Let’s say your arbitration agreement calls for arbitration administered by JAMS under JAMS rules, but the arbitrator is independent and applies AAA rules, over one party’s objection. A new decision from the Fifth Circuit says that is enough to vacate the resulting award.
In Poolre Insurance Corp. v. Organizational Strategies, Inc., __ F.3d__, 2015 WL 1566633 (5th Cir. April 7, 2015), there was a dispute between a self-insured company, the consultants that set up its insurance program (Capstone), and its reinsurer. The arbitration agreement between the company and Capstone called for arbitration under the Commercial Arbitration Rules of the AAA, with venue in Delaware. The arbitration agreement between the company and the reinsurer, on the other hand, called for arbitration by the International Chamber of Commerce (ICC), in Anguilla, with the arbitrator chosen by “the Anguilla  Director of Insurance.” (Anguilla is in the British West Indies. Why don’t I ever get to arbitrate somewhere exotic? Maybe that’s the reward for being a reinsurance lawyer…)
Capstone started arbitration with the company at “Conflict Resolution Systems, PLLC” (CRS) in Houston, and Dion Ramos was named the arbitrator. When the reinsurer inquired whether the Anguilla Director of Insurance could select the arbitrator, as required in the reinsurance contract, an Anguillan official explained that “no such official existed.” (Sounds reminiscent of these cases...) However, the Anguillan official designated CRS to select an independent arbitrator and administer the proceedings. The company objected to the arbitrator’s authority, and the reinsurer intervened to request an arbitrator based in Anguilla. Ramos found he had jurisdiction over all parties, and found the reinsurer waived its right to arbitrate in Anguilla by intervening. The company continued to object, arguing that the arbitrator did not have the power to apply AAA rules to the reinsurance dispute.
Ramos found the reinsurer was properly joined in the arbitration. On the merits, Ramos found the company breached its contracts with Capstone and the reinsurer and granted attorneys’ fees and expenses to Capstone and the reinsurer of about a half a million dollars. Ramos denied all the company’s claims.
The reinsurer and Capstone moved to confirm the award and the company moved to vacate. The Texas district court found Ramos exceeded his authority by exercising jurisdiction over the reinsurer and applying AAA rules to the reinsurance dispute. Because the inclusion of the reinsurer “tainted the entire process,” the district court vacated the award.
On appeal, the Fifth Circuit affirmed the district court’s decision to vacate the award. The court noted that arbitration awards may be vacated when arbitrators “exceed the express limitations” of the contractual mandate, or act contrary to express contractual provisions. Here, the Fifth Circuit found two separate bases for vacating the award. First, the arbitrator-selection mechanism in the reinsurance contracts was not followed. (In a footnote, the court acknowledged that the selection mechanism provided in the contract was not actually available, since there was no official with that title, but that the parties could have come to the court under Section 5 of the FAA and asked the court to appoint an arbitrator.) Second, Ramos “acted contrary” to the requirement that the reinsurance disputes be arbitrated by the ICC under ICC rules. The court found that was a “forum selection clause integral to the agreement” and therefore the arbitrator exceeded his power by applying AAA rules. (Interestingly, the Fifth Circuit did not analyze the third basis that the district court used to support vacatur: the arbitrator’s decision to join all the parties to a single arbitration, although the company had not consented to consolidation.)
What are the lessons here for parties? Here are at least two. First, do not try to consolidate arbitrations that call for different administrators or different rules unless all parties agree. And second, if you are going to specify an unusual arbitrator-selection process, make sure to put a “Plan B” in the contract.
Two other bits of arbitration news:
Second, Delaware’s Rapid Arbitration Act officially became a law on April 3 and will go into effect in May. Will Delaware businesses see the promise of speedy dispute resolution (max resolution time is 180 days by law) as enough of a benefit to give it a try? We may never know, as the process will be confidential…