In First State Ins. Co. v. National Casualty Co., No. 14-1644 (1st Cir. Mar. 20, 2015), the First Circuit rejected an argument that arbitrators exceeded their authority in requiring the parties to follow a specific payment procedure, holding that the contract’s “honorable engagement” provision empowered the arbitrators to grant forms of relief, including equitable remedies, not explicitly mentioned in the underlying agreement.
First State Insurance Company (“First State”) entered into a number of reinsurance and retrocessional agreements with National Casualty Company (“National”), a reinsurer. In 2011, First State initiated arbitration under eight of the agreements to resolve billing and payment of claims disputes. The parties agreed to consolidate all the arbitrations into a single proceeding before a panel of three arbitrators. First State suggested, and the arbitrators agreed, over National’s objection, to consider the contract interpretation issues first. The contract interpretation award, made on December 13, 2012, held for First State, finding that National’s payment obligation was not conditioned upon the exercise of its right to audit or ask for additional documents from First State.
First State filed a petition pursuant to the Federal Arbitration Act (“FAA”) to confirm the award in the Southern District of New York. National moved to dismiss the petition or transfer venue to the District of Massachusetts. Eight months later, on September 27, 2013, the court transferred the case. National then cross-petitioned to vacate the contract interpretation award on October 15, 2013. By then, there was a final arbitration award and First State also petitioned to confirm that award. The district court confirmed both the contract interpretation award and the final arbitration award. National appealed the confirmation of the contract interpretation award, which was the only one it had challenged.
As to National’s cross-petition to vacate the contract interpretation award, the First Circuit held that, because it was filed outside the 90-day window mandated by the FAA, it was clearly time-barred. However, rather than having to consider the many theories why the petition should not be considered time-barred, the court upheld the confirmation on the merits.
The court first rejected National’s argument that the arbitrators exceeded the scope of their authority. All that was necessary was for the arbitrators to “arguably construe” the underlying agreements. Only if they dispensed “their own brand of industrial justice” will a court vacate the award. That standard was not met here because, regardless of whether the arbitrators were right or wrong, the text of the award made clear that the arbitrators construed the contracts.
The court found that the arbitrators had construed the contract, even in the “reservation of rights” procedure in the contract interpretation award. Therein, the arbitrators held that National was required to make payments to First State following a billing supported by a Proof of Loss and Reinsurance Report(s), subject only to an appropriate reservation of rights by National in instances where it had a question regarding coverage. National claimed this reservation of rights procedure was “plucked out of thin air” and not derived from any contract term.
The court disagreed, noting that the agreements contained an honorable engagement provision, which directs the arbitrators to consider each agreement as an honorable engagement, not merely a legal one. While the court stated that this was the first time it had considered such a clause, in its opinion, the honorable engagement clause empowers arbitrators to grant forms of relief not explicitly mentioned in the underlying agreement. Thus, because the arbitrators were authorized to grant equitable remedies, and because the reservation of rights procedure in the award was such a remedy, there was no basis to vacate the award.
A version of this post originally appeared in the May 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.
