(Article from Insurance Law Alert, December 2023)
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Holding
An Illinois district court granted a motion to compel arbitration, ruling that the question of whether a prior arbitration award has preclusive effect on a subsequent arbitration is a matter for the arbitration panel to decide, not a court. National Cas. Co. v. Cont’l Ins. Co., 2023 U.S. Dist. LEXIS 204528 (N.D. Ill. Nov. 15, 2023).
Background
Continental entered into three reinsurance agreements with National Casualty and Nationwide. When a dispute relating to the reinsurers’ billing arose in 2017, Continental initiated arbitration proceedings against each reinsurer pursuant to an arbitration clause in the agreements. Both arbitration proceedings resulted in final awards that were confirmed by Illinois district courts.
The current dispute arose out of the same provision in the reinsurance agreements. Once again, Continental initiated arbitration against the reinsurers who, in turn, filed suit seeking to preclude Continental from re-arbitrating the final decisions of the 2017 arbitrations. The reinsurers asked the court to stay arbitration in order to allow the parties to litigate the preclusive effect of the prior arbitration. In response, Continental moved to compel arbitration and to dismiss the case. The court granted Continental’s motion and denied the reinsurers’ motion.
Decision
As the court noted, while broad arbitration provisions, such as the one at issue here, require the parties to resolve any dispute relating to the agreement in an arbitration proceeding, a narrow exception exists for a “question of arbitrability.” However, this exception is narrow in scope, limited to “gateway matters,” such as whether non-signatories may be bound by an arbitration clause. The court rejected the reinsurers’ assertion that the preclusive effect of a prior judgment constituted one such “threshold question” of arbitrability. The court explained that a determination of the preclusive effect of the 2017 awards would require an assessment of the merits of the claims and the substantive prerequisites for collateral estoppel and was therefore not a “threshold question of arbitrability” that was subject to judicial ruling.
The court also rejected the reinsurers’ contention that Section 13 of the Federal Arbitration Act (which states that an arbitration award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered”) required the court to adjudicate the preclusive effect of an arbitration award that has been confirmed by a court. The court noted the lack of Seventh Circuit support for this assertion, as well as the First and Ninth Circuits’ rejection of this argument.
Comments
The decision reinforces the well-established principles that “disputes are presumed arbitrable” where a contract includes a broad arbitration clause and that exceptions to this rule are limited in scope. Courts across jurisdictions have held that various procedural defenses—including issues of waiver, delay, notice and laches, among other things—are not “gateway” matters subject to the narrow exception, but rather are matters to be decided by an arbitration panel.
In contrast, questions relating to whether a non-signatory may be bound by an arbitration clause have been deemed gateway matters appropriate for resolution by a court. In a decision issued this month, the Second Circuit denied a motion to compel arbitration, ruling that a non-signatory to a reinsurance agreement was not obligated to arbitrate under a “direct benefits estoppel” theory, which precludes a non-signatory from obtaining benefits from a contract while avoiding an arbitration provision in that same contract. Travelers Indem. Co. v. Grapeland Independent School Dist., 2023 U.S. App. LEXIS 32631 (2d Cir. Dec. 11, 2023).