Review of Court Decisions
Referee Clause Not an Agreement to Arbitrate
The Supreme Court of Delaware held that a referee clause in a construction contract did not clearly and unambiguously reflect the parties' intent to arbitrate disputes arising out of the project.
The Diamond State Port Corp. (DSPC), the owner/ operator of the Port of Delaware, solicited bids to reconstruct a wharf at the port. The bid documents contained a referee clause stating: "The Director or his designee, shall act as referee in all questions arising under the terms of the Contract ... and the Decision of the Director shall be final and binding. On all questions concerning the interpretation of Plans and Specifications, the acceptability, quality and quantity of materials or machinery and work performed, the classification of material, the execution of work and the determination of payment due or to become due, the decision of the Director, or his designee, shall be final and binding." It also contained a consent-to-suit clause. The document originally contained the AIA 201 standard form with an arbitration clause, but DSPC struck the clause from the bid documents.
Kuhn Construction submitted the lowest bid, which DSPC accepted. Kuhn began construction. When various problems arose, Kuhn allegedly requested assistance from DSPC. When the problems were not resolved, Kuhn began to invoice DSPC for additional work. DSPC rejected these bills and sought to have its executive director initiate a multiparty hearing under the referee clause. Kuhn refused to participate, claiming that the director did not have authority to arbitrate claims, and that the referee clause was intended to deal with day-to-day problems. DSPC sent Kuhn a notice of intent to arbitrate. Kuhn responded with a lawsuit in Delaware's Chancery Court seeking to enjoin the arbitration. DSPC moved to compel Kuhn to arbitrate and to dismiss the complaint. The vice chancellor held that the referee clause was governed by prior court precedent, which required it to grant the motion to compel arbitration and dismiss the complaint.
The Supreme Court of Delaware reversed. First, it said it would not enforce a contract that "unclearly or ambiguously reflects the intention to arbitrate." It concluded that the referee clause in this case was subject to two reasonable interpretations and therefore did not clearly and unambiguously reflect the parties' intent to arbitrate. In support of this conclusion the court noted that the referee clause did not use the terms "arbitrate" or "claims." Furthermore, it observed that DSPC unilaterally struck the arbitration provisions used in the construction industry from the bid document. As a result, there was no basis for Kuhn to discuss arbitration before submitting a bid.
Kuhn Construction Co. v. Diamond State Port Corp., No. 124, 2009 (Del. Mar. 8, 2010).
Employer's Waiver of Oppressive Provisions Given Effect
The 2nd Circuit required a former employee to arbitrate a sexual harassment claim under federal and state civil rights laws because the employer waived the unconscionable provisions in the clause.
Ragone, a make-up artist, was terminated from her employment at Atlantic Video, a digital and film production company, on April 11, 2006. In her sexual harassment suit, she alleged that soon after she was hired to work for ESPN, an AV client, "she became the victim of severe, pervasive and continuous sexual harassment" and made numerous complaints about the harassment to AV and ESPN management. AV and ESPN were both named as defendants in the lawsuit and they moved to dismiss and compel arbitration based on the arbitration agreement in Ragone's employment agreement.
Ragone opposed the motion to compel arbitration, arguing that she was forced to sign the arbitration agreement under procedurally unconscionable conditions, and that the arbitration agreement itself was unenforceable on the ground that it had substantively unconscionable provisions, among them an oppressive 90-day statute of limitations for filing an arbitration claim, a fee shifting clause, a prohibition on appeals, and a limitation on discovery.
The district court disagreed, finding no evidence of procedurally unconscionable conditions in the signing of the arbitration agreement. It also found no substantive arbitrability based on the employer's waiver of the oppressive terms in the arbitration agreement. The court also held that ESPN's status as a non-signatory did not preclude Ragone from being compelled to arbitrate her claims against ESPN, since her claims against ESPN were sufficiently intertwined with her claims against AV, which was a signatory to the arbitration agreement.
Ragone argued on appeal that the district court erred in accepting the employer's waivers of oppressive provisions and enforcing the arbitration agreement. She argued that this would allow the defendants to retain the benefit of a contract whose main purpose was to "unfairly prejudice" her.
The 2nd Circuit affirmed. It was not convinced that there was procedural arbitrability in the formation of the arbitration agreement. It was also not persuaded that the district court erred in accepting the employer's waivers of substantive unconscionable provisions, saying that Ragone did not cite any New York law to support this argument, and New York courts have accepted such waivers in the past and considered the arbitration agreements to be modified by them.
The court also noted that under New York case law, the appropriate remedy when faced with a plainly unconscionable arbitration provision is to sever the improper provision, rather than void the entire agreement.
The court ended the decision with a note of caution, stating that its affirmance of the district court's holding that the arbitration agreement is enforceable as modified by the defendants' waivers, is made "with something less than robust enthusiasm." The court went on to say, "Had the defendants attempted to enforce the arbitration agreement as originally written it is not clear that we would hold in their favor." In other words, because the statute of limitations and fee-shifting provisions would significantly diminish a litigant's statutory rights, had the employers not waived these provisions, Ragone might have been able to persuade the court that these provisions were incompatible with her ability to vindicate her federal discrimination claims in arbitration, and therefore void under the Federal Arbitration Act.
Ragone v. Atlantic Video, No. 08-4666, 2010 WL 536070 (2d Cir. Feb. 17, 2010).
Expense-Sharing Provision, But Not Class Action Bar, Held to be Unenforceable
The 3rd Circuit held that where a borrower challenged the enforceability of the arbitration agreement and the car title loan agreement as a whole, her claims of unconscionability were "wanting" except for the provision in a car title loan agreement requiring each side to pay its own arbitration expenses.
Tia Kaneff, a recently separated mother of two who worked in a local supermarket, needed cash to pay the next month's rent on her apartment in Pennsylvania. The bank refused her a loan so she took out a $500 car title loan from Delaware Title Loans with an annual interest rate of 300.01%. The contract called for Delaware law to apply and it contained an arbitration clause that waived the right to a jury trial, banned class actions and class arbitration, allowed the lender to repossess without having to arbitrate or litigate first, required the borrower to pay the $125 filing fee if she commences arbitration, and required each side to pay its own expenses of arbitrating. It also contained a severance clause.
With fees the amount of Kaneff's loan increased to $550. The loan was due in one month but Kaneff claimed she didn't know that. She made six months of payments totaling $842.50. When told that her balance was $783, Kaneff refused to pay any more. DTL repossessed her car. By that time the balance due was over $1,000. Kaneff filed a class action in Pennsylvania state court, but DTL removed it to federal court where it moved to compel arbitration. The district court granted DTL's motion. Kaneff appealed alleging the contract as a whole and the arbitration agreement, particularly the usurious interest rate, the exception for lender repossession, the class action waiver, the cost sharing clause, and the mandatory $125 filing fee were substantively unconscionable under Pennsylvania law. She also contended that these provisions are not susceptible to severance because they are part of a scheme to protect potentially illegal conduct from legal scrutiny.
The 3rd Circuit first addressed the choice of law issue because the plaintiff sought to have Pennsylvania law apply because of its greater interest in the transaction than Delaware's. Most of the opinion is devoted to this issue. The court ultimately agreed, holding that Pennsylvania had a materially greater interest than Delaware in determining if the arbitration agreement is unconscionable due to its strong antipathy to high interest rates.
The briefest part of the opinion dealt with the validity of the arbitration clause, and on this issue the 3rd Circuit found only one provision unconscionable-the provision making "[t]he parties ... responsible for their own expenses, including fees for attorneys, experts and witnesses"-and severed it under the agreement's severability clause. The appeal also concluded that Kaneff's other claims were "wanting" and that the arbitrator would consider them "when s/he decides the validity of the agreement as a whole."
Tia L. Kaneff v. Delaware Title Loans, No. 08-1007, 2009 WL 4042926 (3d Cir. Nov. 24, 2009).
Award Based on Arbitrator's Evidence Assessment Upheld
The 3rd Circuit held that an arbitrator's decision based on an assessment of the evidence and its weight did not show bias or manifest disregard of the law.
Andorra, a Chemoil affiliate, chartered the EOS, an oil tanker owned by Venfleet, to transport fuel from Venezuela to Chemoil's facility in New Jersey. Just before loading onto the EOS, the fuel was placed in shore tank 801, essentially an "open pit" with no overhead protection from the elements. After loading onto the EOS, Venfleet was to keep the cargo at the appropriate temperature using heating coils.
After arrival in New Jersey, Chemoil claimed that test results showed that the cargo was contaminated by water. The tanker remained at sea for 20 days before Chemoil discharged all the cargo.
On Jan. 26, Andorra filed a lawsuit in federal court seeking damages for cargo contamination. It alleged that the tanker's cargo heating coils were defective and leaked water into the cargo, and that Venfleet did not properly pressure test and inspect them. The parties agreed to arbitrate before a sole arbitrator.
During the 21-month arbitration, the parties engaged in "extensive discovery," including document production. However, the arbitrator denied Andorra's request for production of documents related to the EOS's SAAB radar system. The arbitrator ultimately ruled in favor of Venfleet. Based on inspection reports showing the water content of the cargo before it left Venezuela and when it arrived in New Jersey, the arbitrator concluded that the EOS's malfunctioning heating coils could not have contributed more than 0.4% of water to the ship's load. The district court confirmed the award and denied Andorra's cross-motion to vacate. On appeal, Andorra argued that the arbitrator demonstrated bias by refusing to order document production relating to the SAAB radar system.
The 3rd Circuit rejected this argument, finding no evidence that the arbitrator's refusal was motivated by bias or resulted in a fundamentally unfair proceeding. In the court's view, the arbitrator's reliance on the inspection reports and other evidence produced in discovery to come to his conclusion about water content was not "powerfully suggestive of bias." The court also found that the denial of the request for documents relating to the SAAB radar equipment did not so affect Andorra's rights that it could conclude that it was deprived of a fair hearing.
The court also noted that the arbitrator expressed concern that Andorra's cargo tests showing contamination were "improperly drawn," and found "substantial and controlling" evidence undermining Andorra's sample test results. The court ruled that these were factual determinations that the weight of the evidence supported one theory of water content over another. Moreover, the arbitrator carefully explained his reasoning. Accordingly, the 3rd Circuit affirmed.
Andorra Services Inc. v. Venfleet, Ltd., No. 08-4902, 2009 WL4691635 (3d Cir. Dec. 10, 2009).
Authority Not Exceeded Where Both Parties Ask Arbitrator to Amend
The 2nd Circuit held that the functus officio doctrine did not apply since the arbitrator reconsidered the original award pursuant to the parties' petitions for reconsideration, and amended the award in accordance with his interpretation of the arbitral rules that the parties had agreed would apply.
T.Co. entered into two sales contracts to sell steel pipe to Dempsey Pipe and Supply. The contract provided that "Seller is not responsible for consequential loss or damage." It also contained an arbitration clause calling for arbitration under the rules of the American Arbitration Association's International Centre for Dispute Resolution. The contracts designated the "Laws of the State of New York" as the governing law.
Dempsey contended that some of the delivered pipe was defective and withheld some payments. However, it accepted most of the pipe. T.Co. commenced arbitration seeking to recover on the unpaid invoices. Dempsey counterclaimed for close to $1.9 million due to the diminished value of the accepted defective steel pipe.
The arbitrator found in favor of T.Co. on its claim and in favor of Dempsey on the counterclaim, awarding it $420,357 for diminished value of the defective pipe. The arbitrator concluded that even though the consequential damages exclusions applied, N.Y.'s U.C.C. provided the appropriate measure of damages for non-conforming goods where, as here, the fair market value of the goods as accepted was ascertainable.
Both parties promptly submitted applications to the arbitrator to amend the Award pursuant to ICDR Article 30(1). That article permits the arbitrator to "correct any clerical, typographical or computation errors or make an additional award as to claims presented but omitted from the award."
One month later, the arbitrator issued an order accepting only a handful of T.Co.'s corrections The Amended Award was issued soon thereafter.
Both parties filed petitions in federal court in New York to modify or to vacate the amended award. T.Co. argued that the award of diminution damages to Dempsey constituted manifest disregard of the law.
Dempsey argued that the errors in the award were not correctable by the arbitrator because they were not evident on the face of the award and thus not obvious errors in mathematical computation. The district court agreed with Dempsey, holding that correcting the award would violate the functus officio doctrine.
The 2nd Circuit reversed in part and affirmed in part. It affirmed the finding that the arbitrator did not manifestly disregard the law. But it disagreed with the district court's functus officio ruling.
The appeals court concluded that the parties displayed clear and unmistakable intent to submit the question to the arbitrator by petitioning the arbitrator to amend the award under the AAA rules. Thus, it held that the arbitrator's interpretation of these rules, which the parties agreed to use, was entitled to deference. Applying that deference, the court held that the arbitrator did not exceed his powers by granting in part T.Co.'s request that certain errors be corrected in the award.
T.Co. Metals, LLC v. Dempsey Pipe & Supply, No. 08-3894, 2010 WL 114832 (2d Cir. Jan. 14, 2010).
Panel's Ex Parte Meeting with Experts Was Not Misconduct
The 9th Circuit held that an unusual process in which the panel met with two workers' compensation experts outside the presence of the parties in order to resolve a material issue was not misconduct.
U.S. Life contracted to reinsure workers' compensation risks insured by five California insurers (the reinsured) that eventually declared bankruptcy. The reinsurance contract contained an arbitration clause. U.S. Life claimed that the reinsureds misrepresented their reserves during the underwriting process and that it was entitled to rescission or reformation of the contract. It also sought damages for bad faith claims handling. The reinsureds agreed to arbitrate. In a bifurcated arbitration, the panel, made up of two party-appointed arbitrators and a third neutral arbitrator, found no ground for rescission at the end of Phase I. But it did reform the contract somewhat, reducing U.S. Life's responsibility from 100% to 90% for the workers' compensation risk. U.S. Life unsuccessfully challenged the Phase I interim award.
Phase II addressed the damages claim for improper claims handling and U.S. Life's obligations under the reinsurance contract. However, after 13 days of Phase II hearings, the panel could not reach a decision given the parties' divergent expert opinions and so advised the parties. To rectify this "stalemate," the panel advised that it would retain two workers' compensation and claims-handling experts to review 162 of the 500-claim sample and meet with these experts for three days outside the parties' presence ("the ex parte meeting"). There would be no transcript of the ex parte meeting but the experts would provide written conclusions to the panel and the parties; the parties could submit briefs responding to the reviewers' conclusions, participate in a twoday hearing at which they could question the experts under oath, for five hours each, as to the experts' qualifications and the reasons for their conclusions (but not as to the ex parte meeting); the parties could also submit post-hearing briefs to the panel.
After the process was used, the panel issued a Phase II award holding U.S. Life responsible for certain payments to the reinsureds. The district court confirmed the award and denied U.S. Life's motion to vacate. U.S. Life appealed, arguing that by closing the meeting with the experts, the panel refused to hear pertinent and material evidence concerning the reinsureds' claims handling.
The 9th Circuit disagreed. "Although an ex parte meeting between an arbitrator and a neutral expert is not a routine arbitration practice," the court held that the panel had authority to adopt its own procedures and did so. In upholding the process the panel used, the court noted: (1) the panel listened to the parties' evidence and experts but could not reach a decision; (2) the panel told this to the parties and came up with a process after extensive correspondence with counsel; (3) the process the panel used ensured due process because it allowed the parties to comment in their briefs on the experts' written conclusions, and to question the experts about their qualifications and conclusions. This was ample opportunity to discover and critique the reviewers' conclusions, the court said.
The court found that although the panel discussed material Phase II issues at the ex parte meeting, this was mitigated by the notice, extensive correspondence, and inclusive procedures. Since U.S. Life failed to show any misconduct by the panel, the 9th Circuit affirmed the order denying its motion to vacate.
U.S. Life Insurance Co. v. Superior National Life Ins., No. 07-55938, 2010 U.S. App. LEXIS 41 (9th Cir. Jan. 4, 2010).
Note: According to Mealey's Reinsurance News on Lexis/ Nexis, U.S. Life is preparing a petition for review to submit to the U.S. Supreme Court.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Review of Court Decisions. Contributors: Not available. Magazine title: Dispute Resolution Journal. Volume: 65. Issue: 1 Publication date: February-April 2010. Page number: 89+. © American Arbitration Association Nov 2008-Jan 2009. Provided by ProQuest LLC. All Rights Reserved.