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You Can Always Get What You Want, or At Least What You Contract For – Fifth Circuit Affirms Vacation of Arbitration Award

You Can Always Get What You Want, or At Least What You Contract For – Fifth Circuit Affirms Vacation of Arbitration Award

On April 7, 2015, the Fifth Circuit affirmed the Southern District of Texas’ decision to vacate an arbitration award rendered in a dispute involving two separate contracts – one which was to be governed by the Commercial Arbitration Rules of the American Arbitration Association and one to which the International Chamber of Commerce (ICC) rules applied. The arbitrator determined that the AAA rules applied to the entire controversy, over one party’s objection.

The dispute involved a self-insured professional services firm, a company hired to provide formation and administrative services for captive insurance companies[1] (“Capstone”), and the self-insured’s reinsurer. The Feldman Law Firm (“Feldman”), which provided legal services related to Capstone’s insurance administration program, sent the managers of the professional services firm its Billing Guidelines which contained an arbitration clause requiring application of the Commercial Arbitration Rules of the AAA and provided that “the issues of arbitrability shall likewise be decided by the arbitrator, and not by any other person.” Feldman also sent a Services Agreement which mandated venue in Delaware.

The self-insured’s contracts with the reinsurer contained an arbitration agreement requiring ICC arbitration. The contracts also mandated that arbitration “take place in the Territory of Anguilla, [British West Indies].” After a dispute arose over the amount of premiums being paid by the self-insured, both contracts were terminated. Capstone filed a demand for arbitration for its breach of contract claims against the self-insured, and that demand was forwarded to Dion Ramos of Conflict Resolution Systems, PLLC in Houston, Texas. Although the reinsurance agreements required an Anguilla-based arbitrator, Ramos found jurisdiction over those claims, too, and ruled against the self-insured in the amount of $451,244.44 “to be divided among [Capstone, Feldman, and the reinsurer] as they see fit.”

On March 31, 2014, the Texas district court found that “Ramos exceeded his authority by exercising jurisdiction over and applying AAA rules to the disputes between [the self-insured and reinsurer]. Because this ‘tainted the entire process’ the court vacated the award.”

The Fifth Circuit affirmed, finding that the parties to an arbitration contract make a choice as to who should decide future disputes between them, and an arbitrator should not disregard that choice. Further, the court held Ramos exceeded his authority under 9 U.S.C. § 10(a)(4) by failing to apply the contract’s requirement that arbitration be conducted in accordance with ICC rules.

[1] A captive insurance company is an entity created to insure its owner.

Haley Fowler Gregory