Arbitration in the Courts

May 2024 | Volume 13
Where Advocacy Meets Business

You get one bite at the apple:

Arbitration award collaterally estopped party to the arbitration from relitigating issue in later federal court litigation against a non-party. 

Amerisure Mut. Ins. Co., v. Swiss Reinsurance. Am. Co., Case No. 22-CU-12298 (E.D.Mich. Mar. 28, 2024).

It is generally accepted that arbitration awards are given the same issue preclusive (collateral estoppel) effect as court judgments, precluding parties from relitigating issues decided by the arbitrators.  In Amerisure v. Swiss Re, the United States District Court for the Eastern District of Michigan applied “non-mutual” collateral estoppel to preclude Amerisure from relitigating an issue decided in its arbitration with one reinsurer in subsequent litigation with another reinsurer.   

Amerisure issued primary and umbrella liability insurance policies to Armstrong International Inc.  A number of individuals brought suit against Armstrong seeking to hold it liable for injuries from exposure to asbestos products Armstrong manufactured or distributed during the relevant policy periods.  Amerisure provided indemnity and defense coverage to Armstrong.  Amerisure initially provided coverage for Armstrong’s defense costs under its primary policies.  After the indemnity limits of those policies were exhausted, Amerisure paid additional defense costs under the umbrella policies.  Amerisure paid these defense costs in addition to the limits of the umbrella policies.

Amerisure had purchased facultative reinsurance for the umbrella policies from various reinsurers, including, as relevant here, Allstate and Swiss Re.  When Amerisure sought reinsurance coverage from Allstate and Swiss Re, they denied Amerisure’s claims, arguing that the reinsured umbrella policies, by their plain terms, did not provide coverage for defense costs beyond the limits of the policies.

In 2019, Amerisure went to arbitration with Allstate.  The arbitrators issued an award, which stated that “the crux of the dispute was … why Amerisure seemed to be paying defense costs in addition to – rather than within – policy limits and whether that practice exceeded Amerisure’s obligations under the reinsured umbrella policies.”  The umbrella policies provided for the payment of defense costs in addition to policy limits only for claims that were “not covered” by the underlying primary policies.  The panel found that ‘“not covered’ did not mean uncollectible due to exhaustion of the primary policy; it meant outside the range of risks that the primary policy covered.”  As Armstrong International’s claims were a risk covered under the primary policy, the award concluded that Amerisure’s payment of defense costs in addition to the umbrella policy limits was not required, and therefore Allstate only had to indemnify Amerisure for these defense costs paid within the policy limits.  The United States District Court for the Northern District of Illinois confirmed the award in 2020.

In 2022, Amerisure sued Swiss Re in the Eastern District of Michigan seeking reinsurance coverage for Swiss Re’s share of defense costs Amerisure had paid to Armstrong in addition to limits under the same umbrella policies.  Swiss Re argued that the award in the Allstate arbitration collaterally estopped Amerisure from relitigating whether the umbrella policies provided coverage for defense costs in addition to the limits.  The Eastern District of Michigan agreed.

The court began by finding that whether to apply Michigan or federal collateral estoppel law to the award was “less than clear.”  However, because Michigan and federal law lead to the same result, the court did not resolve that choice of law issue.

Turning to whether Amerisure was collaterally estopped, the court agreed with Amerisure that the doctrine ordinarily requires “mutuality of estoppel,” meaning that “the one taking advantage of the earlier adjudication would have been bound by it, had it gone against him.”  However, the court held, both Michigan and federal law excuse the mutuality requirement when collateral estoppel is asserted “defensively” to estop a party “from re-litigating an issue that such party has already had a full and fair opportunity to litigate in a prior suit.”  And Swiss Re was asserting collateral estoppel defensively “to prevent Amerisure, the plaintiff, from asserting that the umbrella policies required it to pay Armstrong’s defense costs in additional to limits—a claim that it litigated and lost during the Allstate arbitration.”

Because Amerisure had a full and fair opportunity to litigate the scope of its defense cost obligations under the same policies in the Allstate arbitration, it was precluded from relitigating the same claim against Swiss Re.  Otherwise, the court reasoned, allowing Amerisure to “relitigate the issue against Swiss Re would allow it to relitigate the issue against any of its reinsurers.  This would mean giving Amerisure a ‘“second bite at the apple,’ and using additional judicial resources and risking inconsistent results each time.”

Read the court’s full decision here.

Eight Circuit finds no agreement to arbitrate where condition precedent was not satisfied:

Ordinary state-law principles of contract construction apply in determining whether the parties agreed to arbitrate.

Anhui Powerguard Technology Company, Limited v. DRE Health Corporation,, 95 F.4th 1146 (8th Cir. 2024).

Federal arbitration law, embodied in the Federal Arbitration Act, reflects a pro-arbitration policy.  For instance, where the parties have agreed to arbitrate, all doubts concerning the scope of that agreement are resolved in favor of arbitration.  But the Eighth Circuit Court of Appeal’s decision in Anhui v. DRE is a reminder that “despite arbitration’s ‘favored status,’ a party cannot be required to submit to arbitration any dispute which he did not agree so to submit.”  The threshold question is therefore always whether the parties agreed to arbitrate at all in the first instance.  And whether an arbitration agreement exists is governed by ordinary state contract law principles.  It is only once an agreement to arbitrate exists under state law that federal substantive law governs whether the dispute falls within the scope of that agreement.  In Anhui, applying Missouri contract law, the court found that the parties’ agreement to arbitrate was subject to a condition precedent, and because that condition was not satisfied, there was no agreement to arbitrate.

The underlying dispute arose out of DRE Health’s purchase of disposable gloves from Chinese manufacturer Anhui.  When DRE was unable to make payments of more than $9 million for completed deliveries, the parties executed a novation under which Anhui agreed to reduce the amount outstanding from DRE in exchange for DRE’s agreement to purchase additional shipments of gloves.  The new agreement set forth a payment schedule, and further stated: “After the initial payment of $1,970,000.00 USD and in consideration of future payment commitments, Anhui Powerguard agrees to release DRE Health from all legal claims (granted DRE completes installment payments), agrees that the venue for any future disputes shall be binding arbitration with Hong Kong International Arbitration Centre (HKIAC) under the terms of the original [Purchase Order], and agrees to deliver nitrile gloves to DRE Health[.]”

When DRE failed to make the initial $1.97 million payment, Anhui brought suit to recover the outstanding payments in the United States District Court for the Western District of Missouri.  DRE moved to compel arbitration.  The district court denied the motion, holding that DRE’s payment of the initial $1.97 million installment was a condition precedent to Anhui’s obligation to arbitrate.  DRE appealed, and the Eighth Circuit affirmed.

The parties did not dispute that the $1.97 million payment constituted a condition precedent, but they disagreed as to which of the obligations were conditioned on this payment.  DRE argued that this condition applied only to Anhui’s agreement to release DRE from its obligations under the parties’ original agreement.  Anhui argued that this condition applied all of the obligations listed – i.e., the release of claims, the agreement to arbitrate, and the delivery of additional product.

The Eight Circuit relied on Missouri’s “series-qualifier canon” to find that the condition applied not only to the release, but also the agreement the arbitrate.  Under this canon, “when there is a straightforward, parallel construction that involves all nouns or verbs in a series, a prepositive modifier normally applies to the entire series.”  Here, the contract indicated a parallel construction because the verb “agrees” preceded all three obligations.  Other “syntactical elements” further supported applying the condition to all three obligations, including that each obligation was separated by commas, rather than periods or semicolons, and the word “and” preceded the final obligation, indicating the party intended a conjunctive construction.

Finally, the court rejected DRE’s contention that the threshold issue of arbitrability was for the arbitrators rather than the court.  While parties may agree to arbitrate arbitrability, DRE’s argument “puts the cart before the horse, as it presumes the arbitration provision formed part of the contract at issue,” and “the absence of an agreement to arbitrate necessarily forecloses any argument that the parties delegated the issue of arbitrability to an arbitrator.”

Read the court’s full decision here.

Fifth Circuit holds that courts must “look through” the arbitration to the underlying dispute in determining personal jurisdiction:

But foreign corporation was not subject to personal jurisdiction based on domestic subsidiary’s contacts with the forum state.

Conti 11 Container Schiffarts-GmbH & Co. KG M.S., MSC Flaminia v. MSC Mediterranean Shipping Co. S.A.,, 91 F.4th 789 (5th Cir. 2024).

Before a US court can grant a petition to confirm an arbitral award, it must have personal jurisdiction over the respondent (or quasi in rem jurisdiction over their assets).  If the respondent is a natural person domiciled in the state in which the court sits, or a corporation that is either incorporated in or has its principal place of business in the forum state, the court has “general” jurisdiction over the respondent in any action, regardless of its connection to the forum state.  Otherwise, the court can only exercise “specific” jurisdiction over the respondent, meaning that the respondent must “purposely avail itself of the privilege of conducting activities within the forum state,” and the claim must arise out of or relate to those activities.  Conti involved a petition in federal court in Louisiana to enforce a foreign award issued by a tribunal seated in London against Swiss corporation MSC.  Because MSC is a foreign corporation, the question was whether there was specific jurisdiction over MSC in Louisiana.  Of particular interest, the Fifth Circuit Court of Appeals held that in determining whether the respondent in an award enforcement action is subject to personal jurisdiction, the court must look not only to the contacts related to the arbitration itself, but to the relationship between the underlying dispute and the respondent’s contacts with the forum state.   

Conti, a German corporation, chartered a vessel to MSC.  MSC’s U.S. subsidiary accepted an order from an American manufacturer to ship three containers of a chemical known as DVB from the Port of New Orleans.  MSC’s office in Antwerp Belgium approved the booking.  While in transit after loading in New Orleans, the cargo exploded, resulting in the death of several crew members and causing extensive damage to the ship.  Conti commenced an arbitration in London pursuant to the charter agreement, and ultimately obtained an award of approximately $200 million against MSC.

Conti sought recognition of the award in the United States District Court for the Eastern District of Louisiana.  MSC moved to dismiss for lack of personal jurisdiction.  The district court denied the motion, holding that MSC’s relevant contacts for jurisdictional purposes were not limited to the London arbitration, but also the underlying dispute that led to the arbitration.  Because the underlying dispute arose out of the loading and shipment from the Port of New Orleans, the district held that MSC was subject to personal jurisdiction in Louisiana.  MSC appealed to the Fifth Circuit.

MSC’s main argument on appeal was that the district court erred in considering the underlying dispute’s connection to Louisiana – such as the storage, loading and shipping of the vessel at the Port of New Orleans.  Rather, MSC argued, whether the court had personal jurisdiction should depend only on whether there was a connection between MSC’s acts related to the arbitration proceeding and Louisiana, i.e., MSC’s refusal to pay the award.

The Fifth Circuit disagreed.  Joining the Second, Third, Fourth, Sixth, Ninth, Tenth and DC Circuits, the Fifth Circuit held that the district court properly assessed personal jurisdiction by “looking through” the arbitration to MSC’s contacts with Louisiana arising out of the underlying dispute.  See, e.g., Solé Resort S.A. de C.V. v. Allure Resorts Mgmt., LLC, 450 F.3d 100 (2d Cir. 2006); Telecordia Tech Inv. V. Telkom S.A. Ltd., 458 F.3d 172 (3d Cir. 2006; Glencore Grain Rotterdam B.V. v. Shivnah Rai Harnarain Co., 284 F.3d 1114 (9th Cir. 2002); Compañia de Inversiones Mercantiles, S.A. v. Grupo Cementos de Chihuahua S.A.B. de C.V., 970 F.3d 1269 (10th Cir. 2020).  The court reasoned this was required because the arbitration is an extension of the parties’ contract with one another, without which the arbitration and the resulting award would not exist.  Nevertheless, the Fifth Circuit reversed, holding that the district court erred in finding that MSC’s acts in connection with the underlying dispute constituted sufficient contacts with Louisiana to confer personal jurisdiction.

Whether MSC was subject to jurisdiction in Louisiana depended on MSC’s own contacts with the state.  But, the contacts between the underlying dispute and Louisiana “resulted not from MSC’s activity but rather that of its subsidiary, MSC (USA), and third parties,” who received the order and booked the carriage through New Orleans.  As a general rule, “a foreign parent corporation is not subject to the jurisdiction of a forum state merely because its subsidiary is present or doing business there.”  This “presumption of institutional independence” is a strong one, which can only be disregarded upon a showing by “clear evidence” that a foreign parent and its domestic subsidiary are not distinct corporate entities.  Conti failed to make this showing, as the evidence showed that MSC and its US subsidiary had different headquarters, different officers and directors, and followed corporate formalities.

Accordingly, “the sole contact with the forum—the DVB’s shipping from the Port of New Orleans—did not occur as a result of MSC’s own choice,” but by the “unilateral activity” of others, including the manufacturer’s choice to ship from New Orleans, and MSC US employees’ booking of the carriage via New Orleans.  The only “putative contact” of MSC itself was the approval of the contract by an MSC employee in Antwerp.  Thus, the court lacked personal jurisdiction over MSC to enforce the award.

Read the court’s full decision here.

Nonsignatory bound to arbitrate where its claim was based on a contract with an arbitration clause:

Parent-guarantor derived a “direct benefit” from LLC Agreement where its claim depended on agreement’s designation of Delaware law.

Hitachi Construction Machinery Co., Ltd. v. Weld Holdco, LLC,, 2023 WL 8452389 (S.D.N.Y. Dec. 6, 2023).

An arbitration agreement may bind a non-signatory when dictated by ordinary principles of contract and agency.  Hitachi v. Weld confirmed that one such principle is that a non-signatory may be estopped from denying an obligation to arbitrate if it “knowingly exploits the benefits” of and thereby derives a “direct benefit” from an agreement containing an arbitration clause.

Hitachi US acquired an interest in Acme Business Holdco, LLC from Weld Holdco, LLC through two agreements – an Equity Purchase Agreement (“EPA”) and an LLC Agreement.  Both agreements included an arbitration clause adopting the JAMS Rules.  Following the purchase, Hitachi US’s parent, Hitachi Japan, entered into a separate agreement guarantying $220 million of Acme’s debt.  Hitachi Japan and Weld later entered into a Cross Guaranty Agreement, under which Weld agreed to reimburse Hitachi Japan for amounts it paid to cover Acme’s debts.  The Guaranty and Cross Guaranty Agreements each contained a forum selection clause providing that any disputes arising under the agreements would be litigated in New York courts.

After Acme defaulted on certain of the guaranteed loans, Hitachi Japan paid the debt and sought reimbursement from Weld under the Cross Guaranty Agreement.  When Weld failed to pay, Hitachi brought suit against Weld in the United States District Court for the Southern District of New York for breach of the Cross Guaranty Agreement (the Guarantee Action).

Hitachi Japan later brought a second action before the same court against Acme and Weld in “equitable subrogation,” claiming to stand in the shoes of Acme’s lenders.  As relevant here, the only claim against Weld in the Subrogation Action was for fraudulent conveyance, alleging that Weld forced Acme to violate Delaware law by orchestrating the distribution of roughly $57 million of Acme’s assets, causing its liabilities to exceed its assets.

The Weld defendants later commenced arbitration against Hitachi Japan and sought to stay or dismiss both actions in favor of arbitration, alleging that Hitachi Japan’s claims arose out of the EPA and the LLC Agreement, which contained a JAMS arbitration clause.

The court began by addressing whether the court or the arbitrators should decide whether Hitachi Japan’s claims were arbitrable.  Under federal law, the question of arbitrability is presumptively for the court, unless the parties have “clearly and unmistakably” agreed to arbitrate arbitrability.  A number of arbitral institutions, including JAMS, have promulgated rules granting arbitrators the authority to determine their own jurisdiction.  Federal courts have consistently held that parties’ agreement to arbitrate under such rules constitutes clear and unmistakable intent to arbitrate arbitrability.

Relying on this precedent, Weld argued that the parties agreed to arbitrate arbitrability because the EPA and the LLC Agreement reference the JAMS Rules.  The court, however, disagreed because Hitachi was not a signatory to either of those agreements.  Accordingly, “the reference to the JAMS Rules in those agreements does not constitute clear and unmistakable consent on Hitachi’s part to delegate the question of arbitrability to an arbitrator.”  The court distinguished those cases in which a signatory was held to have agreed to arbitrate arbitrability of a non-signatory’s claims, reasoning that those cases presented “the inverse” situation in which a signatory was argued to have agreed to arbitrate arbitrability.

Turning to the question of arbitrability, the court rejected Weld’s attempts to compel Hitachi Japan to arbitrate its claim in the Guarantee Action.  Hitachi’s sole claim in that action was for breach of the Cross Guarantee Agreement, which contained an express forum selection clause requiring litigation in New York.  Thus, Hitachi Japan “decidedly manifested an affirmative intent to litigate any claims related to the numerous loans it guaranteed.”  The court noted that Hitachi Japan was never a party to the EPA and the LLC Agreements.

The court, however, held that Hitachi Japan was obligated to arbitrate its fraudulent conveyance claim against Weld in the Subrogation Action, because that claim was based on the LLC Agreement.  This was because, the court held, a non-signatory is estopped from denying any obligation to arbitrate where it “knowingly exploits the benefits of an agreement with an arbitration and derives a direct benefit from the agreement.”  This includes circumstances in which the non-signatory “asserts claims based on that agreement.”  Here, Hitachi Japan’s subrogation claims were based on the LLC Agreement, which was “at the heart of Hitachi’s fraudulent conveyance claim.” This was because, “absent the LLC Agreement’s express incorporation of the Delaware Act,” Weld and Acme would not be bound by Delaware law.  “Because Hitachi’s fraudulent conveyance claim is wholly dependent on the LLC Agreement,” Hitachi could not “avoid its arbitration provision.”

Read the court’s full decision here.

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