National Union Fire Insurance Company of Pittsburgh, PA entered into a reinsurance treaty with Odyssey America Reinsurance Corporation, which contained an arbitration clause. After a dispute arose between the parties and was submitted to arbitration, a panel issued a ruling in Odyssey’s favor. The panel further ordered National Union to reimburse Odyssey for its legal fees and costs expended during the arbitration. National Union then moved in the U.S. District Court for the Southern District of New York to vacate the portion of the panel’s award requiring it to pay attorneys’ fees.

The court denied National Union’s motion on several bases. First, the court found that because the treaty did not contain a provision stipulating that each party was to bear the expenses of its outside counsel, the arbitrators did not exceed their powers under Section 10 of the Federal Arbitration Act in ordering National Union to pay Odyssey’s attorneys’ fees. On the contrary, the court held that the panel’s award “drew its essence” from the broad language of the arbitration clause in the treaty, which provided that “all disputes or differences” arising out of the interpretation of the treaty were subject to arbitration.

Next, the court rejected National Union’s argument that the panel’s award of attorneys’ fees was prohibited by New York law, finding that an award of such fees was compensatory in nature. Thus, even assuming that National Union was correct in arguing that New York law governed the dispute, an issue not addressed by the decision, the court found that this prong of the panel’s order did not constitute an impermissible award of punitive damages that violated New York law.

Last, the court ruled that the panel’s award of attorneys’ fees was not in manifest disregard of the law, because such an award was not precluded by New York law (again, even assuming it applied) or the language of the treaty.

Click here to review a copy of the court’s decision, captioned National Union Fire Insurance Company of Pittsburgh, PA v. Odyssey America Reinsurance Corp., No. 05-cv-7539 (2009).