Who decides whether a prior arbitration award precludes a subsequent dispute between the parties? That is the question that was faced by an Illinois federal court. Given the strong presumption in favor of arbitration in the federal courts, how do you think the court decided the ensuing motion to compel arbitration versus the motion to stay the arbitration?
In National Casualty Co. v. Continental Insurance Co., No. 23 cv 3143 (N.D. Ill. Nov. 15, 2023), the parties entered into three reinsurance agreements during a six-year period, each with the same arbitration clause. A dispute arose between the parties over the manner in which the cedent was billing losses and whether the methodology the cedent used was permitted under the definition of loss occurrence.
The cedent separately arbitrated the dispute with two reinsurers and, in 2017, final awards were issued and confirmed in the Illinois federal court. A new dispute arose under the same contractual provisions as in the 2017 disputes. The cedent once again brought two separate arbitration proceedings. In response, the two reinsurers brought this action for injunctive and declaratory relief seeking to preclude the cedent from pursuing the second set of arbitrations. The cedent moved to compel arbitration and the reinsurers moved to stay the arbitrations so that the preclusion issue would be addressed by the court.
In granting the cedent’s motion to compel and denying the reinsurers’ motion to stay, the court found that the preclusive effect of the 2017 awards on the current proceedings or on future arbitrations was within the scope of the arbitration clauses and, therefore, the arbitrators must decide what, if any, effect the prior awards have on the parties’ disputes.
The court set forth the standard for a motion to compel arbitration: (1) an enforceable written agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal to arbitrate. Here, the court found that the parties agreed that there was an enforceable written agreement to arbitrate in the form of the arbitration provisions of the reinsurance contracts. The parties also agreed that the scope of the arbitration clause was broad.
The court stated that the issue before the court was a narrow inquiry into the arbitration clause’s scope: whether a dispute over the preclusive effect of a prior arbitration is arbitrable. “More specifically, when a federal court order confirms an arbitration award, is the preclusive effect of that award on a subsequent arbitration a matter for the court or the arbitrator to decide?”
The court noted that there was a narrow exception to the presumption of arbitrability, but that it did not apply in this situation. Instead, the court held that “[i]t is well settled in the Seventh Circuit, and other circuits, too, that the preclusive effect of a prior arbitral award—whether or not confirmed by a court—is a defense subject to arbitration.
This is how the court disposed of the reinsurers’ arguments:
Cloaked as a “threshold question of arbitrability,” the Reinsurers ask the Court to disregard well-established law, and to determine the preclusive effect of the 2017 Awards on the New Arbitrations. But deciding that question would require the Court to inappropriately delve into the merits of the claims, assessing the presence of all prerequisites for collateral estoppel. This the Court cannot do.
* * *
Any dispute—whether old or new—concerning “the interpretation of [the parties’] Contract or their rights with respect to any transaction involved” is subject to arbitration. . . . It will be for an arbitration panel to determine what impact, if any, the 2017 Awards have on the current and future disputes.
Ultimately, the court granted the motion to compel arbitration and sent the parties back to their respective arbitration panels to address whether the 2017 awards have any preclusive effect on the current disputes. The court also dismissed the complaint without prejudice rather than staying the litigation because there was nothing further for the court to decide.
