Archive for October, 2009

Incorporation by Reference of an Arbitration Agreement: Governing U.S. Legal Standards

Tuesday, October 27th, 2009

According to a recent decision of the U.S. Court of Appeals for the Third Circuit, a retrocession agreement (reinsurance of reinsurance) that incorporates by reference all terms of a reinsurannce contract that contains an arbitration clause, does provide for arbitration of disputes under the retrocession contract. Further, the Court held, courts must address the question of incorporation-by-reference of an arbitration clause just as they would address the incorporation of any other contract term. To impose a more stringent legal standard for incorporation of an arbitration clause, as compared to other commercial terms, would violate the command of the Federal Arbitration Act (“FAA”) that arbitration agreements be enforced “save upon such grounds as exist in law or in equity for the revocation of any contract.” (Century Indem. Co. v. Certain Underwriters at Lloyd’s, 2009 U. S. App. LEXIS 22619 (3d Cir. Oct. 15, 2009)).

Incorporation-by-reference is a pervasive arbitrability problem in complex, multi-layered commercial relationships. Reinsurance and large-scale construction projects are typical contexts in which the issue may arise.

In reaching the conclusion that the retrocession agreement did indeed incorporate the reinsurance contract’s arbitration clause, the Third Circuit had occasion to work through and clarify two relatively murky issues in the federal law of arbitrability.

First, the Court examined Supreme Court arbitrability jurisprudence to ascertain if federal policy favoring arbitration fosters any presumption in favor of the existence or validity of an arbitration agreement. The Court found little support for such a presumption, as the federal policy favoring arbitration would seem to be triggered only once parties are found — according to applicable state-law principles governing formation of any contract — to have made an agreement to arbitrate.
The presumption of arbitrability, the Court stated, probably applies only in determining the scope of arbitrable issues under a valid arbitration agreement. But the Court, acknowledging some ambiguities in its own decisions, found it unnecessary to make a definite ruling on this point because a valid arbitration agreement could be found here without the benefit of a presumption.

The second issue addressed involved the effect of prior Third Circuit case law requiring an arbitration agreement to be “express” and “unequivocal” to merit enforcement. Did such language refer to a substantive standard? And if so, was the standard at odds with the FAA’s basic command to enforce arbitration agreements on the same basis as other contracts? Alternatively, did this “express” and “unequivocal” language merely refer to the circumstances in which an arbitration clause would be enforced by summary judgment despite one party’s claim that factual disputes about the formation of the agreement required a trial
of that question?

The Court rejected use of these terms as a substantive standard, on the basis that both the text of the FAA and decisions of the Supreme Court require that the validity of an arbitration agreement be decided upon ordinary state law contract principles generally applicable to all