Law triangle: arbitrating international reinsurance disputes under the New York Convention, the McCarran-Ferguson Act, and antagonistic state law.

Author:Murphy, J. Logan
 
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ABSTRACT

The McCarran--Ferguson Act was enacted to preserve the longstanding prerogative of the States to regulate the insurance industry. States have acted in accordance with this statute to declare arbitration agreements in insurance contracts invalid. However, the Senate has since ratified the New York Convention and appended implementing legislation to the Federal Arbitration Act that obligates domestic courts to recognize arbitration agreements in all international contracts. In an odd convergence of authority, a functional conflict arises between these three bodies of law: the federal law says that state law controls in this area, even over other federal law that might incidentally cover the subject of insurance; the reverse-preemptive state law instructs that arbitration agreements are void in all circumstances; and a later-in-date treaty and corresponding implementing legislation purportedly compel enforcement of the agreement. A resolution of this conflict is required.

In a recent case in the district court for the Northern District of Georgia, a British insurer attempted to enforce an arbitration agreement contained within a reinsurance agreement with a Georgia-based investment company. The reinsurer resisted, invoking the McCarran--Ferguson Act and arguing that Georgia law quite clearly states that arbitration agreements in insurance contracts are void as a matter of public policy. The court held that even though the arbitration agreement would be invalid in a domestic setting, special considerations pertaining to international commercial arrangements counseled that this arbitration agreement should be enforced.

This Note argues that the outcome in Goshawk was the correct one, but expands the doctrinal basis on which courts should rely when faced with this conflict. Courts should invoke any of four doctrines to enforce arbitration agreements in international reinsurance contracts: (1) pacta sunt servanda and the corresponding obligation to abide by the text of a ratified treaty; (2) the Charming Betsy canon's teaching that domestic law should hot be interpreted in a manner that conflicts with international law and obligations; (3) the last-in-time rule, which gives the force of law to the latent expression of the state's will in a certain area; and (4) the Supreme Court's jurisprudence enforcing international arbitration agreements in a host of situations based on notions of international commercial comity, cooperation, and efficiency.

TABLE OF CONTENTS I. INTRODUCTION II. THE ACT, THE CONVENTION, AND IMPLEMENTING LEGISLATION A. The McCarran-Ferguson Act B. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards C. The Implementing Legislation III. ARBITRATION OF A REINSURANCE CONTRACT AS THE "BUSINESS OF INSURANCE" IV. DOCTRINES REGARDING THE USE AND IMPLEMENTATION OF INTERNATIONAL LAW A. Pacta Sunt Servanda B. The Charming Betsy Canon C. Last-in-time Rule V. ENFONCEMENT OF ARBITRATION AGREEMENTS FOR THE PURPOSES OF INTERNATIONAL COMMERCIAL COMITY AND COOPERATION VI. CONCLUSION I. INTRODUCTION

The aim of Congress was clear when it enacted the McCarran-Ferguson Act (1) in 1945: "The business of insurance ... shall be subject to the laws of the several States." (2) This provision arose from a surprising coup by the Supreme Court that usurped the long-standing prerogative of the States to regulate the insurance industry. (3) By generally exempting the "business of insurance" from federal regulation, Congress intended to repudiate the Court's decision and return regulatory control over the insurance business to state capitols. (4) Despite the overarching federalist nature of the McCarran-Ferguson Act, (5) Congress deliberately retained the power to regulate the "business of insurance" through legislation that "specifically relates to the business of insurance." (6) In other words, federal oversight was to have effect only if specifically enacted to regulate the business of insurance. Ancillary legislation could not indirectly influence the manner in which the States oversaw the business of insurance. (7)

In its own path of development, arbitration has emerged as a preferred method of resolving disputes the world over. (8) Defined as "a device whereby the settlement of a question ... is entrusted to ... the arbitrator ... who derive[s] their powers from a private agreement ... and who ... decide[s] the case on the basis of such an agreement," (39) arbitration is now the "accepted method for resolving transnational commercial disputes." (10) However, arbitration has not always enjoyed such prominence. Many judicial and legislative bodies have historically been averse to arbitration. (11) This suspicion migrated into American courts on the coattails of British common law. (12) The U.S. Judiciary's distaste for arbitration and the enforcement of "future dispute" clauses was regularly on display until the latter half of the twentieth century. (13) Nonetheless, jurists' thoughts on alternative dispute resolution have progressed since the time of judicial acrimony, and legislation at both the state and federal levels now evinces an attitude of acceptance, if not encouragement, toward the recognition of arbitration as a valid mechanism for dispute resolution. (14)

The "drive" (15) toward the apotheosis of arbitration as a method of dispute resolution began with the enactment of the Federal Arbitration Act (FAA) in 1925. (16) Section 3 of the FAA mandates that all federal courts stay any trial or proceeding and refer the dispute to arbitration when presented with a valid arbitration agreement regarding that issue. (17) The FAA's purpose "was to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." (18) Moreover, the original text of the legislation indicated a specific congressional intent to enforce arbitration agreements in contracts arising out of interstate and international commerce. (19)

The ascent of arbitration was not unique to the United States. Recognizing the trend toward the use of extra-judicial proceedings for the settlement of disputes, countries around the world solidified their commitment to international arbitration as an efficient means of dispute resolution. (20) The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) (21) in 1958 was a bellwether for the acceptance of international dispute resolution. The New York Convention, as it is commonly referenced, represented international recognition of the importance of arbitration to international commercial comity and codified a necessary framework for consistent dispute resolution for international agreements. The Convention was a logical extension of U.S. arbitration policy, and, after overcoming its initial reticence, the United States affirmed its commitment toward international commercial arbitration by ratifying the Convention in 1970. (22) Soon after, implementing legislation brought the provisions of the Convention into the full force of law. (23)

Today, insurance disputes are increasingly resolved through the use of binding arbitration. (24) Arbitration is generally recognized as providing significant advantages over traditional litigation, including privacy, finality, cost reduction, and speed. (25) Parties are able to preserve the privacy of their circumstances through the use of a private adjudicator and forum--whereas courts rarely deny public access to proceedings. (26) Most arbitration decisions are final, and the majority of arbitration agreements do not provide for an appeal. (27) Cost reduction is achieved through simplified procedures--particularly those where representation by attorneys is not necessary. (28) Finally, the parties to arbitration do not have to be worked into a court's busy docket; they may proceed to arbitration whenever they are ready. (29)

Despite the perceived benefits of arbitration, many states have seen fit to curtail its use in various contexts because of public policy concerns. (30) Such was the decision of Georgia when it exempted "[a]ny contract of insurance" from a general statutory mandate to enforce valid arbitration agreements. (31) The implication of this provision was recently contested in the federal district court for the Northern District of Georgia when a party invoked the Georgia statute to preclude the court from issuing an order compelling arbitration in Goshawk Dedicated Lmtd. v. Portsmouth Settlement Co. I. (32) Goshawk, a British insurer, brought suit seeking an order compelling arbitration pursuant to a provision in its reinsurance contract with Portsmouth, a Georgia-based investment company. (33) Goshawk contended that the Convention and its implementing legislation "control the parties' agreement and require [the] enforcement [of the arbitration agreement]." (34) Portsmouth responded that any arbitration agreement was unenforceable because, under the McCarran-Ferguson Act, Georgia Code [section] 9-9-2(c)(3) reverse-preempts any federal legislation which incidentally regulates the business of insurance, including the Convention, its implementing legislation, and the Federal Arbitration Act. (35)

The district court found for Goshawk and held that the Convention controlled pursuant to the "policies recognized in the context of international commerce that strongly favor enforcement of arbitration clauses." (36) In so concluding, the court specifically rejected a prior decision of the Second Circuit, which held that the Convention was not self-executing, and, therefore, did not preempt a similar anti-arbitration statute in Kentucky. (37) Thus, reasoned the Second Circuit, the implementing legislation of the Convention--as a part of the Federal Arbitration Act--was reverse-preempted pursuant to the McCarran-Ferguson Act. (38)

The Northern...

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