One oft-cited provision of the Federal Arbitration Act (“FAA”) invoked by parties seeking to vacate unfavorable arbitration awards is that the arbitrators were guilty of misconduct “in refusing to hear evidence pertinent and material to the controversy.” FAA § 10(a)(3). These challenges typically arise in the context of overturning final awards when evidence a party sought to offer during the hearing on the merits was rejected for some reason by the panel. In an unusual scenario, however, a New York federal district court recently ruled on a vacatur motion seeking to overturn a panel’s post-hearing interim award on the ground that certain pertinent and material documents and testimony not introduced during the evidentiary hearing should have been heard by the panel before issuing its final award. For the reasons discussed below, the district court rejected this party’s attempt to obtain a second bite at the evidentiary apple on §10(a)(3) and other grounds.
In this case, disputes arose between a Canadian insurer and its Belgian reinsurer involving several different reinsurance contracts as well as insurance business written pursuant to a managing general agent (“MGA”) agreement in which the Belgian reinsurer, through the Canadian insurer’s MGA affiliate, issued primary policies reinsured on a quota-share basis by that insurer. Each party claimed that monies were due to it after applying offsets across all of these contracts. A key contract interpretation issue arbitrated was the basis on which the parties’ quota share reinsurance treaty had terminated, i.e.,on either a cut-off or run-off basis.
Shortly before the hearing and pursuant to a panel order, the parties designated additional potential hearing exhibits, with the reinsurer identifying 450 documents versus 81 marked by the insurer. When questioned about why such a large number of new exhibits were being marked so close to the hearing, the reinsurer’s counsel acknowledged that that it was unlikely all those documents would be used at the hearing but felt that the panel’s order required him to mark them now or risk his client being precluded from introducing them later during their case-in-chief. During the nine-day arbitration hearing, eleven witnesses testified and hundreds of documents were introduced as exhibits. On the final hearing day, the umpire twice stated that it was the panel’s understanding that the parties had completed their evidentiary submissions, and neither party objected to that understanding, stated that it wished to submit any additional evidence, or argued that it had not been afforded an opportunity to present any evidence.
After the evidentiary hearing, the panel issued two interim awards, both of which noted that the panel had conducted “a final hearing on the merits.” In the second one, the majority found that the quota share treaty terminated on a cut-off basis, ruling in favor of the insurer’s interpretation. It retained jurisdiction for a minimum of nine months to resolve any disputes that may arise between the parties in complying with the interim award or agreeing on an expedited and efficient alternative dispute resolution procedure to resolve future disputes governed by the interim award. The panel also scheduled a one-day hearing to consider whether any modifications to the award, including the protocols set forth therein, were necessary and whether there was any need for the panel to retain jurisdiction for an additional period of time and to hear any additional requests for relief from the parties. The panel expressly reserved the right to modify its interim award and to issue future interlocutory awards or a final award as justice and equity may require regarding any of the matters addressed in the interim awards.
About five months after the second interim award was issued, new arbitration counsel for the reinsurer filed a petition to modify it arguing, inter alia, that the quota share cut-off ruling should be reversed because documentary evidence and testimony from a witness not presented during the evidentiary hearing demonstrated that the parties intended the quota share liabilities to be run off, not cut off. Following briefing by the parties on the discrete issue of whether grounds existed warranting the reopening of the arbitration (akin to whether there were grounds for a new trial in a judicial context), the panel issued its final award. The majority ruled that the reinsurer had failed to provide a valid excuse for not introducing the documents and testimony during the hearing on the merits and that the panel’s retention of jurisdiction was not intended to leave the evidentiary record open or to permit the rehearing of any substantive issues previously considered. The dissenting arbitrator argued that the evidence sought to be presented by the reinsurer was pertinent and material, that the panel had retained jurisdiction and the discretion to modify its interim award, and that, in denying the reinsurer’s petition to modify, the panel had refused to hear this evidence.
The insurer sought to confirm the panel’s final award in New York federal district court, and the reinsurer cross-moved to vacate it on several grounds including violation of FAA § 10(a)(3) and (4). Noting at the outset that arbitration awards are subject to “very limited review” and that arbitrators “enjoy broad discretion” to decide whether to hear certain evidence and “do not need to allow parties to present every piece of relevant evidence,” the court examined the factual circumstances surrounding the reinsurer’s petition to offer additional post-hearing evidence. The central principle cited by the district court in analyzing this vacatur motion was whether the procedure afforded by the panel was “fundamentally unfair.” Finding that the reinsurer was granted a full and fair opportunity to present its case at the hearing, the court focused on the following key facts:
In denying the reinsurer’s cross-motion to vacate, the district court found that it was afforded a full and fair opportunity to present its case and that the panel did not disregard any evidence properly presented. “The fact that [the reinsurer] declined to call certain witnesses or present certain evidence within the time allotted – or, more to the point, the fact that, with the benefit of hindsight, it regretted its handling of the hearing – does not constitute fundamental unfairness.”
Notably, the court acknowledged the panel’s right to modify its interim award “as long as doing so did not create fundamental unfairness.” While the doctrine of functus officio ordinarily bars arbitrators from revisiting final awards subject to judicial review, “’if an arbitrator is not functus officio as to an interim award, then the interim award is not subject to judicial review’ and is therefore logically subject to revisitation” (quoting SH Tankers Ltd. v. Koch Shipping Inc., 12 Civ. 00375 (AJN), 2012 U.S. Dist. LEXIS, at *14 (S.D.N.Y. June 19, 2012)). In this case, however, the court concluded that the panel’s retention of jurisdiction was limited to ensuring that the reinsurer complied with the payment protocols in the second interim award and not to permit the submission of additional evidence or the reopening of the evidentiary record.
The court also held that the panel did not exceed its authority such that FAA § 10(a)(4) (“where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made”) was inapplicable to vacate the final award for three reasons. First, the reinsurer argued that the panel had “rewritten” the parties’ contract in finding that it was terminated on a cut-off, instead of run-off, basis. The court observed that this was a “hotly contested” issue with both parties presenting competing interpretations. The fact that the panel largely agreed with the insurer did not mean that it failed to reach a decision drawn from the “essence” of the agreement to arbitrate or failed to provide a “barely colorable justification for the outcome reached.” Second, the reinsurer contended that the panel exceeded its powers by violating its own award when it refused to consider the petition to modify or conduct a one-day hearing as provided for in its second interim award. The court rejected this argument because the panel made it clear that its continued jurisdiction was for the purpose of overseeing any disputes that might emerge over compliance with the award and not to reopen the record for the presentation of evidence that the reinsurer had no excuse for failing to present the first time around. Third, the reinsurer complained that the panel exceeded its authority by imposing a “punitive sanction” in the form of attorney’s fees. The court ruled that broad arbitration clauses such as the ones in this matter gave the arbitrators discretion to order remedies they determine are appropriate, including attorney’s fees for bad faith conduct, even absent a specific authorization to do so and even where there was a specific contractual provision stating that each party would bear its own attorney’s fees. More importantly, the reinsurer itself sought the award of attorney’s fees, thereby waiving any argument that such an award was beyond the panel’s authority.
Another interesting aspect of this decision was the district court’s ruling not to seal portions of the court record notwithstanding the fact that the arbitration proceedings were subject to a confidentiality agreement and both parties had filed motions to seal the record. Briefly, the court observed that the mere existence of the parties’ confidentiality agreement did not demonstrate that sealing was necessary, did not bind the court, and had no effect on the well-established common law right of access to these “judicial documents.” While the public interest in the relationship between an insurer and its reinsurer is relatively low, the weight to be given the presumption of access here was reasonably high at least as to some of the documents at issue. “’In circumstances where an arbitration award is confirmed, the public in the usual case has a right to know what the Court has done.” (quoting Global Reinsurance Corp. – U.S. Branch v. Argonaut Ins. Co., Nos. 07 Civ. 8196 (PKC), 07 Civ. 8350 (PKC), 2008 U.S. Dist. LEXIS 32419, at *5 (S.D.N.Y. Apr. 18, 2008)). The pleadings and challenged arbitration decisions, according to the district court, directly affected its adjudication of this matter and, therefore, should not be sealed.
One important lesson here is that all pertinent and material evidence must be presented by the parties during the arbitration hearing on the merits as there will unlikely be a “second bite” at the evidentiary apple even though the panel may have issued an interim, and not final, award and even if it expressly retained jurisdiction to modify that interim award (which this court acknowledged arbitration panels have the inherent authority to do). It also highlights the importance of formally closing the evidentiary hearing. In this case, the umpire twice announced on the last hearing day that it was the panel’s understanding that the parties had completed their evidentiary submissions. In the absence of any objections or a request by a party to submit additional evidence, it will be nearly impossible to argue later on appeal that the panel refused to hear any pertinent and material evidence. From a practice standpoint, formally announcing the close the hearing record should be routine procedure. For example, the American Arbitration Association’s Commercial Arbitration Rule 35 entitled “Closing of Hearing” provides in pertinent part: “The arbitrator shall specifically inquire of all parties whether they have any further proofs to offer or witnesses to be heard. Upon receiving negative replies or if satisfied that the record is complete, the arbitrator shall declare the hearing closed.” Making such an on-the-record inquiry of the parties at the conclusion of the evidentiary hearing is a worthwhile addition to every arbitrator’s hearing playbook.
Century Indemnity Co. v. AXA Belgium, 11 Civ. 7263 (JMF), 2012 U.S. Dist. LEXIS 136472 (S.D.N.Y. Sept. 24, 2012).