Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

Federal Court Reluctantly Permits Replacement of Arbitrator by Appointing Party Who Solicited His Resignation Prior to Umpire Selection

Over the past decade, there have been several interesting cases involving the resignation or death of party-arbitrators under various circumstances and at different times during an arbitration. E.g., Gass, Ronald S., When Arbitrators Resign: Second Circuit Affirms New Rule that a Substitute Arbitrator Should be Appointed Instead of Starting Arbitration Anew, 17 ARIAS-U.S. Quarterly 25 (3rd Quarter 2010); Gass, Ronald S., Federal Court Rules that Party-Arbitrator’s Resignation Due to Illness and Subsequent Recovery Does not Require Arbitration to Start Anew, 16 ARIAS-U.S. Quarterly 26 (3rd Quarter 2009); Gass, Ronald S., When an Arbitrator Dies: Federal Court Rules that Arbitration Must “Begin Afresh”, 11 ARIAS-U.S. Quarterly 30 (4th Quarter 2004). Some of the most difficult and vexing ethical and procedural issues threatening the integrity of the arbitral process and the speedy resolution of disputes can arise in these situations, particularly when the party-arbitrator’s resignation is requested by the appointing party. In a recent New York federal district court decision, the tension between a party’s right to appoint the arbitrator of its choice versus the potential manipulation and attendant disruption of the arbitral process was addressed in the context of a cedent’s efforts to consolidate two arbitrations arising from a single reinsurance loss.

In this case, the reinsurer, National Indemnity Company (“NICO”), issued two contracts to the cedent, IRB-Brasil Resseguros S.A. (“IRB”) – one effective for three months from November 21, 2007 to February 21, 2008 and the other for one year from February 21, 2008 to February 21, 2009. During the terms of these agreements, IRB sustained almost a $250 million loss, and a claim payment dispute arose between the parties. Initially, NICO simultaneously commenced two arbitrations at year-end 2008 – one in London under the first three-month contract and the other in New York under the second one-year contract. Nearly two years after the London panel dismissed the first contract dispute on the ground that it lacked jurisdiction, NICO commenced a third arbitration in New York to address the dispute under the three-month contract. Meanwhile, in the second one-year contract arbitration, the parties selected their party-arbitrators, and each nominated slates of two umpire candidates, one of whom was to be struck by the other party and the umpire chosen by drawing lots, all in accordance with the arbitration clause. Although the parties agreed to postpone umpire selection in the second arbitration for several months while they discussed possible settlement, their negotiations ultimately proved unsuccessful, and no umpire was ever selected.

In the third arbitration NICO commenced in New York, IRB named the same party-arbitrator it had appointed in the second arbitration. Several months later, NICO, in a surprising move, appointed one of the two umpire candidates previously nominated by the cedent in the second arbitration. This appointment provoked a federal court petition by IRB seeking the disqualification of NICO’s new party-arbitrator and the consolidation of the two New York arbitrations. IRB believed that NICO or its counsel had ex parte contact with its erstwhile umpire candidate. NICO countered with a cross-petition claiming that IRB had defaulted in selecting an umpire in the third arbitration and sought a court-appointed umpire because IRB’s party-arbitrator had refused to discuss umpire selection with NICO’s newly appointed arbitrator, who was now the subject of IRB’s disqualification challenge.

In the first of two decisions issued within a couple months of each other by the New York federal district court, the relief sought by both parties was denied. First, the court concluded that neither Section 5 of the Federal Arbitration Act (“FAA”), which authorizes court appointment of arbitrators if a party fails to follow the contractual selection process or there is a lapse in their selection, nor any other FAA provision permitted the pre-award disqualification of an arbitrator duly selected in accordance with the parties’ arbitration clause, as NICO had done in the third arbitration. Absent conduct giving rise to an appearance of impropriety, NICO’s party-arbitrator had done nothing to raise concerns about his ability or qualifications to act in this capacity. The fact that he had previously indicated his willingness to serve as IRB’s umpire candidate in the second arbitration a year earlier was not a disqualifying event. It simply meant that he had removed himself from consideration as an umpire candidate in that other arbitration and that NICO had effectively exercised its option to strike him.

With regard to the cedent’s consolidation request, the court followed U.S. Supreme Court precedent holding that contract interpretation issues, such as whether two arbitrations should be consolidated, were best left to the arbitrators in the second arbitration to decide once the umpire was selected and the panel fully constituted. Lastly, NICO’s claim that the court should appoint the umpire in the third arbitration because IRB’s party-arbitrator had refused to accept NICO’s newly appointed arbitrator was also dismissed. The court expressed its expectation that its ruling not to disqualify NICO’s party-arbitrator in the third arbitration would now enable to parties to move forward with umpire selection while the second arbitration panel decided whether the two matters should be consolidated.

Notwithstanding the court’s optimism, umpire selection in the two New York arbitrations quickly derailed again. After IRB struck one of the two NICO candidates in the second arbitration and tried to move forward with umpire selection, NICO refused to draw lots until IRB’s remaining nominee completed an umpire questionnaire. Soon thereafter, NICO’s party-arbitrator in the second arbitration “abruptly” informed the parties that he was resigning, as it turned out, at NICO’s request. In his place, NICO appointed the umpire candidate IRB had nominated in the second arbitration who was now serving as its party-arbitrator in the third arbitration, i.e., the same arbitrator was appointed by NICO as its party-arbitrator in both arbitrations.

Having reached a new impasse, the parties swiftly returned to federal district court. This time IRB petitioned to (1) prohibit NICO from changing the party-arbitrator it had originally designated in the second arbitration or, alternatively, permit IRB to choose a default party-arbitrator for NICO; (2) prohibit NICO from requiring the submission of an umpire questionnaire from IRB’s party-arbitrator prior to the random draw; and (3) stay the third arbitration pending the second arbitration panel’s consolidation decision. NICO cross-petitioned to disqualify IRB’s umpire candidate in the second arbitration for allegedly being under the control of IRB or, alternatively, to require him to complete an umpire questionnaire.

With regard to NICO soliciting the resignation of its party-arbitrator in the second arbitration, the court, citing “thin” case law on the subject, reluctantly permitted the substitution of the same party-arbitrator NICO had appointed in the third arbitration (i.e., the same person the court had previously declined to disqualify) in the second arbitration. Citing Southern District of New York precedent, the judge concurred with the principle that striking a replacement arbitrator when a party’s initial arbitrator resigns was inconsistent with the underlying goal of arbitration, “which is to provide for a balanced deliberation that produces an outcome that both parties are willing to accept.” The parties are entitled to a party-arbitrator of their choice to advocate for their position. However, the court was clearly troubled by the fact that NICO had directly solicited its party-arbitrator’s resignation two years after his appointment in the second arbitration. The judge expressed concerns about the risk of manipulation and potential delay and was “wary of creating an unfettered right to alter the composition of an arbitration panel” that would “inject an intolerable level of uncertainty into the arbitration system.” However, there were two important extenuating factors in this case that persuaded the court not to intervene: (1) the second arbitration panel had not yet taken any action in the matter before it because the panel had not yet been fully constituted; and (2) having the same party-arbitrators in both of the New York arbitrations would seemingly bolster IRB’s case for the desired consolidation of these two proceedings.

NICO’s argument that IRB’s umpire candidate in the second arbitration must be disqualified because he was under the cedent’s control was based on the fact that IRB’s party-arbitrator had spoken with both of the IRB-nominated umpire candidates and “confirmed their interest, ability, and willingness to serve as IRB’s Umpire candidates” in the second arbitration. NICO contended that this was an improper ex parte communication with the umpire candidates and that the reference to their willingness to serve as “IRB’s Umpire candidates” was tantamount to the remaining candidate agreeing to act as the cedent’s agent in the second arbitration. IRB countered that such ex parte communications were not uncommon in ad hoc arbitrations. The court found that the ex parte communication between IRB’s party-arbitrator and its umpire candidate did not render him “under its control” as a matter of law and observed that NICO was essentially challenging him, pre-award, for alleged bias. Under well-established Second Circuit precedent, it refused to disqualify the cedent’s candidate because evident partiality attacks may not be raised until after an award is issued.

The umpire selection stalemate over the questionnaire in the second arbitration was also quickly dispatched. Noting that the arbitration agreement made no mention of an umpire questionnaire requirement, the court found that counsel for the parties had agreed that the umpire candidates would be required to complete questionnaires on the basis of an e-mail IRB’s counsel sent to opposing counsel mentioning them. Consequently, the court held that there was an agreement to modify the arbitration clause and to require the candidates in the second arbitration to submit umpire questionnaires. Therefore, it ordered IRB’s candidate to complete the same questionnaire that NICO’s candidate had previously submitted to the parties. The court also expressed its expectation that, once the umpire questionnaire was received, the drawing of lots would proceed and any further pre-award evident partiality challenges of IRB’s candidate would be “treated by this Court as not made in good faith.” Lastly, the court granted IRB’s request that the third arbitration be stayed until such time as the second arbitration panel could rule on the consolidation question.

There are several remarkable aspects of this case that warrant closer scrutiny. First, it raises serious questions about the timing and propriety of party-arbitrator resignations directly solicited by the appointing party. Here the likelihood of prejudice was minimal because the second arbitration, two years after its commencement, had not progressed beyond the parties’ exchange of umpire slates, and there were no decisions made by or evidentiary hearings held before a fully constituted panel. However, the judge plainly signaled her discomfort with party-requested resignations and hinted that if the arbitrator had resigned after panel formation, the result may have been different because such resignations interfere with the speedy resolution of disputes in arbitration and can “inject an intolerable level of uncertainty” into the arbitral process.

Second, despite the court’s finding that the IRB party-arbitrator’s ex parte contact with its two umpire candidates did not result in disqualification, this is still a risky practice. Cf. ARIAS-U.S., Practical Guide to Reinsurance Arbitration Procedure § 2.3 Comment C (rev. ed. 2004) (“It is accepted practice that the parties will not meet with, or discuss anticipated issues with, umpire candidates prior to nomination or appointment. If the parties desire to determine whether umpire nominees have potential conflicts before selecting an umpire, the parties should consider circulating a questionnaire such as Sample Form 2.1., the ARIAS-U.S. Arbitrator and Umpire Disclosure Questionnaire.”). At best, ex parte party-arbitrator contacts with potential umpire candidates needlessly provoke questions later about the neutral’s impartiality and, at worst, triggers tedious and time-consuming organizational meeting voir dire about the nature and scope of such communications and, as in this case, arbitration delays and costly litigation.

Third, the court’s recitation of the facts does not explain why IRB’s umpire candidate in the second arbitration later agreed to accept NICO’s appointment as its party-arbitrator in the third arbitration. He must have known that he was being considered as an umpire candidate by IRB because its party-arbitrator spoke with him, albeit nearly one-and-a-half years earlier, to determine his willingness to serve. Given the long hiatus in umpire selection, perhaps he may have assumed that he was no longer under consideration. In any case, it is certainly easy to understand why IRB was dismayed by his subsequent appointment by NICO.

Fourth, the judge’s premise that umpire questionnaires may not be made a prerequisite for umpire selection if the arbitration clause does not require them seems out of step with current insurance and reinsurance arbitration practice. Parties typically rely on umpire questionnaires such as the ARIAS-U.S. form to flesh out the experience and qualifications of umpire candidates and to detect potential disqualifying conflicts. Although the judge in this case ordered IRB’s party-arbitrator to complete a questionnaire prior to drawing lots, her comment that any further pre-award challenge to IRB’s umpire candidate qualifications by NICO “that reflects another effort to question his impartiality will be treated by this Court as not made in good faith” is unfortunate. The whole point of these questionnaires is to assist the parties in assessing and, if necessary, challenging the candidates’ impartiality prior to umpire selection. To suggest that a party’s legitimate inquiries into a candidate’s experience or qualification deficiencies or potential conflicts or bias based on questionnaire responses would not be in good faith diminishes the important role this tool plays in safeguarding the fairness and integrity of the arbitral process. Perhaps the judge’s remark should be taken with a grain of salt when considered against the backdrop of this case. It may have been her way of signaling the court’s palpable irritation over the parties’ repeated umpire and party-arbitrator impartiality challenges and attendant arbitration delays when Second Circuit precedent so clearly frowns upon such pre-award evident partiality litigation.

IRB-Brasil Resseguros S.A. v. National Indemnity Co., Case No. Civ. 1965 (NRB), 2011 U.S. Dist. LEXIS 136640 (S.D.N.Y. Nov. 29, 2011); 2011 U.S. Dist. LEXIS 116664 (S.D.N.Y. Oct. 5, 2011).

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