A recent decision handed down by a Pennsylvania federal court provides an important reminder that, in certain circumstances, courts are neither willing — nor able — to rescue parties from procedural morasses created by their own gamesmanship. In Argonaut Insurance Co. v. Century Indemnity Co., C.A. No. 05-5355, 2007 WL 2668889 (E.D. Pa. Sept. 6, 2007), the Court declined to resolve the parties’ dispute regarding which arbitration panel was the proper forum to address the issue of consolidation of arbitrations, finding that the question was one of “arbitral procedure” that was not within the Court’s power to address. Id. at *1.
As noted by the Court, the parties had “created a rather tangled web of arbitration demands, leading to multiple incomplete arbitration panels.” Id. Century had issued three separate arbitration demands to Argonaut, each seeking recovery of amounts allegedly due in connection with one specific underlying claim. Argonaut responded to each of the arbitration demands by appointing its party-appointed arbitrator and demanding that Century appoint its arbitrator within thirty days as required by the parties’ agreements. Several weeks later, Century issued a fourth arbitration demand covering a variety of contracts and claims, including, significantly, the three specific claims which were the subject of the three prior demands. Argonaut responded to the fourth arbitration demand by objecting to the putative consolidation of separate disputes, but nevertheless named an arbitrator for “each of the [separate] arbitrations encompassed within” the fourth demand. Id. at *2. Significantly, Argonaut also “exercised its right to appoint a second arbitrator for each of the first three arbitration proceedings, inasmuch as Century had not timely exercised its right to choose its own arbitrator for those proceedings.” Id. In response, Century took the position that the fourth demand had “superceded” the three prior demands and, “to avoid confusion,” formally withdrew those prior demands. Id.
The parties then turned to the Court “to unravel this thicket”, id. at *3, over which they had “labored mightily.” Id. Argonaut filed a petition to compel Century to proceed in three separate arbitrations, and Century filed a cross-petition to compel Argonaut to proceed in a single consolidated arbitration that encompassed the three initial claims as well as sixteen other claims that were included in Century’s fourth, omnibus, arbitration demand. Both parties agreed that resolution of the choice between separate or consolidated proceedings is an issue of arbitral procedure that “must be made within the arbitration realm.” Id. at *1. The Court pointedly observed that the parties had refused to “undertake any businesslike handling of their disputes”, id., until the Court decided the “narrow issue [of] which of the partially formed three-member arbitration panels is the appropriate body to determine the issue of consolidation.” Id.
Significantly, both Argonaut and Century advocated a “first in time” rule, meaning that the first panel that was “completely” formed would be the panel with the power to decide the consolidation issue. The parties, of course, disagreed as to which panel was first formed. Argonaut understandably took the position that one of the first arbitration panels — for which it selected both its and Century’s arbitrator — was first in time, while Century asserted that the panel formed as a result of its fourth arbitration demand was the first (and only) panel to be formed inasmuch as its initial three demands had been “superceded” and “withdrawn.”
The Court ultimately concluded that, like the issue of consolidation itself, “the issue of whether Century’s consolidated demand superceded its previous demands, or whether Century had effectively withdrawn its earlier demands, was a matter of arbitral procedure for the arbitrator, and not [one of the narrow “gateway” questions] of arbitrability for the Court.” Id. at *5 (emphasis in original).
The question of whether the parties have consented in the first instance to arbitration, at all, and specifically, whether they have consented to arbitrate a particular substantive matter, are examples of the “narrow circumstances” that present “gateway” questions of arbitrability for the Court. . . . [H]ere, neither Argonaut nor Century disputes the validity of the pertinent arbitration clause (or clauses, as the case may be), nor do they dispute whether the particular insurance claims submitted to arbitration are properly brought before an arbitration panel for resolution. Instead, they dispute whether and which of the panels has or have been fully formed, a question that would require the Court to determine whether or not Century effectively withdrew its first three arbitration demands, or whether the fourth demand superceded the prior demands. The question of whether withdrawal is permitted, at what point, and in what manner, is a question of procedure arising out of the process of arbitration and not a question of arbitrability.
Id. (emphasis in original; citation omitted). The Court bemoaned the fact that “the parties [had] resolved to use this forum to put an end to their gamesmanship,” but acknowledged that it was “somewhat hamstrung as to the result that must ensue,” id. at *6, noting that “[a]n order to compel arbitration is warranted, the Court having been presented with undisputed evidence that the dispute among the parties is arbitrable,” id., and that the Court “lacks authority to dismiss (or stay) an arbitration unless it is for the reason that a dispute is not arbitrable.” Id. Although recognizing that “‘principles of efficiency strongly favor a single arbitration panel’s determination of whether consolidation of the reinsurance claims is appropriate,’” id. (citations omitted), the Court concluded that, due to the “combination of statutory directives and case law together with the parties’ contractual agreement,” it was left with only the “distinctly inefficient conclusion” that “all four arbitration panels must proceed.” Id. The Court thus issued an order denying the petitions filed by Argonaut and Century, and ordering that “[t]he four arbitration proceedings commenced by the parties shall proceed, including the arbitration panels’ consideration and resolution of the issues as to whether the fourth demand for arbitration operated to end, consolidate or otherwise subsume the preceding three demands for arbitration.” Id.
Taking a parting, and somewhat sarcastic, shot at the parties, the Court noted that, “unless these two sophisticated business litigants can sensibly jointly design a procedural roadmap, the panels will have to agree on a reasonable solution as to which panel must decide the issues.” Id.
This case stands as a reminder to cedents and reinsurers to carefully evaluate and document their intentions regarding consolidation — as well as all other significant subjects — at the time of contracting, to carefully adhere to the procedural requirements set forth in their agreements, and to carefully consider the consequences of their arbitration strategy (or gamesmanship) if a dispute develops. Those who do not may likely find themselves stuck in a morass of their own doing from which extrication will be difficult and expensive.