In advising resort to arbitration, counsel generally weigh factors such as informality, speed, cost, confidentiality, fact-finder expertise and venue. In effect, arbitration allows parties to free themselves from the one-size-fits-all rules of civil procedure and create an adjudicatory system specifically tailored to the needs of the litigants.
But once the decision to arbitrate is made, attention must be given to the framework controlling the conduct of the arbitration itself, including how arbitration awards may be judicially reviewed and enforced. For example, the parties may consider whether they wish to proceed under the Federal Arbitration Act (FAA), the Pennsylvania Uniform Arbitration Act (PUAA), common law arbitration or even procedures under arbitration acts that have been repealed.
Moreover, the parties may select procedures of national or local provider organizations such as the AAA, ADR Options or the Dispute Resolution Institute, or even decide to have their dispute administered by one of these organizations while proceeding under the procedures of another.
Finally, the parties may agree to simply set forth all of the procedures in a comprehensive agreement independent of any statute, organization or other formal established procedures.
Whenever adopting any of these approaches, however, parties must recognize that while they have considerable latitude in setting out their contractual expectations, they may remain subject to statutory constraints unless their agreements are drafted carefully to reflect those expectations.
These circumstances were confronted recently in a case decided Aug. 18 by the 3rd U.S. Circuit Court of Appeals, Ario v Underwriting Members of Syndicate 33 at Lloyd’s for the 1998 Year of Account.
According to the opinion, Joel Ario, the Pennsylvania insurance commissioner, was acting as liquidator for two Pennsylvania insurance carriers that had entered into reinsurance treaties with the reinsurer-defendants.
The treaties contained basic provisions governing arbitration providing, in effect, that any dispute relating to the interpretation or performance of the agreement, including formation and validity of transactions, shall be submitted to binding arbitration, the opinion said. The agreement described the manner of arbitration selection, the time within which the award must be made, the arbitrators’ authority in conducting the arbitration, the nature of the damages that might be awarded and the place of the arbitration. This section of the agreement then concluded: “Except as hereinabove provided, the arbitration shall be conducted in accordance with the rules and procedures established by the Uniform Arbitration Act as enacted in Pennsylvania,” the opinion said.
Also relevant to the court decision was the “service-of-suit provision.” According to the opinion, it provided that if a reinsurer failed to pay any amount due under the arbitration award, it “will submit to the jurisdiction of a court of competent jurisdiction within the United States.” It further provided that the reinsurers did not waive their rights to “commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States district court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state within the United States.”
A dispute arose between the primary insurers and the reinsurers with respect to four treaties. Arbitration commenced and the arbitrators issued an unreasoned award rescinding three of the four treaties, thus relieving the reinsurers of any obligation to pay on them, while ordering them to pay on the fourth treaty, the opinion said.
Ario filed a motion to confirm in part and vacate in part the award of the arbitrators. The reinsurers removed the case to the federal district court under provisions of the FAA implementing legislation allowing for the enforcement of foreign arbitral awards under the Convention on the Recognition of Foreign Arbitral Awards ( the convention) and filed a motion to confirm the award.
Ario filed a motion to remand the case to state court, arguing that the parties had selected the PUAA to govern the arbitration and had opted out of the FAA entirely. He further argued that even if the removal to the federal courts was proper, the parties had opted out of the vacatur standards set out in the FAA in favor of those set forth in the PUAA. Both arguments were rejected by the district court. On appeal, the 3rd Circuit (by a 2-1 vote) affirmed the action of the district court.
First, the appellate court made clear that although parties may choose state law arbitration standards they cannot “opt-out” of coverage by the FAA (or the convention) in its entirety. Rather it acknowledged that while parties may contract to arbitrate pursuant to state law procedures, this does not mean the agreement is no longer subject to the FAA, but only that the FAA requires that the court enforce the terms of the parties’ agreement. In effect, it is the FAA that has authorized the parties to choose the state rules, and that this applies as well to the chapter of the FAA relating to the convention.
That is not to say parties could not by their agreement waive their rights under the FAA to remove these cases to federal court. However, as there is a strong preference for a federal forum, any ambiguity in language regarding such waiver will be resolved against waiver.
In this case, the appellate court determined that the parties’ agreement was not sufficiently clear and unambiguous to establish that the enforcement of the arbitration awards was intended to be conducted in accordance with the rules and procedures established by the PUAA. It pointed out that not only did the arbitration provisions of the agreement make no mention of removal, but the service-of-suit provision explicitly stated that nothing in the agreement should be understood to constitute a waiver of reinsurers’ rights to commence, remove or transfer a case to any court of competent jurisdiction, including removal to the U.S. district court.
But what about Ario’s further argument that PUAA and not FAA vacatur standards should apply? (As noted in the dissent by Judge Ruggero Aldisert, the FAA standards would limit vacatur only to a showing that the award of the arbitrators was “completely irrational,” while under the PUAA the court might correct or modify an award that is simply “contrary to law.”)
The court agreed that parties might opt for state statutory or common law enforcement in lieu of the FAA rules. However, they are required to express a “clear intent” if state vacatur standards are to be applied. In fact, the court referred to another 3rd Circuit case, Roadway Package Systems Inc. v Kayser, which states in dictum that “it is not particularly difficult for example to provide that any controversy shall be settled in accordance with the terms of the PUAA.”
The court acknowledged that while the language in the treaties resembles the language in Roadway and might be construed as satisfying “clear intent,” it must be considered in conjunction with all of the other language in the treaties, which points to a different conclusion. Thus, the service-of-suit provision speaks only to the establishing of a judicial forum for the enforcement of the award, but neither makes reference to the operative law nor affirmatively elects PUAA vacatur standards.
On the other hand, the arbitration provisions in which reference to the PUAA is made and upon which Ario relies are concerned only with the conduct of the arbitration itself, not the subsequent enforcement of an award. In the words of the court, the agreement is involved with the “nuts and bolts” of the arbitration proceeding, not the later enforcement of the award.
As earlier noted, however, there was a dissent to this 2-1 decision. Aldisert was of the opinion that the statement in the agreement that any dispute or disagreement that is the subject of the arbitration shall be subject to the rules and procedures established by the PUAA reflects an intent to abide by the state rules of arbitration in their entirety; and, that the PUAA contains “rules” and specific provisions relating to judicial vacatur. Moreover he would reject the notion that the service-of-suit provision, which is designed solely to assist implementation of an arbitration award, may also be employed for the purpose of declaring what standard should govern judicial review of arbitral awards.
The lesson to be learned from this opinion seems clear. Parties should not rely on general arbitration language that refers to a statute or set of rules but does not make clear that it is designed to cover all aspects of the arbitration. Care should be taken to assure the language is sufficiently broad and explicit to include the parties’ intent. Conversely, if there are aspects of the arbitration that are not to be subject to the statute or procedures selected, this too should be specifically noted. Otherwise, unwanted, unexpected and extensive litigation may ensue as to the intent of the parties relating to procedural or even substantive matters. •
ABRAHAM J. GAFNI is a mediator/arbitrator with ADR Options and a professor at Villanova University School of Law.