(Article from Insurance Law Alert, March 2023)
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Holding
A Georgia district court ruled that a reinsurance dispute between General Electric and various reinsurers and retrocessionaires that indemnified insurance issued to a power plant was subject to arbitration, notwithstanding that the contract between the power plant and General Electric did not contain an arbitration provision. Various Insurers, Reinsurers and Retrocessionaires Subscribing to Policy Numbers v. General Electric International, Inc., No. 1:21-cv-04751 (N.D. Ga. Mar. 17, 2023).
Background
General Electric (“GE”) designed, manufactured and installed a gas turbine at an Algerian power plant owned by SKH. When the turbine malfunctioned, SKH allegedly incurred tens of millions of dollars in damage and business interruption losses. SKH was partially reimbursed by its insurer. In turn, several reinsurers and retrocessionaires (collectively, the “Plaintiffs”) partially indemnified SKH’s insurer. Plaintiffs, as SKH’s subrogees, then sought reimbursement from GE for those payments. GE moved to compel arbitration even though the contract between SKH and GE did not contain an arbitration clause. The court granted the motion to compel, concluding that SKH was a third-party beneficiary to a separate service contract between GE and the power plant’s operator, which did contain an arbitration clause.
Decision
The court ruled that Plaintiffs (as subrogees to SKH) were third-party beneficiaries of the service contract between GE and the plant operator because SKH received “direct tangible benefits” from that contract in terms of warranty, maintenance, inspection, testing and repair of parts and machinery. In addition, the court held that the claims at issue arose from the service contract and were therefore subject to arbitration. Plaintiffs argued that their claims were grounded in tort or statutory law, not contract, and therefore outside the scope of the service contract. The court rejected this contention, explaining that it need not reach “the issue of whether Plaintiffs’ claims are within the scope of the Services Contract’s arbitration provision, because . . . the provision in question delegates questions of arbitrability, including scope, to the arbitrator.”
Comments
The question of whether a non-signatory may be bound by an arbitration clause under a third-party beneficiary doctrine (or other equitable doctrines) turns not only on applicable policy language, but also on the particular factual record. One fact deemed important by the General Electric court was the sophisticated nature of the parties. The court stated: “Where contract terms are drafted by sophisticated parties that presumably understand the legal impact of conferring a substantial benefit on a non-executing third party, the equities further favor application of non-signatory doctrines.”