When a reinsurance arbitration is conducted under non-neutral rules or practices, when and how ex parte communications are allowed to take place between a party’s counsel and a party’s party-appointed arbitrator are important items to resolve at the organizational meeting. A typical, but not universal, formulation is to cut-off ex parte communications when the first pre-hearing briefs are filed. Ex parte communications typically are allowed to resume when the final award is issued. When there are motions made, typically ex parte communications cease when the first motion brief or request for a ruling is filed and are not recommenced on that issue until the panel rules. So what happens if the arbitration panel issues an interim final award resolving the substantive issue in the dispute on the merits, but requires additional briefing on damages? May ex parte communications recommence after the interim final award?
This was the question addressed by the United States Court of Appeals for the Sixth Circuit, in an unpublished decision, in Star Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, Nos. 15-1403, 15-1490, 2016 U.S. App. LEXIS 15306 (6th Cir. Aug. 18, 2016) (Unpublished).
In this case, at the organizational meeting, which was then followed up by two scheduling orders, the parties agreed to cease ex parte communications after the initial pre-hearing briefs were filed. As the circuit court pointed out, nothing in the scheduling orders addressed the issue of whether or when ex parte communications could resume. After an interim final award was issued on the merits (with damages-related issues held for additional submissions), the reinsurer’s counsel and party-appointed arbitrator had, according to the court, three ex parte communications. Other issues arose also, as the court reported, concerning various interim orders and motion decisions being issued by a majority of the panel allegedly without input from the cedent’s party-appointed arbitrator, who was out of the country.
The Sixth Circuit Court of Appeals reversed the district court’s order confirming an interim final arbitration award and a final arbitration award because of the ex parte communications, which the court held were in violation of the arbitration panel’s scheduling orders on ex parte communications. The decision to vacate the awards was grounded in Michigan law, which both parties agreed applied.
In vacating the arbitration awards, the court never mentioned the Federal Arbitration Act. Under Michigan law, an arbitration award shall be vacated if there was misconduct prejudicing a party’s rights by an arbitrator. Mich. Ct. R. 3.602(J)(2)(b). Michigan case law, according the court, made it plain that the district court should have vacated the awards because the ex parte contacts clearly violated the parties’ scheduling orders. The case law as described by the court indicates that ex parte contact is not a categorical ground to vacate an arbitration award, but ex parte communications do void an award if the communications violate the parties’ arbitration agreement.
The circuit court rejected the reinsurer’s argument, supported by the panel majority, that in the reinsurance industry it is recognized that ex parte communications may recommence after the panel issues a dispositive ruling. In doing so, the court pointed to Rule 15.5 of the ARIAS•U.S. U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes, which provides that ex parte communications cannot recommence until the panel issues its final award (“The prohibition on ex parte communications shall remain in effect until the Panel issues its final award.”). The court also held that the prejudicial effect of the communications was irrelevant because the communications violated the scheduling orders and required that the court vacate the awards.
Two interesting issues arise from this decision. First, state arbitration law may provide the basis to seek vacatur of an arbitration award that differs from the Federal Arbitration Act. The Michigan rule, and the case law interpreting it, is not coextensive with the limited bases to vacate an award under the Federal Arbitration Act.
Second, the scheduling orders did not address when ex parte communications may resume. If the scheduling orders had addressed resumption of ex parte communications this dispute may not have arisen.
Finally, using the ARIAS•U.S. Neutral Panel Rules eliminates this issue altogether.