by ~ Michael F. Aylward (Email) (Web Site)
Who decides the scope of what is arbitrable: the arbitrators or a reviewing court? And when does a prior arbitration panel’s ruling estop the cedent from pursuing the same claims against a different reinsurer? Those were the questions posed to the U.S. Court of Appeals for the First Circuit in a recently-decided case addressing the respective roles of arbitration panels and judges in the arbitration process.
In Employers Insurance Co. of Wausau v. OneBeacon American Insurance Co., No. 13-13913 (1st Cir. Feb. 26, 2014), the First Circuit was asked to consider a dispute involving reinsurance contracts that OneBeacon’s predecessor had entered into with various reinsurers between 1986 and 1996. In particular, OneBeacon’s predecessor had entered into Multi-Line Excess Cover (“MLEC”) reinsurance contracts with Wausau from 1973 to 1974 and then with Swiss Re from 1975 to 1980.
In 2007, OneBeacon demanded arbitration against Swiss Re. After that proceeding ended unfavorably for OneBeacon, it sought arbitration against Wausau in 2012 under the MLEC agreements, allegedly seeking reinsurance recovery for some of the same losses that it had originally sought to recover from Swiss Re. Wausau sought dismissal of OneBeacon’s claim, arguing that this new claim was barred by the outcome of the Swiss Re arbitration. The Massachusetts District Court (Casper, J.) denied the petition, holding that “the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.” Wausau appealed.
On appeal, the First Circuit characterized the core issue to be determined as follows:
"The single issue on appeal is whether a dispute over the preclusive effect of a prior arbitration is arbitrable. More specifically, when an arbitration decision is confirmed by a federal court order, is the preclusive effect of that decision on a subsequent arbitration a matter for the federal court or the arbitrator to decide?"
Addressing these issues, Wausau argued that since federal courts have the exclusive authority to determine the preclusive effects of their judgments, an arbitrator lacks the authority to determine the preclusive effect of a prior arbitration once it has been confirmed by a federal court. However, the arbitration clauses in the MLEC agreements required the arbitration of “any irreconcilable dispute between [the parties] in connection with” the agreements. In light of this broad language, the First Circuit found that the requirement of arbitration extended to disputes over the preclusive effect of prior arbitrations. The First Circuit also observed that courts are in agreement that the “effect of an arbitration award on future awards . . . is properly resolved through arbitration.”
Wausau argued on appeal that the earlier arbitration panel’s award should have preclusive effect as it had been confirmed by the order of a federal district court. Wausau argued that (1) Section 13 of the Federal Arbitration Act provides that an order confirming an arbitration award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action,” 9 U.S.C. § 13; and (2) enforcement of a federal judgment, including the determination of its preclusive effect, is the “exclusive province of federal courts”; therefore, (3) only federal courts have the authority to determine the preclusive effect of an arbitration award after it has been confirmed by a court order. Any other conclusion, Wausau argued, would violate the unambiguous text of Section 13 placing orders confirming arbitration awards on equal footing with all other court orders.
The First Circuit instead adopted the view of the Ninth Circuit, expressed in Chiron Corp. v. Ortho Diagnostic Systems, Inc., 207 F.3d 1126, 1132 (9th Cir. 2000), that judicial confirmation of an arbitration award “does not warrant deviation from the general rule that the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.” Further, the court found that a district court’s confirmation of an arbitration award was rarely based on the merits. As a result, the First Circuit ruled that the district court’s confirmation of the Swiss Re arbitration panel’s award could not collaterally estop OneBeacon from making a later, related claim against Wausau. The court concluded:
"This conclusion does no violence to the text of Section 13 or the Congressional intent underlying it. Nor does it harm the federal court’s power to enforce its own judgments. It simply means that the federal court will protect its judgments within their proper bounds. For example, if a federal court, in enforcing an arbitration award, held that the arbitration was not fraudulent, and thus was enforceable, a subsequent arbitrator would not be able to decide to the contrary. But if a federal court has nothing to say about the merits of the arbitration decision that it confirms (which is almost always the case), then a subsequent arbitrator does not infringe on the prerogatives of the federal court by determining the preclusive effect of that arbitration decision. Therefore, we will not deviate here from the general rule that the preclusive effect of a prior arbitration is an arbitrable issue."
Wausau also argued that when the parties negotiated their arbitration agreement in the early 1970s, the applicable case law did not hold that preclusion was an arbitrable issue. As a result, Wausau contended that the parties could not have intended for the scope of their arbitration agreement to cover the preclusive effect of prior arbitrations. The court declined to consider this issue, however, finding that Wausau had not raised it in the court below.
The OneBeacon decision appears to significantly strengthen the role of arbitrators and circumscribe the power of the District Court in considering the arbitrability of reinsurance disputes.
Mr. Aylward is a Senior Partner in the Boston office of Morrison Mahoney LLP. He may be reached at email@example.com.
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