A recent decision of the Third Circuit Court of Appeals, Ario, Insurance Commissioner of the Commonwealth of Pennsylvania, in his official capacity as the statutory liquidator of Legion Insurance Company (in liquidation) v. The Underwriting Members of Syndicate 53 at Lloyd’s for the 1998 Year of Account, No. 09-1921, 09-2989 and 09-2991 (3d Cir. 2010), involved a dispute between the Liquidator of Legion and Villanova, as cedents, and The Underwriting Members of Syndicate 53 at Lloyd’s for the 1998 Year of Account, as reinsurers, which concerned whether the cedents had properly underwrote the business described in the reinsurance placement materials.

The Liquidator demanded arbitration in 2006 and a panel ultimately issued an award rescinding three of the four treaties. The Liquidator filed a lawsuit in state court to confirm the award in part and vacate in part, which the reinsurers removed to the District Court for the Eastern District of Pennsylvania pursuant to the removal provision in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”), 9 U.S.C. § 205, as implemented by the Federal Arbitration Act (the “FAA”). The reinsurers then filed a motion to confirm the award in the District Court.

The Liquidator moved to remand the case to state court, based on the argument that the parties had selected the Pennsylvania Uniform Arbitration Act (the “PUAA”) to govern the arbitration and therefore had opted out of the procedures set forth in the FAA and the Convention. The District Court denied the motion, concluding that it had jurisdiction over the case because the arbitration award clearly fell under the Convention. The District Court also denied the Liquidator's motion to vacate the award under the standards enumerated in the FAA, rejecting the Liquidator's argument that the vacatur standards of the PUAA applied.

On appeal, the Liquidator again argued that the parties had opted out of the FAA’s procedures and, even if the FAA applied, the arbitration provisions in the reinsurance treaties at issue included a clear and unequivocal expression of intent to opt out of the removal provision of the Convention. The treaties provided, in relevant part, that “any dispute or difference between the Reinsured and the Reinsurers relating to the interpretation or performance of this Agreement…or any transaction under this Agreement…shall be submitted to binding arbitration…in accordance with the rules and procedures established by the [PUAA].” The court disagreed with the Liquidator’s argument, finding that, although the FAA allows parties to choose state law arbitration standards, they cannot “opt out” of the Convention entirely. Further, the court stated that although parties may specifically waive the right of removal under the Convention, the arbitration provisions in the treaties did not clearly and unambiguously contain such language.

The court also held that the arbitration provisions on which the Liquidator relied addressed solely the “rules and procedures” applicable to the conduct of the arbitration, and not the applicable standard for the review of the panel's award. While the court noted that there was a plausible argument that the parties may have agreed to apply PUAA standards to the enforcement of any award, the arbitration clauses did not evidence a “clear intent” to apply the PUAA vacatur standards in favor of the FAA. Applying the FAA vacatur standards, rather than those set forth in the PUAA, the Third Circuit affirmed the District Court's decision.

Click here to review a copy of the court’s decision.