Articles / Alternative Dispute Resolution
Independence Of Arbitrators In Large International Law Firms
Swiss lawyers Frank Spoorenberg and Daniela Franchini, of the Genevia law firm Tavernier Tschanz, report a recent decision by the Swiss Supreme Court addressing the independence of arbitrators who are lawyers in large international firms. The case concerned an arbitration arising out of a contract for the construction and installation of a boat lift in Italy. The parties were a Dutch affiliate of a German Group (Y) and an Italian company (X). The lift cables failed, and X filed a request for arbitration before the ICC seeking damages from Y. The ICC appointed a Swiss lawyer from the Swiss office of law firm A as sole arbitrator. The arbitration proceeded, and the arbitrator found for Y.
Following the entry of the award, X learned that the German office of law firm A had advised a company belonging to the same group as Y. According to X, “the connection between the law firm A and a company belonging to the same group as Y would have constituted a ground to challenge the arbitrator or the award had it been known during the proceedings,” and that such a challenge would have resulted in the removal of the arbitrator. Specifically, X argued that under the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration, recusal was mandated.
While the specific IBA Guideline is not referenced in the Spoorenberg/Franchini report, this author assumes that the reference is to IBA Guideline 1.4, which identifies as a relationship which results in a non-waivable conflict of interest those situations wherein “The arbitrator or his or her firm regularly advises the party, or an affiliate of the party, and the arbitrator or his or her firm derives significant financial income therefrom.”
The Swiss Supreme Court held that “the different lawyers working with A had to be considered members of one and the same law firm”. The arbitrator submitted that “A was not an integrated law firm, the members of which would share the fees, but a mere network of independent law firms.” The Court, relying upon this fact, confirmed the arbitral award and determined the arbitrator to have acted properly in serving as an arbitrator in the proceeding. In so finding, the Supreme Court “emphasized that the member firms of the network were independent legal entities with no financial integration.” Additionally, it noted that “the party to the arbitration and the affiliate had no specific relationship and were members of a group composed of more than 300 legal entities.”
Based on these conclusions, the Supreme Court found that the IBA Guidelines “had no relevance in this case.” Additionally, the Supreme Court found that “the circumstances of the case were not of such gravity as to render the award ‘incompatible with the sense of justice and equity’ because there was no indication of any bias against X during the proceedings (subjective impartiality) and the connection between the arbitrator and Y’s affiliate was very tenuous (objective impartiality).”
Frank Spoorenberg and Daniela Franchini, Independence Of Arbitrators In Large International Law Firms, International Law Office, December 1, 2016
In South Jersey Sanitation Company, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., the United States Court of Appeals for the Third Circuit reversed a lower court’s denial of a motion by Applied Underwriters Captive Risk Assurance Company, Inc (“Applied Underwriters”) to compel the arbitration of its dispute with South Jersey Sanitation Company, Inc. (“South Jersey”). At issue was an agreement know as the Reinsurance Participation Agreement (“RPA”), which South Jersey sought to have rescinded based upon fraud, intentional misrepresentation, illegality, and negligent misrepresentation.
The District Court ruled in favor of South Jersey, finding that (1) Nebraska law governed the dispute pursuant to the RPA’s choice-of-law clause; (2) Nebraska law provides that “all arbitration provisions ‘concerning or relating to an insurance policy,’ except those ‘between insurance companies,’ are unenforceable”; (3) “the RPA is not a contract between insurance companies”; (4) the Nebraska Statute prohibiting enforcement of arbitration agreements concerning or relating to insurance policies preempts the Federal Arbitration Act (“FAA”), through the McCarran–Ferguson Act (“M–FA”), and (5) the arbitration provision is therefore unenforceable.
The Court of Appeals reviewed the issues de novo, determined that the District Court had erred in failing to compel arbitration, and reversed and remanded.
Two principal issues were addressed: First, given the clear and unambiguous existence of a “controlling arbitration agreement” within the RPA, did the District Court err by not enforcing such agreement? Second, is the Nebraska “reverse-preemeption” statute applicable, and enforceable?
Beginning with the first issue, the right of a court to ignore a clear and “controlling” arbitration agreement when the contract containing the arbitration clause is alleged to have been procured by fraud, the Appellate Court held:
“Congress enacted the [FAA] ‘to reverse the longstanding judicial hostility to arbitration agreements ․ . . and to place arbitration agreements upon the same footing as other contracts.’ [citation omitted] Although the FAA favors arbitration and limits the involvement of the court system in contracts that provide for arbitration, “[l]ike other contracts, (arbitration agreements) may be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’ ” Rent–A–Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68 [remaining citation omitted]). Accordingly, where a party challenges the validity of an otherwise controlling arbitration clause, courts hear that challenge. [citation omitted] (“If a party challenges the validity under [FAA] § 2 of the precise agreement to arbitrate at issue, the federal court must consider the challenge before ordering compliance with that agreement under [FAA] § 4.”).
The challenge, however, must focus exclusively on the arbitration provision, rather on than the contract as a whole. As the Supreme Court stressed in Rent–A–Center, “only (an arbitration provision-specific) challenge is relevant to a court’s determination whether the arbitration agreement at issue is enforceable.” [citation omitted]. If the challenge encompasses the contract as a whole, the validity of that contract, like all other disputes arising under the contract, is a matter for the arbitrator to decide. [citation omitted].
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[U]nless South Jersey specifically challenges the legal validity of the RPA’s arbitration provision, the parties’ present dispute, which arises out of the RPA, is subject to arbitration.”
With respect to South Jersey’s claim that the arbitration clause of the RPA was void under Nebraska law, the Appellate Court rejected South Jersey’s claims that the courts, and not an arbitration tribunal, must determine the applicability of the Nebraska reverse-preemption statute for similar reasons.
“On its face, South Jersey’s contention that the RPA’s arbitration provision is rendered unenforceable by the Nebraska Statute appears to target the arbitration provision alone, rather than the contract as a whole. This argument, however, suffers from the same defect as South Jersey’s fraud argument because regardless of whether the Nebraska Statute reverse-preempts the FAA that statute must first be shown to apply to the arbitration provision at issue. We determine that it is not clear that the short but obscure RPA falls within the ambit of the Nebraska Statute.”
The Appellate Court clarifies is decision regarding the reverse-preemption provision in a footnote:
“We do not decide here whether the Nebraska Statute reverse-preempts the FAA because South Jersey has not persuaded us that the Nebraska Statute is applicable to the contract at issue. To determine its applicability, the precise function and contours of the RPA must be elucidated, and that is a matter for the arbitrator under the parties’ clear and expansive arbitration agreement.”
Even though expressly declaring that it was not ruling upon the enforceability of the Nebraska reverse-preemption statute, the Appellate Court further examined that issue. First, it set forth the applicable section of the McCarran–Ferguson Act (“M–FA”) relied upon to underpin the Nebraska statute.
“The M–FA provides in relevant part that ‘[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance[.]” 15 U.S.C. § 1012.
Having reviewed the language of the M-FA, the Appellate Court concluded: “[u]nder [the M–FA], state laws reverse-preempt federal laws if (1) the state statute was enacted ‘for the purpose of regulating the business of insurance,’ (2) the federal statute does not ‘specifically relate to the business of insurance,’ and (3) the federal statute would ‘invalidate, impair, or supersede’ the state statute.” [citation omitted]
Next, the Appellate Court looked to Nebraska’s interpretation of its statute:
“In Kremer v. Rural Community Insurance Co., [citation omitted] the Nebraska Supreme Court stated that, ‘under § 25–2602.01(f)(4), agreements to arbitrate future controversies concerning an insurance policy are invalid.’ Noting that ‘[e]very federal appellate court to address this issue has held that state laws restricting arbitration provisions in insurance contracts regulate the business of insurance and are not preempted by the FAA,’ (citations omitted), the Nebraska Supreme Court ‘conclude[d] that a statute precluding the parties to an insurance contract from including an arbitration agreement for future controversies regulates the insurer-insured contractual relationship’ [citation omitted]. In reaching this conclusion, the court noted that it did not consider dispositive ‘whether statutes restricting arbitration agreements in insurance policies affect the transfer of risk.’[citation omitted]. This language, while dicta, strongly suggests that Subsection (f)(4) of the Nebraska Statute applies only to insurance policies themselves, and that ‘any agreement’ must be read as an arbitration agreement or provision within such a policy, rather than a derivative investment contract.
Having reviewed the M-FA and the Nebraska Courts’ construction of its reverse-preemption statute, the Appellate Court applied its analysis to the facts of the case before it. The Court’s conclusion: it is not clear from the pleadings and documents whether the RPA is an “agreement concerning or relating to an insurance policy” within the meaning of the Nebraska Statute. An argument that it does is a challenge to the entire agreement and not just the arbitration clause of the RPA, hence for the same reasons that an arbitrator must decide the issue of fraud, an arbitrator must decide the construction of the RPA and the concomitant applicability of the Nebraska statute.
The full decision: South Jersey Sanitation Company, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., Case No. 14-4010 (3d Cir. Oct. 25, 2016)