Not a whole lot going on today, with only a few cases and, frankly, not many of them of particular interest.  So, here’s an abbreviated “Highlights” with the cases of most importance.

Honorable engagement

Continental Casualty Co. v. Certain Underwriters at Lloyds, 2021 U.S. App. LEXIS 25184 (7^th Cir. August 23, 2021), presents a standard of review which, while familiar to those engaged in reinsurance, differs from that present in most commercial arbitrations. The action arises out of asbestos damage insurance.  Continental, which wrote insurance covering such losses, sought to lay off some of the risk by entering into several reinsurance treaty contracts with Underwriters. The relevant contracts contained an arbitration clause which provided: “The arbitrators shall interpret this Agreement as an honorable engagement and not as merely a legal obligation. . . and they shall make their award with a view to effecting the general purpose of this Agreement in a reasonable manner rather than in accordance with a literal interpretation of the language.”

The parties disagreed on whether the Underwriters had paid the full amount due under the provisions of the treaties and submitted the issue to arbitration.  The panel found in favor of the Underwriters, holding that “the [Underwriters] have fully discharged their past, present, and future obligations [for the relevant losses].”  Continental moved to vacate the quoted portion of the award, arguing that a prohibition against its submission of future claims exceeded the arbitrators’ authority and would deprive it of millions of dollars.  The District Court denied the motion and confirmed the award. The Court of Appeals, with Circuit Judge Wood writing for herself and Circuit Judges Hamilton and Kirsch, affirms.

The decision centers on the broad discretion which courts give to arbitrators, particularly where, as here, the agreement provides for the arbitrators’ application of the honorable engagement principle. The issue, the court holds, is not whether “the arbitrator or arbitrators erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.” (emphasis added)(citation omitted).  Only if “‘there is no possible interpretive route to the award’ may a ‘noncontractual basis. . . be inferred and the award set aside.’” (citation omitted).  Opining that “we have not spoken directly to the question of honorable-engagement clauses,” the Court cites to authorities in the First and Second Circuits which grant arbitrators acting under such provisions the power to issue forms of relief “not explicitly mentioned in the underlying agreement.”  Finding that the panel “may have thought the only way to implement the purpose of the agreement was to preclude all asbestos bills for the three named companies” or that the arbitrators “may have been persuaded that no such claims were likely to come along,” the court finds that the arbitrators did not “stray beyond the boundaries of their authority. . . .”  “The agreement gave [the arbitrators] the power to resolve the case on general principles, not just legal entitlements, and that seems to be what they did.” (Emphasis added).

The key takeaway for attorneys not usually living in the reinsurance world is that they must be aware of the broad scope which an honorable engagement clause gives the panel.  If you enter an agreement containing such language or a similar provision, like ex aequo et bono or amiable compositeur, understand that the leash you are giving the arbitrators is very, very long indeed.

Applicable federal rules

Mount v. Peruzzi of Langhorne, LLC, 2021 U.S. Dist. LEXIS 157579 (E.D. Pa. August 20, 2021), began with a failed automobile purchase.  As part of the transaction, plaintiff entered into a retail installment contract. Issues arose regarding the vehicle’s financing, and defendant repossessed the car. Mount sued for damages to her credit rating, the cost of replacement transportation, and various types of emotional distress. Defendants moved to compel arbitration under a provision contained in Mount’s Buyer Order.  The court denies the motion, holding that Mount’s retail installment contract (“RIC”), not the purchase order, governed the parties’ rights as they related to the issues in the litigation.  Since the RIC did not contain an arbitration clause, there was no agreement to arbitrate.

The decision itself is not noteworthy.  However, in a lengthy footnote, Judge Beetlestone discusses the issue of whether Fed. R. Civ. P. 12(b)(1) and 12(b)(6) governs the consideration of a motion to compel arbitration. Although the court ultimately determines that it need not resolve the issue of which rule to apply, the footnote lays out the implications of that choice, focusing on the materials which the court may consider in resolving the motion.  This procedural issue has been raised in a number of cases recently, although few, if any, have found it to be outcome determinative.[1]

Arbitrability of waiver

In Rost v. Liberty Coca-Cola Beverages, LLC, 2021 U.S. Dist. LEXIS 158864 (S.D.N.Y. August 23, 2021), the court considers whether it or the arbitrator determines if the defendant waived arbitration by failing to follow the stepped dispute resolution procedure provided in Liberty’s employment procedures.  Judge Briccetti holds that the court’s role is limited to determining whether the parties entered into an agreement to arbitrate their disputes. The existence of a waiver, however, is a decision for the arbitral tribunal. He distinguishes this case, in which waiver allegedly arises from the defendant’s failure to satisfy “conditions precedent to arbitration,” from those cases in which the employer refuses to participate at all in the arbitration.  In the latter cases, he holds,  the court, not the arbitrator, determines whether arbitration must go forward.

Hopefully the courts give us some good material over the next couple days.  In any event, see you Friday.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com

[1] A number of cases also throw Rule 56(b)’s summary judgment standard into the mix.