Fifth Circuit Rules Arbitrator Exceeded His Authority in Contract Dispute

The United States Court of Appeals for the Fifth Circuit has held that an arbitrator exceeded his authority in a contract dispute. In PoolRe Insurance Corp. v. Organizational Strategies Inc., No. 14-20433, Organizational Strategies Inc. (“OSI”) entered into a contract with Capstone Associated Services to create a new captive insurance program. At the time, the companies agreed to settle any future disputes through binding arbitration using the rules adopted by the American Arbitration Association (“AAA”). In addition, a third-party insurer managed by Capstone, PoolRe, provided insurance services to the businesses that were formed as part of the captive insurance program. The newly formed captive companies and PoolRe also agreed to settle any future disputes through arbitral proceedings, but instead opted to utilize the International Chamber of Commerce (“ICC”) arbitration rules. Their agreement stated an arbitrator must be selected by the Director of Insurance in Anguilla, British West Indies.

After a breach of contract dispute arose between the various companies, Capstone sought arbitration against OSI. Next, a Houston-based arbitrator was appointed in the matter over OSI’s objections. Because there was no Director of Insurance official in Anguilla, PoolRe intervened in order to have the Houston-based arbitrator appoint an Anguilla-based arbitrator. Instead, the arbitrator applied AAA rules and found that he had jurisdiction over both disputes. The arbitrator also ruled that PoolRe waived its right to pursue arbitration in the British West Indies when the company intervened in the U.S. case. OSI then objected to the arbitrator’s ruling to no avail.

Following a hearing, the Houston arbitrator issued an award against OSI. Despite this, the Southern District of Texas refused to confirm the award. According to the court, the arbitrator exceeded his authority when he applied AAA rules to the dispute between PoolRe and the captive insurance companies. Because the arbitrator’s error “tainted the entire process,” the court vacated the arbitral award in its entirety. Capstone then filed an appeal with the nation’s Fifth Circuit.

On appeal, the Fifth Circuit first held that the lower court correctly concluded the arbitrator exceeded his authority when he found that PoolRe was properly joined in the arbitral proceedings. The court stated the arbitrator “was appointed in a manner contrary to that provided in the Reinsurance Agreements between PoolRe and the Captives.” The appellate court also said the neutral “acted contrary to the Reinsurance Agreements’ clause requiring that all disputes ‘be submitted for binding, final, and non-appealable arbitration to the [ICC] under and in accordance with its then prevailing ICC Rules of Arbitration.’”

Next, the Fifth Circuit held that the district court did not commit error when it vacated the entire arbitral award rather than only that portion related to PoolRe. The court said:

Appellants argue that, under Smith, a court “can carve out only the objectionable part of the award and confirm the rest.” However, a district court does not have to vacate in part and confirm in part just because it may do so. Moreover, unlike in Smith, the district court here found that PoolRe’s involvement tainted the entire process. Additionally, the lump sum awarded to the parties was not easily divisible like the two separate awards at issue in Smith. Nothing in the statute or our cases suggests that a district court errs by failing to vacate in part, particularly where the arbitrator awarded a lump sum “to be divided among the parties as they see fit.” Thus, we hold that the district court did not err in vacating the entire award.

Finally, the United States Court of Appeals for the Fifth Circuit affirmed the lower court’s order vacating the entire arbitral award because the arbitrator exceeded his authority.

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