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In PoolRe Ins. Corp. v. Organizational Strategies, Inc., No. 14-20433 (5th Cir. Apr. 7, 2015), the U.S. Court of Appeals for the Fifth Circuit affirmed the vacatur of an arbitration award, holding that the arbitrator exceeded his authority in a multiple-party, multiple-contract arbitration by acting in accordance with one arbitration agreement, but contrary to the arbitrator appointment and forum selection clauses in other arbitration agreements involving an intervening party.

After an insurance-related American Arbitration Association (“AAA”) arbitration involving multiple entities, Appellants sought reversal of a Texas district court’s decision to vacate the arbitral award. Appellants Capstone Associated Services, Capstone Associated Services (Wyoming) L.P., and Capstone Insurance Management, Limited (collectively “Capstone”) are related companies that provide turnkey formation and administrative services for captive insurance companies. Capstone administers Appellant PoolRe, a third-party insurer. Appellant Feldman Law Firm, L.L.P. (“the Firm”), provides legal services related to Capstone’s captive insurance support program. The dispute arose out of Appellants’ relationship with a professional services firm, Organizational Strategies, Incorporated (“OSI”).

Capstone and OSI entered into an Engagement Letter, under which three captive insurance companies (the “Captives”) were formed to underwrite alternative risk programs for OSI. The Engagement Letter attached the Firm’s Billing Guidelines, including a clause requiring arbitration pursuant to AAA rules, and a delegation clause requiring the arbitrability of an issue to be decided by the arbitrator. Also attached was a Services Agreement to be executed after the formation of the Captives, which provided for venue and jurisdiction in Delaware and contained an integration clause such that, in the event of any conflict between the Services Agreement and the Engagement Letter, the terms of the Services Agreement control.

PoolRe and the Captives went on to issue a series of insurance policies to OSI. PoolRe entered into a separate Reinsurance Agreement with each of the Captives, all of which included identical arbitration clauses requiring ICC arbitration in the Territory of Anguilla, B.W.I. After OSI asked Capstone to change certain accounting information, under the belief that they were overpaying premiums, Capstone refused and, ultimately, OSI terminated the Engagement Letter and PoolRe cancelled its agreements with the Captives. OSI questioned whether PoolRe had properly refunded deposits and the Firm withdrew from further work with OSI pending the resolution of the dispute.

Capstone filed an arbitration demand against OSI in March 2013 for breach of contract claims. The demand was forwarded to Dion Ramos of Conflict Resolution Services, PLLC (“CRS”) in Houston, Texas, who appointed himself as arbitrator. The Reinsurance Agreements between PoolRe and the Captives required that the “Anguilla, B.W.I. Director of Insurance” select the arbitrator. The director of the Anguilla Financial Services Commission sent a letter to PoolRe, informing it that no such official exists, and designated CRS to select an independent arbitrator and administer the arbitration proceedings. OSI appeared in April 2013, objecting to the arbitrator’s authority and moving to dismiss based on the venue clause in the Services Agreement. PoolRe and the Firm intervened in the AAA arbitration, with PoolRe intervening for the “limited purpose of having Ramos appoint an Anguilla-based arbitrator.”

Ramos issued a jurisdictional ruling, applying AAA rules, finding jurisdiction over Capstone’s claims pursuant to the arbitration clause in the Billing Guidelines and over PoolRe’s claims pursuant to the arbitration clause in the Reinsurance Agreements, and holding that PoolRe waived its right to arbitration in Anguilla by intervening. OSI objected to the ruling, noting that the ruling as to PoolRe removed the arbitration from the ICC’s jurisdiction.

Ramos also denied OSI’s motion to dismiss based on the Delaware venue clause in the Services Agreement. After a hearing, Ramos ultimately issued an award against OSI, finding OSI to be in material breach of the contracts with Capstone, PoolRe and the Firm, granting attorneys’ fees and costs to Capstone, PoolRe and the Firm, and denying all of OSI’s counterclaims.

PoolRe sought to confirm the award in Texas district court, and OSI moved to vacate the award. The district court found that Ramos exceeded his authority by exercising jurisdiction over and applying AAA rules to the disputes between PoolRe and the Captives. Because this “tainted the entire process,” the court vacated the award pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a)(4), and denied the motion to confirm. Capstone and PoolRe appealed the vacatur to the Fifth Circuit.

Reviewing the vacatur de novo, the Fifth Circuit agreed that Ramos acted contrary to the express provisions of the PoolRe arbitration agreements and affirmed the vacatur decision. First, the court noted that Ramos was appointed in the manner provided in the Billing Guidelines between OSI and Capstone, but in a manner contrary to that provided in the Reinsurance Agreements between PoolRe and the Captives. As Ramos was not selected via the contractually agreed method when he decided the dispute between PoolRe and the Captives, the Fifth Circuit found that the district court properly vacated the award with regard to the claims against PoolRe. The court also noted that although the specified appointing authority did not exist, the district court appointment procedure set forth in the FAA, 9 U.S.C. § 5, could have been invoked as a solution.

Second, the Fifth Circuit found that Ramos acted contrary to the clause in the Reinsurance Agreements calling for disputes to be decided “in accordance with” the ICC Rules of Arbitration. The court construed the term “in accordance with” as a forum selection clause integral to the agreement. Thus, by applying AAA rules to the dispute with PoolRe, Ramos acted contrary to an express forum selection clause in the arbitration agreement, exceeding his authority under 9 U.S.C. § 10(a)(4).

Finally, the Fifth Circuit rejected Appellants’ argument that the award should only have been vacated in part, insofar as it gave recovery to PoolRe. Although case law provides that a court may vacate an award in part and confirm in part where an arbitrator has exceeded his authority, nothing in either the case law or in 9 U.S.C. § 10(a)(4) provides that a district court must do so, particularly where the arbitrator awarded a lump sum to be split among multiple parties. Thus, the district court did not err in vacating the entire award.

A version of this post originally appeared in the July 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.


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