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

Pennsylvania Federal Court Rejects “First in Time” Rule to Determine Which of Four Arbitration Panels Should Decide Consolidation Question

Ever since several influential federal courts ruled that the question of multiple arbitration consolidation is for arbitration panels, not the courts, to decide, it was inevitable that the tricky “which panel” question would be litigated. This conundrum was recently posed in an noteworthy Pennsylvania federal district court case that rejected the parties’ novel “first in time” rule, i.e., the first fully constituted panel should decide the threshold consolidation question. Instead, in a disappointing but not altogether surprising opinion, the court ordered that four partially constituted arbitration panels must be completed and each was to proceed to determine whether any of the arbitrations should end, consolidate, or subsume the others.

Without naming its own party-arbitrators, the cedent filed three separate arbitration demands with its reinsurer involving three distinct claims governed by a 1968 reinsurance agreement. The first two demands were issued in early April 2005 and the third in early May 2005. In each instance, the reinsurer timely appointed its party-arbitrators. Prior to the expiration of the arbitration clause’s 30-day appointment deadline but without naming its own party-arbitrators, the cedent issued a fourth arbitration demand that encompassed the other three losses plus 16 additional disputed claims arising under several other reinsurance agreements in addition to the 1968 treaty.

The reinsurer subsequently notified the cedent that it had appointed default party-arbitrators in the initial three arbitrations and objected to the cedent’s attempt to consolidate them into a fourth one, although it did take the precaution of naming its party-arbitrator in response to the cedent’s last demand. The cedent claimed that the fourth demand “superseded” the three prior ones, but for the avoidance of any doubt, it purported to withdraw the three earlier demands and timely appointed its party-arbitrator for the consolidated arbitration. Finding themselves at a stalemate, both parties filed motions to compel arbitration in Pennsylvania federal district court.

In considering the motions, the court acknowledged, as did the parties, that the consolidation question was clearly one of procedure for the arbitrators to decide in light of recent binding precedent in the Third Circuit, Certain Underwriters at Lloyd’s London v. Westchester Fire Insurance Co., 489 F.3d 580 (3d Cir. 2007). Therefore, the narrow question presented here was which of the four partially constituted tripartite arbitration panels was the appropriate body to determine the consolidation issue.

In the absence of any applicable authority, both parties advanced a “first in time” rule, i.e., “the first panel that was ‘completely’ formed must decide the threshold question of consolidation.” The problem, of course, was that proponents of this novel rule disagreed over which of the four panels was “formed” first. The cedent contended that the last panel was the first “formed” because the fourth demand letter withdrew the prior three arbitrations, and it was the only panel to have a party-arbitrator appointed by each party. The court rejected this argument primarily on the ground that the consolidation question and whether the cedent’s purported withdrawal of the three prior arbitrations effectively superseded them were both matters of arbitration procedure, as opposed to arbitrability, that a panel must decide.

Recognizing that the Federal Arbitration Act, case law, and the arbitration agreement worked to “compel a distinctly inefficient conclusion here,” the court ordered all four arbitration panels to be constituted and then decide whether any of the arbitrations should end, be consolidated, or subsumed by the others unless these “two sophisticated business litigants can sensibly jointly design a procedural roadmap.”

As this decision signals, federal courts are unlikely to intervene to decide which of multiple panels (whether they be partially or fully constituted) ought to decide procedural questions such as consolidation and the effectiveness of a party’s withdrawal of prior arbitration demands. In the event that these panels ultimately disagree over how the matter ought to proceed, the parties may be confronted with a thorny, mind-bending, and inefficient process and the unpleasant prospect of having to complete all of those arbitrations before court review may be sought.

Argonaut Insurance Co. v. Century Indemnity Co., Civ. No. 05-5355, 2007 U.S. Dist. LEXIS 65863 (E.D. Pa. Sept. 6, 2007).

THE GASS COMPANY, INC.
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