On rare occasions, arbitrations come to an abrupt halt because one of the arbitrators dies or becomes incapacitated. Reinsurance arbitration clauses seldom address this particular contingency. If the arbitration is in its earliest stages (e.g., prior to the panel’s organizational meeting), or after the organizational meeting but before any evidentiary hearings have taken place, a party may prefer to appoint a substitute arbitrator to pick up where the prior one left off. This approach works well when both sides agree, but what happens if evidentiary hearings have taken place or panel deliberations have commenced and the other side objects to the replacement arbitrator? This was the issue decided recently by a New York federal district court. Applying Second Circuit precedent, it ruled that an 11-year-old arbitration in its post-hearing briefing phase must “begin afresh” after one of the party-arbitrators died.
In a protracted non-reinsurance arbitration case, a division of the Mexican state-owned oil company, Pemex-Refinacion (“Pemex”), chartered a tanker from a Georgian shipping company, Tbilisi Shipping Co. Ltd. (“Tbilisi”), in late 1992 to transport certain oil products. During one of the tanker’s voyages, parcels of unleaded gasoline and diesel oil became cross-contaminated while being unloaded. Although Pemex was able to salvage the cargo, it incurred over a half million dollars in salvage costs and other losses. Invoking the charter contract’s arbitration clause, Tbilisi initiated an arbitration in 1993 to determine the quantum of damages. Shortly thereafter, the parties appointed their arbitrators, who, in turn, appointed an umpire.
Nothing further happening until 1995 when Pemex filed with the panel a brief outline of its claims together with preliminary documentation, and Tbilisi filed an application to have Pemex’s claims dismissed as time-barred, which the panel unanimously rejected. It was not until 1996 that Pemex filed its Statement of Claim, and between then and 2003, the panel held 16 hearings and completed the evidentiary stage of the arbitration. In mid-2003, Pemex filed its main post-hearing brief, but before Tbilisi could submit its brief and before panel deliberations had commenced, Pemex’s party-arbitrator died. Pemex sought to appoint a replacement unilaterally, but Tbilisi objected. Pemex then filed an action in federal district court to enforce its appointment, and Tbilisi cross-moved for an order compelling Pemex to recommence the arbitration with a newly constituted panel.
The district court cited the “general rule” in the Second Circuit that “the arbitration must commence anew with a fresh panel” when one member of a three-member panel dies before the rendering of an award and the arbitration agreement does not anticipate that circumstance, Trade and Transport, Inc. v. Natural Petroleum Charterers Inc., 931 F.2d 191, 194 (2d Cir. 1991). It then considered whether this case presented any “special circumstances” warranting one of the recognized exceptions to this rule such as when vacancies occur during the very early stages of the arbitration or when a panel has rendered a final decision with respect to only some of the issues raised in the arbitration (e.g., a bifurcated arbitration with separate liability and damages phases).
In rejecting Pemex’s “creative” arguments that this arbitration was the sort of bifurcated proceeding that fit one of the exceptions to the general rule, the court observed that arbitrators play a crucial role “from assessing the credibility of witnesses to serving as advocates for their respective appointees;” hence, “it makes sense that it is only in instances where a panel is completely without power to revisit an issue that the Court has approved the appointment of a replacement.” While arbitrator replacement under these circumstances, even at such a late stage in the proceedings, is still possible, both parties must waive any objections. Given that the unresolved part of this arbitration concerning damages had progressed nearly to the point of completion (i.e., Tbilisi needed only to file is main post-hearing brief and each party had to file their reply briefs) and in the absence of any waiver by Tbilisi, this case fit squarely into the Second Circuit’s general rule that the arbitration must begin afresh. In denying Pemex’s motion to appoint a replacement arbitrator and ordering a new arbitration proceeding, the court acknowledged that Tbilisi was “at liberty” to reappoint its prior arbitrator or to select a new one.
Although the court agreed with Pemex’s sentiment that this result was a “regrettable loss of time and money” after 11 years of proceedings, its decision was “made easier” in this case because some of the fault for this arbitration’s extensive length was attributable to Pemex.
Pemex-Refinacion v. Tbilisi Shipping Co. Ltd. (S.D.N.Y. Sept. 16, 2004) (Baer, J.), reported in New York Law Journal (Sept. 16, 2004).