiring the sale of the company.  The tribunal ultimately issued a unanimous first partial final award ordering the sale of Continental Towers, which was later confirmed in the SDNY.  This was followed by a second partial final award that imposed sanctions on the majority shareholders, including staying their counterclaims until they complied with the tribunal’s order to complete the sale of Continental Towers.

Rather than comply with the awards, the majority shareholders took their fight abroad.  A few months following the second partial final award, wholly-owned subsidiaries of Continental Towers initiated arbitrations in Peru and Guatemala, asserting claims mirroring the majority shareholders’ stayed counterclaims in the New York arbitration.  The Guatemala tribunal even issued an injunction purporting to enjoin the minority shareholders from, among other things, undertaking “transactions that change the equity interests that [the majority shareholders] hold in certain of [Continental Towers’] subsidiaries,” directly conflicting with the New York tribunal’s ordering of the sale of Continental Towers.  The minority shareholders therefore moved for an anti-arbitration injunction from the New York tribunal to enjoin the South American arbitrations.

The New York tribunal found that, because the majority shareholders were the real parties in interest in all three arbitrations, the South American arbitrations were a transparent attempt to circumvent the New York tribunal’s orders.  The New York tribunal therefore issued a third partial final award ordering the majority shareholders to terminate the parallel arbitrations.

The minority shareholders then petitioned the SDNY for expedited confirmation of the third award. The majority shareholders cross-moved for vacatur.

The court rejected the majority shareholders’ vacatur motion, and confirmed the award.  The court rejected the respondents’ contention that the injunction exceeded the arbitrators’ authority, holding that the arbitrators had the authority to issue the anti-suit injunction.  The arbitrators’ scope of authority “generally depends on the intention of the parties to an arbitration, which is determined by the parties’ agreement.”  The shareholder agreement granted the tribunal broad authority to decide “any controversy, claim or dispute arising out of or in connection” with the shareholders’ agreement, and authorized the arbitrators to award specific performance and injunctive relief.  The agreement further provided that the arbitration would be conducted under the AAA Rules, which likewise granted the arbitrators authority to issue injunctive relief.  The arbitrators had found that the shareholders’ parallel arbitration violated the arbitration clause and the implied covenant of good faith, and awarded the anti-suit injunction as the appropriate remedy.  The court held that it was well within the arbitrators’ authority, as defined by the agreement, to order an anti-suit injunction to remedy these breaches.

Read the court’s full decision here.

Southern District of Texas finds arbitrators exceeded their powers in amending award:

Tribunal’s redetermination of substantive issue of law went beyond correction of computational errors permitted by ICC Rules.

RSM Production Corp. v. Gaz du Cameroun, S.A., No. 4:22-CV-03611, WL X (S.D. Tx. Nov. 6, 2023).

The common law doctrine of functus officio bars an arbitrator from revisiting the merits of an award once issued.  The rule recognizes that once the arbitrators render an award, their contractual powers are exhausted.  If a tribunal modifies the substance of an award after it is functus officio, the amended award is subject to vacatur under FAA § 10(a)(4), which provides for vacatur “where the arbitrators exceed their powers.” This common law doctrine is, however, subject to certain well-known exceptions.  Most notably, arbitrators may correct clerical or computational errors, which are properly viewed as perfecting or explaining their determination, rather than altering the substance of their conclusions.  Moreover, because arbitration is a matter of contract, the parties are free to empower the arbitrators to revisit and modify their awards.  This can be accomplished by agreeing to arbitrate under the rules of an arbitral institution, such as the International Chamber of Commerce (ICC), which empower arbitrators to revise their awards in the manner specified in the rules.  However, the ICC Rules, like most, limit the arbitrators’ authority to correcting the same type of computational or clerical errors permitted under the functus officio doctrine.

In RSM Production Corp., the United States District Court for the Southern District of Texas held that the addendum modifying a final award may be vacated under FAA § 10(a)(4) where the arbitrators exceed their authority to correct awards under the institutional rules chosen by the parties.  Specifically, RSM Production Corp. concerned a petition to vacate an addendum issued pursuant to Article 36 of the ICC Rules, which grants arbitrators the power to correct “a clerical, computational, or typographical error, or any errors of a similar nature contained in an award.”

The underlying dispute arose from a set of agreements between RSM Production Corp. (RSM) and Gaz Du Cameroun, S.A. (GdC) concerning a natural gas production and distribution project.  Under the contracts, GdC would advance certain costs and serve as operator in exchange for a 60% interest in the project, while RSM retained a 40% interest for itself.  However, RSM was not entitled to receive its share of the proceeds until GdC recuperated 100% of its costs from the gas proceeds.  Thus, the contracts defined RSM’s “payout date” as “the first day of the calendar month following the calendar month” in which GdC fully recovered its costs.

The parties’ dispute concerned when GdC recuperated all costs and thus what constituted the contractual “payout date.”  GdC claimed that it had not recouped its costs until May 2016, and thus it did have to begin paying RSM its share of the proceeds until June 1, 2016.  RSM disagreed, claiming that GdC had recouped the costs recoverable under the contract by January 2016, and therefore the payout date was months earlier on February 1.  According to RSM, GdC’s arrived at the June 1 payout date by improperly including payments GdC made to a third company under a separate royalty contract in calculating its recoverable costs.  RSM therefore commenced arbitration, claiming its share of the proceeds based on a February 1 payout date.  RSM claimed a total of $10,578,123 comprised of three components: (i) $6,566,497 on the proceeds from sales generated between February 1 and June 1; (ii) $3,866,616 on the proceeds from sales generated prior to February 1, but received on or after February 1, 2016; and (iii) $145,009 on the proceeds received between GdC’s full cost recovery in January and the February 1 payout date.  The tribunal labelled this three-part claim as “Claim No. 1.”

In the alternative, RSM argued that, if the correct payout date was June 1, it was nevertheless entitled to components two and three of Claim No. 1, albeit calculated based on GdC’s alleged cost recovery in May 2016. The tribunal labelled RSM’s alternative claim as “Claims Nos. 2 and 3.”

The tribunal issued an award in RSM’s favor entitled, “RSM Claim No. 1: GdC’s Inclusion of the CHL Royalty in the Calculation of ‘Payout.’”  The tribunal found that GdC had improperly included the royalty payments in its recoverable costs, the proper payout date was February 1, and RSM was entitled to the full $10,578,123 it demanded.  In reaching this conclusion, the tribunal explicitly found that RSM’s compensation was calculated in “three steps,” citing specific contractual provisions entitling RSM to recover each of the three components of Claim No. 1.  The tribunal further found that Claims Nos. 2 and 3 were moot because they arose only in the event the tribunal deemed the proper payout date to be June 1, 2016.

In response, GdC filed an application under Article 36 of the ICC Rules seeking a “correction” of the amounts awarded.  GdC did not contest the tribunal’s conclusion that the proper payout date was February 1.  Rather, it argued that the tribunal had erred in granting the full $10,578,123 because, according to the title of the award, the tribunal only decided that the proper payout date was February 1.  Therefore, GdC argued, the tribunal did not address the second and third components Claim No. 1 concerning RSM’s share of the proceeds generated before February 1.  Those claims, GdC argued, were only encompassed in what the tribunal had labelled Claim Nos. 2 and 3.  GdC further argued that those claims were therefore not moot, the tribunal had yet to decide RSM’s entitlement to the second and third components of Claim No. 1, and it therefore erred in awarding RSM the full $10,578,123.

The tribunal issued an addendum award in which it agreed with GdC, and characterized its award to RSM of amounts generated prior to the payout date as a “miscalculat[ion of] the appropriate relief due to RSM.”  The Addendum Award then purported to correct this “computational error” by limiting the damages awarded RSM to $6,566,497.38 (the first component of Claim No. 1).

RSM moved to vacate the Addendum Award under FAA § 10(a)(4), arguing that the arbitrators had exceeded their powers under the ICC Rules by issuing the Addendum Award, because it did not merely correct a computational error, but amounted to a “re-do” of its prior merits determination.  The court agreed.

The court observed that mere computational errors are typically straightforward and involve simple mistakes, such as 2+2=5.  Here, however, rather than making such ministerial corrections, the tribunal revisited the merits and “effectively reversed” its “comprehensive breakdown” of why RSM was owed amounts corresponding to the second and third components of Claim No. 1.  The court emphasized that the tribunal’s Addendum Award “conflate[d] the title of its original decision with its substance.”  The title of the tribunal’s first award may have suggested it was limited to determining the appropriate payout date, and thus only RSM’s entitlement to the first component of Claim No. 1.  But RSM’s submissions were clear that it was seeking all three components of Claim No. 1, and the “substance of [the tribunal’s] decision expressly determined that RSM was entitled to recover on each of the three components that made up the $10,578,123.28 award.”

The court therefore held that “the tribunal committed a textbook case of reversing course on a substantive legal issue previously decided.”  Notably, in reaching this conclusion, the court rejected GdC’s argument that “the tribunal is entitled to extreme deference on the interpretation of its power, including what constitutes a ‘computational error’” under the ICC Rules.  Rather, for the court, “the tribunal exceeded its authority by modifying the award in a way forbidden by the plain text of the agreement.”  The parties agreed to the application of the ICC Rules, and the meaning of ICC Rule 36 was clear.

Read the court’s full decision here.

Subscribe to Updates

Stay informed of Chaffetz Lindsey’s updates, new articles, and events invitations by subscribing to our mailing list.