Disinterested Arbitrators: Summary and Analysis of Scandinavian Re and Trustmark Cases
INTRODUCTION
Three recent decisions from two different United States district courts shed light on whether arbitrators remain “disinterested” despite prior or concurrent involvement in other arbitrations involving the same parties and/or shared arbitrators or umpires. Trustmark Ins. Co. v. John Hancock Life Ins. Co., 2010 WL 309885 (N.D.Ill. January 21, 2010); Trustmark Ins. Co. v. Clarendon Nat’l. Ins. Co., 2010 WL 431592 (N.D.Ill. February 1, 2010); Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire & Marine Ins. Co., 2010 WL 653481 (S.D.N.Y. February 23, 2010). This news alert summarizes these decisions and offers a brief discussion of the implications of each.
CASE SUMMARIES AND ANALYSIS THE TRUSTMARK CASES
Two recent cases involving the Trustmark Insurance Company, Trustmark Ins. Co. v. John Hancock Life Ins. Co., 2010 WL 309885 (N.D.Ill. January 21, 2010) and Trustmark Ins. Co. v. Clarendon Nat’l. Ins. Co., 2010 WL 431592 (N.D. Ill. February 1, 2010), address the effect of confidentiality agreements in determining whether arbitrators can remain “disinterested” when serving in consecutive arbitrations between the same parties. When considered together, the Trustmark cases have important implications for parties and arbitrators alike.
TRUSTMARK v. JOHN HANCOCK
Trustmark Insurance Company (Trustmark) provided excess of loss reinsurance coverage to John Hancock Life Insurance Company (Hancock). In 2002, Hancock initiated arbitration against Trustmark (the first arbitration), alleging that Trustmark refused to honor billings associated with Hancock’s retrocessional business. Prior to commencing arbitration proceedings, the parties entered into a confidentiality agreement under which documents exchanged, testimony given and the ultimate award were subject to confidentiality. The arbitrators, including Hancock’s partyappointed arbitrator Mark Gurevitz signed the confidentiality agreement and were therefore bound by its terms. In 2004, the panel rendered a decision finding that Hancock’s retrocessional business was covered and therefore was properly ceded under the applicable reinsurance treaties. The award was subsequently confirmed pursuant to the confidentiality agreement.
Some time after the confirmation of the award in the first arbitration, Hancock sent a new billing to Trustmark that was again disputed. Hancock initiated arbitration proceedings (the second arbitration) and again appointed Gurevitz as its party-appointed arbitrator. At an organizational meeting, Trustmark raised concerns regarding Gurevitz’s ability to adhere to the confidentiality agreement applicable to the first arbitration. Gurevitz stated that although he would “scrupulously abide by confidentiality” he might find it “hard to segregate, difficult to deal with” knowledge gained from the first arbitration that would be otherwise unknown to the other members of the panel for the second arbitration. Trustmark ultimately did not object to Gurevitz’s appointment.
During the second arbitration, Hancock requested that the second panel authorize the use of all materials associated with the first arbitration (despite the confidentiality agreement between the parties) so that the parties could avoid relitigating whether Hancock’s retrocessional business was covered. Gurevitz, despite being party to the confidentiality agreement, did not recuse himself, and participated in the decision. The panel ultimately accepted and extended the confidentiality agreement to the current panel members. Notwithstanding this decision, the panel subsequently found that Trustmark was precluded from relitigating the claim that Hancock’s retrocessional business was not covered by the reinsurance contracts.
Trustmark thereafter moved to enjoin the arbitration, arguing that the confidentiality agreement was non-arbitrable and asking the court to remove Gurevitz because he was no longer disinterested because he violated the confidentiality agreement. Trustmark contended that its challenge regarding Gurevitz was not based on any alleged partiality or bias, but rather was made because Gurevitz breached the confidentiality agreement and thereby affected the other members of the panel. In support of its position, Trustmark noted Gurevitz’s admission that he might find it hard to segregate knowledge learned in the first arbitration from the second. Trustmark also cited a specific situation that took place during a conference relating to the second arbitration, where Gurevitz, in support of Hancock, described his recollection of the treatment of a similar issue in the first arbitration.
In response to Trustmark’s assertions, Hancock argued that Trustmark’s motion was premature because the challenge was brought prior to a final award by the panel.
The district court agreed with Trustmark. The court found that Gurevitz breached the confidentiality agreement by and through his refusal to recuse himself from the panel when deciding whether to extend the prior confidentiality agreement, and because he disclosed procedures and decisions from the first arbitration. The court reasoned that Gurevitz’s breach of the prior confidentiality agreement constituted a breach of his duty to Trustmark, and that Gurevitz might be held liable for that breach depending on the circumstances arising in the second arbitration. As a result, the court held that Gurevitz was an interested party because he had a personal stake in the outcome of the arbitration. Thus, the court determined that Trustmark demonstrated a strong likelihood of success on the merits of its claim to disqualify Gurevitz, and held that Trustmark’s motion was not premature.
The court granted Trustmark’s motion and enjoined the second arbitration so long as Gurevitz remained on the panel.
TRUSTMARK v. CLARENDON
Trustmark Insurance Company (Trustmark) and Clarendon National Insurance Company (Clarendon) entered into a number of reinsurance contracts during 1997 and 1998, where Clarendon reinsured a number of Trustmark’s risks. Under the 1998 contracts, Clarendon reinsured Trustmark under a variable quota share treaty as well as under excess of loss agreements. Both types of the 1998 agreements were the basis of a dispute between the parties that culminated in Trustmark demanding arbitration in 2006. Clarendon requested that both disputes be considered in one arbitration, but Trustmark denied the request. Clarendon appointed Mary Ellen Burns as its arbitrator for the first arbitration concerning the excess of loss treaties. The parties entered into the standard ARIAS confidentiality agreement before commencing the arbitration proceedings. In March 2009, following arbitration between the parties, the panel issued a final award.
When the time came for the second arbitration between the parties, regarding the variable quota share treaty, Clarendon again appointed Burns as its arbitrator. Trustmark challenged the appointment of Burns, citing concerns with her ability to abide by the confidentiality agreement from the first arbitration and questioning whether she was disinterested. The crux of Trustmark’s argument was that it was “inevitable” that Burns would breach the terms of the confidentiality agreement or that, in the alternative, the requirements for the anticipatory repudiation of the confidentiality agreement were present.
The court rejected both of Trustmark’s claims, finding that the mere fear that the confidentiality agreement would be breached did not constitute a viable cause of action. The court found the repudiation argument unpersuasive, because Trustmark could not point to a single statement to indicate that Burns intended to breach the confidentiality agreement. Similarly, the court reasoned that a breach of the confidentiality agreement was not “inevitable” on the facts presented, noting that Trustmark had not advanced any evidence to show that Burns would be unable to perform her duties on the panel without breaching the confidentiality agreement. Significantly, the court also distinguished the facts before it from those addressed in Trustmark v. John Hancock, stating that “the critical difference between this case and Hancock is that in Hancock the arbitrator in question had already breached a confidentiality agreement and in so doing had rebutted the presumption that he could disregard the knowledge that he already had.”
On the evidence presented by Trustmark, or more appropriately the lack thereof, the court refused to enjoin the second arbitration and held that Trustmark’s motion was premature because a cause of action did not yet exist.
THE SIGNIFICANCE OF THE TRUSTMARK CASES
The Trustmark cases indicate that arbitrators may serve on subsequent panels in arbitrations involving the same parties, so long as they have a good-faith belief in their ability to honor prior, relevant confidentiality agreements and do in fact honor those agreements throughout the arbitration. Additionally, while both Trustmark cases confirm that the courts are hesitant to interfere with the arbitral process prior to the entry of an award, they indicate that an exception to this general rule is warranted when an arbitrator common to a prior and related arbitration between the parties breaches a confidentiality agreement.
Neither of the Trustmark cases, however, squarely address whether a court will enjoin an arbitration when an arbitrator’s representations suggest the potential inability to honor a prior confidentiality agreement. In Trustmark v. Hancock, the court recognized the significance of Gurevitz’s statement regarding the potential difficulty in segregating knowledge gained in the first arbitration from use in the second. However, that court also found that Gurevitz did, in fact, breach the confidentiality agreement and thus did not have to directly address whether his statement alone would have been sufficient to warrant his disqualification. Similarly, in Trustmark v. Clarendon, the court distinguished the facts before it with those in Hancock based on the issue of whether the confidentiality agreement was actually breached, rather than the potential for its breach based on arbitrator statements. Thus Clarendon only further complicates matters through its holding by suggesting that absent statements to the contrary, an arbitrator will be presumed to be able to fulfill her duties without having to breach any confidentiality agreements.
Notwithstanding these unsettled issues, both of the Trustmark cases indicate that the best practice is to require that arbitrators who are subject to prior, relevant confidentiality agreements definitively address whether they will be able to honor confidentiality in the present arbitration.
SCANDINAVIAN RE v. ST. PAUL
In 1999, Scandinavian Re and St. Paul entered into a retrocessional agreement under which St. Paul ceded a portion of its casualty reinsurance to Scandinavian Re. In 2007, a dispute arose between the parties regarding the retrocessional agreement and Scandinavian Re initiated arbitration proceedings (the St. Paul arbitration). Scandinavian Re appointed Jonathan Rosen and St. Paul appointed Peter Gentile as their respective party-appointed arbitrators. Rosen and Gentile selected Paul Dassenko to be the umpire, and the parties confirmed Dassenko’s appointment.
Prior to his appointment, Dassenko completed and submitted an umpire questionnaire to identify any potential conflicts of interest. Dassenko disclosed relationships with companies affiliated with both Scandinavian Re and St. Paul, as well as past involvement on arbitration panels with Rosen. Dassenko also disclosed that he was concurrently involved in a matter as a party-appointed arbitrator adverse to Scandinavian Re. In February 2008, at an organizational meeting, Dassenko and the party-appointed arbitrators had the opportunity to make additional disclosures. Disclosures were made by Rosen and Gentile at that time. The parties proceeded to arbitration, which commenced in June 2009, with the understanding that any additional potential conflicts would be disclosed at the time in which they became known. In the months leading up to and throughout the arbitration proceedings, Dassenko, Gentile and Rosen all made various disclosures regarding potential conflicts, but neither Dassenko nor Gentile ever disclosed their involvement in other arbitrations involving St. Paul. In August 2009, the panel, by majority vote, issued an award in favor of St. Paul and against Scandinavian Re.
During the St. Paul arbitration, and unbeknownst to Scandinavian Re and perhaps even to St. Paul, both Dassenko and Gentile were chosen to serve on another arbitration panel in an arbitration that commenced in June, 2008, between PMA Capital Insurance Company (PMA) and Platinum Bda, a wholly-owned subsidiary of Platinum Underwriters Holdings Ltd. (the Platinum arbitration). In that matter, Dassenko was chosen as umpire and Gentile was appointed by Platinum Bda as its party-appointed arbitrator. Platinum Bda was regarded as being the successor entity to St. Paul, and the Platinum arbitration shared a common witness and addressed many of the same or similar disputed issues and contract terms as those relevant in the St. Paul arbitration. At an organizational meeting for the Platinum arbitration, held in September 2008, both Dassenko and Gentile disclosed that they were both currently serving in another matter on the same panel, but neither Dassenko nor Gentile disclosed that this other matter involved Scandinavian Re and St. Paul.
In October 2009, after the panel issued its award in the St. Paul arbitration, Scandinavian Re first learned of Dassenko and Gentile’s involvement in the Platinum arbitration. Scandinavian Re thereafter sought to vacate the arbitration award entered following the St. Paul arbitration on grounds that Dassenko and Gentile’s failure to disclose their involvement in the Platinum arbitration indicates “evident partiality” and rendered them not disinterested. Scandinavian Re contended that, given the commonality of parties, witnesses and disputed issues in the Platinum arbitration and the St. Paul arbitration, it would have objected to the continued service of both Dassenko and Gentile had it been aware of their involvement in the Platinum arbitration.
St. Paul disputed Scandinavian Re’s assertion that Platinum Bda was a related corporate entity. It also argued that the undisclosed relationships were trivial because neither Dassenko nor Gentile had any financial interest in the outcome of either arbitration and neither had a direct relationship with St. Paul.
The court agreed with Scandinavian Re, and vacated the award on the basis of Dassenko’s and Gentile’s failure to disclose their involvement in the Platinum arbitration. The court concluded that the evident partiality standard articulated by the Second Circuit in Morelite Construction Corp. v. New York City District Counsel Carpenters Benefit Funds, 748 F.2d 79 (2d Cir. 1984) was applicable, and that based on that standard, a reasonable person would conclude that an arbitrator is partial to one side when that arbitrator fails to disclose a material relationship. In so finding, the court stated that “the significance of the undisclosed relationship is the decisive factor, not which people the relationship involves.” Additionally, the court rejected St. Paul’s argument that the undisclosed relationships were “trivial,” finding that the evidence indicated otherwise. Specifically the court cited the commonality between the two arbitrations, noting that both shared common arbitrators, overlapped in time, shared similar issues, involved related parties, and included a common, critical witness. All of these factors led the court to find that Dassenko and Gentile placed themselves in a position to receive ex parte information, and by failing to make the appropriate disclosures, deprived Scandinavian Re of its opportunity to object to their service or adjust its arbitration strategy. The court reasoned that even if Dassenko and Gentile believed in good faith that they would not be influenced by the information learned through their participation in the Platinum arbitration, this did not excuse their failure to disclose the potential conflict to the parties in the St. Paul arbitration.
Based on these considerations, the court held that the weight of evidence showed a material conflict of interest and evident partiality on the part of Dassenko and Gentile, and vacated the arbitration award pursuant to Scandinavian Re’s motion.
THE SIGNIFICANCE OF SCANDINAVIAN RE v. ST. PAUL
The court’s decision in Scandinavian Re highlights the importance of full and continuous disclosure of any and all potential conflicts by arbitrators and umpires. The primary focus of the court’s decision is clear upon consideration of the many aspects of the case that the court did not address in reaching its decision. The decision was not based on the fact that Dassenko and Gentile concurrently served in an arbitration between related parties, and the court did not endeavor to determine the extent of any ex parte information known to either individual. In addition, the court did not attempt toascertain whether Dassenko and Gentile’s involvement in the Platinum arbitration actually influenced their decisions in the St. Paul arbitration. The court was not even concerned with whether Dassenko or Gentile had a good-faith belief that they would not be influenced by the information that they learned through their involvement in the Platinum arbitration.
Rather, the court’s holding centered on the failure of Dassenko and Gentile to fully disclose their involvement in the Platinum arbitration, resulting in an inference of partiality and irreparable prejudice to Scandinavian Re. This suggests that the nondisclosure of potential conflicts alone may be grounds for vacatur when the circumstances are such that the potential for arbitrator partiality exists. Of additional note is that the decision did not directly reach the issue of whether arbitrators may serve concurrently on arbitration panels that involve the same parties or even the same or similar issues. However, the disposition of the case indicates that such common involvement and overlap will not alone give rise to vacatur so long as the parties to the arbitration are made fully aware of the potential conflicts. Therefore, Scandinavian Re indicates that parties and arbitrators should take particular care to determine and disclose any potential conflicts that may exist, both before and during an arbitration proceeding.
1 Of additional note is that the district court held that the confidentiality agreement was not subject to arbitration, because it did not contain an arbitration clause. The court refused to find that the arbitration clause of the subject underwriting agreement was applicable to the confidentiality agreement.
