On June 3rd, the U.S. Court of Appeals for the Sixth Circuit reaffirmed the fundamental principle that arbitration panels have no jurisdiction to determine the rights or obligations of nonparties to an arbitration and, therefore, vacated the panel’s award because the arbitrators exceeded their powers (applying Section 10(a)(4) of the Federal Arbitration Act) and acted in manifest disregard for the law.
In this dispute, the panel issued an interim final order that the cedent, was liable to its reinsurer for 50% of the reinsurer's administrative costs relating to the management of a reinsurance pool. However, the panel ordered the cedent to reimburse a management subsidiary of a third reinsurer who, pursuant to an assumption contract with the cedent’s reinsurer, had purchased all of that reinsurer's interest in the reinsurance contract. Because neither the third-party reinsurer nor its management affiliate was a party to either the contract or the ongoing arbitration, the cedent brought a federal district court action to vacate the award on the grounds that it exceeded the panel’s authority and was in manifest disregard for the law.
Affirming the district court’s vacation of the award, the Sixth Circuit agreed that the panel’s order mandated payment directly to a nonparty. Consequently, that award unambiguously exceeded the terms of the reinsurance contract dispute and adjudicated the parties' relationship with a nonparty. This, the court held, the panel may not do. The award was also in manifest disregard of an earlier court ruling in this case that the third-party reinsurer and its affiliates could not be compelled to submit to this arbitration because of a third-party disclaimer provision in the assumption contract between it and the reinsurer.
In dicta, the court of appeals criticized the breadth of the district court’s ruling regarding the cedent’s right to offset the administrative costs it owed to the reinsurer against other liquidated debts the reinsurer owed it. It found that the panel clearly determined that the “scope of debts” subject to offset was restricted to the administrative costs it had ordered the reinsurer to pay and by no other debt. Thus, the district court was without the power to order the panel to reconsider this issue, particularly in the absence of any record of decision indicating why the panel chose to limit the cedent’s offset rights in this manner.
The district court’s order was also invalid, according the Sixth Circuit, to the extent that it attempted to empower the panel to consider the cedent's setoff rights with regard to any debt between the cedent and the reinsurer. There was no evidence here that the parties had submitted any debt other than the ones relating to the reinsurance contract at issue, and thus, the arbitration panel's authority was inherently limited to debts relating to that specific dispute.
Nationwide Mutual Insurance Co. v. Home Insurance Co., 2003 U.S. App. LEXIS 10927 (6th Cir. June 3, 2003).