“Do-Overs”: A New Installment in the Law of Reconstituted Arbitral Tribunals
By Marc J. Goldstein
Do-overs are much-discussed in the news, as the President and Chief Justice of the United States decided, in an abundance of caution, to re-enact the administering of the Constitutionally-mandated oath of office in a White House ceremony attended by roughly 500 million fewer people than witnessed the original stumbling performance at mid-day on January 20, 2009.
Do-overs in arbitration are again a topic of discussion, after the recent decision of a federal district judge in New York that ordered an arbitration to start anew and erased a “Summary Judgment Order” on liability issues rendered by the original tribunal prior to the resignation of one of its members due to illness. Ins. Co. of North America (“INA”) v. Pub. Serv. Mut. Ins. Co., 2008 U.S. Dist. LEXIS 101788 (S.D.N.Y. Dec. 12, 2008).
In INA, the arbitration took place before a three-member tribunal pursuant to the arbitration clause of a reinsurance contract. At issue was whether the allocation of costs among reinsurers had been properly made. The arbitration clause did not specify arbitration rules. During the proceedings, the parties agreed upon a procedure for discovery and motions for summary judgment. Respondent moved for summary judgment on the entire case, seeking a determination that its reinsurance allocation was reasonable, an award of the balance claimed to be due, and interest, costs, and attorneys’ fees. The Tribunal in a “Summary Judgment Order” granted the motion for summary judgment in part – but only to the extent of holding that New York rather than New Jersey law controlled on the issue of whether the allocation was reasonable. Judgment on all the other issues presented by Respondent’s motion – including whether the allocation was reasonable under New York law, was reserved. Petitioner moved for reconsideration of the Order, and, while that motion was pending, its party-appointed arbitrator resigned citing health reasons. Respondent then contended that Petitioner was required to appoint a replacement arbitrator and go forward in the existing case; Petitioner insisted that a new arbitration had to begin, and purported to commence that proceeding and to appoint a new party-appointed arbitrator in the new case.
Proceedings then moved to the District Court, where Respondent sought a stay of the new arbitration and confirmation of the Summary Judgment Order as a partial final award. The District Court denied this relief, and granted Petitioner’s cross-motion to stay the existing arbitration – thus effectively nullifying the Summary Judgment Order and requiring that the arbitration begin anew with a newly-constituted tribunal. The Court acknowledged the “general rule” (decided by case law, but not by statute) that if one member of a three-member tribunal is unable to continue, and no award has been made, and the parties have not by agreement decided what should happen in this circumstance, then the arbitration must begin anew. But here the general rule did not apply, the Court held, because the Summary Judgment Order was not sufficiently final to be considered as a partial final award, as it determined fewer than all of the issues presented by the motion for summary judgment, and, even on the issue that was determined, the parties evidently envisioned the possibility of reconsideration.
The general rule had been stated, but not for the first time, by the Second Circuit in Trade & Transport v. Natural Petroleum Charterers, 931 F.2d 191, 194 (2d Cir. 1991). But in that case the panel had rendered what it called, and what in fact was, a “partial final award” –an award that finally determined the issue of liability. Indeed, in that case, when the losing party sought reconsideration, the tribunal responded that it was functus officio as to the liability issue.
In INA, the Court focused on a significant underlying premise of the general rule as stated in Trade & Transport: that the scope of the issues submitted by the parties, when compared with the issues decided, determines whether the decision is final. Whereas the interim award in Trade & Transport had “’conclusively decided every point’” presented in the parties’ interim submission, the Summary Judgment Order in INA clearly did not.
One should hesitate, however, to take this aspect of the INA decision, concerning the scope of the submission, too literally. Suppose the tribunal had granted all aspects of the motion for summary judgment, except that it reserved decision on pre-award interest and allocation of attorneys’ fees pending further briefing on choice-of-law. In that scenario, the tribunal would not have “conclusively decided every point” submitted to it, but its determination of liability and damages issues would not be affected by the reserved issues, and it is likely that the parties’ intention was to have those issues determined once and for all time, even if determination of another issue was reserved. In this scenario, there should be no obstacle either to enforcement of such a decision as a final partial award, or to the arbitration continuing, with a replacement arbitrator appointed either by a method agreed by the parties, or by the Court if they fail to agree. The rationale for the result in INA, properly viewed, is twofold: first, that the Summary Judgment Order did not even determine the liability issue completely, but only the law applicable to determine liability, and second, that the parties by their conduct in litigating the motion for reconsideration, demonstrated that they did had not agreed that the tribunal’s summary judgment decision would be final and binding at the time it was rendered. (The latter is a slightly different emphasis from the Court’s, which focused on the tribunal’s willingness to determine the reconsideration motion.)
The do-over result in INA is exceptional, not only because of the particular circumstances of the Summary Judgment Order, but also because the parties had not adopted institutional rules of arbitration that address replacement of an arbitrator. Most institutional rules of international arbitration (e.g., ICC, AAA, LCIA, Stockholm, Singapore), as well as the UNCITRAL Model Law and UNCITRAL Arbitration Rules, provide for appointment of a substitute arbitrator according to the rules or agreement governing the initial appointment of the arbitrator being replaced, or by another method chosen by the administering institution. Some rules also state explicitly that is up to the re-constituted tribunal to decide to what extent any proceedings should be repeated (although some rules make repetition of proceedings mandatory if the presiding arbitrator is replaced).
Such provisions are also found in many arbitration statutes, such as the English Arbitration Act. The English Act provides that the reconstituted tribunal shall in its sole discretion determine to what extent “the proceedings” shall be repeated. Assuming that “proceedings” includes any interim awards issues prior to the replacement of an arbitrator, it would lie within the discretion of a reconstituted tribunal, seated in the United Kingdom and governed by its procedural law, to let stand, or to vacate or modify, such interim awards. In the case of vacatur or modification, principles of functus officio should not apply, as the powers to re-determine issues are expressly vested by the statute. Whether this is in fact the result under English law has not been researched for this commentary. However, in a case in which this author was counsel, in 2005, this result was indeed reached by an arbitration tribunal seated in Singapore, where the governing Singapore statute contained provisions similar to the English Act. An interim award deciding a preliminary legal issue bearing upon liability and damages was allowed to stand, in the discretion of the reconstituted tribunal, following the resignation of the Chairman for health reasons and his replacement by an appointed of the Singapore International Arbitration Centre.
It is to be noted, in conclusion, that the foregoing discussion is not applicable to situations where a three-person tribunal is “truncated” by the improper and willful failure or refusal of a duly-appointed arbitrator to fulfill his or her mission. Some institutional rules provide in such circumstances for continuation of the proceedings by the remaining two arbitrators. Under what circumstances this may be lawful or appropriate is a widely-discussed topic, but one that is beyond the scope of this comment.