Enforcement of Foreign Arbitration Agreements and Awards in Insurance Coverage Disputes

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By Richard R. Ryan

It is often said that the parties to a contract make their own law, and it is, of course, true that, subject to the rules of public policy and orde public, the parties are free to agree upon such terms as they may choose. Nevertheless, agreements that are intended to have legal operation (as opposed to a merely social operation) create legal rights and duties, and legal rights and duties cannot exist in a vacuum but must have a place within a legal system . . . .1

On an increasingly international stage many insurance contracts now provide for arbitration of coverage disputes. Although the parties to such contracts have a great deal of autonomy in structuring the parameters of the arbitration, either one or both may have to: (1) respond to attempts by third parties to pre-empt arbitration; and/or (2) seek the recognition or enforcement of the award. This paper will briefly review some of the concerns that arise in those contexts.

  1. The Arbitration Agreement in an Insurance Contract

As with any insurance coverage issue the initial inquiry begins with the contract of insurance: does the policy contain an arbitration clause and, if so, what are its terms? For purposes of this paper I have assumed the existence of an arbitration clause providing for the application of the substantive law of New York, arbitration in London, and proceedings conducted pursuant to the English Arbitration Act (“1996 Act”).2 A typical arbitration clause would provide that:

Any dispute arising under this Policy shall be finally and fully determined in London, England under the provisions of the English Arbitration Act of 1996, as amended and supplemented, by a Board composed of three arbitrators to be selected for each controversy . . .

The policy should also set forth: detailed notice provisions for the commencement of arbitration; procedures for selection of the arbitrators; and, requirements for the hearing and rendering of a decision. A typical choice of law provision would provide that: “This Policy shall be governed by and construed in accordance with the internal laws of the State of New York . . . .”3

The arbitration process provides certain procedural opportunities that should be reviewed by the parties and their counsel at the outset of any dispute. This is more than an indulgence in idle curiosity. It is often possible for a party to structure the form or nature of the proceedings to its advantage. Set forth below is a discussion of the attributes of, and benefits to be gained by, resort to arbitration.

  1. Confidentiality: Arbitrations are private affairs and, without question, third parties will be excluded from the proceedings. English cases have held that there is an implied duty of confidentiality among the parties, which extends not only to documents disclosed in the arbitration, but also to documents, materials, and arguments generated during the course of the arbitration itself, as well as to the arbitration award. However, this duty is not absolute and is subject to certain exceptions.4
  2. Adaptability: The parties may adapt the proceedings with regard to the nature of the dispute and precise issues involved. Arbitration procedures are not, and need not be, the same as those of the courts. The parties may choose the degree of formality or informality of the procedure. For example, the parties may choose to engage in documents-only and expedited hearing procedures.
  3. Finality: The arbitration award is final and binding upon the parties. The 1996 Act does provide for appeals from errors of law; however, under English procedure a question of foreign law is considered a question of fact. The parties may agree to waive the right to appeal an error of law. The award may also be challenged for serious irregularity, primarily for jurisdictional and procedural errors. These grounds may not be waived. (See the 1996 Act §§ 66 to 71).
  4. Enforceability: United States and foreign courts5 must enforce an arbitrator’s award as if it were the court’s own judgment.
  5. Costs: There is some debate as to the comparative expense of arbitration and litigation. On the one hand, declaratory judgment actions in U.S. courts are very costly, often lasting several years and involving unduly burdensome discovery requests and irrelevant and unnecessary depositions. On the other hand, although English arbitration adds an additional layer of cost insofar as arbitrators must be impaneled and English counsel may be retained, it may also avoid the often-protracted battle over venue as well as some of the more abusive aspects of discovery, both of which are likely to be very costly. The costs of arbitration are primarily time-related and will depend upon the matters in dispute, the procedure chosen by the parties and their choice of representatives. In all probability, the expense of arbitration compares favorably to that of litigation and is certainly proportionate to the size, nature and complexity of the losses involved.
  1. State, Federal and International Law Require Enforcement of Arbitration Agreements

The favored position afforded arbitration agreements finds its foundation in both the law’s respect for parties’ right to contract and the strong public policy in favor of arbitration.

The U.S. Supreme Court’s affirmed the right of contracting parties to choose their method of dispute resolution, holding that courts should enforce choice of law and choice of forum clauses in cases of “freely negotiated private international agreement(s).” Bremen v. Zatata Offshore Co., 407 U.S. 1, 12-13 (1972). Choice clauses in international agreements are enforceable unless it is shown that: (1) their formation was induced by fraud or overreaching; (2) the forum is inconvenient or unfair; (3) the fundamental unfairness of the chosen laws would deprive the plaintiff of a remedy; or (4) enforcement of the provisions would contravene public policy. 407 U.S. at 15-18.6

In Richards v. Lloyd’s of London, 135 F.3d 1289 (9th Cir. 1998), cert. denied, 119 S. Ct. 365 (1998), American “external names” sought to void choice of law and forum clauses contained in contracts with Lloyd’s of London. The contracts required that any disputes were to be heard in an English court under English law. The Ninth Circuit upheld the validity of the choice clauses, following six sister Circuits. The Court’s decision was based upon the rule established in Bremen, in which United States Supreme Court emphasized that “in the light of present-day commercial realities and expanding international trade we conclude that the forum clause should control absent a strong showing that it should be set aside” and that “[t]he elimination of all uncertainties [regarding the forum] by agreeing in advance . . . is an indispensable element in international trade, commerce and contracting.” 135 F.2d at 1294 (citing Bremen, 407 U.S. at 15, 13-14, respectively).

In addition to recognizing that contracting parties have a right to define the framework within which their disputes should be resolved, both state and federal courts recognize a strong public policy in favor of arbitration. For example, under New York law, a court may refuse to compel arbitration only if there is no substantial question whether a valid agreement to arbitrate was made or if a statute of limitations would act to bar the action if brought in court. N.Y. C.P.L.R. § 7503 (McKinney 1980 & Supp. 1994). Otherwise, a stay of litigation is mandatory, i.e., “court shall direct the parties to arbitrate.” Id. at § 7503(a). However, the various states’ arbitration statutes, including New York’s, may be applied only in the absence of interference with a Federal regulatory scheme. Island Territory of Curacao v. Solitron Devices, Inc., 489 F.2d 1313, 1318 (2nd Cir. 1973), cert. denied, 416 U.S. 986, (1974).

The federal regulatory scheme applicable to an arbitration clause contained in a policy issued by a foreign insurer can be found in both the Federal Arbitration Act, 9 U.S.C.A. § 1 et. seq., and the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 3 U.S.T. 2517, T.I.A.S. No. 6957, 330 U.N.T.S. 38 (1970) (The full text of the latter, “the New York Convention” is reproduced following 9 U.S.C. § 201 (1988)).

Chapter 1 of Title 9 of the United States Code, “The Federal Arbitration Act,” 9 U.S.C. § 1, et seq. (1988), as amended, establishes a substantive body of federal law that promotes a strong public policy favoring arbitration, Southland Corp. v. Keating, 465 U.S. 1, 10-11 (1984), and was enacted to reverse centuries of judicial hostility to arbitration agreements by placing arbitration agreements upon the same footing as other contracts. Pritzker v. Merrill Lynch Pierce Fenner & Smith, 7 F.3d 1110 (3d Cir. 1993). Under this federal law, “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Moses H. Cone Memorial Hospital v. Mercury Construction, 460 U.S. 1, 24-25 (1983). Thus a disputed issue is arbitrable “unless it may said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83 (1960). The Federal Arbitration Act applies where the parties have entered into a written arbitration agreement, there is an independent basis for Federal jurisdiction and underlying transaction involves interstate commerce. Where these criteria are met, even where the parties have chosen state law to control their respective contractual obligations, the duty to arbitrate is subject to the Federal Arbitration Act. Cosmotek Mumessillik de Ticaret, Ltd. v. Cosmotek USA, 942 F. Supp. 757, 759 (D. Conn. 1996).

Chapter 2 of Title 9 of the United States Code contains the New York Convention and the enabling legislation by which it was ratified by the United States in 1970. The New York Convention ratified an international treaty promoting arbitration of international commercial disputes, and was negotiated pursuant to the Constitution’s Treaty power. The goal of the New York Convention is to facilitate international business transactions by promoting enforcement of arbitral agreements in contracts involving international commerce. Transcasualty v. Certain Underwriters at Lloyds of London, 119 F.3d 619 (8th Cir.), cert. denied, 118 S.Ct 852 (1997). The Convention contemplates a limited inquiry by courts when considering a motion to compel arbitration:

  1. Is there an agreement in writing to arbitrate the dispute?
  2. Does the agreement provide for arbitration in the territory of a Convention signatory?
  3. Does the agreement to arbitrate arise out of a commercial legal relationship?
  4. Is a party to the agreement not an American citizen or does the commercial relationship have some reasonable relation with one or more Foreign States?

Propgraph International Inc. v. Barhydt, 928 F. Supp. 983, 988 (N.D. Cal. 1996). See also Sedco, Inc. v. Petroleos Mexicanos Mexican Nat’l Oil Co., 767 F.2d 1140, 1144-1145 (5th Cir. 1985). If these requirements are met the Convention requires courts to order arbitration.

Review of the arbitration clauses being considered herein, i.e. insurance contracts between foreign insurers and U.S. or foreign domiciled companies, in light of the factors set forth above reveals that both the Federal Arbitration Act and the New York Convention will apply. The New York Convention was not intended to be exclusive within its domain and there is no reason to assume that Congress did not intend to provide overlapping coverage between the Convention and the Federal Arbitration Act, 9 U.S.C.A. § 201. Lander Co. v. MMP Investments, 107 F.3d 476, 481 (7th Cir. 1997), cert. denied, 118 S.Ct. 55 (1997). Thus, where both the New York Convention and the Federal Arbitration Act apply, the parties have a choice of methods by which to enforce the arbitration agreement or award. Spector v. Torenberg, 852 F. Supp 201, 205 (S.D.N.Y. 1994). There are certain distinctions for differences in the provisions of the two acts that can sometimes prove significant:7

Federal Arbitration Act New York Convention
1. One-year statute of limitations to enforce arbitration awards. 9 U.S.C.A. § 9. 1. Three year statute of limitations. 9 U.S.C.A. § 207.
2. There must be independent grounds for Federal jurisdiction, i.e. diversity or federal question jurisdiction. 2. Creates original jurisdiction and provides for removal from a state court to a U. S. District Court for any proceedings within the terms of the statute. 9 U.S.C.A. §§ 203 & 205.
3. Provides for conventional venue within any district having jurisdiction. 9 U.S.C.A. § 4. 3. Provides for venue in the court specified in the arbitration agreement. 9 U.S.C.A. § 204.
4. The arbitration shall be within the district in which the petition for an order directing such arbitration is filed. 9 U.S.C.A. § 4. 4. The arbitration shall be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States. 9 U.S.C.A. § 206.
5. Forfeiture of the right to oppose enforcement of the award unless a judicial challenge to the award is filed within three months. 9 U.S.C.A. § 12. 5. Does not provide for an action to vacate an award, but does contemplate a challenge to the award in a proceeding under local law and recognizes defenses to enforcement. 9 U.S.C.A. § 207.

Generally, the provisions of the New York Convention are more flexible and designed to accommodate the needs of international arbitration. Where both acts apply, to the extent there is a conflict between the Federal Arbitration Act and the New York Convention where both apply, the provisions of the New York Convention control.8

  1. Actions by Third Parties Are Subject to the Agreement of the Contracting Parties to Arbitrate

Third parties, strangers to the arbitration agreement, often attempt to pre-empt an arbitration clause by naming the parties to the arbitration agreement as defendants in a lawsuit. With respect to an insurance contract, attempts to pre-empt arbitration by third parties occur primarily in two circumstances: first, an insurer will seek to join a co-insurer based on the argument that the arbitrating insurer is a necessary party without whom full relief cannot be granted; and, second, a third party will seek to join an insurer pursuant to a direct action statute.

So long as third parties seek a recovery of monies which is dependent upon the existence of the insurance contract issued by the arbitrating carrier and its corresponding obligations to its insured, the third parties are subject to any and all policy defenses and must arbitrate.9 Thus, the third party can possess no greater rights against the arbitrating insurer than the insured does and is subject to the policy’s requirement that any disputes under the policy be subject to arbitration, whether in Bermuda, London or elsewhere.10 Under New York law, (and the law of the vast majority of states,11 as well as under the Federal Arbitration Act and the New York Convention, the court must either dismiss the arbitrating party from the action or stay the proceedings initiated by the third parties, and direct the parties to arbitrate in accordance with the policy.12

Courts have rejected the argument often made by co-insurers that a separate foreign arbitration would undermine the ability of the court to grant complete relief. The presence of the arbitrating carrier is not necessary to resolve issues the insured may have with its other carriers. For example, in Special Jet Services, Inc. v. Federal Ins. Co., 83 F.R.D. 596, 600 (W.D. Pa. 1979), the court denied a defendant insurer’s motion to dismiss for failure to join an additional insurer as a necessary party, noting that the additional insurer had “no independent, legally protected right at stake in a proceeding which is to determine the rights of an insured under an insurance policy issued by a different insurer.”

It is well established that courts have the power to stay litigation directed towards an insurance contract where litigation would pre-empt the intended effect of the arbitration clause. In H.M. Hamilton & Co., Inc. v. American Home Assurance Co., 251 N.Y.S.2d 215, 217 (App. Div. 1964), aff’d, 255 N.Y.S.2d 262 (1964), an action was filed in a New York court to compel arbitration and to restrain any further proceedings in a suit filed in Georgia. The holding in Hamilton is instructive:

It is the public policy of this State, that “those who agree to arbitrate should be made to keep their solemn written promise.” . . . It would further frustrate the policy . . . [of enforcing arbitration agreements] . . . if we accept appellants’ argument based on the circumstance that the Georgia litigation antedated the New York litigation. For an action instituted in contravention of an arbitration agreement of course precedes as [sic] attempt to stay it, and if the action is brought in a foreign jurisdiction it is always open to the party seeking the stay to plead the arbitration agreement as a bar, for whatever the plea may be worth.

251 N.Y.S.2d at 217 (citations omitted; bracketed material added). In Hamilton, then, not only did the court refuse to defer to a prior-filed action by the party resisting arbitration, it recognized that the prior filing by that party in and of itself represented an act in contravention of arbitration of the kind that the Federal Arbitration Act and the contractual agreement were intended to prevent. It would be ironic indeed if a recalcitrant party to a dispute subject to arbitration could avoid the arbitral process merely by filing a lawsuit and then pleading “prior case pending” in defense of the effort to compel arbitration.

The policy in favor of arbitration faces a different type of attack in states with direct actions statutes. These statutes create a cause of action directly against the insurer in favor of a third party who is a stranger to the insurance contract, and thus has no contractual relationship with the insured. By way of illustration, the attorney general of the State of Louisiana filed an action against numerous tobacco manufacturers, distributors and others seeking recovery of costs incurred by Louisiana in providing healthcare for smoking related injury and disease. Subsequently, the attorney general amended his state court petition to add more than 100 insurance companies. A.C.E. Insurance Company, a Bermuda corporation, removed the state court petition to federal court based on the existence of a federal question arising under the New York Convention. The attorney general then filed a motion to remand the case to state court, which was denied by the U.S. District Court for the Western District of Louisiana. Ieyoub ex. rel. v. The American Tobacco Co., et al., No. 97-1174 (W.D. La. Sept. 11, 1997), reprinted in 11 No. 43 Mealey’s Litig. Rep. pp. D-1 (Sept. 16, 1997), appeal docketed, No. 97-31279 (5th Cir. 1997).

In so ruling, the Court observed that Congress “intended Section 205 to channel convention act cases into Federal courts.” Pursuant to 9 U.S.C. § 205, federal jurisdiction exists and an action may be removed from state to federal court when the action’s subject matter “relates to” an agreement covered by the New York Convention. Id. at 3. The Ieyoub Court held that the attorney general’s action related to the New York Convention because: (1) the attorney general was seeking damages directly under the insurance contract between A.C.E. and its insured; (2) a contractual relationship existed between the attorney general and A.C.E., inasmuch as Louisiana’s direct action statute “creates a contractual relationship which inures to the benefit of any person who might be negligently injured by the insured.” On this basis the Court held that removal to federal court had been proper. Id. at 11-12.

It should be noted that the Ieyoub decision neither cited to, nor followed a previous decision from the Fifth Circuit, Zimmerman v. International Companies & Consulting Inc., 107 F.3d 344 (5th Cir. 1997). In Zimmerman an injured worker filed a suit against his employer’s insurer. The insurer moved to stay the litigation pending arbitration. The Zimmerman Court found that the direct action statute is “read into and becomes part of the insurance policy by law.” Id. at 346. Thus, the Court declined to enforce the London arbitration clause on the basis that it would contravene the plaintiff’s right to pursue its action in a judicial forum pursuant to Louisiana’s direct action statute, La. Rev. Stat. Ann. § 22:655. The Court rejected application of decisions holding that direct action plaintiff should be treated as if he was a third party beneficiary of the contract and held that the Federal Arbitration Act did not apply. Id. at 346. Pivotal to the Court’s decision was its finding that the injured worker had not contractually bound himself to the arbitration agreement from which it concluded that the Federal Arbitration Act did not apply (the court did not consider application of the New York Convention). Id.

The framework and analysis set forth in Ieyoub is well reasoned and the decision should be affirmed on appeal. In the first instance any recovery by a third party seeking a recovery under a direct action statute is still dependent upon the existence of coverage under the policy. Moreover, as the direct action plaintiff is proceeding by virtue of the fact that the direct action statute that is read into the insurance contract by operation of law, the direct action plaintiff is subject to the provisions of the insurance contract including the arbitration clause. Under theses circumstances the Federal Arbitration Act applies, and a state statute cannot be used to negate the agreement to arbitrate.

The foundational issue for the application of the Federal Arbitration Act is whether the direct action plaintiff is subject to the arbitration clause in the insurer’s policy. It is well established that non-parties should be bound to the arbitration provisions in a contract as “effective third party beneficiaries” where the non-parties interests are contingent upon a construction of the contract. Nauru Phosphate Royalties, Inc. v. Drago, 138 F.3d 160, 166-67 (5th Cir. 1998), cert. denied, 119 S.Ct. 179 (1998). See supra note 8 and accompanying text. Moreover, any defenses available to an insurer against its insured should also be available in response to any direct action brought by an injured party pursuant to statute. Haston v. Transamerica Insurance Svces., 662 So.2d 1138, 1139-40 (Ala. 1995). The applicability of an arbitration agreement is an affirmative defense under the Federal Arbitration Act. See American Sugar Refining Co. v. The Anaconda, 138 F.2d 765, 767 (5th Cir. 1943), aff’d, 322 U.S. 42 (1944).

When the Federal Arbitration Act applies, a state’s direct action statute cannot operate to pre-empt the agreement of contracting parties to arbitrate. Southland Corp. v. Keating, 465 U.S. 1, 16 (1984) (holding that states’ Franchise Investment Law statute which precluded enforceability of arbitration agreement conflicted with the Federal Arbitration Act). In enacting the Federal Arbitration Act Congress withdrew the power of state courts to require a judicial forum with regard to a dispute which the parties to the contract agreed should be arbitrated. Central Jersey Freightliner v. Freightliner Corp., 987 F. Supp. 289, 299 (D. N.J. 1997). In addition, it should be noted that the arbitration clause does not preclude a party from pursuing a statutory claim, but only determines the forum in which a liability should be decided. Id. at 300. Arbitration clauses are procedural in nature and do not deprive a party of substantive rights, but instead, require only that the dispute be resolved in an arbitral rather that a judicial forum. See Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614, 628 (1985); Farmland Dairies, Inc. v. Milk Drivers and Diary Employees, 956 F. Supp. 1190, 1199 (D. N.J. 1997).

Where the New York Convention applies, the court is required to order arbitration. In Continental Insurance Co. v. Jantran, Inc., 906 F. Supp. 362, 366-67 (E.D. La 1995), the Court noted that “the arbitral clause [was] part and parcel of the policy which allegedly provide[d] the coverage claimed by” the plaintiff. The Court held that the cause of action being pursued by the plaintiff pursuant to Louisiana’s direct action statute was subject to mandatory arbitration. Id. The New York Convention clearly applies to a direct action by a plaintiff that is dependent upon construction of an insurance contract entered into between citizens of different countries. See supra discussion at pp. 5-7.

  1. Enforceability of the Arbitration Award

More than 80 countries subscribe to the New York Convention. The Convention requires courts in subscribing countries to enforce arbitration awards as if the awards were made in that country, subject to limited grounds on which enforcement may be refused. As with the enforcement of the arbitration provision, it may be anticipated that recognition or enforcement of the award may become necessary as the result of relationships, commercial or otherwise, with parties who were strangers to the arbitration proceedings. The New York Convention applies if three basic requirements are met:

  1. The award arises out of a legal relationship.
  2. The relationship is commercial in nature.
  3. The award arises out of a relationship not entirely domestic in scope.

New York Convention, 9 U.S.C.A. §§ 201-08. The Convention allows for recognition and enforcement13of an award that complies with the laws of the country where the arbitration occurred. In this regard the starting point for the enforcement is the form of the award.

Unlike many U.S. arbitration awards, which in psychological parlance leave the participants with a lack of “closure,” an award under the 1996 Act will consist of directions to the parties accompanied by supporting rationale. The award should also contain sufficient information to allow the award to stand on its own for purposes of enforcement or consideration by a court or other independent tribunal. In very generic terms an award will likely contain the following elements:

  1. Jurisdictional basis: The award should indicate the existence of the arbitration agreement, which, under the New York Convention, must be in writing. The award should identify the source and attributes of the agreement, including any prerequisites or conditions for arbitration, as well as how the parties complied with them. The award should contain sufficient facts to show that the tribunal was properly constituted and that each party was given an adequate opportunity to state his case.
  2. The identity of the parties to be bound by the award: Although this may appear axiomatic, in this era of corporate mergers, acquisitions and name changes, the parties names as they appear in the operative arbitration agreement may be significantly different by the time of the award. Steps should be taken to ensure that a legally sufficient explanation appears to properly identify the parties and their nexus to original parties to the agreement.
  3. The tribunal’s decision: This section constitutes the tribunal’s direction to the parties. Each direction in the award must be specific, unambiguous and capable of performance by the party against whom it is directed. The directions should not be conditional save in exceptional circumstances where the possibility of including a conditional element in the award has been canvassed and agreed by the parties. There should be no conditions or requirements which make the award impracticable to enforce.
  4. An analysis of the legal and factual basis for the award: A statement of findings of fact necessary to the award. In most jurisdictions findings of fact are not appealable. Section 52 of the 1996 Act requires awards to be in writing and to be signed by all arbitrators. Significantly, for the first time in its history, the 1996 Act also requires a statement of reasons for the award, unless the parties agree otherwise.

Clarity in the statement of the basis for the award is quite important. Section 69 of the 1996 Act provides that there is a right of appeal on a point of law that was originally raised before the tribunal. By contrast, in the absence of irregularities amounting to “substantial injustice” there is no right of appeal of the arbitrators’ findings of fact. This distinction, between a finding of fact and a point of law, is critical. Under English law questions of foreign law are considered to be questions of fact as opposed to questions of law. As one respected English text states:

Since an issue as to the substance and effect of a foreign law is a question of fact the decision of the arbitrator upon it is final. It is not a matter upon which he should, or indeed can, refer to the High Court. [Prodexport State Co. for Foreign Trade v. E.D. and F. Man Ltd. (1972) 2 Lloyds Rep 375 at 383 cited in support of the proposition).]

Mustill et al., Commercial Arbitration 73 (2d ed. 1989). See also Bankers and Shippers Insurance Co. of New York v. Liverpool Marine and General Insurance Co. Ltd., (1925) 24 Lloyds L. R. 85, 93 (“This is an appeal on a question of foreign law which, in English Courts is a question of fact.”).

  1. Conclusion

In most cases arbitration clauses in insurance contracts function as intended. They provide a framework for analysis of coverage, settlement discussions and, where necessary, resolution of disputes through the arbitration process in a private and confidential manner. However, as the contracting parties are legal and economic entities that do not exist in a vacuum, it often becomes necessary to reconcile the arbitration process with the requirements of a legal system. The legislative and judicial system in the United States have made ever increasing efforts to encourage arbitration and accommodate the parties chosen method of dispute resolution, including the recognition and enforcement of an arbitration agreement or award as to those not parties to the contract.

Richard R. Ryan is a former partner in the law firm of McCullough, Campbell & Lane in Chicago. He thanks his colleague Rachel Krug for her assistance with this article.


    1 Lord McNair (Former President of the International Court of Justice), The General Principles of Law Recognised by Civilised Nations, 33 B.Y.I.L. 1, 7 (1957).

2 These jurisdictional provisions are not the only options. For example, some existing policies provide for arbitration in Bermuda under Bermuda arbitration rules and law. Bermuda follows the UNCITRAL Model Law on International Commercial Arbitration of 1986. By way of comparison, the Model Law provides almost total finality with respect to the arbitral award, but provides narrower evidentiary rules and less party flexibility. The 1996 Act, on the other hand, mandates flexibility and efficiency regarding procedures and evidence, but is subject to judicial intervention by the court – both during and after the proceedings.

3 Although the states are without power to undercut the enforceability of arbitration agreements where the Federal Arbitration Act or the New York Convention applies, the contracting parties may opt to apply the substantive law of a particular state to the to resolve the dispute. See, e.g., Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University, 489 U.S. 468 (1989).

4 See D. Mark Cato, Arbitration Practice and Procedure 964-69 (2nd ed. 1997); Patrick Neill, QC, Confidentiality in Arbitration, 12 Arb. Int’l 287 (1996); Michael Collins, QC, Privacy and Confidentiality in Arbitration Proceedings, 11 Arb. Int’l 321 (1995).

5 See the list of signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 3 U.S.T. 2517, T.I.A.S. No. 6957, 330 U.N.T.S. 38 (1970). The full text of this Convention is reproduced following 9 U.S.C.A. § 201 (1988).

6 It should be noted that if a court were faced with a motion to transfer venue (from one U.S. Court to another) pursuant to 28 U.S.C. § 1404(a), the Bremen decision, while instructive, would not be dispositive. Stewart Organization, Inc. v. Ricoh Corp., 48 U.S. 22 (1988).

7 Section 208 of the New York Convention does incorporate the provisions of Chapter 1 of the Federal Arbitration Act, 9 U.S.C.A. §§ 1-16, to the extent that these provisions do not conflict with the New York Convention, 9 U.S.C.A. §§ 201-208. Jain v. Mere, 51 F.3d 686 (7th Cir. 1995).

8 Oil Basins, Ltd. v. Broken Hill Proprietary Co., 613 F. Supp. 483, 487 (S.D.N.Y. 1985).

9 Hartford Accident and Indem. Co. v. CNA Ins. Cos., 472 N.Y.S.2d 342, 345 (App. Div. 1984) (insurer suing another insurer for contribution “subject to any defense or claim of lack of coverage which may be raised against the assured”). See also Lumbermen’s Mut. Cas. Co. v. Harleysville Mut. Cas. Co., 287 F. Supp. 932, 938 (W.D. Va. 1968) (claim for contribution arising from defendant’s policy is subject to all rights and defenses defendant insurer would have against its insured); Commercial Union Ins. Co. v. Medical Protective Co., 393 N.W.2d 479, 482 (Mich. 1986) (insurer subrogated to rights of insured acquires no greater rights than those held by insureds).

10 Lumbermens Mutual Casualty Co., v. Borden Co., 268 F. Supp. 303, 313 (S.D.N.Y. 1967). See also Solomon v. Consolidated Resistance Co. of America, Inc., 468 N.Y.S.2d 532, 533 (App. Div. 1983) (“if the named plaintiffs [insureds] would be required to submit the controversy to arbitration, then the plaintiffs’ insurer will be similarly bound.”). Decisions in other jurisdictions are in accord with this result. See Parker v. The Standard Steamship Owner’s Protection & Indemnity Association (Bermuda) Limited, No. 4:92CV034-B-0, 1993 WL 557902, at 3 (N.D. Miss. July 23,1993) (applying federal law and compelling creditor to arbitrate claim against debtor’s insurer based upon arbitration clause in debtor’s insurance policy “since [creditor’s] right to recovery against [the debtor’s insurer] is based upon and solely derived from the [debtor’s] policy”).

11 See, e.g., Johnson v. Noble, 608 N.E.2d 537, 540-541 (Ill. App. 1992) (the third-party beneficiary doctrine applies to arbitration agreements); Township of Clinton v. Contrera, 284 N.W.2d 787, 789 (Mich. App. 1979) (resolve any doubts about the arbitratability of an issue in favor of arbitration).

12 Thompson-CSF v. American Arbitration Association, 64 F.3d 773, 776 (2d Cir. 1995) (non parties to arbitration clauses may be bound arbitration agreements); Lee v. Chica, 983 F.2d 883, 887 (8th Cir. 1993) (compelling arbitration against a party who did not sign the agreement); In Re Oil Spill by Amoco Cadiz, 659 F.2d 789, 796 (7th Cir. 1981) (plaintiff asserting a claim against a defendant based upon agency is bound by an arbitration clause in the contract between the defendant and its agent); C. Itoh & Co. (America) Inc. v. Jordan Int’l Co., 552 F.2d 1228, 1232 (7th Cir. 1977) (the courts may not deny petition to stay based upon discretionary terms such as judicial economy); McCreary Tire & Rubber Co. v. CEAT, 501 F.2d 1032, 1037 (3rd Cir. 1974) (reversible error to deny a stay request under the New York Convention); Dunn Const. v. Sugar Beach Condo Ass’n, 760 F. Supp. 1479, 1483-85 (S.D. Ala. 1991) (party asserting a claim as a third party beneficiary is stopped from contesting arbitration clause); Knorr Brake Corp v. Harbil, Inc., 556 F. Supp. 489, 493-94 (N.D. Ill. 1983) (staying litigation pending arbitration of referable issues). Kauffman v. The Chicago Corp., 466 N.W.2d 726, 730 (Mich. App. 1991) (state courts are bound to enforce the Federal Arbitration Act under the Supremacy Clause even if this results in inefficiencies or duplicative proceedings).

13 These are distinct terms. The legal force and effect of an award may be recognized as a defense or an estoppel to an attempt to revisit the issues that were the subject of the award. An award is enforced when steps are taken to make sure that its directives are carried out. Redfern et al., Law and Practice of International Commerical Arbitration 448 (Swett & Maxwell 1991).