Connecticut General Life Insurance v. Sun Life Assurance Co. of Canada ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 99-4085 & 99-4106
Connecticut General Life Insurance Company,
et al.,
Petitioners/Cross-Respondents/Appellees,
v.
Sun Life Assurance Company of Canada, et al.,
Respondents/Cross-Petitioners/Appellants,
v.
Unicover Managers, Inc., et al.,
Third-Party Respondents/Appellees.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 99 C 6491 & 6512--William J. Hibbler, Judge.
Argued March 27, 2000--Decided April 27, 2000
Before Posner, Chief Judge, and Flaum and Williams,
Circuit Judges.
Posner, Chief Judge. These consolidated appeals
ask: When does a federal district court have the
power to order the consolidation of arbitration
proceedings before a single arbitral panel? The
question grows out of a reinsurance contract
between two (overlapping) sets of insurance
companies. One set, the three "retrocessionaires"
(Sun, Phoenix, and Cologne), agreed to reinsure
workers’ compensation reinsurance policies issued
by the other set, the seven "retrocedents." (Two
of the retrocessionaires, Phoenix and Cologne,
are also retrocedents.) For clarity we’ll call
the retrocessionaires the "reinsurers," and the
retrocedents the "insurers," though in fact both
sets of companies are reinsurers, there being
many layers of reinsurance in the workers’
compensation insurance market.
The contract was negotiated on behalf of the
insurers by Unicover Managers, Inc., described in
the contract as their "manager." Unicover is a
middleman in the workers’ compensation
reinsurance market. Although not technically an
insurance company, it issues reinsurance
contracts to insurance companies (the
retrocedents in this case) and then in effect
assigns these contracts to other insurance
companies (the retrocessionaires), who then bear
the risk created by the contracts and reap the
premiums that the contracts specify.
The contract contains an arbitration provision
pursuant to which Sun and Phoenix served a demand
for arbitration on Unicover and its insurers.
Four of the latter responded by filing their own
demands, each seeking a separate arbitration
between itself, on the one hand, and Sun and
Phoenix, on the other. Each of the six companies
filed a motion in the federal district court in
Chicago (the venue prescribed by the arbitration
provision of the contract) pursuant to section 4
of the Federal Arbitration Act, 9 U.S.C. sec. 4,
to compel arbitration. The district court denied
the reinsurers’ motion for a single arbitration
and granted the insurers’ motions for separate
arbitrations; its order, which wound up the
proceedings in the district court, is appealable
under 9 U.S.C. sec. 16(a)(3). See Iowa Grain Co.
v. Brown, 171 F.3d 504, 507-08 (7th Cir. 1999);
Napleton v. General Motors Corp., 138 F.3d 1209,
1212 (7th Cir. 1998); Augustea Impb Et Salvataggi
v. Mitsubishi Corp., 126 F.3d 95, 99 (2d Cir.
1997). (Whether our test for the appealability of
such orders is too demanding is at present before
the Supreme Court. See Randolph v. Green Tree
Financial Corp.-Alabama, 178 F.3d 1149, 1152-57
(11th Cir. 1999), cert. granted, 2000 WL 122150(U.S. Apr. 3, 2000); Napleton v. General Motors
Corp., supra, 138 F.3d at 1216-18 (dissenting
opinion).) Two of the other insurers settled, and
the position of the remaining two (which includes
one of the companies that is both a
retrocessionaire and a retrocedent, Cologne Life
Reinsurance Company) is unclear. Sun and Phoenix
stated in their demand for arbitration that they
were seeking rescission of the reinsurance
contract, plus damages, on the ground of fraud by
Unicover (for which, they contend, the insurers,
as Unicover’s principals, are liable) in both the
inducement and the performance of the contract.
The potential damages could, we are told, exceed
$2 billion.
None of the parties contends that the issue of
one versus many arbitrations is for the
arbitrators rather than the court to decide. The
arbitration provision in the contract does not
address the question of who decides, cf. First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
945 (1995), and there are compelling practical
objections to remitting the question to the
arbitrators. See Thomas J. Stipanowich,
"Arbitration and the Multiparty Dispute: The
Search for Workable Solutions," 72 Iowa L. Rev.
473, 513 (1987). Arbitral panels are ad hoc,
making it difficult to coordinate their decisions
on such a question. And there are no contractual
or statutory provisions for transferring cases
between panels, should multiple arbitrations be
commenced when the contract envisaged a single
consolidated one.
In defending the district court’s refusal to
order the single arbitration sought by their
opponents, the insurers press upon us a series of
cases in this and other courts that, they say,
hold that a federal district court cannot grant a
motion to consolidate separate arbitration
proceedings unless the contract on which the
arbitration is founded expressly authorizes
consolidation. Champ v. Siegel Trading Co., 55
F.3d 269, 275-77 (7th Cir. 1995); Glencore, Ltd.
v. Schnitzer Steel Products Co., 189 F.3d 264 (2d
Cir. 1999); Government of United Kingdom v.
Boeing Co., 998 F.2d 68, 71-74 (2d Cir. 1993);
American Centennial Ins. Co. v. National Casualty
Co., 951 F.2d 107 (6th Cir. 1991); Baesler v.
Continental Grain Co., 900 F.2d 1193 (8th Cir.
1990); Protective Life Ins. Corp. v. Lincoln
Nat’l Life Ins. Corp., 873 F.2d 281 (11th Cir.
1989) (per curiam); Del E. Webb Construction v.
Richardson Hospital Authority, 823 F.2d 145, 150
(5th Cir. 1987); Weyerhaeuser Co. v. Western Seas
Shipping Co., 743 F.2d 635 (9th Cir. 1984). All
that these cases actually hold, however, is that
unless the contract provides for consolidated
arbitration, the court cannot order it. E.g.,
Government of United Kingdom v. Boeing Co.,
supra, 998 F.2d at 72 ("Each of our sister
circuit courts that has considered the question
since these Supreme Court decisions has held that
district courts do not have the authority under
the FAA to consolidate arbitrations absent the
parties’ consent") (emphasis added); American
Centennial Ins. Co. v. National Casualty Co.,
supra, 951 F.2d at 108 ("we align ourselves with
the view taken by the Fifth, Eighth, Ninth, and
Eleventh Circuits, and hold that a district court
is without power to consolidate arbitration
proceedings, over the objection of a party to the
arbitration agreement, when the agreement is
silent regarding consolidation") (emphasis
added).
A court can in appropriate circumstances
consolidate cases before it (just as we have
consolidated the three separate appeals taken
from the district court’s order), whether or not
the parties want the cases consolidated, e.g.,
Fed. R. Civ. P. 42(a), or stay or transfer a case
in order to enable the consolidated or otherwise
orderly disposition of multiple proceedings.
E.g., 28 U.S.C. sec. 1404; Finova Capital Corp.
v. Ryan Helicopters U.S.A., Inc., 180 F.3d 896(7th Cir. 1999); Evans Transportation Co. v.
Scullin Steel Co., 693 F.2d 715 (7th Cir. 1982).
But it cannot consolidate, transfer, etc.
arbitration proceedings in defiance of the
parties’ wishes or contractual undertakings. The
arbitration of contractual disputes pursuant to
an arbitration clause in the contract is not a
stage in a judicial proceeding but an alternative
to such a proceeding, and the court cannot mess
in the arbitrators’ procedures beyond the very
limited extent permitted by sections 9 and 10 of
the Federal Arbitration Act (the provisions
governing judicial review of arbitration awards).
E.g., Baravati v. Josephthal, Lyon & Ross, Inc.,
28 F.3d 704, 709 (7th Cir. 1994); UHC Management
Co. v. Computer Sciences Corp., 148 F.3d 992, 997
(8th Cir. 1998). But we cannot see any reason
why, in interpreting the arbitration clause for
purposes of deciding whether to order
consolidation, the court should (as the language
we quoted from the American Centennial case
might, if read literally, be thought to suggest)
place its thumb on the scale, insisting that it
be "clear," rather than merely more likely than
not, that the parties intended consolidation. It
is not as if consolidation of arbitration
proceedings were somehow disfavored; quite the
contrary--the same considerations of adjudicative
economy that argue in favor of consolidating
closely related court cases argue for
consolidating closely related arbitrations. To
repeat, the court has no power to order such
consolidation if the parties’ contract does not
authorize it. But in deciding whether the
contract does authorize it the court may resort
to the usual methods of contract interpretation,
just as courts do in interpreting other
provisions in an arbitration clause. See, e.g.,
First Options of Chicago, Inc. v. Kaplan, supra,514 U.S. at 944; Mastrobuono v. Shearson Lehman
Hutton, Inc., 514 U.S. 52, 62-63 (1995); Volt
Information Sciences, Inc. v. Board of Trustees,
489 U.S. 468, 475 (1989); Perry v. Thomas, 482
U.S. 483, 492 n. 9 (1987); Brennan v. King, 139
F.3d 258, 264 (1st Cir. 1998).
The arbitration provision in this case neither
clearly permits nor clearly forbids
consolidation. In fact, it’s a muddle, suggesting
that the parties did not think about the issue.
So far as bears on the question of consolidation,
the provision reads as follows:
Any dispute arising out of the interpretation,
performance or breach of this Agreement,
including the formation or validity thereof, will
be submitted for decision to a panel of three
arbitrators. . . . One arbitrator will be chosen
by each party [and the party-designated
arbitrators will then choose a third, a neutral
to preside over the panel and presumably cast the
deciding vote in a close case] . . . . Unless
otherwise mutually agreed by the parties,
arbitration will take place in Chicago . . . . If
more than one Retrocessionaire is involved in
arbitration where there are common questions of
law or fact and a possibility of conflicting
awards or inconsistent results, all such
Retrocessionaires will constitute and act as one
party for purposes of this Article [the
arbitration provision] . . . .
The insurers argue that since each of them is a
party to the contract, it is impossible that each
could have a right to select one arbitrator if a
panel of three arbitrators is to decide a dispute
involving more than one party on the insurers’
side. There is no problem if there is more than
one party on the reinsurers’ side, by virtue of
the last sentence we quoted, whereby all the
reinsurers are to constitute a single party. But
that does not solve the problem of multiple
parties on the insurers’ side, because there is
no corresponding clause authorizing them to be
treated as one. The insurers argue that this
asymmetry is powerful evidence against such
treatment.
But this leaves out of account that any dispute
is to be referred to a panel of three
arbitrators, not just a dispute between the
reinsurers and a single insurer. As normally
understood, the word "dispute" (a word not
defined in the contract) does not exclude a
dispute involving multiple parties. So far as can
be inferred from the parties’ demands for
arbitration--which are our only clue to the
nature of the fight between the parties--there is
indeed a single dispute between the reinsurers on
the one hand and the insurers on the other,
arising out of the conduct of Unicover in
negotiating and administering the reinsurance
contract.
If "dispute" is taken in its ordinary sense and
"party" in the sense in which each of the
insurers is a separate party to these appeals
(the sense in which we used the word earlier in
this opinion), then the first two sentences that
we quoted from the arbitration provision are in
hopeless conflict. What to do? As a semantic
matter, it is easier to dissolve the conflict by
reading "party" to mean "side," a common usage,
than it is to read "dispute" to mean a dispute
with only one party on each side, an uncommon
usage. But what then of the fact that the
arbitration provision expressly makes the
reinsurers one party for purposes of arbitration
yet is silent about the insurers? The sensible
answer--which incidentally demonstrates the
limited utility, see, e.g., In re Continental
Casualty Co., 29 F.3d 292, 294 (7th Cir. 1994);
In re American Reserve Corp., 840 F.2d 487, 492
(7th Cir. 1988); Illinois Dept. of Public Aid v.
Schweiker, 707 F.2d 273, 277 (7th Cir. 1983); In
re Sealed Case No. 97-3112, 181 F.3d 128, 132
(D.C. Cir. 1999) (en banc); William N. Eskridge,
Jr., "Norms, Empiricism, and Canons in Statutory
Interpretation," 66 U. Chi. L. Rev. 671, 676-77
(1999), of the rule of interpretation that goes
by the impressive name of expressio unius est
exclusio alterius--is that the contract itself
makes the insurers one party but not the
reinsurers, so that making the reinsurers a
single party for purposes of arbitration suggests
if anything an intent to have a single
arbitration proceeding when there is a single
dispute, even if it’s a dispute with more than
one of the insurers. The contract was negotiated
on the insurers’ side by Unicover as their agent,
and Unicover is also the administrator of the
contract. The parties could foresee that any
dispute arising out of either the formation or
the administration of the contract would be a
dispute between the reinsurers and (or over the
behavior of) Unicover. Unicover didn’t want to be
in the position of having to arbitrate separately
with each reinsurer, so the arbitration provision
specifies that the reinsurers shall constitute a
single party. Presumably the reinsurers didn’t
want to arbitrate separately with each insurer,
either, especially since the contract places no
limit on the number of insurers that Unicover
might bring into the pool of insurers to whom it
would be issuing reinsurance policies and then
laying off the risk created by those policies on
the reinsurers. Another straw in the wind is the
provision for arbitration in Chicago, which just
happens to be Unicover’s headquarters but not
that of any of the other parties.
We cannot say that these textual inferences are
conclusive in favor of consolidation, but they
support it, as do practical considerations, which
are relevant to disambiguating a contract,
because parties to a contract generally aim at
obtaining sensible results in a sensible way.
See, e.g., Bratton v. Roadway Package System,
Inc., 77 F.3d 168, 173 (7th Cir. 1996); In re
Villa West Associates, 146 F.3d 798, 803 (10th
Cir. 1998); William C. Atwater & Co. v. Panama
R.R., 159 N.E. 418, 419 (N.Y. 1927); Rubin v.
Laser, 703 N.E.2d 453, 459 (Ill. App. 1998); E.
Allan Farnsworth, Contracts sec. 7.10, p. 466 (3d
ed. 1999). To have the identical dispute
litigated before different arbitration panels is
a formula for duplication of effort and a fertile
source, in this case, of disputes over esoteric
issues in the law of res judicata (the kind of
dispute that would also arise if the question of
consolidation were for the arbitrators rather
than the district court to answer). If separate
arbitrations are ordered and the reinsurers lose
the first one, will the decision by that
arbitration panel have res judicata or collateral
estoppel effect in the other arbitrations? See,
e.g., W.R. Grace & Co. v. Local Union 759, 461
U.S. 757, 764-65 (1983); Independent Lift Truck
Builders Union v. NACCO Materials Handling Group,
Inc., 202 F.3d 965, 968 (7th Cir. 2000); Chiron
Corp. v. Ortho Diagnostic Systems, Inc., No. 99-
15064, 2000 WL 309779, at *6 (9th Cir. Mar. 28,
2000); John Hancock Mutual Life Ins. Co. v.
Olick, 151 F.3d 132, 139-40 (3d Cir. 1998);
National Union Fire Ins. Co. v. Belco Petroleum
Corp., 88 F.3d 129, 135-36 (2d Cir. 1996). Will
it if the first order is confirmed first? See
Miller v. Runyon, 77 F.3d 189, 193-94 (7th Cir.
1996); Chiron Corp. v. Ortho Diagnostic Systems,
Inc., supra, at *7; John Hancock Mutual Life Ins.
Co. v. Olick, supra, 151 F.3d at 137-39. What if
the second order is confirmed first? See
Consolidation Coal Co. v. United Mine Workers of
America, District 12, Nos. 99-1640 and 99-1641
(7th Cir. appeal pending, argued Jan. 13, 2000).
If the reinsurers win, this would not bind any
other insurer than the one involved in the
particular arbitration--unless the insurers are
deemed to be in privity with each other because
of the common agency of Unicover. E.g., We Care
Hair Development, Inc. v. Engen, 180 F.3d 838,
842 (7th Cir. 1999); Canedy v. Boardman, 16 F.3d
183, 185 (7th Cir. 1994). All these problems are
avoided by interpreting the contract to allow the
reinsurers to demand a single arbitration,
provided there is a single dispute, as appears to
be the case; should this turn out not to be the
case, severance would be possible.
The insurers have some practical arguments of
their own, two related ones in fact. They ask:
What if the insurers disagree about the choice of
an arbitrator? Standing alone this is a very weak
argument; the arbitration clause expressly
requires the reinsurers to act as one party and
thus agree on a single arbitrator, so apparently
the parties thought this a feasible requirement
to impose. The insurers seek to strengthen the
argument by pointing out that two of the
reinsurers are also insurers, and so are on both
sides of the dispute. One of them, however,
Phoenix, has thrown in its lot with the
reinsurers, and does not claim--and obviously
does not have--any right to participate in the
choice of the insurers’ arbitrator. The status of
the other, Cologne, is unclear, but obviously it
will have to decide which side it’s on before the
arbitrators are chosen.
We conclude that the balance of both the textual
and the practical arguments favor the reinsurers,
and we therefore reverse the judgment of the
district court and remand for further proceedings
consistent with this opinion.