The vexing procedural question of what happens after a party-arbitrator resigns due to a serious illness in the midst of an arbitration proceeding was recently addressed by a New York federal district court albeit under unusual factual circumstances. Diverging from the general Second Circuit rule that when a party-arbitrator dies during the pendency of an arbitration the arbitration must commence anew (See Ronald S. Gass, When an Arbitrator Dies: Federal Court Rules that Arbitration Must “Begin Afresh”, 11 ARIAS-U.S. Quarterly 30 (4th Quarter 2004)), the district court found in this unique case that the resigning party-arbitrator, who recovered several months later and had resumed his arbitration practice, should be reappointed to the original panel. If he was unwilling or unable to rejoin the panel, the appointing party must designate a new party-arbitrator to the existing panel within 30 days; otherwise, the court would select a replacement pursuant to its authority under § 5 of the Federal Arbitration Act (“FAA”).
The Insurance Company of North America (“INA”) and other entities were embroiled in a reinsurance arbitration against Public Service Mutual Insurance Company (“PSMIC”). In May 2008, INA’s party-arbitrator learned that he had cancer requiring immediate and intensive treatment, and consequently, he resigned from the panel. His resignation came shortly after the panel had issued a unanimous summary disposition order, the principal ruling of which disposed of INA’s main legal defense and set the stage for further discovery and a hearing on INA’s other defenses to PSMIC’s claim for payment under certain reinsurance contracts. Also, at the time of the party-arbitrator’s resignation, an INA motion for reconsideration was pending before the panel.
In the wake of the INA party-arbitrator’s resignation, the parties became deadlocked over how to proceed, and litigation ensued in federal district court. In December 2008, the court, after weighing the competing policy concerns over whether the arbitration should start anew (i.e., “troubling incentives for ‘bad faith manipulation of the arbitration process’” versus the potential for wasted resources), decided to apply the Second Circuit rule given the “unique” facts of this case. It ordered the arbitration to start over from scratch, specifically noting the unfairness of requiring INA to submit its reconsideration motion on a summary disposition order (which the court did not consider to be a final partial award conclusively deciding every point the parties had submitted to the panel for resolution) before the two panelists who had heard the original arguments and decided the summary disposition motion and one who had not.
In January 2009 and before a new arbitration panel was constituted, PSMIC’s counsel learned that the resigning INA party-arbitrator had recovered sufficiently to be actively soliciting new arbitration assignments. When the party-arbitrator was asked by PSMIC’s counsel whether he was available to rejoin the original panel, INA interjected that it was unwilling to allow him to do so because the prior panel was now defunct per the court’s December 2008 order. When the resigning party-arbitrator eventually replied to PSMIC’s inquiry, he stated that his May 2008 resignation was “final and not conditional or provisional” and that he believed that he had no right to rejoin the panel. PSMIC then sought extraordinary judicial relief from the district court’s order requiring the arbitration to begin afresh on the ground that newly discovered evidence required its vacation and the reappointment of INA’s original party-arbitrator to the existing panel.
The parties did not contest the fact that INA’s party-arbitrator had been seriously ill and required intensive cancer treatments at the time he resigned, nor did they dispute that he had recovered sufficiently to resume his arbitration practice by November 2008. However, PSMIC successfully demonstrated that it had no knowledge of the INA party-arbitrator’s recovery until mid-January 2009, after the December 2008 hearing and court’s order was issued. Given that the INA party-arbitrator was now actively seeking appointments to other arbitral panels, the court viewed this as a special circumstance justifying its departure from the Second Circuit “start anew” general rule, which the judge observed was premised on the permanent unavailability of the arbitrator. Given the INA party-arbitrator’s subsequent availability, requiring the arbitration to continue, according to the court, “is the closest way to effectuate the intent of the parties under the arbitration agreement.”
Having demonstrated its right to extraordinary judicial relief due to newly discovered evidence, PSMIC requested the court to reappoint INA’s party-arbitrator to the existing panel pursuant to § 5 of the FAA. In opposition, INA argued that (1) its resigning party-arbitrator was unwilling to be reappointed, and (2) he was no longer qualified to serve because he was not currently an executive officer of an insurance company as required by the arbitration clause. Regarding the party-arbitrator’s alleged unwillingness to serve, the court found this issue to be premature because he had not yet had the benefit of the court’s latest order and reasonably may have been under the impression that its prior permanent stay of the arbitration and December 2008 order did not give him the right to rejoin the existing panel and to continue with the arbitration where it left off. As for the second argument, the court observed that the parties had agreed to waive the “active executive” requirement when this issue first emerged during the arbitration proceeding and, thus, dismissed this contention.
In vacating its December 2008 order and fashioning a new one on June 30, 2009, the district court also addressed the limitation in § 5 of the FAA that permits the court to appoint an arbitrator only if the arbitration agreement does not specify a method of appointment or if that method is not followed. The parties’ arbitration clause merely provided, as is typical, that each was to select its own party-arbitrator but was silent on how a vacancy created by the death or resignation of a party-arbitrator was to be filled. Because INA originally selected the party-arbitrator who resigned, the court concluded that, if that party-arbitrator was willing, he should be reappointed and that the original panel should pick up where it left off at the time of his resignation. If he was unable or unwilling to rejoin the panel of his own accord, then INA would have the opportunity to select a replacement because there had been no failure to avail itself of the contractually prescribed method for appointing a party-arbitrator nor a “lapse” in naming one. If INA failed to appoint a new party-arbitrator within 30 days, then the court would appoint one pursuant to § 5 given the parties’ appointment deadlock and the arbitration agreement’s silence on the method for filling a party-arbitrator vacancy.
In an interesting coda to this case, the district court’s June 30th order was vacated on July 16, 2009 because the parties had previously taken an appeal of its December 2008 order to the Second Circuit. Therefore, the lower court lacked jurisdiction to grant the relief subsequently sought by PSMIC in early 2009. However, the district court requested that the Second Circuit construe its June 30th order as “an expression of its willingness to grant PSMIC’s . . . motion.” On July 23rd, pursuant to a stipulation for remand, the Second Circuit remanded the case to the district court, and the judge reentered his decision in substantially identical form to the original June 30th order.
This case presents an unusual factual scenario that does not fit neatly into the general Second Circuit rule that the arbitration must commence anew with a fresh panel if one of the arbitrators dies before rendering an award. Here, the party-arbitrator did not die but resigned due to a serious illness but later recovered sufficiently to continue his arbitration practice and, at least theoretically, with this arbitration. Thus, he was not “permanently” unavailable to serve on the panel. Also, the court did not view the summary disposition order issued by the panel prior to the party-arbitrator’s resignation to be tantamount to a partial final award, which may have been another important factor in the court’s reversal of its initial December 2008 order, which had followed Second Circuit precedent.
Insurance Company of North America v. Public Service Mutual Insurance Company, No. 08CV7003 (HB), 2009 U.S. Dist. Lexis 66325 (S.D.N.Y. July 29, 2009).
TELEPHONE: (203) 227-9431
FAX: (212) 208-3003