In Companion Property and Casualty Insurance Company v Allied Provident Insurance, Inc. (2014 U.S. Dist. LEXIS 136473), District Judge Nathan in the Southern District of New York (SDNY) confirmed an interim arbitration award ordering payment of security for certain contractual amounts. The judgment usefully summarizes the court’s power to review, confirm or vacate interim arbitration awards, and its power to order arbitrator replacements when one arbitrator is unable to discharge his duties due to illness.
The decision also raises important arbitration agreement drafting points, and exhibits the robust approach of New York courts in upholding the integrity of the arbitral process.
Companion Property and Casualty Insurance (“Companion“) is an insurance company based in South Carolina. Companion entered into a Reinsurance Agreement with Allied Provident Insurance (“Allied“) based in Barbados, under which Companion transferred the insurance risk of certain policies, together with a portion of the premium, to Allied. Insurance regulations require the policy-issuing company (i.e. Companion) to pay for any losses the off-shore reinsurer fails to cover. Having also given away most of the premium, the insurance company must mitigate its risk by obtaining collateral from the reinsurer. The Reinsurance Agreement required Allied to maintain a collateral reinsurance trust for this purpose.
Companion commenced New York-seated arbitration proceedings against Allied when Allied failed to pay amounts due under the Reinsurance Agreement. In August 2013, Companion applied to the three member arbitral tribunal for an interim order for payment of security for (i) amounts owed and (ii) amounts required to replenish the collateral reinsurance trust. In October 2013, the tribunal issued an interim award granting Companion’s application and ordered Allied to pay security within 15 business days. Allied ignored the interim award. Companion applied to the US District Court for SDNY to have the award confirmed under Section 9 of the Federal Arbitration Act (“FAA“). Allied deployed a multi-pronged defense – moving to vacate the interim award under FAA Section 10 or stay the interim award, disqualify the arbitral panel, appoint a new panel, or stay the arbitration proceedings. The Court upheld the award in favour of Companion and dismissed each of Allied’s motions.
Key decisions of the court
- The Court has the power to confirm an Interim Award to ensure the integrity of the arbitral process
District Judge Nathan reiterated the principle that while courts generally do not have the power to review an interlocutory ruling by an arbitration panel (for the policy reason that most of the advantages inherent in arbitration are dissipated by interlocutory appeals), an exception is necessary in relation to interim security awards when “confirmation is necessary to ensure the integrity of arbitration.” In a situation where Allied had simply ignored the tribunal’s ruling, Companion had no choice but to petition the court for confirmation of the award against the recalcitrant respondent.
- The Court will enforce an award as long as “there is a barely colorable justification” for the arbitrators’ decision
The judge repeated two key principles: (1) “[t]he scope of the district court’s review of an arbitral award is limited” (Banco de Seguros, 344 F.3d at 260) and (2) “[T]he burden of proof necessary to avoid confirmation of an arbitration award is very high, and a district court will enforce the award as long as ‘there is a barely colorable justification for the outcome reached” (Kolel Beth Yechiel Mechil of Tarikov, Inc. v YLL Irrevocable Trust, 729 F.3d 99, 103-04 (2d Cir. 2013) (citing Rich v. Spartis, 516 F.3d 75, 81 (2d Cir. 2008)).
While the tribunal had not provided written reasons for its decision in the interim award, the court noted that this was not necessary; the “colorable justification” or grounds of the panel’s decision could be “inferred from the case” (British Ins. Co., 93 F. Supp. 2d at 514-15) and the parties’ papers, namely, the interim award was necessary to “assure that funds are available and collectible in the event of a final award in favor of Companion“.
- Allied failed to meet the high burden of proof required to vacate the award
As stated by Judge Nathan, “[a] party moving to vacate an arbitration award has the burden of proof, and the showing required to avoid confirmation is very high.” (D.H. Blair & Co., 462 F.3d 95 at 110). Allied sought to vacate the award on three of the four grounds provided under Section 10 of the FAA. We set out two of them below:
- Allegation of arbitrator misconduct – FAA s10(a)(3)
Allied’s allegations of arbitrator misconduct stemmed from the illness of Allied’s appointed arbitrator, Mr. Carroll, who was diagnosed with a brain tumour. Allied alleged that the other two arbitrators had actively obstructed Mr. Carroll’s participation and that he had not been involved in determining the interim award, making the proceedings fundamentally unfair. The evidence, however, proved the opposite.
- Allegation of arbitrators exceeding their powers – FAA s10(a)(4)
Allied alleged that the tribunal’s failure to issue the interim award without a hearing was an abuse of power. The judge dismissed this motion citing the long line of New York precedent that while arbitrators must give each party an adequate opportunity to present its evidence and argument, “the lack of oral hearings does not amount to the denial of fundamental fairness required to warrant vacating the award” (British Ins. Co., 93 F. Supp. 2d at 517). Furthermore, Allied had not argued that it had been denied an adequate opportunity to put its case, and had never requested a hearing in the first place.
- The Marine Products rule applies to death of an arbitrator, not resignation due to illness
Mr. Carroll resigned from the panel due to ill health. Allied moved to dismiss the panel in its entirety on the basis of an extension of the rule in Marine Products Export Corp. v M.T. Globe Galaxy (977 F. 2d 66 (2d Cir. 1992)) – namely “a new panel should be convened if a vacancy arises due to the death of an arbitrator prior to issuing a final award“. This was dismissed on the basis of Second Circuit authority that the Marine Products rule “does not apply to a vacancy occasioned by a resignation“, regardless of the reason for the resignation.
Conclusion and Drafting Points
This case provides a useful account of the New York courts’ supportive approach to arbitration generally, and in particular to their treatment of interim award enforcement. It is also a reminder that the burden of proof required to vacate an award is high, that arbitrators need not conduct an oral hearing before making their decisions, and that resignation of an arbitrator due to ill health will not warrant the entire reconstitution of an arbitral panel.
A drafting point arises from a footnote in the judgment in relation to enforceability of interim awards. Allied argued that the parties’ arbitration agreement itself barred judicial confirmation of interim awards based on the wording: “judgment may be entered upon the final decision of the arbitrators in any court having jurisdiction.” The Court decided that the wording was ambiguous and could not be interpreted as a prohibition on judicial confirmation of an interim award. To avoid such ambiguity parties should include wording to expressly permit judicial confirmation of interim awards in their arbitration agreements.
A further drafting point arose in relation to Allied’s argument that the arbitration agreement itself required a hearing before the panel could render a decision, based on the following wording: “The Arbitrators…shall issue their decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence, but in which cross examination and rebuttal shall be allowed.” The court did not rule on the effect of this wording, pointing out that Allied had foregone this alleged procedural protection at the time and could not later complain to a court on the same basis. While Allied’s argument failed, it would be worth avoiding such prescriptive wording as a less robust court might regard such wording as requiring a hearing before the arbitrators issue interim decisions.