Considering consolidation.

AuthorKing, Mitchell S.
PositionIn commercial arbitration

MOST REINSURANCE agreements arise in interstate commerce and are governed by the Federal Arbitration Act (FAA), which is silent on consolidation. (1) Until recently, courts determined whether arbitrations involving multiple contracts, parties, or claims could be consolidated. They routinely denied such requests absent express contractual provisions providing for consolidation, despite equitable or public policy considerations favoring consolidation. (2)

The federal courts have reversed direction, however, following the United States Supreme Court's 2003 decision in Green Tree Financial Corp. v. Bazzle. (3) In the aftermath of that decision, various United States Courts of Appeal have held that the question of whether to consolidate arbitration proceedings under the FAA is for the arbitrators rather than the courts to decide. (4) But the Supreme Court has not provided any guidance regarding which panel of arbitrators decides that question. While some courts have sidestepped the issue completely, others have addressed it with a variety of approaches and outcomes. Taken together, the cases do not establish clear, consistent or even particularly coherent rules. Indeed, the courts' rulings appear to necessitate or promote procedural maneuvering in many arbitrations. A review of the cases nonetheless provides a guide to the various approaches and suggests that practical considerations are often significant regardless of the arbitration agreements in dispute.

  1. The Statutory Framework Under The Federal Arbitration Act

    The FAA "creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate." (5) The FAA is applicable to all arbitration agreements involving maritime or interstate commerce transactions, and it is applicable to any arbitration agreement within the coverage of the Act. (6) It is applicable even if the parties have included a choice of law provision in their contract selecting a particular state's law. (7) However, where parties enter into a set of arbitration rules different from those of the FAA, "enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the act would otherwise permit it to go forward." (8) In essence, where the issue is the validity and enforceability of arbitration agreements themselves, the FAA controls. However, state law may supplement the FAA on matters collateral to the agreement to arbitrate if not inconsistent with the FAA. (9)

    Section 2 of the FAA provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Section 4 provides that once a court is satisfied that a contract provides for arbitration, the court must order the parties "to proceed to arbitration in accordance with the terms of the agreement." (10) The FAA makes no reference to consolidation of arbitrations.

    A federal court sitting in diversity usually applies the state substantive law and federal procedural rules. (11) Although arbitration rules are substantive law, (12) "the FAA applies in diversity cases because Congress intended the Act to prescribe how federal courts are to conduct themselves." (13) Thus, for cases that fall within its reach, the FAA governs all aspects of arbitration procedure and preempts inconsistent state law. (14)

  2. The Post-Bazzle Rule: Consolidation is a Procedural Issue for Arbitrators to Decide

    In Bazzle, the Supreme Court considered whether arbitration agreements contained in two commercial lending contracts authorized class arbitration. The South Carolina high court had held that the arbitration clauses were silent as to class arbitration and that, in such circumstances, the contracts permitted class arbitration as a matter of South Carolina law. The Supreme Court, by a four-member plurality, held that whether the clauses were silent as to class arbitration was a matter of contract interpretation under state law. But it also held that the state court could not resolve that question because "[u]nder the terms of the parties' contracts, the question--whether the agreement forbids class arbitration--is for the arbitrator to decide." (15) Specifically, the Court found that the parties had agreed to have the arbitrator determine "all disputes, claims, or controversies arising from or relating to this contract or the relationships which result from this contract," and whether the contract forbids class arbitration is a dispute "relating to this contract" and the resulting "relationships." (16)

    In so holding, the Court largely relied on its earlier decision in Howsam v. Dean Witter Reynolds, (17) where it had recognized that arbitrators decide procedural matters related to arbitration, and held that the timeliness of an arbitration was such a procedural matter. Together, the Bazzle and Howsam decisions have come to stand for the proposition that arbitrations under the FAA present two general categories of questions: 1) so-called gateway questions, including whether the parties have agreed to arbitrate a matter and, if so, whether their controversy falls within their agreement (i.e., whether the parties should be arbitrating at all); and 2) questions regarding what kind of arbitration proceeding they agreed to. The former category lies squarely within the authority of the court while the latter category the procedural matters--are the arbitrator's domain. (18) Bazzle and Howsam underlie a series of decisions by federal courts holding that, under the FAA, consolidation is a procedural matter presumptively for the arbitrator to decide.

  3. Choosing a Panel to Decide the Consolidation Question

    The seemingly simple proposition that arbitrators decide questions of consolidation has evolved in a number of directions because the courts have been forced to confront the question of which panel of arbitrators should resolve the consolidation issue. The courts considering this issue have taken varied approaches with respect to referring the consolidation question to arbitrators, including: (1) compelling the appointment of multiple panels to consider the question simultaneously, (2) empanelling arbitrators specifically for the purpose of considering consolidation: and (3) referring the question to the earliest constituted panel. While each of the courts recognizes practical considerations as well as potential consequences for the parties" substantive contractual rights involved m resolving the issue, they differ with respect to identifying the dominant considerations. (19)

    1. Multiple Panel Approach

      In Employers Insurance Co. of Wausau v. Century Indemnity Co. ("Century I"), (20) Century demanded consolidated arbitration of disputes with multiple reinsurers. Wausau had issued two reinsurance agreements to Century (first and second excess agreements). Allstate had issued one reinsurance agreement to Century (first excess agreement). The arbitration agreements in the three contracts were identical and each provided that each party would appoint its own arbitrator and the two arbitrators would choose an umpire.

      Century demanded that the reinsurers collectively appoint a single arbitrator. Wausau objected, arguing that the first and second excess agreements were separate contracts and that neither of them contained language expressing an agreement by Wausau to participate in a consolidated arbitration. Allstate also objected, arguing that its agreement did not allow for consolidated arbitration. At the time the matter was submitted to the court, no arbitration panel had been appointed.

      The court held that the matter of consolidation was a question for the arbitrators. It further held that, since no panel had been selected, the court needed to compel the parties to select arbitrators. It rejected, as contrary to the unambiguous language of the agreements, Century's argument that the reinsurers should collectively appoint a single arbitrator. In particular, the court found that Wausau was not a party to Allstate's agreement, and vice versa. It ordered Wausau and Allstate to submit to separate arbitrations in which "their arbitrators may consider the issue of consolidation once they have been seated." (21) The court did not address how a conflict between the panels on the consolidation issue might be resolved if one arose.

      Wausau appealed the decision to the Seventh Circuit, which affirmed the district court's ruling that consolidation was a question for the arbitrator as opposed to the court. Employers Insurance Co. of Wausau v. Century Indemnity Co., ("Century II"). (22) As part of the appeal, Wausau and Century asked the Seventh Circuit to clarify the district court's decision as to how they were to proceed with arbitration. Century maintained that the decision required Wausau to appoint one arbitrator for a single arbitration covering both Wausau agreements. Wausau argued that it was to appoint two arbitrators, one for each of two separate arbitrations one under the first excess agreement, and one under the second excess agreement. The court found that the decision required a single arbitration for Wausau covering both of its agreements.

      In Clearwater Insurance Co. v. Granite State Insurance Co., (23) the respondent moved to stay proceedings to compel four separate California arbitrations pending the decision of a Massachusetts arbitration panel which was then considering whether to consolidate the claims. The court declined the stay and ordered the separate arbitrations to proceed. According to the court, its role was limited to determining whether grounds existed requiring it to compel each of the four...

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