SUMMARY: In Employers Insurance Company of Wausau v. Arrowood Indemnity Company, No. 12-cv-08005-LLS (S.D.N.Y. Oct. 25, 2013), a consolidated dispute between a cedent and three of its reinsurers over the reinsurers’ obligations to reimburse the cedent for claims, the U.S. District Court for the Southern District of New York refused the cedent’s request that the court order the selection of an umpire in a manner not provided for by the reinsurance agreements. Instead, the court determined that the agreements should be enforced, and that the arbitrators already appointed must select an umpire in accordance with the terms of the agreements.
Arrowood Indemnity Company ceded various claims to its reinsurers, Employers Insurance Company of Wausau, Nationwide Mutual Insurance Company, and National Casualty Company (“Reinsurers”) under separate reinsurance agreements. When the Reinsurers failed to pay Arrowood’s claims, Arrowood initiated arbitration. The agreements provided that the party arbitrators would select the umpire. Following the parties’ selection of arbitrators, the parties arrived at an impasse over appointment of an umpire in each dispute. The Reinsurers petitioned the federal court in the Western District of Wisconsin to enforce the agreements by ordering compliance with the agreements’ mechanism for selection of umpires.
Arrowood responded that not all of the agreements contained the same umpire selection mechanism. Because the parties were not able to agree on an umpire, Arrowood argued the court should choose an arbitrator from a list of three it had submitted. See Employers Ins.Co. of Wausau v. Arrowood Indem. Co., 2012 U.S. Dist. LEXIS 154140 (W.D. Wisc. Oct. 26, 2012). Arrowood further argued that the case should be dismissed for improper venue citing the forum selection clause in each agreement that provided: “arbitration shall take place in New York, New York unless some other place is mutually agreed upon.” The Reinsurers argued that the forum selection clauses were permissive rather than mandatory and therefore did not preclude the case from proceeding outside New York.
The Wisconsin federal court disagreed with the Reinsurers’ argument that the action should remain in Wisconsin. The court ruled that the forum selection clauses were mandatory, requiring the dispute to be heard in New York. The court agreed that under the Federal Arbitration Act, 9 U.S.C. § 4, the forum selection clause must be enforced in the context of a petition to compel arbitration, which was to be heard by the court in the forum selected by the parties through the agreements’ forum selection clause.
Arrowood also argued that its underlying case for breach of the agreements should not be transferred because it was attempting to enforce the agreements under § 5 of the FAA which does not contain the same venue limitations as does § 4. The court disagreed that some claims could be selected by Arrowood for transfer of venue while others would be decided separately. Accordingly, the court transferred the entire case to the Southern District of New York to consider the umpire selection process as well as Arrowood’s underlying claims.
The Southern District of New York considered whether the mechanism for selection of an umpire in the agreements should be enforced or whether the court should apply a different selection approach. Although the reinsurance agreements specified a procedure whereby the appointed arbitrators would select a neutral umpire, Arrowood instead proposed an alternative approach, claiming the method stipulated in the agreements would not lead to appointment of an agreed upon umpire. Arrowood suggested the parties instead each nominate up to eight candidates from which the umpire would be selected after a voir dire style objection process.
However, the Court, acting under authority granted by Section 5 of the Federal Arbitration Act, denied that alternative, ordering that the present arbitrators select an umpire in accordance with the agreements’ requirements. Though the court simply entered a two page order without a written opinion, we note that its decision is consistent with the decision of the Northern District of California in Granite State Insurance Co. v. Clearwater Insurance Co., No. C 13-2924 SI, 2013 WL 4482948 (N.D. Cal. Aug. 19, 2013) where, faced with a similar stalemate over arbitrator selection, the court ruled the parties must follow the arbitrator selection process provided by the agreements. Citing to Sections 4 and 5 of the FAA, the district court there held that these sections limit the court’s authority to require the parties to arbitrate as agreed or to appoint arbitrators under certain conditions. It also noted that a court may appoint an umpire only where the circumstances render it impossible to follow the parties’ arbitration clause dictating the method of selecting an umpire. The ruling by the Southern District of New York in Arrowood supports these propositions.
IMPORT OF DECISION: While the FAA empowers courts to appoint arbitrators or umpires if the selection method in the parties’ agreement fails, the FAA also clearly says courts are to enforce an agreement’s appointment provisions. This decision underscores the point that courts will require parties to follow the approach set out in their contract, even if it may not be ideally tailored to a particular situation.