First State Insurance Company v. National Casualty Co , 781 F.3d 7 ( 2015 )

United States Court of Appeals
For the First Circuit
No. 14-1644
FIRST STATE INSURANCE COMPANY and
NEW ENGLAND REINSURANCE CORPORATION,
Appellees,
v.
NATIONAL CASUALTY COMPANY,
Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Selya, Circuit Judge,
Souter,* Associate Justice,
and Lipez, Circuit Judge.
Kendall W. Harrison, with whom Godfrey & Kahn, S.C., Susan A.
Hartnett, Patrick J. Hannon, and Sugarman, Rogers, Barshak & Cohen,
P.C. were on brief, for appellant.
Lloyd A. Gura, with whom Michael P. Mullins, David W.S.
Lieberman, Day Pitney LLP, Amy J. Kallal, Matthew J. Lasky, and
Mound Cotton Wollan & Greengrass were on brief, for appellees.
March 20, 2015
*
Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
SELYA, Circuit Judge. A party that implores a court to
vacate an arbitration award normally faces a steep uphill climb:
the scope of judicial review of arbitration awards is "among the
narrowest known in the law." Me. Cent. R.R. Co. v. Bhd. of Maint.
of Way Emps., 873 F.2d 425, 428 (1st Cir. 1989). And where, as
here, the arbitration clause contains an "honorable engagement"
provision, judicial review is encumbered by yet a further level of
circumscription. Surveying this arid landscape, the court below
refused to vacate the challenged arbitration award and instead
confirmed it. Discerning no error, we affirm.
I. BACKGROUND
In industry parlance, a primary insurer may cede risk
to another insurer, who effectively becomes a reinsurer. See N.
River Ins. Co. v. ACE Am. Reins. Co., 361 F.3d 134, 137 (2d Cir.
2004). When a reinsurer cedes assumed risk to yet another insurer,
that transfer is called a retrocessional agreement. See Compagnie
de Reassurance d'Ile de France v. New Eng. Reins. Corp., 57 F.3d
56, 62 (1st Cir. 1995). Here, First State Insurance Company and
New England Reinsurance Corporation (collectively, First State)
entered into a number of reinsurance and retrocessional agreements
with a reinsurer, National Casualty Company (National). In August
of 2011, First State demanded arbitration under eight of these
agreements to resolve differences of opinion about billing disputes
and the interpretation of certain contract provisions relating to
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payment of claims.1 By agreement of the parties, all the
arbitrations were consolidated in a single proceeding before a
panel of three arbitrators.
At First State's suggestion and over National's
objection, the arbitrators agreed to consider the contract
interpretation issues first. As to those issues, First State
sought declaratory relief addressing (i) the minimum quantum of
information required to be furnished in order to trigger National's
payment obligations and (ii) whether National could condition
payment on its exercise of its contractual right to inspect First
State's files.
After briefing and argument, the arbitrators handed down
a contract interpretation award dated December 13, 2012. This
award established a payment protocol under the agreements, which
provided that National's payment obligations were to be triggered
"upon its receipt of a billing supported by a Proof of Loss and
Reinsurance Report(s) prepared by First State in a form and content
generally as those introduced with the briefings on this motion."
The award further noted that "[s]aid payments may be made subject
to an appropriate reservation of rights by [National] in instances
1
The arbitration clauses in the various agreements are
similar but not identical. The same holds true for the loss
settlement provisions and the provisions granting National a right
to inspect or audit First State's books and records at any
reasonable time. These modest differences are not material to
this appeal.
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where it has or does identify specific facts which create a
reasonable question regarding coverage under the subject
reinsurance agreement(s)" but "[p]ayment obligations on the part of
[National] are not conditioned upon the exercise of its right to
audit or the production of additional information or documents,
other than those provided by First State as described . . . above."
First State promptly repaired to the United States
District Court for the Southern District of New York and filed a
petition pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. §
9, to confirm the award. National moved to dismiss the petition
or, in the alternative, to transfer venue to the District of
Massachusetts. On September 27, 2013 — some eight months after
suit had been brought — the court transferred the case to the
District of Massachusetts. National thereafter cross-petitioned to
vacate the contract interpretation award. See id. § 10(a)(4).
That cross-petition was not filed until October 15, 2013.
By then, the underlying arbitration proceedings had run
their course, and First State had petitioned in the District of
Massachusetts to confirm the panel's final award. The district
court consolidated the two confirmation petitions and, after a
hearing, summarily confirmed both the contract interpretation award
and the final arbitration award. This timely appeal ensued.
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II. ANALYSIS
National's claims of error relate only to the contract
interpretation award. Before reaching them, however, we must take
the measure of a preliminary obstacle. Under the FAA, a party
seeking to vacate an arbitration award must apply to the district
court within 90 days after the promulgation of the award. See id.
§ 12. First State asserts that National's cross-petition to vacate
the contract interpretation award was filed outside this temporal
window and is, therefore, time-barred.
It is clear beyond hope of contradiction that National
did not meet the 90-day statutory deadline. The arbitrators issued
the contract interpretation award on December 13, 2012, and
National did not file its petition to vacate that award until
October 15, 2013 (more than 300 days later). Spinning an intricate
web of arguments, National insists that its motion to dismiss First
State's petition to confirm (which was filed within the 90-day
period) could serve as a surrogate for a petition to vacate or, at
least, had the effect of tolling the deadline. National adds a
series of arguments based on First State's infelicitous choice of
a forum, averring that it could not have filed a timeous petition
to vacate in the Southern District of New York conditioned upon the
disposition of its motion to dismiss without undermining its venue-
based objections and unnecessarily taxing the resources of two
district courts.
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We need not unravel this tangled skein, however, as this
case is easily resolved on the merits.2 See, e.g., Cozza v.
Network Assocs., Inc., 362 F.3d 12, 15 (1st Cir. 2004) (bypassing
"novel jurisdictional issue" regarding timeliness of appeal in FAA
case where matter was susceptible to straightforward merits
disposition); Nisselson v. Lernout, 469 F.3d 143, 151 (1st Cir.
2006) (bypassing unsettled prudential standing question when record
provided clear basis to resolve case on the merits). On this
understanding, we proceed directly to the merits of National's
appeal.
National asseverates that the district court erred in
refusing to vacate the contract interpretation award because the
arbitrators exceeded the scope of their authority. Since the court
below neither conducted an evidentiary hearing nor made findings of
fact, our review is de novo. See Cytyc Corp. v. DEKA Prods. Ltd.
P'ship, 439 F.3d 27, 32 & n.2 (1st Cir. 2006).
A federal court's authority to defenestrate an
arbitration award is extremely limited. See Oxford Health Plans
LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013); Cytyc, 439 F.3d at 32.
2
Although the Supreme Court has disapproved of some uses of
hypothetical jurisdiction, see Steel Co. v. Citizens for a Better
Env't, 523 U.S. 83, 94-95 (1998), we have held that the Court's
rationale extends only to situations that implicate Article III
jurisdiction. See, e.g., Nisselson v. Lernout, 469 F.3d 143, 151
(1st Cir. 2006); McBee v. Delica Co., 417 F.3d 107, 127 (1st Cir.
2005). We may continue to bypass thorny jurisdictional issues and
resolve cases on the merits where, as here, those jurisdictional
issues implicate only statutory or prudential considerations.
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Here, the sole inquiry is whether the arbitrators "even arguably"
construed the underlying agreements and, thus, acted within the
scope of their contractually delineated powers. Oxford Health, 133
S. Ct. at 2068. A legal error (even a serious one) in contract
interpretation is, in and of itself, not a sufficient reason for a
federal court to undo an arbitration award. See id.; Cytyc, 439
F.3d at 32. Only if the arbitrators acted so far outside the
bounds of their authority that they can be said to have dispensed
their "own brand of industrial justice" will a court vacate the
award. Stolt-Nielsen v. AnimalFeeds Int'l Corp., 559 U.S. 662, 671
(2010) (internal quotation mark omitted). Put another way, as long
as an arbitration award "draw[s] its essence" from the underlying
agreement, it will withstand judicial review — and it does not
matter how "good, bad, or ugly" the match between the contract and
the terms of the award may be. Oxford Health, 133 S. Ct. at 2068,
2071 (internal quotation mark omitted).
National submits that this case represents one of the
rare instances in which the vacation of an arbitration award is
warranted because the arbitrators exceeded the scope of their
powers by re-writing the terms of the parties' agreements. In its
view, the payment protocol fashioned by the arbitrators is
ultracrepidarian since it obligates National to pay billings that
may not fall within the terms and conditions of any applicable
agreement. National further submits that the award effectively
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forecloses or at least significantly impairs its broad access
rights under the inspection and audit provisions of the agreements
by conditioning those rights on the transmittal of an appropriate
time-of-payment reservation of rights. This reservation of rights
procedure, National says, is plucked out of thin air and not
derived from any contract term.
These arguments comprise more cry than wool. In
ascertaining whether arbitrators arguably interpreted the
underlying contract, an inquiring court must look first to the text
of the arbitral award. After all, "[t]he award will often suggest
on its face that the arbitrator was arguably interpreting the
contract." BNSF Ry. Co. v. Alstom Transp., Inc., __ F.3d__, __
(5th Cir. 2015) [No. 13-11274, Slip Op. at 4].
The contract interpretation award here is of this genre:
it explained that the payment protocol was, in part, "based upon
the terms of the subject reinsurance agreements," and confined its
inquiry into National's payment obligations to the obligations
existing "under the subject reinsurance agreements." It is readily
apparent, then, that the arbitrators understood the nature of their
task. See Oxford Health, 133 S. Ct. at 2069; BNSF, __ F.3d at __
[Slip Op. at 4].
To cinch the matter, the payment protocol limned in the
award tracks the plain language of the relevant provisions in the
parties' reinsurance agreements. By way of illustration, the
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various loss settlement provisions, see supra note 1, obligate
National to pay either "within 15 days" or "at the same time . . .
as the reinsured may elect to pay" or "immediate[ly]" upon the
production of "reasonable" or "satisfactory" evidence of the amount
"due" or "to be paid." These arrangements are generally consistent
with the payment protocol in the arbitration award, which obligates
National to pay "upon its receipt of a billing" supported by a
proof of loss and reinsurance report containing, inter alia, the
amount paid or due by First State to its insured.
We think it noteworthy that none of the loss settlement
provisions in the underlying agreements expressly cross-references
the separate inspection, audit, or access to records provisions.
The contract interpretation award mirrors this separation; it
provides that National's payment obligations are independent of and
not conditioned upon the exercise of National's right to inspect
and audit First State's records. Given this structural similarity,
we are fortified in our conclusion that the arbitrators were doing
nothing beyond construing the underlying agreements.
Let us be perfectly clear. Whether the arbitrators were
correct either in their interpretation of the underlying agreements
or in their implementation of a particular payment protocol is not
within our purview. For present purposes, it suffices that, when
compared to the text of the underlying agreements, the contract
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interpretation award leaves no doubt that the arbitrators were
arguably construing those agreements.
This brings us to National's complaint that the
reservation of rights procedure adumbrated in the contract
interpretation award does not draw its essence from the underlying
agreements. That procedure, National says, operates to
circumscribe its broad inspection and audit rights under those
agreements. We do not agree.
Each of the eight reinsurance agreements, as well as the
agreement to consolidate the arbitrations, contains an honorable
engagement provision. This language directs the arbitrators to
consider each agreement as "an honorable engagement rather than
merely a legal obligation" and goes on to explain that the
arbitrators are "relieved of all judicial formalities and may
abstain from following the strict rules of law."
Until today, this court has not had occasion to address
the operation and effect of an honorable engagement provision in an
arbitration clause. We believe that an honorable engagement
provision empowers arbitrators to grant forms of relief, such as
equitable remedies, not explicitly mentioned in the underlying
agreement. See Banco de Seguros del Estado v. Mut. Marine Office,
Inc., 344 F.3d 255, 261 (2d Cir. 2003); Pac. Reins. Mgmt. Corp. v.
Ohio Reins. Corp., 935 F.2d 1019, 1024-25 (9th Cir. 1991); Harper
Ins. Ltd. v. Century Indem. Co., 819 F. Supp. 2d 270, 278 (S.D.N.Y.
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2011). This is a huge advantage: the prospects for successful
arbitration are measurably enhanced if the arbitrators have
flexibility to custom-tailor remedies to fit particular
circumstances. See Yasuda Fire & Marine Ins. Co. of Eur. v. Cont'l
Cas. Co., 37 F.3d 345, 351 (7th Cir. 1994). An honorable
engagement provision ensures that flexibility.
We therefore hold that the honorable engagement
provisions in the arbitration clauses of the underlying agreements
authorized the arbitrators to grant equitable remedies. We further
hold that the reservation of rights procedure is such a remedy.
Consequently, National's objection to that procedure is unavailing.
We add a coda. National makes much of an event that
occurred after the arbitrators promulgated the contract
interpretation award: a decision by the arbitrators in the second
phase of this arbitration that struck a reservation of rights
letter submitted by National in connection with certain payments.
This decision shows, as National sees it, that the reservation of
rights procedure effectively forecloses both its inspection and
audit rights and its ability to recoup improper payments from First
State.
In the Shakespearean phrase, National's fears are less
than horrible imaginings. William Shakespeare, Macbeth, act 1, sc.
3 (circa 1606). First State acknowledged both in its brief and at
oral argument in this court that the contract interpretation award
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does not condition National's inspection, audit, or recoupment
rights on its submission of an appropriate reservation of rights.
As First State concedes, the contract interpretation award leaves
National, upon receipt of a billing from First State, with three
options: it may (i) reject the billing, (ii) pay the billing
without comment, or (iii) pay the billing with a reservation of
rights. Whether National employs the second or third option when
paying a particular billing, it retains the right thereafter to
inspect First State's records, audit the claim, and seek recoupment
through a subsequent arbitration should it conclude that payment
was improperly made. First State has endorsed this reading of the
contract interpretation award and, therefore, it cannot assert
either the absence or inadequacy of a reservation of rights as a
defense to future recoupment efforts by National.
III. CONCLUSION
We need go no further. For the reasons elucidated above,
the denial of National's cross-petition to vacate and the order
confirming the contract interpretation award are
Affirmed.
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