Court Opinion

ID: 2788120
Source: CourtListenerOpinion
Date Created: 2015-03-20 20:00:34.229338+00
Date Added: 2024-06-11T11:27:02.346350
License: Public Domain

United States Court of Appeals
                       For the First Circuit

No. 14-1644

                 FIRST STATE INSURANCE COMPANY and
               NEW ENGLAND REINSURANCE CORPORATION,

                            Appellees,

                                 v.

                    NATIONAL CASUALTY COMPANY,

                            Appellant.

          APPEAL FROM THE UNITED STATES DISTRICT COURT

                 FOR THE DISTRICT OF MASSACHUSETTS

              [Hon. Rya W. Zobel, U.S. District Judge]

                               Before

                       Selya, Circuit Judge,
                    Souter,* Associate Justice,
                     and Lipez, Circuit Judge.

     Kendall W. Harrison, with whom Godfrey & Kahn, S.C., Susan A.
Hartnett, Patrick J. Hannon, and Sugarman, Rogers, Barshak & Cohen,
P.C. were on brief, for appellant.
     Lloyd A. Gura, with whom Michael P. Mullins, David W.S.
Lieberman, Day Pitney LLP, Amy J. Kallal, Matthew J. Lasky, and
Mound Cotton Wollan & Greengrass were on brief, for appellees.

                          March 20, 2015

     *
      Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
           SELYA, Circuit Judge.    A party that implores a court to

vacate an arbitration award normally faces a steep uphill climb:

the scope of judicial review of arbitration awards is "among the

narrowest known in the law."    Me. Cent. R.R. Co. v. Bhd. of Maint.

of Way Emps., 873 F.2d 425, 428 (1st Cir. 1989).      And where, as

here, the arbitration clause contains an "honorable engagement"

provision, judicial review is encumbered by yet a further level of

circumscription. Surveying this arid landscape, the court below

refused to vacate the challenged arbitration award and instead

confirmed it.     Discerning no error, we affirm.

I.   BACKGROUND

             In industry parlance, a primary insurer may cede risk

to another insurer, who effectively becomes a reinsurer.     See N.

River Ins. Co. v. ACE Am. Reins. Co., 361 F.3d 134, 137 (2d Cir.

2004). When a reinsurer cedes assumed risk to yet another insurer,

that transfer is called a retrocessional agreement.    See Compagnie

de Reassurance d'Ile de France v. New Eng. Reins. Corp., 57 F.3d
56, 62 (1st Cir. 1995).     Here, First State Insurance Company and

New England Reinsurance Corporation (collectively, First State)

entered into a number of reinsurance and retrocessional agreements

with a reinsurer, National Casualty Company (National).    In August

of 2011, First State demanded arbitration under eight of these

agreements to resolve differences of opinion about billing disputes

and the interpretation of certain contract provisions relating to

                                   -2-
payment   of      claims.1     By   agreement   of   the    parties,    all    the

arbitrations were consolidated in a single proceeding before a

panel of three arbitrators.

             At    First     State's    suggestion    and    over     National's

objection,     the    arbitrators      agreed   to   consider   the    contract

interpretation issues first.            As to those issues, First State

sought declaratory relief addressing (i) the minimum quantum of

information required to be furnished in order to trigger National's

payment obligations and (ii) whether National could condition

payment on its exercise of its contractual right to inspect First

State's files.

             After briefing and argument, the arbitrators handed down

a contract interpretation award dated December 13, 2012.                      This

award established a payment protocol under the agreements, which

provided that National's payment obligations were to be triggered

"upon its receipt of a billing supported by a Proof of Loss and

Reinsurance Report(s) prepared by First State in a form and content

generally as those introduced with the briefings on this motion."

The award further noted that "[s]aid payments may be made subject

to an appropriate reservation of rights by [National] in instances

     1
       The arbitration clauses in the various agreements are
similar but not identical.     The same holds true for the loss
settlement provisions and the provisions granting National a right
to inspect or audit First State's books and records at any
reasonable time. These modest differences are not material to
this appeal.

                                        -3-
where it has or does identify specific facts which create a

reasonable     question      regarding     coverage        under    the     subject

reinsurance agreement(s)" but "[p]ayment obligations on the part of

[National] are not conditioned upon the exercise of its right to

audit or the production of additional information or documents,

other than those provided by First State as described . . . above."

             First   State   promptly    repaired     to    the    United   States

District Court for the Southern District of New York and filed a

petition pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. §

9, to confirm the award.        National moved to dismiss the petition

or, in the alternative, to transfer venue to the District of

Massachusetts.       On September 27, 2013 — some eight months after

suit had been brought — the court transferred the case to the

District of Massachusetts. National thereafter cross-petitioned to

vacate the contract interpretation award.                  See id. § 10(a)(4).

That cross-petition was not filed until October 15, 2013.

             By then, the underlying arbitration proceedings had run

their course, and First State had petitioned in the District of

Massachusetts to confirm the panel's final award.                   The district

court consolidated the two confirmation petitions and, after a

hearing, summarily confirmed both the contract interpretation award

and the final arbitration award.         This timely appeal ensued.

                                     -4-
II.   ANALYSIS

           National's claims of error relate only to the contract

interpretation award.    Before reaching them, however, we must take

the measure of a preliminary obstacle.          Under the FAA, a party

seeking to vacate an arbitration award must apply to the district

court within 90 days after the promulgation of the award.         See id.

§ 12. First State asserts that National's cross-petition to vacate

the contract interpretation award was filed outside this temporal

window and is, therefore, time-barred.

           It is clear beyond hope of contradiction that National

did not meet the 90-day statutory deadline. The arbitrators issued

the   contract   interpretation   award   on   December   13,   2012,   and

National did not file its petition to vacate that award until

October 15, 2013 (more than 300 days later). Spinning an intricate

web of arguments, National insists that its motion to dismiss First

State's petition to confirm (which was filed within the 90-day

period) could serve as a surrogate for a petition to vacate or, at

least, had the effect of tolling the deadline.            National adds a

series of arguments based on First State's infelicitous choice of

a forum, averring that it could not have filed a timeous petition

to vacate in the Southern District of New York conditioned upon the

disposition of its motion to dismiss without undermining its venue-

based objections and unnecessarily taxing the resources of two

district courts.

                                  -5-
               We need not unravel this tangled skein, however, as this

case is easily resolved on the merits.2                 See, e.g., Cozza v.

Network Assocs., Inc., 362 F.3d 12, 15 (1st Cir. 2004) (bypassing

"novel jurisdictional issue" regarding timeliness of appeal in FAA

case       where   matter    was   susceptible   to   straightforward    merits

disposition); Nisselson v. Lernout, 469 F.3d 143, 151 (1st Cir.

2006) (bypassing unsettled prudential standing question when record

provided clear basis to resolve case on the merits).                    On this

understanding, we proceed directly to the merits of National's

appeal.

               National asseverates that the district court erred in

refusing to vacate the contract interpretation award because the

arbitrators exceeded the scope of their authority. Since the court

below neither conducted an evidentiary hearing nor made findings of

fact, our review is de novo.           See Cytyc Corp. v. DEKA Prods. Ltd.

P'ship, 439 F.3d 27, 32 & n.2 (1st Cir. 2006).

               A   federal     court's    authority     to   defenestrate    an

arbitration award is extremely limited.               See Oxford Health Plans

LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013); Cytyc, 439 F.3d at 32.

       2
       Although the Supreme Court has disapproved of some uses of
hypothetical jurisdiction, see Steel Co. v. Citizens for a Better
Env't, 523 U.S. 83, 94-95 (1998), we have held that the Court's
rationale extends only to situations that implicate Article III
jurisdiction. See, e.g., Nisselson v. Lernout, 469 F.3d 143, 151
(1st Cir. 2006); McBee v. Delica Co., 417 F.3d 107, 127 (1st Cir.
2005). We may continue to bypass thorny jurisdictional issues and
resolve cases on the merits where, as here, those jurisdictional
issues implicate only statutory or prudential considerations.

                                         -6-
Here, the sole inquiry is whether the arbitrators "even arguably"

construed the underlying agreements and, thus, acted within the

scope of their contractually delineated powers. Oxford Health, 133
S. Ct. at 2068.      A legal error (even a serious one) in contract

interpretation is, in and of itself, not a sufficient reason for a

federal court to undo an arbitration award.          See id.; Cytyc, 439
F.3d at 32.       Only if the arbitrators acted so far outside the

bounds of their authority that they can be said to have dispensed

their "own brand of industrial justice" will a court vacate the

award. Stolt-Nielsen v. AnimalFeeds Int'l Corp., 559 U.S. 662, 671

(2010) (internal quotation mark omitted). Put another way, as long

as an arbitration award "draw[s] its essence" from the underlying

agreement, it will withstand judicial review — and it does not

matter how "good, bad, or ugly" the match between the contract and

the terms of the award may be.      Oxford Health, 133 S. Ct. at 2068,

2071 (internal quotation mark omitted).

              National submits that this case represents one of the

rare instances in which the vacation of an arbitration award is

warranted because the arbitrators exceeded the scope of their

powers by re-writing the terms of the parties' agreements.         In its

view,   the    payment   protocol   fashioned   by   the   arbitrators   is

ultracrepidarian since it obligates National to pay billings that

may not fall within the terms and conditions of any applicable

agreement.      National further submits that the award effectively

                                    -7-
forecloses or at least significantly impairs its broad access

rights under the inspection and audit provisions of the agreements

by conditioning those rights on the transmittal of an appropriate

time-of-payment reservation of rights.         This reservation of rights

procedure, National says, is plucked out of thin air and not

derived from any contract term.

             These   arguments   comprise    more   cry   than   wool.    In

ascertaining     whether    arbitrators      arguably     interpreted    the

underlying contract, an inquiring court must look first to the text

of the arbitral award.     After all, "[t]he award will often suggest

on its face that the arbitrator was arguably interpreting the

contract."     BNSF Ry. Co. v. Alstom Transp., Inc., __ F.3d__, __

(5th Cir. 2015) [No. 13-11274, Slip Op. at 4].

             The contract interpretation award here is of this genre:

it explained that the payment protocol was, in part, "based upon

the terms of the subject reinsurance agreements," and confined its

inquiry into National's payment obligations to the obligations

existing "under the subject reinsurance agreements." It is readily

apparent, then, that the arbitrators understood the nature of their

task.   See Oxford Health, 133 S. Ct. at 2069; BNSF, __ F.3d at __

[Slip Op. at 4].

             To cinch the matter, the payment protocol limned in the

award tracks the plain language of the relevant provisions in the

parties' reinsurance agreements.            By way of illustration, the

                                    -8-
various loss settlement provisions, see supra note 1, obligate

National to pay either "within 15 days" or "at the same time . . .

as the reinsured may elect to pay" or "immediate[ly]" upon the

production of "reasonable" or "satisfactory" evidence of the amount

"due" or "to be paid." These arrangements are generally consistent

with the payment protocol in the arbitration award, which obligates

National to pay "upon its receipt of a billing" supported by a

proof of loss and reinsurance report containing, inter alia, the

amount paid or due by First State to its insured.

          We think it noteworthy that none of the loss settlement

provisions in the underlying agreements expressly cross-references

the separate inspection, audit, or access to records provisions.

The contract interpretation award mirrors this separation; it

provides that National's payment obligations are independent of and

not conditioned upon the exercise of National's right to inspect

and audit First State's records. Given this structural similarity,

we are fortified in our conclusion that the arbitrators were doing

nothing beyond construing the underlying agreements.

          Let us be perfectly clear.   Whether the arbitrators were

correct either in their interpretation of the underlying agreements

or in their implementation of a particular payment protocol is not

within our purview.   For present purposes, it suffices that, when

compared to the text of the underlying agreements, the contract

                                -9-
interpretation award leaves no doubt that the arbitrators were

arguably construing those agreements.

             This    brings    us   to     National's      complaint       that   the

reservation     of    rights    procedure        adumbrated     in   the    contract

interpretation award does not draw its essence from the underlying

agreements.          That     procedure,        National    says,    operates      to

circumscribe its broad inspection and audit rights under those

agreements.     We do not agree.

             Each of the eight reinsurance agreements, as well as the

agreement to consolidate the arbitrations, contains an honorable

engagement provision.          This language directs the arbitrators to

consider each agreement as "an honorable engagement rather than

merely   a   legal    obligation"    and    goes     on    to   explain    that   the

arbitrators are "relieved of all judicial formalities and may

abstain from following the strict rules of law."

             Until today, this court has not had occasion to address

the operation and effect of an honorable engagement provision in an

arbitration clause.           We believe that an honorable engagement

provision empowers arbitrators to grant forms of relief, such as

equitable remedies, not explicitly mentioned in the underlying

agreement.    See Banco de Seguros del Estado v. Mut. Marine Office,

Inc., 344 F.3d 255, 261 (2d Cir. 2003); Pac. Reins. Mgmt. Corp. v.

Ohio Reins. Corp., 935 F.2d 1019, 1024-25 (9th Cir. 1991); Harper

Ins. Ltd. v. Century Indem. Co., 819 F. Supp. 2d 270, 278 (S.D.N.Y.

                                         -10-
2011).     This is a huge advantage: the prospects for successful

arbitration        are    measurably   enhanced      if   the   arbitrators     have

flexibility         to    custom-tailor       remedies     to      fit     particular

circumstances. See Yasuda Fire & Marine Ins. Co. of Eur. v. Cont'l

Cas.   Co.,    37 F.3d 345,   351    (7th    Cir.   1994).     An     honorable

engagement provision ensures that flexibility.

              We    therefore       hold    that    the   honorable        engagement

provisions in the arbitration clauses of the underlying agreements

authorized the arbitrators to grant equitable remedies. We further

hold that the reservation of rights procedure is such a remedy.

Consequently, National's objection to that procedure is unavailing.

              We add a coda.         National makes much of an event that

occurred      after       the   arbitrators        promulgated       the     contract

interpretation award: a decision by the arbitrators in the second

phase of this arbitration that struck a reservation of rights

letter submitted by National in connection with certain payments.

This decision shows, as National sees it, that the reservation of

rights procedure effectively forecloses both its inspection and

audit rights and its ability to recoup improper payments from First

State.

              In the Shakespearean phrase, National's fears are less

than horrible imaginings. William Shakespeare, Macbeth, act 1, sc.

3 (circa 1606).          First State acknowledged both in its brief and at

oral argument in this court that the contract interpretation award

                                           -11-
does not condition National's inspection, audit, or recoupment

rights on its submission of an appropriate reservation of rights.

As First State concedes, the contract interpretation award leaves

National, upon receipt of a billing from First State, with three

options: it may (i) reject the billing, (ii) pay the billing

without comment, or (iii) pay the billing with a reservation of

rights.   Whether National employs the second or third option when

paying a particular billing, it retains the right thereafter to

inspect First State's records, audit the claim, and seek recoupment

through a subsequent arbitration should it conclude that payment

was improperly made.   First State has endorsed this reading of the

contract interpretation award and, therefore, it cannot assert

either the absence or inadequacy of a reservation of rights as a

defense to future recoupment efforts by National.

III. CONCLUSION

            We need go no further. For the reasons elucidated above,

the denial of National's cross-petition to vacate and the order

confirming the contract interpretation award are

Affirmed.

                                -12-