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Practice Note:
Protecting Decisions of the Arbitration Panel

by ~ Catherine Colinvaux and Jubilee Menzies* (Email) (Web Site)

The recent decision in Insurance Co. of North America v. Public Service Mutual Ins. Co., 2008 WL 5205970 (S.D.N.Y. Dec. 12, 2008) ("INA v. PSMIC") (Harold Baer, J.) provides a cautionary tale about one of the risks of arbitration: the occasional need to dissolve and reconstitute an arbitration panel, and the lost time, lost money and even lost dispositive decisions that may result.

Environmental Allocation Dispute

INA v. PSMIC arises out of INA's excess of loss casualty reinsurance of Public Service Mutual ("PSMIC"). In 2005, PSMIC settled environmental claims by one of its insured companies, Deleet Merchandising Corporation. Upon settlement, PSMIC allocated its loss over the fifteen annual primary liability policies it had issued to Deleet between 1971 and 1986. PSMIC then sought payment from its reinsurers, including INA, based upon its allocation methodology. INA disputed the allocation and contended that PSMIC's billing did not properly reflect the allocation risk to the underlying policies because, INA claimed, New Jersey law would allocate the loss differently.

PSMIC demanded arbitration. The INA treaties contained typical arbitration clauses which provided that any dispute "shall be submitted to three arbitrators, one to be chosen by each party, and the third by the two so chosen." At the outset, each party appointed its own arbitrator, the two then appointed an umpire per procedure, and together the trio comprised the original panel, properly formed.

Reinsurer's Arbitrator Resigns After Summary Judgment for Cedent

Complications arose when INA's appointed arbitrator resigned for health reasons part way through the arbitration. Not long before the arbitrator's resignation, the panel had unanimously decided a summary judgment motion in PSMIC's favor. PSMIC had sought summary judgment for payment of the entire disputed amount, together with interest, attorneys' fees and expenses. PSMIC argued the panel must reject what it characterized as INA's "sole defense," namely, that New Jersey law governed the allocation.

The panel unanimously agreed that New Jersey law did not apply. However, rather than decide the entire arbitration in PSMIC's favor on summary judgment, the panel directed that the parties should focus on "whether-for reasons other than [New Jersey law]-PSMIC's reinsurance allocation was made in bad faith or was unreasonable." At the same time, the panel set a final hearing date.

INA moved for reconsideration of the summary judgment ruling and while that ruling was pending, a mere seven days before the final arbitration hearing was scheduled to begin, INA's party arbitrator resigned.

INA argued that the panel must be reconstituted with new arbitrators. Understandably, however, PSMIC wished to continue with the existing arbitration, leaving intact a unanimous ruling under which it was likely to win the entire arbitration, and substituting a new INA arbitrator.

Must the Arbitration Commence Anew?

With the parties at an impasse, INA brought suit in federal court in New York City. The key issue before the court was (1) whether an arbitration proceeding interrupted by the resignation of a panelist may continue after the appointment of a replacement arbitrator, keeping existing rulings intact; or (2) whether the arbitration must start again before a new panel.

The general rule is that in the event of an arbitrator's death, arbitration must commence anew before a full panel. Marine Products Export Corp. v. M.T. Globe Galaxy, 977 F.2d 66 (2d Cir. 1992) ("Marine Products"). Nevertheless, the Second Circuit has recognized that deviation from the general rule is warranted under "special circumstances." The court has held that when a member of an arbitration panel dies after the panel has issued a partial final award that conclusively decided every point in the parties' submissions, a replacement arbitrator may be appointed to the panel and the existing arbitration may proceed. Trade & Transport, Inc. v. Natural Petroleum Charterers, Inc., 931 F.2d 191, 194 (2d Cir. 1991) ("Trade & Transport").

As the INA v. PSMIC court made clear, the key to upholding a partial award in such circumstances is that the award be "final." PSMIC argued that special circumstances warranted deviation from the general rule because the panel had disposed of the major disputed issue in the case on a summary judgment. Therefore, argued PSMIC, the court should permit a replacement arbitrator to join the original panel, and the existing proceeding should continue. Supporting PSMIC's contentions, even the umpire of the original panel opined that substantive rights had accrued and that PSMIC would suffer prejudice if a new arbitration were ordered.

Unfortunately for PSMIC, the court agreed with INA that the prior panel's summary judgment ruling was not "final," and thus, the particular facts of this case did not constitute "special circumstances" allowing it to depart from the general rule requiring the arbitration to commence anew with a new panel.

The District Court Applies Second Circuit's General Rule, Considers Policy Implications

In reaching its conclusion, the district court considered the specific circumstances of the dispute and larger public policy issues. Although the implications of the summary judgment order were significant-even outcome determinative-for PSMIC, the court noted that the panel ruling was no more than an interim decision on a choice of law issue. Even as to that ruling, a motion for rehearing was pending when INA's arbitrator resigned, and the panel had expressly declined PSMIC's invitation to issue a broader ruling that would dispose of all liability and damages issues. As a result, the court reasoned, the ruling, though likely dispositive, was not "final."

Despite its holding, the INA v. PSMIC court recognized the "potential for abuse of a rule that can afford a losing party a 'second bite at the apple' upon the resignation of its party-appointed arbitrator." Acknowledging the potential for manipulation of the arbitration process if parties can freely halt proceedings by resigning their appointed arbitrators, the court suggested that its decision would not foreclose the possibility of continuing an arbitration with a replacement panelist in a case that evidences misconduct or resignation for trivial reasons.

The court also recognized that a rule requiring arbitration to "commence anew" whenever a panelist dies or resigns may result in squandered resources. Troubled by these concerns, the court stated that its decision was based strictly on the unique facts of this case and the status of the arbitration at the time of the original panelist's resignation.

Practical Considerations for Securing Dispositive Rulings

These caveats notwithstanding, the decision is in accord with the general rule, and the facts and outcome have implications for practice. For example, in Trade & Transport, mentioned above, the parties had requested that the arbitration panel issue a final determination as to liability, which the panel immediately and conclusively did. Upon the later death of one arbitrator, the district court and the Second Circuit both permitted the appointment of a replacement panelist, without commencing the arbitration anew. The difference: a "partial final award."

The practical implications are clear. Even before the organizational meeting, consider whether the arbitration may benefit from a structure which permits interim rulings to become final. Such a structure may be appropriate when the issues can be segregated into discrete units or when an arbitration is expected to continue over a long period of time-increasing the likelihood that a member of the panel may become unable to serve. Similarly, consider requesting an interim final ruling when presenting substantive matters for resolution before the final hearing. If the parties and panel express an advance intent to permit interim final rulings, the rulings may be permitted to stand even if a panel member is lost.Our range for men and women in fendi bags,replica watches,replica gucci watches and chopard replica watches will leave you agog.

Catherine Colinvaux may be reached at ccolinvaux@zelle.com.

*Jubilee Menzies is a member of the class of 2010 at Boston College Law School. She is currently a summer law clerk in Zelle Hofmann's Boston office.

 2009 Zelle Hofmann Voelbel & Mason LLP. All Rights Reserved.

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