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How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice? | Loree Reinsurance and Arbitration Law Forum

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« United States Supreme CourtVacates Judgment in AmericanExpress Merchants’ Litigation

How Will Stolt-Nielsen, S.A. v.Animalfeeds Int’l Corp. Change

Reinsurance Arbitration Practice?»

May 25th, 2010Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators,Awards, Class Action Arbitration, Class Action Waivers, Consolidation ofArbitration Proceedings, Grounds for Vacatur, Practice and Procedure,Reinsurance Arbitration, United States Court of Appeals for the Second Circuit,United States Supreme Court6 Comments » By Philip J. Loree Jr.

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. ChangeReinsurance Arbitration Practice?

Part I

A. Introduction

Shortly before the United States Supreme Court decided Stolt-Nielsen, S.A.v. AnimalFeeds Int’l Corp., ___ U.S. ___, slip op. (April 27, 2010), we wrote

about the implications the case might have on reinsurance arbitration

practice. (See our post here.) But since then, you have not heard much

from us, other than our brief report (here) about the Supreme Court

vacating and remanding to the United States Court of Appeals for the

Second Circuit the American Express Merchants’ Litigation judgment for

further consideration in light of Stolt-Nielsen. One — but by no means

the only — reason is that after Stolt-Nielsen was decided, we wrote a

comprehensive article on it, which will be published in a subscription-only

publication in June.

But that article – while comprehensive in scope – is directed at folks

interested in the Federal Arbitration Act in general, not necessarily those

interested in reinsurance arbitration in particular. And that’s what we want

to cover in this multi-part series: Stolt-Nielsen’s implications on

reinsurance arbitration practice.

Stolt-Nielsen affects reinsurance arbitration in two very important ways.

First, it has set a fairly liberal standard of review that now applies to

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commercial arbitration awards in cases where a party asserts that the

arbitrators exceeded their powers under Federal Arbitration Act Section

10(a)(4) because of the award’s outcome. That, as we shall see, has all

sorts of implications for persons involved in reinsurance arbitrations.

Second, it has changed the rules applicable to consolidated-reinsurance-

arbitration practice – or at least it requires a wholesale reevaluation of

those rules. That, too, has a number of important implications for

reinsurance-arbitration practice.

This Part I of the series explains why the standard for challenging an award

based on its outcome is important in reinsurance arbitration practice. And,

after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards

of review, it explains how Stolt-Nielsen has established for the lower courts

a fairly searching standard of review. Part II (here) will delve into what the

implications of that standard of review will likely be.

Part III (here) will provide the background necessary to understand how

Stolt-Nielsen affects the law applicable to consolidated reinsurance

arbitration. Part IV (here) will delve into the details of how Stolt-Nielsenchanges – or at least requires reconsideration of – the legal status quo in

this area. And Part V will discuss the implications of all of this.

We do not set out to discuss the background of Stolt-Nielsen in any detail

or to provide a play-by-play of how the Court decided the case. If you are

a regular reader you probably already know the background in detail, and

our upcoming article does a pretty good job of mapping out the Court’s

reasoning. Instead, we focus our attention on the aspects of the decision

that are relevant to the two key subjects of discussion.

But before we delve into what Stolt-Nielsen has to say about the standard

of review, we pause briefly to address why the standard of review

applicable to an outcome-based challenge is so important in reinsurance

and other forms of commercial arbitration.

B. Why is the Outcome-Based Standard of Review under Section 10(a)(4)

Important to Reinsurance Arbitration Practice?

Those involved in, or who have responsibility for, reinsurance arbitrations

have good reason to be concerned about the extent to which a Court can

vacate an award based on its outcome. For the standard of review is not

merely legal “mumbo jumbo,” but delineates the degree of discretion that a

judge has to vacate an arbitration award. That degree of discretion

effectively acts as a check on arbitral power and determines how final a

final arbitration award really is.

Reinsurance arbitrators should be (and usually are) interested in the

standard of review because it bears on how much discretion they have to

decide a case in a particular manner. Since arbitrators have institutional,

reputational and economic interests in ensuring that their awards will be

confirmed, they need to know how much discretion a judge has to second-

guess their decisions.

Parties likewise have good reason to be concerned about the standard of

review. The end product of arbitration will (or, at least, should) determine

their rights and obligations, making one or both parties winners or losers.

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Winners want that determination to be final; losers do not – and the scope

of the standard of review determines (however loosely) the odds that the

loser might get another bite at the proverbial apple.

Parties also have institutional interests in the standard of review because it

factors into the risk-benefit calculus that informs their decision whether to

arbitrate in the first place. The less discretion a judge has to vacate an

award, the greater the risk that a party who agrees to arbitrate might be

saddled with an arbitration award that bears little or no resemblance to

what one would expect given the clear and unambiguous language of the

contract and applicable law, custom and practice. The more discretion a

judge has to overturn an award, the more likely it is that arbitration will be

followed by litigation, thereby increasing costs.

The risk of high expense is inversely proportional to the risk of a wacky but

unreviewable outcome. If reinsurers and cedents are going to make

informed choices about arbitration, they need to know where along the

continuum of standard-of-review choices the law has attempted to strike

the balance between these risks.

Attorney interests are aligned with those of their clients. But to advance

their client’s interests attorneys need to know the contours of the standard

of review so that they can tailor strategy to maximize the chances that the

client will reap whatever benefits the standard of review may have to offer.

For example, if the standard of review provides the court with some

discretion to vacate an award that conflicts with the clear and unambiguous

terms of the reinsurance contract, and those terms support the client’s

position, then the attorney must not only forcefully argue those terms are

controlling, but also make clear (diplomatically, of course) that an award

inconsistent with those terms will likely be vacated.

C. The Legal Landscape: The Section 10(a)(4) Standard of Review Prior to

Stolt-Nielsen

To better understand how Stolt-Nielsen changed the standard of review

applicable to outcome challenges, it is helpful to review briefly the

somewhat confused, pre-Stolt-Nielsen law on outcome-based standards of

review.

Section 10(a)(4) of the Federal Arbitration Act authorizes courts to vacate

an arbitration award “where the arbitrators exceeded their powers, or so

imperfectly executed them that a mutual, final, and definite award upon

the subject matter submitted was not made.” Prior to Hall Street Assoc. v.Mattel, Inc., 552 U.S. ___ (2008), courts interpreted Section 10(a)(4) in at

least two different ways. Some courts interpreted Section 10(a)(4) as

limited to challenges based on whether the matter decided fell within the

scope of the parties’ arbitration agreement or submission. That begged

the question whether, and, if so, to what extent, the outcome of a

commercial arbitration award on an issue within the parties’ submission

was subject to any review at all.

The Supreme Court had provided only indirect guidance on the subject.

The Steel Workers’ Trilogy cases, and their progeny, had ruled that, in

labor arbitration cases governed by Section 301 of the Labor Management

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Relations Act (“LMRA”), the outcome of an award was subject to review to

determine whether it drew “its essence from” the parties’ agreement, and

was not based on the arbitrators’ “own notions of industrial justice.” UnitedPaperworkers Int’l Union v. Misco, 484 U.S. 29, 38 (1987); UnitedSteelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960).

And, as respects commercial arbitration awards, the Court suggested in

dicta in Wilko v. Swan, 346 U.S. 427 (1953), overruled on other grounds,

Rodriguez De Quijas v. Shearson/American Express, Inc., 490 U.S. 477

(1989), that an award could be vacated if it was in “manifest disregard of

the law.” This dicta was referred to with approval in First Options ofChicago v. Kaplan, 514 U.S. 938, 942 (1995).

Based on this somewhat obscure guidance, a number of courts that had

interpreted Section 10(a)(4) of the Federal Arbitration Act as limited to

challenges to arbitral authority developed independent grounds to review

the outcomes of awards, whether for “manifest disregard of the law,” or

failure of the award to draw its essence from the parties’ agreement, a

standard that we shall refer to as “manifest disregard of the agreement.”

Some courts adopted both standards, some only one.

But some other courts held that one or both of these “manifest disregard”

standards were impliedly incorporated within Section 10(a)(4) and that

vacatur under Section 10(a)(4) was not limited to situations where

arbitrators ruled on an issue that was outside the scope of their authority.

These courts held that arbitrators exceeded their powers by manifestly

disregarding the law, the agreement or both.

Whether or not a court adopted one or both standards of review, and

whether or not they deemed those standards of review to be within or

without Section 10(a)(4), courts often articulated the standards of review

differently, and applied them with varying degrees of strictness or laxity.

But for the most part, all courts were reluctant to grant relief based on

them save in fairly unusual circumstances.

In 2008 the Court decided Hall Street, which held that the Section 10 of the

Federal Arbitration Act stated the exclusive grounds available to challenge a

commercial arbitration award. In dicta the Court discussed whether

“manifest disregard of the law” might be encompassed within Section

10(a)(4), but did not decide whether that was so.

Courts that had ruled that “manifest disregard of the law,” “manifest

disregard of the agreement,” or both, were independent grounds for

vacatur were forced to reconsider whether those standards were, in fact,

independent, or whether they were subsumed within Section 10(a)(4). This

led to some conflicting authority, with some courts holding that one or

both of those standards were subsumed within Section 10(a)(4) and others

concluding that one or both of these outcome-based standards of review

did not survive Hall Street .

D. What did Stolt-Nielsen Have to Say About the Outcome-BasedStandard of Review?

On June 15, 2009 the Supreme Court granted certiorari in Stolt-Nielsen toconsider “[w]hether imposing class arbitration on parties whose arbitration

clauses are silent on that issue is consistent with the Federal Arbitration

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Act, 9 U.S.C. §§ 1 et seq.” As readers will recall, the parties had submitted

to an arbitration panel the question whether the arbitration clauses

contained in a series of charter-party agreements permitted or precluded

class arbitration. The Second Circuit held that the arbitration panel had

not manifestly disregarded the law by imposing class arbitration on the

parties even though their arbitration agreements were concededly silent on

that score.

On April 27, 2010, in a 5-3 decision authored by Associate Justice Samuel

A. Alito, Jr., and joined in by Chief Justice John G. Roberts Jr. and Associate

Justices Antonin Scalia, Anthony M. Kennedy and Clarence Thomas, the

Court held that: (a) the arbitration panel exceeded its powers under FAA

Section 10(a)(4) by imposing class arbitration on the parties, because the

panel’s decision was based solely on the arbitrators’ own notions of public

policy rather than on the FAA, federal maritime, or New York State law; and

(b) it was inconsistent with the FAA to impose class arbitration on the

parties because it was undisputed that the parties had never consented to

class arbitration, and implying such an agreement in the circumstances

would drastically alter the nature of the parties’ agreement to arbitrate on a

bilateral basis.

Although the Court could probably have decided the matter as one of

arbitrability – the Stolt-Nielsen parties appeared to have reserved their

rights to de novo review of the question whether the arbitrators had the

power to render a binding decision on whether class arbitration was

permitted in the face of silence – the Court initially addressed the question

from the standpoint whether the award should be vacated based on the

outcome. And that determination required the Court to state the

applicable standard of review for an outcome-based challenge to a

commercial arbitration award.

The Court imported into the commercial context the labor-arbitration

“manifest disregard of the agreement,” standard and found that it was

subsumed within Section 10(a)(4). It said that it was not deciding whether

the “manifest disregard of the law” standard survived Hall Street (i.e.,

whether it was also part and parcel of Section 10(a)(4)), but declared that if

it did, then it was satisfied here.

Borrowing from the Steelworkers’ Trilogy line of labor arbitration cases

decided about 50 years ago, and more recent labor-arbitration cases, the

Court declared, “’It is only when [an] arbitrator strays from interpretation

and application of the agreement and effectively ‘dispense[s] his own brand

of industrial justice’ that his decision may be unenforceable.” Slip op. at 7

(quoting Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509

(2001) (per curiam)(quoting Enterprise Wheel & Car Corp., 363 U.S. at 597

(1960))).

“In that situation,” said the Court, “an arbitration decision may be vacated

under § 10(a)(4) of the FAA on the ground that the arbitrator ‘exceeded

[his] powers,’ for the task of an arbitrator is to interpret and enforce a

contract, not to make public policy.” Applying that standard to the facts,

the Court “conclude[d] that what the arbitration panel did was simply to

impose its own view of sound policy regarding class arbitration.” Slip op.

at 7.



The Court explained that AnimalFeeds had made three arguments, one of

which was that “the clause should be construed to permit class arbitration

as a matter of public policy.” Slip op. at 8 (quotation omitted). Of the

remaining two arguments, the panel had rejected one and said nothing

about the other. This led the Court to conclude that the arbitrators had

accepted AnimalFeeds’ invitation to base its decision on public policy

grounds.

The Court found further evidence that the panel based its decision on

public policy in that the panel looked to previous arbitral decisions by other

panels that had addressed the question and: (a) “[p]erceiv[ed] . . .

consensus among arbitrators that class arbitration is beneficial in ‘a wide

variety of settings;’” and (b) considered “only whether there was any good

reason not to follow that consensus . . . .” Slip op. at 9 (quotations

omitted).

The Court also found it relevant that the panel was not persuaded by Stolt-

Nielsen’s unrebutted expert testimony — including testimony that there

had never been a class arbitration under the form of charter party

agreement used — or by pre-Green Tree Financial Corp. v. Bazzle, 539 U.S.

444 (2003) decisions holding that courts could not compel class or

consolidated arbitration where the parties’ agreements were silent on that

score. Slip op. at 9; see, e.g., Glencore Ltd. v. Schnitzer Steel Products,

189 F.2d 264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68

(2d Cir. 1993); and Champ v. Siegal Trading Co., 55 F.3d 269 (7th Cir.

1995).

The Court said that because the parties had stipulated that they had

reached no agreement on class arbitration, the arbitrators should have

inquired whether the FAA, maritime law, or New York Law contained a

“default rule” that applied. But instead, “the panel proceeded as if it had

the authority of a common-law court to develop what it viewed as the best

rule to be applied in such a situation.”

The Court was not persuaded by the “references to intent” in the panel

decision, including a reference to the parties’ broad arbitration clause. The

Court pointed out that the parties stipulated, and the arbitration panel

acknowledged, that the charter party agreement was silent on permitting or

precluding class arbitration, and “that the charter party was ‘not ambiguous

so as to call for parol evidence.’” Slip op. at 11 (quoting panel decision).

The stipulation “left no room for an inquiry regarding the parties’ intent,

and any inquiry into that settled question would have been outside the

panel’s assigned task.” Slip op. at 11.

The implications of the Court’s ruling on the standard of review are many,

and shall be discussed in Part II (here).

Editor’s Note: Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series:

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

Tags: Class Arbitration, Consolidated Arbitration, Federal Arbitration Act,


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« How Will Stolt-Nielsen, S.A. v.Animalfeeds Int’l Corp. ChangeReinsurance Arbitration Practice?

Two Upcoming and Notable ADR-Related Events of Interest »

June 1st, 2010Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Groundsfor Vacatur, United States Supreme Court, labor arbitration5 Comments » By Philip J. Loree Jr.


Part II

A. Introduction

In Part I (here) we explained why the standard for challenging an award



of review, we explained how Stolt-Nielsen has established a fairly

searching, standard of review. This Part II explores the legal and practical

implications of that standard of review.

B. Legal Implications of the Stolt-Nielsen Decision’s Manifest Disregard of

the Agreement Standard of Review

1. Courts May Interpret Stolt-Nielsen’s Outcome-Based Standard ofReview Liberally

Reinsurance- and other commercial-arbitration awards are now subject to

the same standard of review as labor-law awards – and in Stolt-Nielsen,

the Court applied that standard of review pretty liberally. The Court has

put to rest the notion that Federal Arbitration Act Section 10(a)(4) vacatur

is limited to questions concerning whether the arbitrators decided a matter

falling within the scope of the parties’ arbitration agreement or

submission. The outcome of the arbitration is now subject to at least

some, limited scrutiny.

The focus will now be on whether the arbitrators interpreted, applied and

enforced the contract, and applied applicable law or norms. Express or







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implied reliance on extra-contractual considerations, such as public policy,

may spoil an award, unless those extra-contractual considerations are

grounded in applicable law. Not heeding clear and unambiguous contract

language, effectively deleting or disregarding contractual provisions or

otherwise rewriting the contract may also subject the award to vacatur.

Interpreting a contract according to reinsurance custom and practice will

remain permissible, because doing so is usually consistent with contract

interpretation rules, and, in any event, reinsurance contracts are supposedto be interpreted in light of custom and practice. An award that relies on

custom and practice would presumably draw its essence from the

reinsurance contract, provided that the interpretation has at least a barely

colorable basis in the contract or applicable law.

Honorable engagement clauses will continue to give arbitrators a degree of

discretion to depart from the ordinary meaning of contract terms, and

permit certain looser interpretations that are based on honorable

engagement. But, as we have pointed out in a prior post (here), in

jurisdictions that have adopted outcome-based standards of review,

interpreting an honorable engagement clause as a license to rewrite a

contract would be tantamount to inviting a court to vacate the resulting

award. Now that Stolt-Nielsen has adopted a uniformly applicable,

outcome-based standard of review, that is now true in all jurisdictions.

Labor-law precedent construing the “manifest disregard of the agreement”

standard is now more relevant than before. In jurisdictions that had not

previously adopted the labor-law standard of review in the commercial

context, such precedent was often distinguishable. That is no longer

necessarily the case, and labor-law precedent interpreting the standard will

be at least persuasive authority for how the standard should be interpreted

in the commercial context.

The relevance of labor-law precedent cannot be discounted, for it confines

the role of the arbitrator to the interpretation and application of the

contract more strictly than does commercial-arbitration precedent. In part

that is because the Labor Management Relations Act says that “[f]inal

adjustment by a method agreed upon by the parties is declared to be the

desirable method for settlement of grievance disputes arising over theapplication or interpretation of an existing collective bargainingagreement.” 29 U.S.C. §173(d) (emphasis added); see, generally, Wright v.Universal Maritime Serv. Corp., 525 U.S. 70, 77-80 (1998). While the

Supreme Court had not previously suggested that the federal policy in

favor of arbitration is limited to “disputes arising over the application or

interpretation of” a commercial contract, the Supreme Court in Stolt-Nielsen nevertheless declared that:

It is only when [an] arbitrator strays from interpretation andapplication of the agreement and effectively ‘dispense[s] his own

brand of industrial justice’ that his decision may be unenforceable. In

that situation an arbitration decision may be vacated under § 10(a)(4)

of the FAA on the ground that the arbitrator ‘exceeded [his] powers,’

for the task of an arbitrator is to interpret and enforce a contract, not

to make public policy.






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Stolt-Nielsen, Slip op. at 7 (emphasis added). The language used by the

Court strongly suggests that a commercial arbitrator’s powers are co-

extensive with that of a labor arbitrator, no matter how broad the scope of

the arbitration clause.

But we believe that the standard will probably not be interpreted quite as

strictly in the commercial context. Commercial arbitration is not subject to

the LMRA, and the policy considerations relevant to labor arbitration —

including the need to maintain industrial peace, and to protect the rights of

individuals arising out of a collective bargaining agreement that is

negotiated and entered into by the union in a representative capacity only –

do not apply in commercial arbitration.

Interpreting Stolt-Nielsen too literally would lead to anomalous results. For

example in labor arbitration statutory claims are not presumed to be

arbitrable because they concern the meaning of a federal statute, not the

interpretation or application of the agreement. See Wright, 525 U.S. at

78-79. Courts therefore require clear and unmistakable of an intent to

arbitrate statutory claims. See 525 U.S. at 80-82. But in commercial

arbitration such claims are arbitrable provided the parties agree to a broad

arbitration clause, because commercial contracts are usually negotiated and

entered into in an individual or entity capacity, and the parties are thus

able to directly protect their own interests in the bargaining process. See,generally, 525 U.S. at 80-82.

So the upshot is that labor precedent will likely inform a court’s application

of the standard in the commercial context, but that the courts will not

blindly apply it when doing so would be inimical to the purposes of

commercial arbitration as expressed by commercial-arbitration precedent,

and would effectively import into commercial arbitration a special rule or

standard that serves only policy considerations relevant to labor

arbitration. But based on the standard articulated in Stolt-Nielsen, and the

way the Court applied the standard to the facts, the Court has effectively

said that the decisions of commercial arbitrators have to be based on at

least barely colorable interpretations of: (a) the contract or (b) applicable

law and norms.

2. The “Manifest Disregard of the Law” Standard May be Subsumed inWhole or in Part within the Court’s “Manifest Disregard of theAgreement” Standard

While the Court stopped short of deciding whether the “manifest disregard

of the law” standard of review survived Hall Street Associates LLC. v. MattelInc., 552 U.S. 576 (2008), the Court’s dictum–and even its holding—

strongly suggest that the standard is not only alive but thriving. The Court

criticized the arbitration panel for not “inquiring whether the FAA, maritime

law, or New York law contains a ‘default rule’ under which an arbitration

clause is construed as allowing class arbitration in the absence of express

consent . . . ,” and instead applying its own public-policy-based rule

derived from other arbitral decisions.

That alone may be read as an admonition to arbitrators to interpret and

apply the law, not their own rules, but there is more. While the Court

recognized that it could have remanded the matter to the arbitrators under














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Federal Arbitration Act Section 10(b), it did not because it concluded that

no outcome was permissible under the Federal Arbitration Act under the

facts before it other than the one it set out to articulate later in the

decision. Stolt-Nielsen, slip op. at 12.

The Court thus did not consider the arbitrators authorized to disregard —

let alone manifestly disregard — what it considered to be the applicable

rule under the Federal Arbitration Act. Whether that means the Court has

effectively endorsed vacatur for “disregard of the Federal Arbitration Act”

only, or “manifest disregard” of any applicable law, is open to question.

The opinion suggests that the court was effectively endorsing the broader,

“manifest disregard of the law” standard. The Court stated that the panel

went astray when it disregarded whatever law there was on the applicable

default rule when the parties’ contracts are silent on class arbitration, and

instead based its decision on its own notions of public policy. So however

the Court might have characterized the standard of review, it appears to

encompass at least some situations that might otherwise be characterized

as “manifest disregard of the law.” Indeed, the Court noted that vacatur

would be required in Stolt-Nielsen had the Court decided to apply a

“manifest disregard of the law” standard.

3. Stolt-Nielsen May be Construed as Making Certain Public-Policy-Related Matters Non-Arbitrable, Even Under a Broad Arbitration Clause

Stolt-Nielsen may be construed as rendering public policy-based issues

nonarbitrable, even when the parties’ arbitration clause is arguably broad

enough to encompass them. Stolt-Nielsen said that the role of arbitrators

was not to make public policy, but to interpret and apply the terms of the

parties’ contract, and ruled that the arbitrators exceeded their powers by

imposing class arbitration based on their own notions of public policy. The

Court pointed out that the arbitrators had effectively–and erroneously–

assumed the role of a common-law court in ascertaining and applying what

it perceived to be applicable public policy.

But it should follow that the arbitrators never had the authority in the first

place to decide the question whether class arbitration should be imposed

as a matter of public policy. Suppose a party asks an arbitrator to

determine whether a provision in a reinsurance contract violates state

public policy, but there is no state law on the books articulating the

applicable public policy or stating whether or not the public policy does or

does not justify enforcing a contract provision identical (or at least similar)

to the one the arbitrator has been asked to rule upon. In that circumstance

the arbitrator would have to: (a) ascertain whether there was or was not a

relevant policy; (b) determine what the policy was and whether the contract

provision was inconsistent with it; and, if the policy was inconsistent with

the contract provision, (c) determine whether the policy is sufficiently

important that it should trump a countervailing state policy of enforcing

contracts according to their terms.

It seems to us that, after Stolt-Nielsen, the parties should not be required

to submit the public-policy issue to arbitration under the circumstances in

the hypothetical above, even if their arbitration agreement was broad

enough to encompass the issue. For the arbitrators would simply be






making a public policy determination that the Supreme Court suggested

must be made by a common-law court, at least in the absence of any clear

statutory or case law guidance on which the arbitrator could base his or

her decision.

C. Practical Implications of the Manifest Disregard of the Agreement

Standard

The most obvious practical implication that the decision will likely have will

be to increase the frequency of motions to vacate. Stolt-Nielsen has

certainly affirmed that Section 10(a)(4) can and should be construed

broadly to encompass a challenge to an award’s outcome. And it has

resoundingly approved applying the labor-law based “manifest disregard of

the contract” standard to commercial arbitration awards, and implied that

the standard encompasses, for all practical purposes, the “manifest

disregard of the law” standard. With courts around the country now

uniformly having greater discretion to review arbitration awards, lawyers

and their parties will no doubt seek to reap the perceived benefits of that

discretion and to test its scope.

While we do not believe that the Supreme Court has opened the proverbial

floodgates to outcome-based challenges of arbitration awards, we do think

that more will be granted. How many more remains to be seen, but it is

safe to assume that final arbitration awards have probably become a tad

less final.

Reinsurance arbitrators will have to take careful note of Stolt-Nielsen’s

standard of review. To ensure finality, their awards will need to be

grounded in the contract and governing law and norms. While most good

arbitrators generally render awards that are so grounded, Stolt-Nielsenappears to have upped the stakes a bit, slightly increasing the risk of

vacatur. Arbitrators need to be familiar with the Stolt-Nielsen standard of

review to help mitigate the increased risk.

Stolt-Nielsen’s heightened standard of review may be a welcome

development to some parties. There are those in the industry who have

complained that reinsurance arbitrations have become too unpredictable,

and there are some who complain that they have been on the losing end of

what they consider to be arbitrary awards. Some of these parties no longer

agree to include arbitration clauses in their contracts.

The heightened degree of judicial discretion that Stolt-Nielsen permits may

allay some or all of these concerns. And depending on how courts

interpret Stolt-Nielsen, parties that no longer utilize arbitration clauses

might eventually reconsider that strategy.

But there are other parties whose principal concern about arbitration is its

cost. Stolt-Nielsen is likely to increase the frequency of motions to vacate,

and more will probably be granted. Obviously that will result in increased

arbitration-related costs, and that may lead some of these parties not to

include arbitration clauses in some or all of their new contracts. Or those

parties may seek alternative, and presumably less costly, ways of resolving

disputes, such as mediation or negotiation.

As we suggested in Part I, the choice of the standard of review involves a



delicate balancing act between competing considerations. It is unclear to

us at this juncture whether the balance struck by Stolt-Nielsen will

encourage or discourage arbitration of reinsurance disputes. Arbitration

may be a foregone conclusion as respects disputes on old business, but its

continued use on new business will depend in part on how the courts

interpret this new, uniformly applicable standard of review, and on whether

the Supreme Court ultimately decides to change it.



Tags: Federal Arbitration Act, Frequency of Motions to Vacate, Grounds for

Vacatur, Honorable Engagement, Labor Management Relations Act,

Manifest Disregard of the Agreement, Public Policy, Reinsurance Arbitrators,

Reinsurance Custom and Practice, Section 10(a)(4), Standard of Review,

Stolt Nielsen S.A. v. Animalfeeds Int'l Corp., United States Supreme Court

This entry was posted on Tuesday, June 1st, 2010 at 10:57 am and is filed under

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5 Responses to “How Will Stolt-Nielsen, S.A. v. AnimalfeedsInt’l Corp. Change Reinsurance Arbitration Practice?”

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp.Change Reinsurance Arbitration Practice? | LoreeReinsurance and Arbitration Law Forum says:June 5, 2010 at 7:34 pm

[...] has established for the lower courts a fairly searching standard of

review. Part II (here) explored the legal and practical implications of

that standard of review. [...]

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp.Change Reinsurance Arbitration Practice? | LoreeReinsurance and Arbitration Law Forum says:June 8, 2010 at 11:14 pm

[...] has established for itself and the lower courts a fairly searching

standard of review. Part II (here) explored the legal and practical

implications of that standard of review. [...]

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp.Change Reinsurance Arbitration Practice? | LoreeReinsurance and Arbitration Law Forum says:July 24, 2010 at 4:13 pm

[...] United States Supreme Court Vacates Judgment in American

Express Merchants’ Litigation How Will Stolt-Nielsen, S.A. v.

Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice? [...]

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp.Change Reinsurance Arbitration Practice? | LoreeReinsurance and Arbitration Law Forum says:



« Two Upcoming and NotableADR-Related Events of Interest

International Institute for ConflictPrevention and Resolution

Newsletter Features Philip J.Loree Jr. Cover Story on Stolt-

Nielsen, S.A. v. AnimalFeeds Int’lCorp. »

June 4th, 2010Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, ClassAction Arbitration, Consolidation of Arbitration Proceedings, ReinsuranceArbitration, Uncategorized, United States Supreme Court6 Comments » By Philip J. Loree Jr.


Part III

A. Introduction




of review, we explained how Stolt-Nielsen has established for the lower

courts a fairly searching standard of review. Part II (here) explored the

legal and practical implications of that standard of review.

This Part III turns to the other key area that will likely change because of

Stolt-Nielsen: Consolidated reinsurance-arbitration practice.

As most reinsurance practitioners know, there is a brief history relevant to

this subject and that will be the focus of this post. For to fully understand

the implications of Stolt-Nielsen on consolidated reinsurance-arbitration

practice, it is necessary to understand how the pre-Stolt-Nielsen practice

evolved.

Parts IV (here) and V (here, here and here) will address how Stolt-Nielsenwill likely change consolidated reinsurance-arbitration practice, and what

the implications of those changes are to the industry.

B. The Traditional Rule: Consolidation of Arbitration Proceedings is Not







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Permitted Unless the Parties Consent or an Applicable State Statute

Authorizes it

Before the United States Supreme Court decided Green Tree Financial Corp.v. Bazzle, 539 U.S. 444 (2003), the general rule was that courts could not

compel consolidated arbitration absent the parties’ consent – if the parties’

contract was silent on consolidated arbitration, then the court could not

compel it. See, e.g., Glencore, Ltd. v. Schnitzer Steel Products, 189 F.2d

264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68 (2d Cir.

1993); Champ v. Siegal Trading Co., 55 F.3d 269 (7th Cir. 1995). At least

one exception was recognized: Courts could compel consolidated

arbitration where authorized by state statute. See New England Energy Inc.v. Keystone Shipping Co., 855 F.2d 1, 3 (1988), cert. denied, 489 U.S. 1077

(1989).

Courts generally took for granted that they — not arbitrators — had the

power to decide whether the parties agreed to consolidated proceedings.

Where the parties’ arbitration clauses were ambiguous, the court would

make the call on whether the parties agreed to consolidation. SeeConnecticut General Life Ins. v. Sun Life Assur., 210 F.3d 771, 774 (7th Cir.

2000) (Posner, J.).

Since, as a practical matter, most reinsurance arbitration clauses are silent

— not ambiguous — on the subject of consolidated arbitration, courts did

not often compel consolidated arbitration. That doesn’t mean there were

few or no consolidated arbitrations — parties would not infrequently agree

to them post-dispute (a good example is the London Market, where the

company and Lloyds’ Market (or Equitas) would often agree to a

consolidated proceeding in which one law firm would represent all (or

virtually all) solvent slip participants).

C. The GreenTree Financial Corp. v. Bazzle Rule: Arbitrators Get to Decide

Whether the Parties Agreed to Consolidated Arbitration, Even Where

the Parties’ Contracts are Silent on that Score

The legal landscape on consolidated arbitration changed fairly dramatically

shortly after the United States Supreme Court decided Green Tree FinancialCorp. v. Bazzle, 539 U.S. 444 (2003). Bazzle was an appeal from a

judgment of the South Carolina Supreme Court concerning two, separate

consumer class action arbitrations in which Green Tree Financial Corp.

(“Green Tree”) was the sole defendant. The South Carolina Supreme Court

held that: (1) the arbitration clauses in the materially identical form

contracts between each individual consumer class member and Green Tree

were silent on whether the arbitration might be heard as a class action; and

(2) in the circumstances, South Carolina law interprets the contracts as

permitting class arbitration. The Supreme Court granted certiorari to

determine whether that holding was consistent with the Federal Arbitration

Act: Specifically, the Court set out to decide whether imposing class

arbitration on parties whose contracts were silent on that point was

consistent with the Federal Arbitration Act.

Based on a plurality opinion written by Associate Justice Stephen G. Breyer,

and joined by Associate Justices David H. Souter, Antonin Scalia, and Ruth

Bader Ginsburg, and an opinion by Associate Justice John Paul Stevens






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concurring in the judgment, the Court vacated the South Carolina Supreme

Court’s judgment, and remanded the case to the arbitrator to determine

whether the arbitration agreements prohibited class action arbitration or

were, as the South Carolina Supreme Court concluded, silent on that point.

The Bazzle arbitration clauses stated, in pertinent part, that:

All disputes, claims or controversies arising from or relating to this

contract or the relationships which result from this contract shall be

resolved by binding arbitration by one arbitrator selected by us with

consent of you. . . . . The parties agree and understand that the

arbitrator shall have all powers provided by the law and the contract.

These powers shall include all legal and equitable remedies, including,

but not limited to, money damages, declaratory relief, and injunctive

relief.

The Plurality Opinion

Green Tree argued that the arbitration clauses prohibited class arbitration.

The four-Justice plurality said this raised a “preliminary question” that

must be dealt with “at the outset, for if [Green Tree] is right, then the

South Carolina court’s holding is flawed on its own terms; that court

neither said nor implied that it would have authorized class arbitration had

the parties’ arbitration agreement forbidden it.” The plurality concluded

that whether the contracts prohibited class arbitration was a “disputed

issue of contract interpretation.” 539 U.S. at 450:

The class arbitrator was ‘selected by’ Green Tree ‘with consent of’

Green Tree’s customers, the named plaintiffs. And insofar as the other

class members agreed to proceed in class arbitration, they consented

as well.

Of course, Green Tree did not independently select this arbitrator to

arbitrate its disputes with the other class members. But whether the

contracts contain this additional requirement is a question that the

literal terms of the contracts do not decide. The contracts simply say

(I) ‘selected by us [Green Tree].’ And that is literally what occurred.

The contracts do not say (II) ‘selected by us [Green Tree] to arbitrate

this dispute and no other (even identical) dispute with another

customer.’ The question whether (I) in fact implicitly means (II) is the

question at issue: Do the contracts forbid class arbitration? Given the

broad authority the contracts elsewhere bestow upon the arbitrator. . .

(the contracts grant to the arbitrator ‘all powers,’ including certain

equitable powers ‘provided by the law and the contract’), the answer

to this question is not completely obvious.

539 U.S. at 451 (emphasis in original).

The plurality also decided that this disputed issue of contract interpretation

fell within the scope of the parties’ broad arbitration agreement:

The parties agreed to submit to the arbitrator ‘[a]ll disputes, claims or

controversies arising from or relating to this contract or the

relationships which result from this contract.’ And the dispute about














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what the arbitration contract in each case means (i.e., whether it

forbids the use of class arbitration procedures) is a dispute “relating

to this contract” and the resulting “relationships.” Hence the parties

seem to have agreed that an arbitrator, not a judge would answer the

relevant question. And if there is doubt about that matter – about the

scope of arbitrable issues – we should resolve that doubt in favor of

arbitration.

539 U.S. at 451-52 (citations and quotations omitted).

The plurality also stated that it did not consider the issue to be one of

arbitrability, which is for the court to decide unless the parties clearly and

unmistakably agree otherwise. Rather, it was one of proceduralarbitrability, which is ordinarily for the arbitrators to decide under a broad

arbitration agreement. While “courts assume that the parties intended

courts, not arbitrators” to decide certain “gateway matters, such as whether

the parties have a valid arbitration agreement at all or whether a

concededly binding arbitration clause applies to a certain type of

controversy,” the Court found that the issue did not fall into “this narrow

exception.” 539 U.S. at 452 (citations omitted). According to the Court,

“the relevant question . . . is what kind of arbitration proceeding the parties

agreed to:”

That question does not concern a state statute or judicial procedures.

It concerns contract interpretation and arbitration procedures.

Arbitrators are well situated to answer that question. Given these

considerations, along with the arbitration contracts’ sweeping

language concerning the scope of the questions committed to

arbitration, this matter of contract interpretation should be for the

arbitrator, not the courts, to decide.

539 U.S. at 452-53 (citations omitted).

Justice Stevens’ Concurring Opinion

In a concurring opinion, Justice Stevens said he believed that “the decision

to conduct class-action arbitration was correct as a matter of law, and

because petitioner has merely challenged the merits of that decision

without claiming that it was made by the wrong decision maker, there is no

need to remand the case to correct that possible error.” He would have

simply affirmed the judgment of the South Carolina Supreme Court but

recognized that were he to “adhere to [his]. . . preferred disposition of the

case, . . . there would be no controlling judgment of the Court. To “avoid

that outcome, and because” the plurality opinion “expresse[d] a view of the

case close to . . . [his] own,” he concurred in the judgment. 539 U.S. at 455

(citations omitted).

D. Courts Construe Bazzle as Requiring Arbitrators to Decide Whether

Parties Consented to Consolidated Reinsurance-Arbitration Proceedings

Although the reasoning of the plurality opinion was endorsed by only

four Justices, a number of courts interpreted Justice Stevens’ concurrence

as endorsing the plurality’s rationale that an arbitrator should decide

whether class or consolidated arbitration was appropriate. See,e.g., Certain Underwriters at Lloyds v. Westchester Fire Ins. Co., 489 F.3d






580, 586 n.2 (3rd Cir. 2007) (citing cases); but see Employers Ins. Co. ofWausau v. Century Indem. Co., 443 F.3d 573, 580-81 (7th Cir. 2006)

(holding that Bazzle’s allocation-of-power rationale was endorsed by only

four Justices, but that consolidation was a procedural matter presumptively

for the arbitrators to decide).

Given that reinsurance disputes frequently involve multiple contracts

and/or multiple parties, parties sought consolidated reinsurance

arbitration, arguing that Bazzle and Howsam v. Dean Witter Reynolds, Inc.,

537 U.S. 79 (2002) – the procedural arbitrability decision on which Bazzleheavily relied – established that consolidation was a procedural issue that

was presumptively for the arbitrators to decide, even when the parties’

agreements were silent on consolidation. And courts generally accepted

that argument and turned consolidation questions over to arbitrators. See,e.g., Westchester Fire, 489 F.3d at 590. In turn, the arbitrators frequently

(if not always) concluded that the parties had consented to consolidation,

even if their agreements were silent on that point.

So it came to be generally accepted that: (a) arbitrators were presumptively

authorized to decide whether the parties agreed to consolidated arbitration,

even when it was undisputed that there was no such agreement; and (b)

arbitrators would routinely order consolidated arbitration. Accordingly,

parties that ordinarily would have resisted consolidated arbitration began

to agree to it, rather than incur the costs associated with unsuccessfully

challenging it.

But on June 15, 2009 the Supreme Court granted certiorari in Stolt-Nielsento decide the question that the Court initially set out to decide in Bazzle:

“Whether imposing class arbitration on parties whose arbitration clauses

are silent on that issue is consistent with the Federal Arbitration Act, 9

U.S.C. §§ 1 et seq.” And when on April 27, 2010 the Supreme Court

answered that question in the negative, it changed, at least to some

degree, consolidated arbitration practice.

In Part IV (here) we discuss Stolt-Nielsen’s rationale for ruling that class

arbitration could not be imposed in the face of the parties’ silence, and

how the Court’s ruling may affect consolidated reinsurance-arbitration

practice.



Tags: Class Arbitration, Consolidation, Green Tree Financial Corp. v. Bazzle,

Howsam v. Dean Witter Reynolds Inc., Reinsurance Arbitration, United

States Supreme Court

This entry was posted on Friday, June 4th, 2010 at 5:34 pm and is filed under

Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action

Arbitration, Consolidation of Arbitration Proceedings, Reinsurance Arbitration,

Uncategorized, United States Supreme Court. You can follow any responses to this

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« International Institute forConflict Prevention andResolution Newsletter FeaturesPhilip J. Loree Jr. Cover Story onStolt-Nielsen, S.A. v.AnimalFeeds Int’l Corp.



June 8th, 2010Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, ClassAction Arbitration, Consolidation of Arbitration Proceedings, Practice andProcedure, Reinsurance Arbitration, United States Supreme Court6 Comments » By Philip J. Loree Jr.


Part IV

A. Introduction




of review, we explained how the Court has established for itself and the

lower courts a fairly searching standard of review. Part II (here) explored

the legal and practical implications of that standard of review.

Part III (here) turned to the other key area that will likely change because of

Stolt-Nielsen — consolidated reinsurance-arbitration practice — and

discussed the state of consolidation law pre-Stolt-Nielsen. This Part IV

discusses Stolt-Nielsen’s rationale for finding that imposing class

arbitration on parties whose agreements are silent on that point is

inconsistent with the Federal Arbitration Act, and explores how the Court’s

ruling may affect consolidated reinsurance-arbitration practice in general.

B. The Supreme Court’s Decides that Imposing Class Arbitration on Parties

whose Contracts are Silent on that Score is Inconsistent with the Federal

Arbitration Act

When we last left Stolt-Nielsen, the Court had determined that the

arbitrators exceeded their authority by issuing an award that was based on







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their own notions of public policy gleaned from other arbitral decisions

imposing class arbitration in the face of silence. When a court vacates an

award it has to decide whether to remand the matter to the arbitrators, for

Section 10(b) of the Federal Arbitration Act authorizes a court to “direct a

rehearing by the arbitrators.” The Court decided not to remand, because

“there can be only one possible outcome on the facts,” that is, where the

parties’ contracts are undisputedly silent on class arbitration, save for the

parties’ agreement to a broad arbitration clause. The Court then set about

to explain why that was so.

1. The Supreme Court Says Bazzle did not Control the Outcome, But

Leaves the Allocation-of-Power Question for Another Day

Before enunciating what it believed to be the rule of decision, the Court

first addressed the extent to which, if at all, Bazzle dictated the outcome of

the case. The Court believed it appropriate to do so since the Bazzleopinions “apparently baffled” the parties, and were misunderstood by the

panel.

The arbitrators believed that Bazzle set forth a contract interpretation rule

— specifically that “‘arbitrators must look to the language of the parties’

agreement to ascertain the parties’ intention whether they intended to

permit or preclude class action.’” Slip op. at 16 (quoting panel’s decision).

At least early in the proceedings the parties, too, apparently believed that

Bazzle established a rule of contract interpretation.

The Stolt-Nielsen entities thought the rule was that the arbitrators must

find evidence that the parties consented to class arbitration. AnimalFeeds

believed that the rule was that class arbitration was permitted so long as

the arbitrators found no evidence that the parties intended to preclude it. And both parties apparently believed that Bazzle established an allocation-

of-power rule under which arbitrators get to decide whether the parties

agreed to class arbitration.

But the Court declared that the panel and the parties were wrong on all

counts as far as Bazzle was concerned. The various Bazzle opinions, said

the Court, “collectively addressed” three issues:

1. “[W]hich decision maker (court or arbitrator) should decide whether

the contracts in question were ‘silent’ on the issue of class

arbitration[];”

2. “[W]hat standard the appropriate decision maker should apply in

determining whether a contract allows class arbitration[];” and

3. “[W]hether, under whatever standard is appropriate, class

arbitration had been properly ordered in the case at hand.”

Bazzle, however, “did not yield a majority decision on any of the three

questions.” The Bazzle plurality addressed issue No. 1 — the allocation-of-

power question — but Justice Stevens’ concurring opinion, which provided

the necessary fifth vote for the Court’s judgment, did not endorse that, or

any other aspect of the plurality’s rationale. Justice Stevens’ concurring

opinion said the matter was “arguably” for the arbitrators, but his preferred

disposition was not to disturb the Supreme Court of South Carolina’s






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judgment, since Green Tree did not raise the allocation-of-power question

before that court. According to Stolt-Nielsen, Stevens therefore “bypassed”

the allocation-of-power question, and “rested . . . on his resolution of the

second and third questions,” stating that he would have affirmed the state

court judgment because it was “correct as a matter of law.”

The Court concluded that it need not decide the allocation-of-power

question because the parties had submitted the class arbitrability question

to arbitration and no one argued that doing so was “impermissible.” And

having determined that “Bazzle did not establish the rule to be applied in

deciding whether class arbitration was permitted[,]” the Court proceeded to

decide on a de novo basis what that rule was. Slip op. at 16-17.

2. The Supreme Court Rules that there are “FAA Rules of Fundamental

Importance,” and that one of those Rules is that Parties Get to Choose with

Whom they Must Arbitrate

By this time the Court had come full circle. It started out by suggesting

that the question before the panel was not one of arbitrability, and that it

would therefore review the arbitration award under a Steelworker’s-

Trilogy-type, outcome-based standard of review. It ended up deciding the

matter de novo as a matter of law, enunciating for the first time the

standard the arbitrators should have applied.

And that standard was not simply a restatement of the pre-Bazzle general

rule that courts cannot compel class or consolidated arbitration unless the

parties consent. It was a federal substantive-law standard that will

presumably displace inconsistent state law on contracts in general, and on

arbitration agreements in particular.

The Court acknowledged that “interpretation of an arbitration agreement is

generally a matter of state law.” Slip op. at 17 (citations omitted). Yet in

the next sentence it declared that “the FAA imposes certain rules of

fundamental importance, including the basic precept that ‘arbitration is a

matter of consent, not coercion.’” Slip op. at 17 (citations omitted).

The Court provided specific examples of these FAA rules of “fundamental

importance”:

1. “parties are ‘generally free to structure their arbitration agreements

as they see fit[;]‘”

2. parties may “agree to limit the issues they choose to arbitrate[;]”

3. parties may “agree on the rules under which any arbitration will

proceed[;]“

4. parties may “choose who will resolve specific disputes[;]” and

5. parties may “specify with whom they chose to arbitrate.”

Slip op. at 19 (citations omitted; emphasis in original).

While these rules of party autonomy were derived from prior Court

decisions, Stolt- Nielsen added a new one: “a party may not be compelled

under the FAA to submit to class arbitration unless there is a contractual

basis for concluding that the party agreed to do so.” Slip op. at 20














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(emphasis in original).

And the Court admonished that it “falls to courts and arbitrators to give

effect to these contractual limitations, and when doing so, courts and

arbitrators must not lose sight of the purpose of the exercise: to give

effect to the intent of the parties.”

3. The Supreme Court Rules that it was Undisputed that the Parties Did

Not Agree to Class Arbitration and there was no Basis for Implying Such an

Agreement

Having set forth the governing principle, the Court considered whether the

arbitrators’ decision complied with it. The panel, stated the Court, based

its conclusion on the parties’ broad arbitration clause and the absence of

any intent “to preclude class arbitration,” even though the parties had

stipulated “that they had reached ‘no agreement’ on class arbitration.” Slip

op. at 20. The panel found that the agreements’ silence was “dispositive”

even though “the parties are sophisticated business entities, even though

there was no tradition of class arbitration under maritime law, and even

though AnimalFeeds does not dispute that it is customary for the shipper

to choose the charter party that is used for a particular shipment. . . .”

The panel’s conclusion, the Court stated, was “fundamentally at war with

the foundational FAA principle that arbitration is a matter of consent.” Slip

op. at 20.

The Court could have ended its analysis here, but did not. It considered

whether consent to class arbitration should be implied. The Court

considered the question from the standpoint of the procedural arbitrability

doctrine, explaining that “in certain contexts, it is appropriate to presume

that parties that enter into an arbitration agreement implicitly authorize

the arbitrator to adopt such procedures as are necessary to give effect to

the parties’ agreement.” Slip op. at 20-21 (citations omitted; emphasis

added).

The Court explained that such a presumption was grounded “in the

background principle that ‘[w]hen the parties to a bargain sufficiently

defined to be a contract have not agreed with respect to a term which is

essential to a determination of their rights and duties, a term which is

reasonable in the circumstances is supplied by the court.’” Slip op. at 21

(quoting Restatement Second of Contracts § 204 (1979)).

Again, the Court could and should have concluded its analysis at this point

by simply stating that, since the parties’ contracts were indisputably

bilateral, and could be given effect by ordering bilateral arbitration, it was

unnecessary to adopt class-arbitration procedures “to give effect to the

parties’ agreement.” The Court might have added that implying consent to

class arbitration would override the FAA rules of “fundamental importance”

discussed above, under which the parties may choose with whom they

arbitrate, who the decision makers should be for a “specific dispute,” and

whether class arbitration should proceed in the first place.

But instead the Court went on to explain that class arbitration “changes the

nature of arbitration to such a degree that it cannot be presumed the

parties consented to it by simply agreeing to submit their disputes to an

arbitrator.” For, in “bilateral arbitration,” the “parties forgo the procedural






rigor and appellate review of the courts in order to realize the benefits of

private dispute resolution: lower costs, greater efficiency and speed, and

the ability to choose expert adjudicators to resolve specialized disputes.”

Slip op. at 21 (citations omitted).

By contrast, “the relative benefits of class-action arbitration are much less

assured, giving reason to doubt the parties’ mutual consent to resolve

disputes” in that manner. Slip op. at 21-22. The Court cited “just some of

the fundamental changes brought on” by class arbitration:

1. “An arbitrator chosen according to an agreed upon procedure . . .

no longer resolves a single dispute between the parties to a single

agreement, but instead resolves many disputes between hundreds or

perhaps even thousands of parties[;]”

2. Under the American Arbitration Association’s Class Arbitration

Rules the “presumption of privacy and confidentiality” that ordinarily

applies in bilateral arbitration does not apply in class arbitration, “thus

frustrating the parties’ assumptions when they agreed to arbitrate[;]”

3. A class arbitration award does not simply purport to bind the

parties to a single arbitration agreement, but “adjudicates the rights of

absent parties as well[;]” and

4. “[T]he commercial stakes of class-action arbitration are comparable

to those of class-action litigation, even though the scope of judicial

review is much more limited.”

The opinion notes that the dissent “minimized these crucial differences” by

contending that the question before the arbitrators was merely a

procedural one, and said that if the matter “were that simple, there would

be no need to consider the parties’ intent with regard to class arbitration.”

Slip op. at 23 (citations omitted). (The dissent is briefly discussed in the

cover article we recently published in the June 2010 issue of Alternatives tothe High Cost of Litigation, blogged here.)

Concluding that the “FAA required more,” the Court stated that it sees “the

question as being whether the parties agreed to authorize class arbitration,”

and where, as here, “the parties stipulated that there was ‘no agreement’

on this question, it follows that the parties cannot be compelled to submit

their dispute to class arbitration.”

4. The Supreme Court Expresses no Opinion on what a Party Must Show

to Establish Consent to Class Arbitration

Because the Court found the parties had stipulated that there was “no

agreement” on class arbitration, there was no reason for the Court to

discuss what a party must show to establish such an agreement. The Court

expressly acknowledged that fact, stating that it had “no occasion to

decide what contractual basis may support a finding that the parties agreed

to authorize class-action arbitration.” Slip op. at 23 n.10.

C. How Does the Supreme Court’s Ruling Affect Consolidated

Reinsurance-Arbitration Practice?

As we pointed out in Part III, Bazzle — a class arbitration case – drastically



changed consolidated reinsurance arbitration practice. So it would be

unreasonable to assume that Stolt-Nielsen will not change the practice that

evolved under Bazzle.

Far from providing much meaningful guidance on how courts or arbitrators

should handle consolidated arbitration practice, Stolt-Nielsen reopens

consolidation-related questions that had – for better or worse – been

resolved by post-Bazzle courts. These questions must now be re-

examined by courts – and perhaps by arbitrators as well.

First, Stolt-Nielsen leaves undecided the crucial threshold allocation-of-

power issue: Who gets to decide whether the parties consented to

consolidated arbitration? As discussed in Part III, courts have presumed

that five Justices of the Supreme Court had ruled in Bazzle that the

question of whether class arbitration is appropriate is a question of

procedural arbitrability. But Stolt-Nielsen has undermined the reasoning of

these courts by declaring that Bazzle did not command a majority of the

Court on the allocation-of-power question or any other issue addressed by

the various Bazzle opinions. Stolt-Nielsen did not decide whether the

question whether the parties consented to class arbitration was one for the

courts or the arbitrators, leaving it to the lower courts to determine the

allocation-of-power question insofar as it relates to both class and

consolidated arbitration. And Stolt-Nielsen – by eschewing the notion that

class arbitration is a mere matter of procedure – has cast into serious

doubt the related question whether consolidated arbitration is a procedural

matter.

Second, the Court has left open the question of what a party must show to

establish consent to class or consolidated arbitration. Where there is

concededly no agreement on consolidated arbitration, presumably courts

and arbitrators should not order it because doing so would negate

the consolidated-arbitration corollary of the Stolt-Nielsen class-arbitration

FAA rule of fundamental importance: a party may not be compelled under

the FAA to submit to consolidated arbitration unless there is a contractual

basis for concluding that the party agreed to do so.

But the Court’s discussion of whether class arbitration could be implied in

the face of silence, suggests that other courts may need to engage in a

similar analysis of whether imposing consolidated arbitration would

fundamentally alter the terms of the parties’ agreement. And that analysis

might or might not lead to the conclusion that imposing consolidated

arbitration in the face of silence would be inconsistent with the FAA.

In Part V we shall discuss the implications of the decision on consolidated

reinsurance-arbitration practice, with a particular focus on how lower

courts may reshape that practice in light of Stolt-Nielsen, and what the

practical implications of that changed practice may be.



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June 18th, 2010Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, ClassAction Arbitration, Consolidation of Arbitration Proceedings, Practice andProcedure, United States Supreme Court5 Comments » By Philip J. Loree Jr.


Part V.A

A. Introduction

In this Part V.A of our consolidated-reinsurance-arbitration series, we delve

into Stolt-Nielsen’s legal implications on consolidated reinsurance-

arbitration practice, focusing on how courts are likely to decide the

allocation-of-power question: Who gets to decide whether the parties

consented to consolidated arbitration? In Part V.B we shall examine Stolt-Nielsen’s other specific legal and practical implications, focusing on what a

party will likely need to show to obtain consolidated arbitration and how

frequently consolidated arbitration is likely to be granted after Stolt-Nielsen.

B. Who Gets to Decide Whether the Parties Consented to Consolidated

Arbitration?

Readers will recall from Part III (here) that courts interpreted Bazzle as

governing the allocation-of-power issue. Now that the Court has said

Bazzle never commanded a majority on that issue, and that it remains

open, courts must reconsider it not only in the class-, but in the

consolidated-arbitration context.

Consolidated arbitrations, like class arbitrations, raise two types of

questions: Common-dispute and party-consent questions. We think that

courts will likely conclude that both are questions of arbitrability for the







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court to decide in the first instance, unless the parties clearly and

unmistakably agree otherwise. Arbitrators may play a role in resolving

contractual ambiguities identified by the court.

1. Who Gets to Decide Common-Dispute Questions?

All consolidated-arbitration questions concern whether at least one

arbitration agreement encompasses not only disputes concerning one, but

all other contracts at issue. We call this the “common-dispute” question.

In some consolidated-arbitration disputes the “common dispute” question

is the only one presented. Suppose reinsurer R enters into two treaties

with cedent C, Contracts A and B, each of which incept on the same date

and are in force for one year. Contract A’s limits are $1 million per

occurrence excess a $500,000 retention. Contract B has per occurrence

limits of $2 million excess of $1.5 million. Both contain broad arbitration

clauses under which the parties agreed to arbitrate “any dispute arising out

of or relating to this contract.”

C pays a $3 million claim and seeks $1,000,000 from Contract A and $1.5

million from Contract B. R says the claim should have been horizontally

allocated over a six-year period. R is not a party to any of C’s contracts

covering the five-year period subsequent to the inception of contracts A

and B.

C demands a consolidated arbitration under Contracts A and B, seeking

$2.5 million. R opposes consolidation, forcing C to bring a motion to

compel consolidated arbitration.

The consolidated-arbitration decision maker in this hypothetical need only

resolve whether the claim “arises out of or is related to” Contracts A, B, or

both. There is no issue concerning the parties with whom R agreed to

arbitrate because R agreed to arbitrate with C under both contracts.

Under the Supreme Court’s Federal Arbitration Act jurisprudence the court

would ordinarily decide this type of question. Questions concerning the

scope of an arbitration agreement itself are ordinarily for the court,

including whether “an arbitration clause in a concededly binding contract

applies to a particular type of controversy. . . .” Howsam v. Dean WitterReynolds, Inc., 537 U.S. 79, 84 (2002). When a court decides that type of

question, it – not the arbitration panel – applies state law rules of contract

interpretation to the scope provision of the arbitration agreement (and

sometimes other provisions, as well) to determine what the parties agreed

to submit to arbitration. See, generally, Mastrobuono v. Shearson LehmanHutton, Inc., 514 U.S. 52, 58-63 (1995).

To the extent there is ambiguity as to whether the disputes are

encompassed by at least one of the arbitration clauses, the court would be

aided by the presumption of arbitrability, under which any ambiguities as

to the scope of the arbitration clauses themselves would be resolved in

favor of arbitration. See, e.g., 514 U.S. at 62. That would presumably

mean a finding that one or both of the arbitration clauses covered the

disputes.

While common-dispute issues will typically raise scope questions,

depending on the facts, there may be other, interrelated issues concerning





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contract interpretation that are ordinarily for the arbitrators to decide.

Suppose a dispute arises over a horizontal, even, pro-rata allocation of a

continuing occurrence to a continuous, excess-of-loss treaty that was in

effect for five years, but which was also subject to annual resigning.

Depending on the facts, a question might arise as to whether the dispute

arose under one contract or five. Resolution of that question might require

interpretation of the treaty language, the slips, the placing information and

other matters, all in light of reinsurance custom and practice.

Whether or not the number of contracts question is one of arbitrability or

simply contract interpretation and construction is not necessarily clear. But

a court might well conclude that it is one for the arbitrators.

The arbitrators – as experts in reinsurance custom and practice – are

presumably better equipped to resolve the dispute than most judges, and

the parties probably expected that the arbitrators would decide the

question if it arose. It might also be intertwined with the merits (e.g., the

number of per occurrence limits and retentions that apply). Were the court

to decide the issue, the court might be deciding a matter the parties

agreed to arbitrate. And, depending on how the arbitrators rule on the

matter, they might moot the controversy over consolidation, saving the

court valuable time and resources.

2. Who Gets to Decide Party-Consent Questions?

Not all putative consolidated arbitrations involve simply multiple contracts

between the same parties. Additional parties may be involved that are not

parties to all other agreements. One or more parties to one contract may

be parties to all or none of the other contracts. Or there may be one treaty

under which the cedent is seeking consolidated arbitration against all

participating reinsurers. Consolidated-arbitration disputes of this variety

raise “party-consent” questions.

Party-consent questions make consolidated-arbitration disputes look much

more like class-arbitration disputes. For what typically distinguishes class

from bilateral arbitration is the presence of not only multiple, bilateral

contracts involving the same parties, but multiple bilateral contracts

involving multiple parties.

What principally motivated the Stolt-Nielsen Court to hold that class

arbitration cannot be imposed without a contractual basis other than a

broad arbitration clause was the Federal Arbitration Act rule of

“fundamental importance” that parties may “specify with whom they chose

to arbitrate.” See Stolt-Nielsen, slip op. at 19-20 (emphasis in original).

A reasonable corollary is that a party may not be compelled under the

FAA to submit to a consolidated arbitration presenting party-consent issues

absent a contractual basis other than the parties’ broad arbitration clause.

Suppose that R and C are parties to Contracts A, B and C, a consecutive

series of one-year “First Excess of Loss Treaties,” each with per occurrence

limits of $1,000,000 excess of $500,000. While R and C are the only

parties to Contract A, R and R1 are the reinsurers participating in Contract

B, and R1 and R2 are the reinsurers participating in Contract C. The

contracts contain identical, tri-partite arbitration clauses providing, among

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other things, that the parties agree to arbitrate any dispute “arising out of

or relating to” the contract.

C bills R, R1 and R2 for their respective shares of a $3 million claim it has

allocated on an even, pro-rata basis over the three contract years. The

reinsurers object, arguing that the loss should have been allocated over a

six-year period.

C demands a consolidated arbitration against R, R1 and R2 under

Contracts A, B and C. The reinsurers object and C moves to compel

arbitration.

To decide whether the parties consented to consolidated arbitration, the

decision maker must not only resolve the common-dispute question, but

also find some contractual basis under at least one of the arbitration

agreements to conclude that: (a) R agreed not only to arbitrate with C in a

bilateral arbitration, but in a consolidated arbitration involving R1 and R2;

and (b) both R1 and R2 agreed to arbitrate with C in a consolidated

proceeding to which R and they are all parties. Under Stolt-Nielsen the

contractual basis must be something other than the contracts’ broad

arbitration clauses.

Courts considering the allocation-of-power question after Stolt-Nielsen will

likely conclude that these party-consent issues should be decided by the

court in the first instance. A classic arbitrability question is whether “the

parties are bound by a given arbitration clause. . . .” See Howsam v.Dean Witter Reynolds, Inc.,, 537 U.S. 79, 83 (2002).

Party-consent issues concern whether all of the parties are “bound by a

given arbitration clause” to arbitrate together in a single, consolidated

proceeding. R was bound to arbitrate with C under Contracts A and B, but

not Contract C; R1 was bound to arbitrate with the C under Contract B and

C, but not A; and R2 was bound to arbitrate with C under Contract C, but

not Contracts A and B. Furthermore, R is not a party to Contract C, or any

other contract with R2; and R1 was a party to only one contract with R

(Contract B) and one contract with R2 (Contract C). Even assuming that

the arbitration clause of each contract encompasses disputes arising out of

each of the others (the common-dispute question), nothing indicates that

R, R1, and R2 agreed to arbitrate together in a single arbitration with C.

The party-consent question is also a question for the court under Section 4

of the Federal Arbitration Act. Section 4, though a procedural statute

technically applicable only in federal court, reflects an allocation of power

between courts and arbitrators that is derived from the substantive

enforceability command of Section 2 (which is applicable in both state and

federal courts). See Buckeye Check Cashing v. Cardegna, 546 U.S. 440,

447 (2006); Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04

(1967). Section 4 provides that “A party aggrieved by the alleged failure,

neglect, or refusal of another to arbitrate under a written agreement for

arbitration may petition any United States district court which, save for

such agreement, would have jurisdiction. . . of the subject matter of a

suit arising out of the controversy between the parties, for an order

directing that such arbitration proceed in the manner provided for in suchagreement.” 9 U.S.C § 4 (emphasis added). On hearing a motion to

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compel, the court must “make an order directing the parties to proceed to

arbitration in accordance with the terms of the agreement” if “the making

of the agreement for arbitration or the failure to comply therewith is not in

issue. . . .” Id. (emphasis added)

When one party demands consolidated arbitration involving party-consent

issues and another objects because it contends it never agreed to arbitrate

in a single proceeding with all of the parties, a question arises whether

there has been a failure, neglect or refusal to perform one or more

arbitration agreements. And that question implicates whether the

resisting party is bound by an arbitration agreement requiring it to

arbitrate with all of the parties, or whether certain parties to the proposed

consolidated arbitration may invoke the benefit of one or more arbitration

clauses to which they are not parties.

Faced with that question, the court must resolve it and ensure that

arbitration proceeds in the manner provided by the parties’ agreements

and in accordance with their terms. That necessarily requires the court to

determine whether the agreements permit, forbid or are silent on

consolidated arbitration involving party-consent issues, or whether they are

ambiguous on that score.

Outside of the class or consolidated arbitration context, when a party

contends on a Federal Arbitration Act Section 4 or 3 motion that a

nonsignatory is subject to the arbitration clause, or cannot invoke the

clause, the court determines whether there is a state law basis for requiring

the nonsignatory to arbitrate or allowing it to invoke the arbitration

clause. If there is such a state law basis, the court enforces the arbitration

agreement accordingly. But it does not refer the question to the

arbitrators. See Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896, 1901-02

(2009); Ross v. American Express Co., 547 F.3d 137, 143 & n.3 (2d Cir.

2008); Ross v. American Express Co., 478 F.3d 96, 99 (2d Cir. 2007); AstraOil Co. v. Rover Navigation, Ltd., 344 F.3d 276, 279-80 & n.2 (2d Cir.

2003); Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773,

776-80 (2d Cir. 1995).

When the question arises under Section 9 of the Federal Arbitration Act

whether a third-party is bound by an arbitration award or is entitled to a

benefit under it, then the court likewise decides the question. Courts do

not hesitate to vacate awards that purport to bind or confer a benefit in

favor of a non-party to an arbitration agreement. See, e.g., Nationwide

Mutual Ins. Co. v. Home Ins. Co., 330 F.3d 843, 846-47 (6th Cir. 2003);

Orion Shipping & Trading Co., Inc. v. Eastern States Petroleum CorporationOf Panama, S.A., 312 F.2d 299, 300-01 (2d Cir. 1963). But courts do not

remand such cases back to the arbitrators to determine whether the non-

party really was a party, or was otherwise bound by or entitled to invoke

the arbitration clause.

We do not perceive a meaningful distinction between the party-consent

questions presented by the motion to compel a consolidated arbitration in

our party-consent hypothetical and those presented in the cases cited

above. The questions are essentially the same and the key, underlying

purpose of the Federal Arbitration Act that the cases serve is the same – to

enforce the parties’ arbitration agreements as written.



We therefore think that courts that consider the party-consent issue in a

dispute over consolidated arbitration will likely conclude that it presents an

issue of arbitrability for courts – not arbitrators to decide. But there is

another important consideration that augurs in favor of allocating the

power to the court.

Party-consent questions raise important issues arising out of the parties’

arbitrator-selection provisions. One of Stolt-Nielsen’s Federal Arbitration

Act rules of “fundamental importance” is that parties may “choose who will

resolve specific disputes.” Slip op. at 19 (emphasis in original). Assuming

there is otherwise a contractual basis for imposing consolidated arbitration

in a multi-party dispute, there must also be contractual basis for the

arbitrator-selection method that the decision maker imposes. So the

decision maker in our party-consent hypothetical would have to find a

contractual basis under at least one of the arbitration clauses under which

R, R1 and R2 collectively agreed to appoint on their behalf only one party-

appointed arbitrator, who, along with C’s party-appointed arbitrator, would

select a single umpire to preside over a consolidated proceeding.

Otherwise, the decision maker would be imposing on the parties a method

of arbitrator selection to which they never agreed.

Just as courts make the call on arbitrator-selection questions in other

contexts, so too should they make them in consolidated-arbitration

disputes presenting party-consent issues. The parties’ rights to choose

what decision makers will resolve what disputes is a vitally important issue

that has, by statute and treaty, been committed to the courts to decide. As

Circuit Judge Richard A. Posner wrote, “Selection of the decision maker by

or with the consent of the parties is the cornerstone of the arbitral

process.” Lefkovitz v. Wagner, 395 F.3d 773, 780 (7th Cir.), cert. denied,

546 U.S. 812 (2005). Federal Arbitration Act § 5 provides that, “[i]f in the

agreement provision be made for a method of naming or appointing an

arbitrator or arbitrators or an umpire, such method shall be followed. . .

.” Article V(1)(d) of the Convention on the Recognition and Enforcement of

Foreign Arbitral Awards ( here) provides a defense to recognition and

enforcement of an award where “[t]he composition of the arbitral authority

or the arbitral procedure was not in accordance with the agreement of the

parties.” And courts will not hesitate to vacate domestic or non-domestic

awards if arbitrator selection procedures were not followed. See, e.g., Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d

85, 91-92 (2d Cir. 2005); Cargill Rice, Inc. v. Empresa Nicaraguense

Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994); Avis Rent A CarSys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986).

As we shall discuss in more detail in Part V.B, we think that in many cases

courts will find that there is no express or implied contractual basis for

imposing consolidated arbitration on the parties in cases involving party-

consent questions. But there are many variants on how consolidated-

arbitration disputes may arise and some arbitration clauses expressly

provide for some form or another of consolidated arbitration. Ambiguities

may arise, as they did in Bazzle.

We think that, at least in certain cases, those ambiguities might be for the



arbitrators to resolve, assuming the issues they raise fall within the scope

of the parties’ arbitration agreements. But the court should, at a minimum,

determine whether the contract unambiguously forbids or permits

consolidated arbitration or is ambiguous or silent on that score.

Stay tuned for more….



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5 Responses to “How Will Stolt-Nielsen, S.A. v. AnimalfeedsInt’l Corp. Change Reinsurance Arbitration Practice?”


[...] Part V.A of our Stolt-Nielsen reinsurance-arbitration practice

series (here) we said that after Stolt-Nielsen courts will likely get to

decide in the first instance whether [...]


[...] was evident from Parts V.A and V.B (here and here), Stolt-

Nielsen has dramatically changed the legal landscape on consolidated

[...]


[...] IV (here) and V (here, here and here) will address how Stolt-

Nielsen will likely change consolidated [...]




« The Second Circuit Says anArbitration Must CommenceAnew When An Arbitrator Dies —But Not When One Resigns



July 14th, 2010Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, ClassAction Arbitration, Consolidation of Arbitration Proceedings, ReinsuranceArbitration, United States Supreme Court3 Comments » By Philip J. Loree Jr.


Part V.B

A. Introduction

In Part V.A of our Stolt-Nielsen reinsurance-arbitration practice series

(here), we said that after Stolt-Nielsen courts will likely get to decide in the

first instance whether the parties consented to consolidated arbitration. If

we are correct, that will be a fundamental change because courts will

presumably construe the terms of the parties’ contracts more strictly than

many arbitrators might, and those constructions will be subject to appellate

review.

In this Part V.B we consider what a party will likely need to show to

persuade a court to consolidate arbitrations, and explain why we believe

that courts will not frequently order consolidation. In Part V.C. we shall

explain the strategic and practical implications of the changes that Stolt-Nielsen will likely bring about in consolidated reinsurance-arbitration

practice.

B. What Will One Have to Show to Establish Consent to Consolidated

Arbitration?

What a party must show to establish consent to consolidated arbitration will

depend on whether the dispute involves (a) multiple, bilateral contracts

between the same parties; (b) multiple, bilateral contracts between a cedent

and different reinsurers; (c) one or more multilateral contracts between a







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cedent and the same group of multiple reinsurers; (d) multiple, multilateral

contracts between a cedent and different groups of reinsurers; or (e) some

combination of (a) or (b) and (c), or (d). While a party may show consent to

consolidated arbitration in Scenario (a) by demonstrating that at least one

of the arbitration clauses is broad enough to encompass the multi-contract

dispute (see Part V.A, here), the party seeking consolidation must show

more to establish consent in Scenarios (b) through (e). Our focus here will

be establishing consent in those Scenarios.

1. Scenario (b): Multiple, Bilateral contracts Between a Cedent andDifferent Reinsurers

Scenario (b) may arise where a cedent seeks consolidated arbitration of a

dispute arising out of a group of separate, bilateral facultative or treaty

reinsurance contracts between the cedent and different reinsurers.

Suppose that Cedent C entered into a series of three consecutive, one-year

bilateral facultative reinsurance agreements, Contracts 1, 2 and 3, with

three different reinsurers, Reinsurers 1, 2 and 3. Cedent C has billed each

reinsurer for a portion of the settlement of an environmental claim that it

has allocated to the three-year period covered by the contracts.

Cedent C can easily demonstrate that it agreed to separate, bilateral

arbitrations with R1, R2 and R3 and vice-versa, and that the dispute over

each reinsurer’s share of the settlement falls within the scope of its

arbitration agreement with that reinsurer. But Stolt-Nielsen requires more.

Cedent C must somehow demonstrate that each of the reinsurers

consented to arbitrate in a single proceeding to which each of the other

reinsurers are parties. And since most reinsurance arbitration agreements

provide for tri-partite arbitration — with each of the parties appointing an

arbitrator, who in turn appoint a neutral umpire — the reinsurers must

agree to act as a single party for the purposes of arbitrator selection.

If the reinsurers had contemplated consolidated arbitration involving

nonparties to their contracts each presumably would have included a

provision in their arbitration agreement that allowed for that. Consider, for

example, the relevant terms of Brokers and Reinsurance Markets

Association standard arbitration clause 6K:

As a condition precedent to any right of action hereunder, any dispute

arising out of this Contract, whether arising before or after

termination, shall be submitted to the decision of a board of

arbitration composed of two arbitrators and an umpire, meeting in

(City, State), unless otherwise agreed.

. . . .

If more than one reinsurer is involved in the same dispute, all such

reinsurers shall constitute and act as one party for purposes of this

Article, and communications shall be made by the Company to each of

the reinsurers constituting the one party, provided that nothing

therein shall impair the rights of such reinsurers to assert several,

rather than joint, defenses or claims, nor be construed as changing

the liability of the Reinsurer under the terms of this Contract from

several to joint.






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(A compilation of BRMA standard contract provisions can be found here.)

This clause, of course, was designed for use in multilateral reinsurance

treaties – not bilateral facultative certificates — otherwise the phrase

“provided that nothing . . . shall. . . be construed as changing the

liability of the Reinsurer under the terms of this Contract from several to

joint[,]” would be unnecessary. But if this provision, or something very

much like it, was included in each of the arbitration agreements in our

hypothetical, then it would least arguably establish consent to consolidated

arbitration on the part of R1, R2 and R3.

Note that the last paragraph uses “reinsurer” and “reinsurers” in the lower

case in the first part of the provision, but uses “Reinsurer” in the upper

case in the last part: “nor be construed as changing the liability of the

Reinsurer under the terms of this Contract from several to joint.” If

“Reinsurer” in the upper case is defined elsewhere as denoting a reinsurer

that is a party to the contract, then “reinsurer” or “reinsurers” in the lower

case could – and perhaps should – be construed to refer to any reinsurer,

irrespective of whether it is a party to the contract containing an arbitration

clause. A court could therefore construe the provision as consent to

consolidated arbitration involving nonparties to the contract. Or a court

might conclude that the provision was ambiguous, and direct an arbitration

panel to determine whether “reinsurer” and “reinsurers” in the lower case

includes reinsurers that are not parties to the contract (an issue could arise

whether that should be determined by three separate arbitration panels or

a court).

But suppose our hypothetical agreements did not expressly authorize

consolidated arbitration. Unless all three reinsurers unreservedly appointed

the same arbitrator in response to the arbitration demand, there would be

nothing to suggest the parties agreed to consolidation.

Indeed, a persuasive argument might be made that the agreements

prohibited arbitration, because many arbitrator selection provisions

expressly say each party gets to appoint its own arbitrator. Consider BRMA

clause 6l:

Should an irreconcilable difference of opinion arise between the

parties to this Contract as to the interpretation of this Contract or

transactions with respect to this Contract, such difference will be

submitted to arbitration upon the request of one of the parties, one

arbiter to be chosen by the Company and one by the Reinsurer and an

umpire to be chosen by the two arbiters before they enter into

arbitration.

. . . .

Assuming “Company” is defined as the cedent and ”Reinsurer” is defined

only as a reinsurer that is a party to the contract, this provision entitles

each of two parties to appoint their own arbitrator. It is not susceptible of

an interpretation that would require a reinsurer that is a party to the

contract to appoint an arbitrator with the advice and consent of any non-

parties, let alone one that would act on behalf of the reinsurer and those

non-parties.














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So if our hypothetical arbitration agreements contained arbitrator selection

provisions like this one, then R1 would be entitled to appoint arbitrator A

under Contract 1, R2 would be entitled to appoint arbitrator B under

Contract 2, and so on. The provision would therefore effectively prohibit

consolidated arbitration, which would require R1, R2 and R3 to appoint a

single arbitrator to act on their collective behalf, all in derogation of the

arbitration agreements.

The provision may also effectively prohibit consolidation because the

arbitration clause expressly applies to “irreconcilable difference[s] of

opinion. . . between the parties to this Contract. . . .” (Emphasis added)

That strongly suggests that the parties did not agree to arbitrate disputes

between the parties to the contracts and parties to other contracts. While a

semantic argument may be made that “between the parties to this

Contract” is not the same as “between the parties to this Contract and noothers,” requiring the parties to affirmatively exclude the existence of an

agreement to arbitrate with third parties when the agreement to arbitrate

does not provide for arbitration with them in the first place would

contradict the letter and spirit of Stolt-Nielsen and its “FAA rules of

fundamental importance.” As discussed in Part IV, here, those rules require

affirmative consent to class or consolidated arbitration, not intent to

exclude class or consolidated arbitration.

Let’s assume that our hypothetical agreements are silent on consolidated

arbitration in the sense that they neither authorize nor prohibit it. The

question before the court would then be whether it could imply consent to

consolidation.

As discussed in Part IV, here, the Stolt-Nielsen Court considered whether

consent to class arbitration might be implied as a matter of law. The Court

did so from the standpoint of the procedural arbitrability doctrine,

explaining that “in certain contexts, it is appropriate to presume that

parties that enter into an arbitration agreement implicitly authorize the

arbitrator to adopt such procedures as are necessary to give effect to the

parties’ agreement.” Stolt-Nielsen, slip op. at 20-21 (citations omitted;

emphasis added). The Court said that such a presumption was grounded

“in the background principle that ‘[w]hen the parties to a bargain

sufficiently defined to be a contract have not agreed with respect to a term

which is essential to a determination of their rights and duties, a term

which is reasonable in the circumstances is supplied by the court.’” Slip op.

at 21 (quoting Restatement Second of Contracts § 204 (1979)).

While the Court could and should have concluded its analysis at that point

— the parties’ agreements were undisputedly bilateral, and could be given

effect by ordering bilateral arbitration, rendering it unnecessary to imply

consent to class arbitration – the Court went on to explain that class

arbitration “changes the nature of arbitration to such a degree that it

cannot be presumed the parties consented to it by simply agreeing to

submit their disputes to an arbitrator.” Slip op. at 21. For, in what the

Court termed “bilateral arbitration,” the “parties forgo the procedural rigor

and appellate review of the courts in order to realize the benefits of private

dispute resolution: lower costs, greater efficiency and speed, and the

ability to choose expert adjudicators to resolve specialized disputes.” Slip






op. at 21 (citations omitted).

In reaching that conclusion the Court said that “the relative benefits of

class-action arbitration are much less assured, giving reason to doubt the

parties’ mutual consent to resolve disputes” in that manner. Slip op. at 21-

22. The Court emphasized “just some of the fundamental changes brought

on” by class arbitration:

1. “An arbitrator chosen according to an agreed upon procedure . . .

no longer resolves a single dispute between the parties to a single

agreement, but instead resolves many disputes between hundreds or

perhaps even thousands of parties[;]”

2. Under the AAA Class Arbitration Rules the “presumption of privacy

and confidentiality” that ordinarily applies in bilateral arbitration does

not apply in class arbitration, “thus frustrating the parties’

assumptions when they agreed to arbitrate[;]”

3. A class arbitration award does not simply purport to bind the

parties to a single arbitration agreement, but “adjudicates the rights of

absent parties as well[;]” and

4. “[T]he commercial stakes of class-action arbitration are comparable

to those of class-action litigation, even though the scope of judicial

review is much more limited.”

Slip op. at 22-23.

These considerations are not fully applicable to consolidated arbitration:

1. As in class arbitration, in consolidated arbitration an arbitrator

chosen according to an agreed upon procedure no longer resolves a

single dispute between the parties to a single agreement, but instead

resolves many disputes . Unlike class arbitration, however,

consolidated arbitration generally involves disputes ranging from a

few to perhaps tens of parties, not “hundreds or perhaps even

thousands of parties.”

2. Unlike class arbitration governed by the AAA Class Arbitration

Rules, the presumption of confidentiality can be maintained in

consolidated reinsurance arbitrations. But reinsurers forced to

participate in consolidated arbitration must sacrifice some of that

confidentiality vis-à-vis their fellow reinsurers.

3. A consolidated arbitration award does not simply bind parties to a

single arbitration agreement, but, unlike a class arbitration award, it

does not purport to “adjudicate[] the rights of absent parties. . . .”

4. Like those of class arbitration, the commercial stakes of

consolidated arbitration are comparable to those of consolidated

litigation, even though the scope of judicial review is much more

limited. But generally those commercial stakes are not as high as

those of class arbitration.

Even though the considerations the Court cited are not fully applicable to

consolidated arbitration, there are a number of significant reasons why

implying consent to consolidated arbitration may materially alter the nature



of what would otherwise be bilateral arbitration, thereby frustrating the

parties’ expectations. A non-exhaustive list of these would include:

1. In consolidated arbitration, the reinsurers are forced to agree

collectively on a single, party-appointed arbitrator to resolve multiple

disputes even though most arbitrator selection provisions would allow

each reinsurer to choose what it – and no one else – concludes to be

the most suitable party-appointed arbitrator for a given dispute.

Most arbitrator selection provisions also allow the parties

considerable input in selecting the most suitable umpire candidates

for a particular dispute. These arbitrator-selection rights are

considerably watered down – if not eliminated — when a group of

reinsurers is required to select collectively a single party-appointed

arbitrator and to agree collectively on a list of suitable umpire

candidates.

2. Consolidated proceedings are an incident of litigation that the

parties could have taken advantage of had they not agreed to

arbitrate. Parties who agree to arbitration typically sacrifice the

procedural niceties of court adjudication for the informality, efficiency,

speed and confidentiality of bilateral arbitration.

3. Consolidated proceedings may be more efficient from the

standpoint of the institution or persons hearing the matter, that is,

the court or the arbitration panel. Judicial efficiency is important from

a public policy standpoint because it is publicly funded. But

arbitration is privately funded, and multiple, private arbitration

proceedings do not usually impose a significant extra burden on the

public fisc (other than the relatively modest increased cost associated

with multiple summary-enforcement proceedings, which may or may

not be necessary, or which may not be contested).

4. To the extent that consolidated arbitration promotes efficiency it

does so principally for the benefit of the cedent, which is spared the

expense of multiple proceedings. But each individual reinsurer may

incur more time and monetary costs in a multi-party, consolidated

proceeding than it might incur in bilateral arbitration.

5. Consolidated arbitration tends to tactically benefit the cedent at

the expense of the reinsurer for the reasons to be set forth in Part

V.C. To the extent cedents may be tactically disadvantaged by having

to commence multiple, bilateral proceedings, they may avoid that

disadvantage by not agreeing to arbitrate or insisting on a provision

authorizing consolidation.

These and other considerations may convince courts not to imply consent

to consolidated arbitration in the face of silence.

2. Scenarios (c) through (e)

Scenarios (c) through (e) arise where there are:

1. One or more multilateral contracts between a cedent and the same group of multiple reinsurers (Scenario (c));

2. Multiple, multilateral contracts between a cedent and differentgroups of reinsurers (Scenario (d)); or



3. Some combination of Scenarios (a), (b), (c) or (d) (Scenario (e)).

As in Scenario (b), to establish consent to consolidated arbitration in any of

these scenarios a cedent would have to show that all of the reinsurers

consented to consolidation. For essentially the same reasons discussed in

Section B.1., above, cedents will likely have difficulty doing so in the

absence of a provision authorizing consolidation.

C. How Frequently will Courts Consolidate Arbitrations or Direct

Arbitrators to Determine Whether the Parties Consented to Consolidation?

The answer is probably “not very.” If courts decide whether the parties

consented to consolidated arbitration, they are likely to apply state law

principles of contract construction fairly strictly – at least more strictly than

many arbitrators have. Their decisions will also be subject to appellate

review, which will presumably make it more likely that any decision

imposing consolidation will have a sound basis in applicable law and the

parties’ agreement.

For the reasons discussed in Section B.1., above, there will probably be a

number of cases where the agreements are not susceptible to an

interpretation permitting consolidated arbitration or where they effectively

prohibit it. Where the agreements are silent, many courts may conclude

that there is no sound basis for implying consent to consolidation.

That does not mean that courts will never find consent to consolidated

arbitration. In Scenario (a) cases – where there are multiple, bilateral

contracts between the same parties – courts may find that the parties’

arbitration clauses are broad enough to encompass a consolidated

proceeding. There may also be cases where state arbitration law permits

courts or arbitrators to impose consolidated arbitration where the

agreements are silent on that score. If the parties clearly and

unambiguously agreed that state arbitration law governs, then courts may

find that the parties consented to the application of that state law. And

certain agreements provide for consolidated arbitration of one form or

another or have language that is ambiguous as to whether consolidated

arbitration is permitted. In those cases, courts will likely either compel

consolidated arbitration or submit the construction question to arbitrators,

who may in turn order consolidation.

But Stolt-Nielsen has changed the legal landscape on consolidated

arbitration fairly dramatically, and on balance we think that courts will not

readily consolidate arbitrations in the way that arbitrators have under the

Bazzle regime. In Part V.C, we explore the practical and strategic

implications of this change.


Part I, Part II, Part III, Part IV, Part V.A, Part V.B, and Part V.C

Tags: Bilateral Arbitration, Brokers and Reinsurance Market Association,

Class Arbitration, Consolidated Arbitration, Federal Arbitration Act, Implied

Consent, Procedural Arbitrability, Stolt Nielsen S.A. v. Animalfeeds Int'l




What to Make of the SecondCircuit Voiding a Class Action

Waiver Under California’sDiscover Bank Rule? »

July 20th, 2010Arbitration Practice and Procedure, Consolidation of Arbitration Proceedings,Practice and Procedure, Reinsurance Arbitration, United States Supreme Court1 Comment » By Philip J. Loree Jr.


Part V.C

A. Introduction

As was evident from Parts V.A and V.B (here and here), Stolt-Nielsen has

dramatically changed the legal landscape on consolidated arbitration. In

this Part V.C. we explore the practical and strategic implications of that

change.

B. Reinsurers Will Likely Regain the Tactical Advantage They Had

Pre-Bazzle

For the last several years since Bazzle, cedents and reinsurers have treated

consolidation of arbitration proceedings largely as a given. Courts

would usually delegate the consolidation question to the arbitrators, and, in

turn, arbitrators would usually order consolidation. After a while,

consolidation became something that the parties frequently agreed upon,

because in most cases there was little or no point in opposing it. (See Part

III, here.)

The advent of large, consolidated proceedings redounded mostly to the

cedents’ benefit. In the consumer-class-arbitration context, the theme is

usually the many against the one — the consumers versus the company.

But in reinsurance arbitration the tables are turned, and the theme is

usually the one against the many – the cedent versus the reinsurers

participating in one or more treaties.







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Consolidated arbitration allowed a cedent to, among other things,

aggregate its claims against several reinsurers participating in a multi-year

treaty program. Without consolidated arbitration the dollar amounts

associated with each claim might be too small to warrant a serious

collection effort. But the ability to aggregate ensured that even relatively

small balances could be pursued.

Collections were fairly straightforward, and reinsurers who might otherwise

have multiple chances before multiple panels to assert certain defenses

were forced to make their arguments before a single arbitration panel.

The ability of cedents to compel consolidated arbitration probably

contributed to reinsurers settling certain claims that they might otherwise

have disputed.

Now that courts may be the gatekeepers when a party demands

consolidated arbitration, and now that the Supreme Court has imposed

some fairly strict standards for establishing consent to class or

consolidated arbitration, reinsurers probably have regained the tactical

advantage. And the strategy adapted may well be of the “divide and

conquer” variety – reinsurers may in appropriate cases force the cedent to

commence multiple proceedings and, among other things, obtain multiple

bites at the apple on their defenses before multiple panels.

Some of the tactical and strategic advantages that may inure to reinsurers’

benefit in light of Stolt-Nielsen are summarized below. Assume for

discussion purposes that there are multiple reinsurers participating in

various years and layers of a multi-year treaty program, and many of the

reinsurers are disputing various claims made by the cedent and allocated

to various years and layers of the program. Assume also that most of the

claims have been outstanding for some time:

1. The Disputed Amounts Per Arbitration Will Be Lower. If the ceding

company is unable to aggregate all of its claims into a single

arbitration proceeding, then the arbitrators’ focus will generally be

only on the amount owed for that claim under the contract that is the

subject of the arbitration, even if the reinsurer owes additional

amounts under other contracts that might otherwise have been the

subject of a consolidated arbitration. If the amount in arbitration is

not particularly high, the arbitrators may be less inclined to award

interest if the cedent wins, even if the amount has been outstanding

for some time. And it will generally be more difficult for the cedent to

paint the reinsurer as recalcitrant because the cedent will not

necessarily be allowed to complain about the aggregate amount the

reinsurer owes for all claims under the treaty program.

2. The Cedent Will Have to Invest More Time and Effort into

Collection. Pursuing separate arbitration proceedings increases time

and monetary costs significantly. Depending on economic conditions,

and on the odds of multiple arbitration panels imposing relatively high

rates of pre-award interest, time tends to be on the side of the party

holding the money, which is usually the reinsurer. The longer it takes

the cedent to collect what it is entitled to for its claims (if anything),

the better off economically the reinsurer may be.






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The more time and money that must be spent on collection, the less

valuable the cedent’s claim is. While the reinsurer will also incur

costs, the importance of resisting payment of the claim may transcend

the dollar value of the controversy over that claim, especially when the

reinsurer has good defenses. There may also be other considerations

justifying the higher cost, such as the reinsurer’s desire for a broad

commutation, or the reinsurer’s belief that the tactical advantages of

separate arbitration proceedings outweigh the additional cost.

These time and money costs may increase the likelihood that

reinsurers can negotiate favorable settlements and perhaps even

commutations of the contract or multiple contracts (if that is what

they desire).

3. Reinsurers Get Multiple Bites at the Proverbial Apple. All other

things being equal, the outcome of a close-call dispute may be

determined by the institutional predispositions of the umpire. If a

reinsurer loses its dispute over claim A in arbitration 1 because it lost

the coin toss, it may prevail on claim B in arbitration 2 if it wins the

toss, even if the claims involve the same or similar issues. While the

cedent might make an issue-preclusion argument in arbitration 2,

such matters are generally in the discretion of the arbitration panel,

and the more sympathetic panel in arbitration 2 may simply decide

the issues de novo. (Of course, the reinsurer might lose the coin toss

again in arbitration 2, but it has even odds of winning each time the

coin is tossed, and the more frequently the coin is tossed, the more

likely the reinsurers will enjoy the benefit of those odds.)

Multiple arbitrations thus allow reinsurers more than one chance to

prevail on a given defense, and that can be an important

consideration in close-call disputes. It also effectively spreads

arbitration risk by reducing the amount at stake each time the

reinsurer asserts the defense.

4. The Reinsurer’s Odds of Prevailing May Increase if it is Able to

Arbitrate Separately the Claims on Which it has Stronger Defenses. If

the reinsurer is disputing in good faith multiple claims arising out of

different contracts, and — as is often the case — its defenses on some

are better than on others, the reinsurer will probably benefit by

arbitrating those stronger claims separately from the ones to which its

defenses are weaker.

5. Reinsurers are Less Likely to Be Prejudiced by Taking Claims

Positions Inconsistent with those of Other Reinsurers. Reinsurers

subscribing to a given treaty or group of treaties can and often do

take inconsistent claims positions for various reasons. For example, a

reinsurer in runoff may take positions in good faith that are

inconsistent with those of active writers, whose claims positions may

be influenced by ongoing , new-business-driven relationships with

cedents. Or claims positions of both runoff and actively-writing

reinsurers may be influenced by the extent to which they cede

reinsurance to others, and whether they do so as direct writers.

But when reinsurers must participate in consolidated proceedings with














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other reinsurers, their inconsistent positions can be used against them

by the cedent, even if there is a good faith basis for those inconsistent

positions. For example, a consolidated arbitration may include several

claims, and not all reinsurers may dispute each claim. If the issue is,

say, allocation, the arbitrators may conclude that a cedent may

allocate a claim in any way that is reasonable and is not designed to

maximize reinsurance recoveries. So if reinsurer A disputes the

allocation of claim 1, but reinsurer B does not, that may strongly

suggest that the allocation is reasonable, even though reinsurer B’s

motivation for paying claim 1 was not necessarily based on the

allocation being reasonable. It is usually (but not always) hard for A

to establish that B’s payment of the claim was principally motivated by

considerations having little or no bearing on whether the allocation

was reasonable. All other things being equal, reinsurer A has a better

chance of persuading the arbitration panel that cedent’s allocation of

claim 1 was unreasonable if reinsurer B is not a party to the

arbitration.

C. How Changed Law on Consolidation May Affect Tactical and Strategic

Considerations

The above are only some examples of tactical benefits reinsurers may

achieve if courts order consolidation less frequently than arbitrators did,

and reinsurers do not agree to consolidation. In view of those potential

benefits, we would not be surprised to see reinsurers begin to dispute with

renewed vigor cedent efforts to consolidate disputes. If reinsurers are

successful (and they probably will be) then they may gain a

significant edge in arbitration. Success on the arbitration front may cause

some reinsurers to dispute claims more readily than before, which may

increase the frequency of reinsurance arbitration.

Cedents understandably may complain, but one cannot fault reinsurers

from taking advantage of what the law as applied to their contracts may

allow them to do. Arbitration is, after all, a matter of contract, and

contracts allocate risks. Arbitration agreements allocate dispute-resolution

risk, and, like other contracts, may do so in a way that later turns out to be

more beneficial to one of the parties at the expense of the other.

Sophisticated parties that sign on to such contracts cannot complain that

the deal turned out to be less advantageous than they thought it would be,

even if the risks that they now must bear were not necessarily known or

ascertainable at the time of contracting.

But cedents will be able to do more than complain. They will no doubt

adjust their collection strategy and tactics to meet those of the reinsurers.

Part of that may involve savvy negotiation; picking one’s battles well;

making wise business decisions about collection-related expenses;

standing on principle from time-to-time; and seeking to eliminate – e.g.,

though interest and costs awards — the economic incentives of piecemeal

arbitration.

Cedents can also begin insisting on provisions in their contracts

authorizing consolidated arbitration. While that will not immediately

increase the number of consolidated proceedings, over time, as new

contracts mature and new disputes develop, it may be that consolidated






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arbitration once again becomes the norm.


Part I, Part II, Part III, Part IV, Part V.A, Part V.B, and Part V.C

Tags: Consolidated Arbitration, Green Tree Financial Corp. v. Bazzle,

Practice and Procedure, Reinsurance Arbitration, Stolt Nielsen S.A. v.

Animalfeeds Int'l Corp.

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