Articles / Alternative Dispute Resolution
Non-Signatories to an Arbitration Agreement: Can they compel an arbitration?
In Jody James Farms, JV v. Altman Group, Inc., the Supreme Court of Texas ruled that the respondent, a non-signatory party to an arbitration agreement, could not compel a signatory party to arbitrate.
This case involves 4 inter-related parties: Jody James Farms, JV (“Jody James”), Rain & Hail LLC, the Altman Group, and the Federal Crop Insurance Corporation (FCIC). Jody James is a farm that grows grain sorghum. Rain & Hail is an insurance company selling crop insurance through independent insurance agencies. The Altman Group is an independent insurance agent, and FCIC is a reinsurer.
In the case presented, Jody James purchased a crop insurance policy issued by Rain & Hail. The Altman Group was the broker for the transaction, and FCIC reinsured the Rain & Hail policy purchased by Jody James. The FCIC reinsurance policy included an arbitration clause requiring arbitration of disputes between Jody James and Rain and Hail.
Jody James suffered a loss and contacted its agent at the Altman Group. When the claim was presented to Rain & Hail, they denied the claim “on several bases, including that Jody James ‘failed to provide a timely notice of damage which has resulted in [Rain & Hail’s] inability to make necessary and required loss determinations for indemnity. . . .” As a result of this denial, an arbitration between Jody James and Rain & Hail related to the denial of coverage occurred, with the tribunal ruling in favor of Rain & Hail. That tribunal concluded: “Jody James did not ‘timely present[ ] notice of its claim in accordance with the provisions of the crop insurance policy and, further, ‘did not state a presentable loss’ because crops from performing and non-performing farm units were commingled.”
Displeased with this result, Jody James sued the Altman Group and the individual broker with whom they dealt in state court. The Altman Group moved to compel arbitration under the reinsurance policy, which move Jody James opposed. The trial court granted the Altman Group’s motion and the matter was then arbitrated. The Altman Group prevailed in the arbitration and then asked the trial court to confirm the award. Jody James moved for vacatur. The trial court ruled for the Altman Group and confirmed the award. Jody James appealed, and the appellate court affirmed the trial court’s decision. Proving Jody James’ tenacity, they next appealed to the Supreme Court of Texas.
The Supreme Court of Texas reversed. They held that while arbitrators have the power to determine their own jurisdiction under the doctrine of Kompetenz-kompetenz,“[d]etermining whether a claim involving a non-signatory must be arbitrated is a gateway matter for the trial court, not the arbitrator, which means the determination is reviewed de novo rather than with the deference that must be accorded to arbitrators.”
The Court next examined the standard of review. They began by mentioning that the “presumption favors adjudication of arbitrability by the courts absent clear and unmistakable evidence of the parties’ intent to submit the matter to arbitration.” Continuing, the Court stated:
“Arbitration is a matter of contract, and that which the parties agree must be arbitrated shall be arbitrated. A presumption favors adjudication of arbitrability by the courts absent clear and unmistakable evidence of the parties’ intent to submit that matter to arbitration. The unmistakable clarity standard follows ‘the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration’ and protects unwilling parties from compelled arbitration of matters they reasonably expected a judge, not an arbitrator, would decide.”
A key fact in the Jody James case was that the Altman Group was not a signatory to any contract containing an arbitration agreement: “The involvement of a non-signatory is an important distinction because a party cannot be forced to arbitrate absent a binding agreement to do so. The question is not whether Jody James agreed to arbitrate with someone, but whether a binding arbitration agreement exists between Jody James and the [Altman Group].”
This last phrase – “whether a binding arbitration agreement exists between Jody James and the [Altman Group]” – is the issue upon which the decision turned. Indeed, it is important to highlight the irony that the party who had not signed an arbitration agreement (the Altman Group) was seeking to impose arbitration upon a party who had signed an agreement to arbitrate, and that the signing party was held NOT to be required to arbitrate.
The determination of who “is bound by an arbitration agreement” is, as the Texas Supreme Court stated, “normally a function of the parties’ intent, as expressed in the agreement’s terms.” That said, the Texas Supreme Court set forth “six scenarios in which arbitration with non-signatories may be required: (1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable estoppel, and (6) third-party beneficiary.”
The Supreme Court then applied each of the six scenarios to the case before it, and found that none applied hence it reversed and vacated the award.
James v. Altman Group, Inc., Texas Supreme Court, No. 17–0062, May 11, 2018.
What is a ‘Reasoned Award’ in International Arbitration and Why Does the Definition Matter?
Despite the common requirement of many countries’ arbitration laws and the UNCITRAL Model Law (with amendments adopted in 2006) requirement that an “award shall state the reasons upon which it is based,” no universal definition or standard exists for determining just what is a “reasoned award.” Odean Volker, in a piece initially published in Law360, attempts to answer the questions: what is a reasoned award, and why does it matter?
Focusing on US jurisprudence, Volker initially notes –
“The term “reasoned award” is not defined in the [Federal Arbitration Act, (FAA)], and articulating a satisfactory description of the required elements of a reasoned award has been an elusive task. U.S. courts have recognized some surprisingly minimal awards as ‘reasoned’ while, in the name of producing a reasoned award, arbitrators sometimes write many hundreds of pages examining in excruciating detail the parties, their dispute, and the arbitrators’ analysis and decision.”
* * *
“Recognizing the lack of a formal definition for ‘reasoned award,’ courts have conceived a reasoned award as one point on a continuum of detail between the extremes of a ‘standard award’ and ‘findings of fact and conclusions of law.’ A standard award requires the least explanation, and simply announces a result without more. ‘Findings of fact and conclusions of law’ require the most explanation and are subject to the exacting standard applied in the U.S. federal court system. The Eleventh Circuit described this continuum as a ‘spectrum of increasingly reasoned awards.’ Acknowledging this continuum of detail, the Fifth Circuit explained that a ‘reasoned award is something short of findings and conclusions, but more than a simple result.”
Recognizing that “defining a reasoned award by what it is not or by contrast to the detail of other awards is hardly satisfactory,” the Eleventh Circuit in the decision Cat Chartercontemplated a dictionary definition to describe the elements of a reasoned award: “Strictly speaking … a ‘reasoned’ award is an award that is provided with or marked by the detailed listing or mention of expressions or statements offered as a justification of an act – the ‘act’ here being, of course, the decision of the Panel.”
The court in Cat Charter relied on this definition when it held that an award that “turned primarily upon credibility determinations” was reasonable. That six-paragraph award simply stated that the claimants proved its claim by “the greater weight of the evidence,” which was enough to understand that the arbitrators found the claimants’ witnesses more credible. “While recognizing that the arbitrators could have provided more explanation, Cat Charter determined that it could not say ‘this statement is devoid of any statements offered as a justification.’” Hence it found the award “reasoned.”
The Second Circuit attempted to refine the description of the elements of a reasoned award in Leeward Construction Co. Ltd. v. American University of Antigua—College of Medicine. There, the court stated that “[a] reasoned award sets forth basic reasoning of the arbitral panel on the central issues before it. It need not delve into every argument made by the parties.”
Why is the definition of a reasoned award important? [B]ecause an award that falls short of the standard is subject to being vacated by a court.” Under the FAA, arbitrators can “exceed their powers” by failing “to meet their obligations as specified in a given contract to the parties.” Volker gives two examples: Western Employers Insurance Co. v. Jefferies & Co. Inc., in which the arbitrators rendered their award without findings of fact and conclusions of law as specified in the parties’ agreement, and; Vold v. Broin & Associates Inc. wherein the arbitrator was to provide a “reasoned award,” but only stated itemized dollar amounts allowed for each claim without mention of any contract provisions at issue, legal citations, or evidence.
The definition is even more important in the international context if the arbitration is seated in a jurisdiction which has adopted the UNCITRAL Model Law. As noted above, this Law requires that the “award shall state the reasons upon which it is based.” Failure to render a reasoned award might also support an action for non-enforcement under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) which provides in Article V(1)(d) that an award need not be enforced if it “was not in accordance with the law of the country where the arbitration took place.”
Volker concludes: “While the U.S. federal courts have not placed a high bar for judging what is, or is not, a reasoned award, understanding the standard is important. The consequences to both the parties and the arbitrators of ignoring the required form can be severe.” I agree!
Odean Volker, HaynesBoone.com, “Odean Volker in Law360: What is a ‘Reasoned Award’ in International Arbitration?,” March 7, 2018.
Independent Factual Research by Judges Via the Internet
The question is often asked: should (indeed, may) arbitrators conduct independent factual research? Most arbitrators will answer both the “should” and “may” questions with an emphatic “no!”
The American Bar Association (ABA), in December 2017, issued an ethical opinion on the appropriateness of judges performing internet searches regarding facts addressed in cases before them, and I thought it might be of interest to my readers. While the rules and guidelines governing the conduct of arbitrators and judges differ, it is often useful for arbitrators to know and reflect upon what is appropriate for judges when determining the appropriateness of their own conduct. Thus, I’ve included here the ABA’s belief regarding what is appropriate for judges.
A hallmark of the U.S. legal system is the requirement that judges make decisions “based upon evidence presented on the record or in open court, and available to all parties.” Consistent with the premise, the ABA’s Model Code of Judicial Conduct (the Code) prohibits ex parte communications, or communications made to the judge outside the parties’ presence, except in limited circumstances. “The ban on ex parte communication ensures that the judge will review and make rulings based only on the facts and evidence presented in the case.” A judge’s independent internet factual research can walk the line between violation and exception to this provision.
Rule 2.9(C) of the Code encompasses an exception to ex parte communications for judicial notice. While not defined in the Code, the ABA uses the definition of judicial notice from the Federal Rules of Evidence for the purpose of this opinion. Federal Rules of Evidence 201(b)(1) and (2) permit “judicial notice of facts which are ‘not subject to reasonable dispute’ because the facts are ‘generally known within the trial court’s territorial jurisdiction.’” Federal Rule of Evidence 201(a) makes the distinction between judicial notice of adjudicative facts as opposed to legislative facts. Adjudicative facts are subject to due process concerns. These facts will determine the outcome of the case as they concern the immediate parties. On the other hand, legislative facts aid judges in questions of law and policy and discretion. Independent judicial research is appropriate for the determination of legislative facts.
To assist judges in understanding when independent factual research is permissible, the ABA provides four guidelines. Their opinion provides:
“When deciding whether to independently investigate facts on the Internet, the judge should consider:
1. Is additional information necessary to decide the case? If so, this type of information generally must be provided by counsel or the parties, or must be subject to proper judicial notice.
2. Is the purpose of the judge’s inquiry to corroborate facts, discredit facts, or fill a factual gap in the record? If the facts are adjudicative, it is improper for a judge to do so.
3. Is the judge seeking general or educational information that is useful to provide the judge with a better understanding of a subject unrelated to a pending or impending case? If so, the inquiry is appropriate. Judges may use the Internet as they would other educational sources, like judicial seminars and books.
4. Is the judge seeking background information about a party or about the subject matter of a pending or impending case? If so, the information may represent adjudicative facts or legislative facts, depending on the circumstances. The key inquiry here is whether the information to be gathered is of factual consequence in determining the case. If it is, it must be subject to testing through the adversary process.”
In addition to these guidelines, the ABA opinion offers several hypothetical judicial notice scenarios along with analysis. The hypotheticals involve everyday scenarios judges may find themselves in, ranging from judicial notice of business hours posted on Yelp to researching electronic court files.
American Bar Association, “Independent Factual Research by Judges Via the Internet,” December 8, 2017.
California Now Allows Non-California lawyers to operate in California widely welcomed
SB 766, a bill signed into law by California Gov. Jerry Brown in July, reverses a California Supreme Court decision that barred non-California lawyers from serving as arbitrators in California. Per the new law’s abstract:
“This bill would permit an individual who is not admitted to practice law in California but who is a member in good standing of a recognized legal profession in the United States or a foreign jurisdiction and is subject to effective regulation and discipline by a duly constituted professional body or public authority to provide legal services in an international commercial arbitration or related proceeding. . .”
Prior to the bill’s enactment, a California Supreme Court ruling in 1998 prohibited non-California bar attorneys from appearing for international arbitrations. The new bill removes “an artificial barrier that resulted in many California-based companies having to travel to places like Singapore, London and Hong Kong to arbitrate their disputes,” says a spokesperson from FedArb, an international mediation service provider.
Many welcome the bill’s passing, including Howard Miller, a mediator and arbitrator with JAMS, the largest alternative dispute resolution provider in the world. Miller believes the bill makes sense because California, with one of the largest economies in the world, is already a leader in the “field of ‘alternative dispute platforms.’” The international arbitration business is worth an estimated $1 billion per year in New York, where the benefits also extend to the associated travel and hospitality sectors according to the Economist. Now California has the chance to delve into the international arbitration market and become a major center in the industry.
Miller also explained that to pass the bill “the entire legal profession had to be supportive,” and legislators needed to understand “that international arbitration between commercial companies has nothing to do with the more controversial issue of consumer, or employment, arbitration.” It is also worth noting that SB 766 applies only to commercial arbitration between companies headquartered in different countries rather than investor-state dispute settlement.
Full text of SB 766
John Breslin, Northern California Record, “Act allowing foreign international arbitration lawyers to operate in California widely welcomed,” August 27, 2018.