The Long Road to Arbitration
By Cindy Chang
Reinsurance contracts, particularly contracts for treaty reinsurance, often mandate arbitration. See Employer Reins. Corp. v. Laurier Indem. Co., No. 8:03CV1650, 2007 U.S. Dist. LEXIS 45670 at *7 (M.D. Fla., June 25, 2007) (noting dearth of case law “because most . . . reinsurance cases end in arbitration”). Arbitration is perceived to be both time- and cost-efficient in comparison to adjudication through the court system, and these efficiencies are among the paramount reasons clients often elect to include arbitration clauses in their agreements.
However, imprecise or ambiguous drafting of the arbitration clause itself may lead disputing parties down a road much longer than they anticipated. In fact, once a party elects to dispute a motion to compel arbitration on the basis of arbitrability, this preliminary dispute on the validity of the agreement to arbitrate may lead to series of hurdles that may stretch longer than the underlying dispute itself.
Although the Federal Arbitration Act, 9 U.S.C. § 1. et seq. (the “FAA”), creates a strong presumption favoring arbitration, the Supreme Court has repeatedly held that “[a]rbitration under the [FAA] is a matter of consent, not coercion.” Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989); see also AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 648 (1986). Accordingly, the presumption favoring arbitration does not apply to the determination of whether there is a valid agreement to arbitrate between the parties. Fleetwood Enters. Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002). Instead, ordinary state contract principles determine the validity of the agreement. First Options v. Kaplan, 514 U.S 938, 943-44 (1995).
And who is responsible for applying these contract principles? A court (unless, of course, the arbitration agreement provides otherwise). Howsam v. Dean Witter Reynolds, 537 U.S. 79, 84 (2002) (“[A] gateway dispute about whether the parties are bound by a given arbitration clause raises a ‘question of arbitrability’ for a court to decide.”); First Options, 514 U.S at 947 (holding when parties do not clearly agree to submit the question of arbitrability to arbitration, the arbitrability of a dispute is subject to independent review by the courts).
Although this rule prevents forcing parties to arbitrate a matter that they may not have agreed to arbitrate, it also precipitates the possibility of a “trial” on the issue of arbitrability. The FAA mandates that “[i]f the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.” 9 U.S.C. §4. In other words, if the court finds that there is a material issue of fact as to the arbitrability of the agreement, it will order a trial on the issue. See Bensadoun v. Jobe-Riat, 316 F.316 171, 175 (2d. Cir. 2003) (“If there is an issue of fact as to the making of the agreement for arbitration, then a trial is necessary.”); Institut Pasteur v. Chiron Corp., 314 F. Supp. 2d 33, 40 (D.D.C. 2004).
With trial come discovery, depositions, additional motions, and a litany of other time-consuming and costly endeavors that accompany any trial. More importantly, regardless of the outcome of arbitrability, the underlying dispute must then still either undergo arbitration proceedings or submit to a trial in court.
Consequently, if parties want to ensure that they bypass any trial, their arbitration agreements should unambiguously reflect their intention. Otherwise, the parties may find themselves in a trial to avoid a trial.
Cindy Chang is an Associate in the firm’s Washington, D.C. office and is a member of the Insurance and Reinsurance and Litigation Practices. Prior to joining the firm, Ms. Chang completed a clerkship with the Honorable Kathianne Knaup Crane of the Missouri Court of Appeals.
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