Opinion ID: 1436064
Heading Depth: 1
Heading Rank: 23

Heading: Construing the Agreement

Text: As we already have indicated, neither party claims that the provisions of the retrocessional agreements are ambiguous with respect to the first fundamental question on this appeal, whether the parties entered into a valid arbitration agreement establishing a mechanism for resolution of the dispute in this case. Thus, we will seek to give effect to the parties' agreements and thus their obligation vel non to arbitrate disputes solely by making reference to the documents themselves, taking the entire contracts into consideration and assuming that the sophisticated parties to the agreements chose their language, particularly that of the incorporating provisions, carefully. See Murphy, 777 A.2d at 429-30. Our approach recognizes that this case involves contractual construction and that we are exercising plenary review rather than applying the clearly erroneous standard applicable in contract interpretation cases. [26] See, e.g., John F. Harkins, 796 F.2d at 659-60. We are dealing with retrocessional agreements designed to shift risk, defined through reference to the underlying reinsurance treaties, from Century to Lloyd's. In this regard, Paragraph 1, it seems clear, is intended to define the scope of Lloyd's's derivative liability. See AgGrow Oils, 242 F.3d at 781-82 (noting that purpose of incorporation by reference was to define surety's secondary liability). Paragraph 1 identifies the reinsurance treaty that Lloyd's will insure, attaches and incorporates that document by reference, and specifies the percentage of that treaty's liabilities and premiums that Lloyd's will assume. App. at 30, 71, 109 (retrocessional agreement para. 1) (emphasis added). Paragraph 2 again refers to the reinsurance treaties, but it does so in markedly different language. It applie[s] all terms and provisions of the incorporated reinsurance treaty to the retrocessional agreement: Subject to the percentage allocation in the preceding paragraph, all terms and provisions of the Policy shall be applied to this agreement as if contained herein, and [Lloyd's] shall receive prompt notice of any change in the Policy. Material changes are not binding on [Lloyd's] unless agreed. Id. (para. 2) (emphasis added). Considering Paragraph 1 and 2 together, see Murphy, 777 A.2d at 429-30, if Paragraph 2's incorporation provision only clarified the extent of Lloyd's's derivative liabilitysomething that Paragraph 1 just accomplishedthen Paragraph 2 would be superfluous. Rather, Paragraph 2's incorporating language, in differing from Paragraph 1's, suggests a different purpose. The incorporation applies all terms of the pertinent reinsurance treaty. Indeed, this reiterative incorporation clause is phrased more strongly and expansively than those in many of the cases that the parties cite, including those in which the provision was held to incorporate the arbitration clause. See, e.g., Progressive Cas., 991 F.2d at 45-46 (finding arbitration clause was effectively incorporated against nonsignatory solely through subject to language). Applying the retrocessional agreement to give effect to all its provisions as Pennsylvania law directs that we do, Capek v. Devito, 564 Pa. 267, 767 A.2d 1047, 1050 (2001), Paragraph 2 applies as to Lloyd's and Century the terms and provisions of the reinsurance treaties, precisely what Paragraph 2 says. Century also asserts that Paragraph 2's introductory clause, [s]ubject to the percentage allocation in the preceding paragraph, indicates that only certain obligations were incorporated because only substantive issues relating to liability can be subject to the percentage allocation of risk and premiums, while administrative provisions such as the arbitration clause cannot. But Paragraph 2's text does not easily admit such a reading; its incorporating language is inescapably broad. Thus, the more reasonable reading of Paragraph 2 is that the parties applied all of the reinsurance agreements' terms and provisions to the retrocessional agreement, except that Lloyd's's rights and obligations respecting premiums and losses are defined as stated in Paragraph 1 of the retrocessional agreements. The reinsurance treaties' arbitration provision does not conflict with Paragraph 1's allocation of liability and premiums, so the provision may be applied to the retrocessional agreements.