The Court of Appeals decision, ExxonMobil Oil Co. v. TIG Ins. Co. (2nd Cir. Aug. 12, 2022), while finding both parties’ positions on the proper interpretation of the arbitration agreement problematic, agrees with Exxon that the agreement required binding arbitration, but reverses the court’s award of pre-award interest in addition to the compensatory damages awarded by the arbitrators.

The Arbitration Agreement and Disagreement
The dispute involved an insurance coverage question. The insurance policy replaced its standardized binding arbitration agreement with an ADR Endorsement, which provided a three-step process for determining how to resolve disputes, summarizing this process as follows:

“1. The Company or the Insured may request of the other in writing that the dispute be settled by an alternative dispute resolution (‘ADR’) process, selected according to the procedures described herein.[] 2. If the Company and the Insured agree to so proceed, they will jointly select an ADR process for settlement of the dispute.[] … 4. If the parties cannot agree on an ADR process within 90 days of the written request described in paragraph (1), the parties shall use binding arbitration.”

Shortly after TIG filed a lawsuit to resolve the issue, Exxon demanded binding arbitration and filed a motion to stay the litigation and compel its preferred means of redress. Exxon argued that the ADR Endorsement amounted to a binding arbitration agreement, while TIG took the position that its provisions were only triggered if the parties agreed to settle the matter by ADR.

The Procedural Road to the Court of Appeals
U.S. District Judge Ramos of the Southern District of New York ruled in favor of Exxon. The arbitration panel found in favor of Exxon and awarded it the policy limits of $25 million, but refused to award prejudgment interest because the policy prohibited the panel from awarding more than those limits. Judge Ramos rejected TIG’s petition to vacate, confirmed the award and added prejudgment interest to it, citing New York statutory law. TIG appealed both rulings, but later limited its appeal to the arbitrability and prejudgment interest issues. While the appeal was pending, a reporter alerted Judge Ramos to the fact that he owned Exxon stock and the Judge disclosed that fact, prompting TIG to move to vacate the contested decisions. Judge Vyskocil, to whom the case was reassigned, reviewed Judge Ramos’ decisions de novo, agreed with his reasoning, and held that his failure to recuse himself was harmless error, denying the motion to vacate Judge Ramos’ decisions.

Should the Court Have Compelled Arbitration?
As an initial matter, the Court of Appeals affirms Judge Vyskocil’s denial of TIG’s motion to vacate. Since the issue of arbitrability hinges on contract interpretation, a legal issue considered de novo by four judges untainted by a conflict of interest (Judge Vyskocil and the appellate panel itself), it holds that there is no need to start from scratch. Turning to the merits, the Court explains:

“Courts in New York avoid construing contracts in ways that ‘would leave contractual clauses meaningless.’[] … [T]he problems for TIG arise in the first sentence of paragraph 4: ‘If the parties cannot agree on an ADR process within 90 days of the written request described in paragraph (1), the parties shall use binding arbitration.’… The natural meaning of this sentence is that the clock on arbitration starts ticking when one party requests ADR, regardless of whether the counterparty accedes to that request.[] Exxon’s reading of the ADR Endorsement may have its challenges, but TIG’s directly contradicts the plain language of paragraph 4. Faced with a choice between an interpretation that is difficult and another that is precluded by the text of the contract, we must adopt the former. We therefore hold that the ADR Endorsement functions as a binding arbitration agreement. When one party requests to settle a dispute via ADR, the parties have 90 days to choose the format. If they fail to do so, they must arbitrate” (italics in the original).

The District Court Begs to Differ as to Prejudgment Interest
Paragraph 6 of the ADR Endorsement provided: “that any decision, award, or agreed settlement made as a result of an ADR process shall be limited to the limits of liability of this Policy.” Since the panel found that Exxon was entitled to the policy limits, it concluded that it lacked jurisdiction to award any additional amounts, including prejudgment interest. However, Judge Ramos held that New York courts were required to add prejudgment interest in contract cases and Judge Vyskocil agreed. The Court of Appeals agrees that post-award interest is mandatory under New York law, but takes a different view of pre-award interest:

“Statutory pre-award interest is not required or available, however, where the parties’ contract is ‘sufficiently clear’ that statutory interest was not ‘contemplated by the parties at the time the contract was formed.’”

Here, paragraph 6 clearly waived the parties’ rights to pre-award interest if it increased the total award above the policy limits. It therefore remands the case to the district court with instructions to recalculate the prejudgment interest accordingly.

(*Seems right. **The Second Circuit’s ruling on the effect of Judge Ramos’ recusal is unlikely to have an impact on how FINRA treats the post-award recusal of arbitrators. Courts don’t have the authority to independently review the legal rulings of arbitrators, notwithstanding the manifest disregard of the law doctrine, and the new panel on remand will presumably be required to hold new hearings anyway. ***The Court’s ruling on pre-award interest is also not likely to prevent New York courts from awarding prejudgment interest in most cases where the arbitrators do not, since FINRA rules and broker-dealer arbitration agreements don’t waive that right. However, it might apply in a post-dispute agreement to limit the arbitrators’ options as to how much and what types of damages they may award. ****This Squib was prepared by Harry A. Jacobowitz, President of HAJ Research and Writing LLC. Mr. Jacobowitz, a member of the Pennsylvania bar, and his firm perform legal research and writing for attorneys and handle substantive searches of SAC’s Award database. He can be contacted at harryjacobowitz@optimum.net.)

Written By: Harry Jacobwitz
Credit: Arbitrate.com
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