Opinion ID: 1436064
Heading Depth: 1
Heading Rank: 30

Heading: Whether the Arbitration Award Should Be Vacated Because the Arbitrators Excluded Certain Evidence from Consideration

Text: Having found that the District Court properly compelled arbitration, we consider the second fundamental question that Century raises on this appeal; whether the District Court properly confirmed the arbitration panel's decision in favor of Lloyd's. Century challenges the arbitration panel's decision, contending that the panel erred in refusing to hear extrinsic evidence that Century sought to submit regarding reinsurance industry custom and practice, the parties' course of dealing, and Lloyd's's own historical corporate practice of paying as well as seeking reimbursement for declaratory judgment expenses under reinsurance contracts covering expenses. Century claims that this exclusion deprived it of a fair hearing and therefore requires the vacating of the award. The FAA allows district courts to vacate arbitration awards only under exceedingly narrow circumstances. Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003) (citing 9 U.S.C. § 10). [29] One such circumstance is where the arbitrators were guilty of misconduct ... in refusing to hear evidence pertinent and material to the controversy. 9 U.S.C. § 10(a)(3); Dluhos, 321 F.3d at 370. Section 10(a)(3) cannot be read, however, to intend that every failure to receive relevant evidence constitutes misconduct which will require the vacation of an arbitrator's award. Newark Stereotypers' Union No. 18 v. Newark Morning Ledger Co., 397 F.2d 594, 599 (3d Cir.1968). After all, even district courts sometimes reject evidence that they should admit and yet such erroneous rulings hardly can be characterized as misconduct. The cases make clear that vacatur pursuant to section 10(a)(3) is warranted only where the arbitrator's refusal to hear proffered testimony `so affects the rights of a party that it may be said that he was deprived of a fair hearing.' Teamsters Local 312 v. Matlack, Inc., 118 F.3d 985, 995 (3d Cir.1997) (quoting Newark Stereotypers' Union No. 18, 397 F.2d at 599). See also Matteson v. Ryder Sys. Inc., 99 F.3d 108, 113 (3d Cir.1996); Lessin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 481 F.3d 813, 818 (D.C.Cir. 2007) (Every failure of an arbitrator to receive relevant evidence does not constitute misconduct requiring vacatur of an arbitrator's award[;] a federal court may vacate an award only if the panel's refusal to hear pertinent and material evidence prejudices the rights of the parties to the arbitration proceedings.) (internal citations and quotations omitted). Unsurprisingly, application of this extremely deferential standard generally results in the confirmation of an arbitration award, Dluhos, 321 F.3d at 370, though this is not to say that a court never can vacate an arbitrator's award by reason of his failure to consider relevant evidence. Nevertheless a court reviewing an arbitrator's decision to reject evidence might uphold an award even if an appellate court when reviewing a trial court's erroneous rejection of the evidence in similar circumstances might not find that the error was harmless. Certainly it is clear that in making evidentiary determinations, an arbitrator need not follow all the niceties observed by the federal courts. Lessin, 481 F.3d at 816 (citing Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 1997)) (internal quotation marks omitted). Rather, an arbitrator need only grant the parties a fundamentally fair hearing. Id. (internal quotation marks omitted). In fact, the reinsurance treaties incorporated into the retrocessional agreements recognized as much as they directed the arbitrators to regard the treaties as honorable engagement[s] and, consistently with this characterization, relieved the arbitrators of all judicial formalities and any obligation to follow[ ] the strict rules of law. Moreover, inasmuch as arbitrators have wide latitude in how they conduct proceedings, Office & Prof'l Employees Int'l Union, Local No. 471 v. Brownsville Gen. Hosp., 186 F.3d 326, 334 (3d Cir.1999), it is well within an arbitrator's authority to refuse to hear evidence that is of little relevance. See Lessin, 481 F.3d at 816; Ass'n of Flight Attendants, AFL-CIO v. USAir, Inc., 960 F.2d 345, 350 (3d Cir.1992) ([I]f the arbitrators are to receive evidence it must be up to them to decide issues of relevance [or] admissibility of evidence.). Here, the arbitration panel refused to admit Century's proffered extrinsic evidence based on the panel's determination that the evidence was irrelevant and inadmissible. App. at 175. The panel majority explained that there was no need to resort to extrinsic evidence to resolve ambiguities in the contracts because it had found the contracts in question to be clear and unambiguous. Id. According to Century, the excluded evidence was pertinent and material under the follow-the-fortunes doctrine as well as to the determination whether the agreements were ambiguous, so its exclusion deprived Century of a fair hearing. First, Century contends that the excluded evidence was pertinent and material to the retrocessional agreements' follow-the-fortunes clauses. Reinsurance contracts often contain a follow-the-fortunes clause that obligates the reinsurer to indemnify the reinsured for any good faith payment of an insured loss. North River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1199 (3d Cir.1995). Such clauses operate to prevent reinsurers from second guessing the reinsured's good faith settlements with its insured and from obtaining de novo review of judgments of the reinsured's liability to its insured. Id. But follow-the-fortunes clauses typically do not make the reinsurer liable for risks beyond those it agreed to take in the reinsurance contract; a loss is not reinsured if the original insurance policy does not contemplate it or if the reinsurance agreement's terms expressly exclude it, and a reinsurer retains the right to question whether the reinsured's liability stems from such an unreinsured loss. Id. at 1199-1200. Second, Century contends that the proffered evidence was pertinent and material to whether the retrocessional agreements were ambiguous and therefore required extrinsic evidence to ascertain the intent of the parties with respect to the questions the arbitrators addressed. See Emerson Radio Corp., 253 F.3d at 164 (discussing determination of contract ambiguity). [30] Century argues that, at the very least, a determination as to ambiguity required consideration of the extrinsic evidence in addition to the parties' proffered views. Id. Century claims that the extrinsic evidence showed that the term expenses, used in Paragraph 1 of the retrocessional agreements, was at least ambiguous and that it was deprived of a fair hearing by the evidence's exclusion. The panel concluded that the retrocession and reinsurance were unambiguous. Even so, the panel held a hearing at which it heard argument regarding the proper construction of the contracts between the parties, App. at 173, and before which it received witness statements from Century setting all the evidence which they would wish to lead in chief from two witnesses it proposed, id. at 174, as well as written submissions from both parties regarding objections to that evidence. The panel considered Century's witness statements containing the evidence that it would proffer in light of the follow-the-fortunes clause and concluded that the evidence was irrelevant or, at the very least, of very little probative value to the resolution of the issues of the dispute. Inasmuch as the question of whether the declaratory judgment expenses were within the terms of the original reinsurance treaties or the retrocessional agreements was to be based on constructions of those contracts, extrinsic evidence was irrelevant. Id. at 175-76. The arbitration panel further concluded that the witnesses' testimony regarding prior claims or payments by Lloyd's would be of little or no probative value without further inquiries into the precise circumstances of each claim or payment. Id. at 175-76. Based on its conclusion that the evidence was of little or no probative value and only would add unnecessary expense and delay to the proceedings, the panel excluded it. Id. Likewise, based on its conclusion that the construction of the reinsurance and retrocession was clear and unambiguous, the extrinsic evidence was irrelevant to construing the contracts more generally. App. at 173-75. Considering the arbitrators' wide latitude in making evidentiary determinations, a latitude to which Century agreed in the arbitration clause in the reinsurance treaties and thus, by extension, agreed to in the retrocessional agreements when they incorporated the treaties by reference, we cannot find that there is a statutory basis to vacate the award. The arbitration panel did not commit misconduct in refusing to hear evidence pertinent and material to the controversy. 9 U.S.C. § 10(a)(3). Rather, the panel considered the evidence and concluded, after receiving written submissions regarding its substance and relevance, that it was irrelevant, a finding that was within its authority to make. We emphasize that, pursuant to the terms of the arbitration agreement, the arbitrators were relieved of all judicial formalities and permitted to abstain from the strict rules of law. App. at 59-60, 101, 127. Because the panel's evidentiary ruling based on written submissions and a hearing falls far short of arbitrator misconduct depriving Century of a fair hearing, we affirm the District Court's denial of Century's motion to vacate the arbitration award.