hassett’s OBJECTIONS
NON-BINDING ARBITRATION: THANKS FOR THE GEWGAW
By Lewis E. Hassett
In preparing this column on non-binding arbitration, I went to my thesaurus to find a variation of “worthless” and “waste” and came across the word “gewgaw.” I liked its sound and learned that it means “a decorative trinket.” That term describes well my view of non-binding arbitration.
Clients sometimes bring me contracts with arbitration clauses that expressly provide for non-binding arbitration. If I represent the claimant, I know that it likely will serve only to delay ultimate collection. Conversely, I rejoice if I represent the defendant. Non-binding arbitration provides a free look at the claimant’s evidence, to say nothing of the settlement leverage engendered by institutionalized delay.
Courts are split on whether clauses mandating non-binding arbitration are enforceable. Understandably so. On the one hand, if the parties agreed to non-binding arbitration, they should live by their agreement, and the majority of courts so hold. See U.S. v. Bankers Ins. Co., 245 F.3d 315 (4th Cir. 2001); Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205 (9th Cir. 1998). On the other hand, non-binding arbitration may serve only to delay a claimant with a meritorious grievance. See Harrison v. Nissan Motor Corp., 111 F.3d 343 (3rd Cir. 1997) (non-binding arbitration under automobile Lemon Law not enforceable under Federal Arbitration Act).
While a court’s decision to enforce an express and unambiguous covenant for non-binding arbitration is well-supported, a court should not strive to interpret an arbitration clause as providing for non-binding arbitration. Any ambiguity should be construed in favor of binding arbitration.
Unfortunately, the Eighth Circuit disagrees. In Dow Corning Corp. v. Safety National Casualty Corp., Case No. 02-2048 (8th Cir., July 9, 2003), the court construed the arbitration clause in an excess policy as providing for non-binding arbitration, because (a)the arbitration clause did not expressly provide for binding arbitration, (b)the arbitration clause did not incorporate rules of the American Arbitration Association or similar arbitral body that expressly provide for binding arbitration, and (c)the arbitration clause referred to arbitration as a “condition precedent to any right of action under this policy....”
My first reaction was that the Litigation Attorneys Association had drafted the opinion. What better gift to litigators than a lengthy pre-litigation quasi-litigation process. I could not help but note that many arbitration clauses include the “condition precedent” language.
Perhaps the court’s analysis should have started with a legal dictionary. The word “arbitration” appears to include the concept that it is binding. Black’s Law Dictionary defines arbitration as “[a] method of dispute resolution involving one or more neutral third parties who are usually agreed to by the disputing parties and whose decision is binding. Also termed (redundantly) binding arbitration.” (Parenthetical in original). Similarly, the American Heritage Dictionary of the English Language defines arbitration as “[t]he process by which the parties to a dispute submit their differences to the judgment of an impartial person or group appointed by mutual consent or statutory provision.”
Under the Eighth Circuit’s rule, many arbitration clauses have been rendered non-binding. However, disputes involving reinsurance likely are unaffected by the decision. The court noted that the arbitration clause was similar to provisions “designed for the resolution of technical disputes between an insurance company and its reinsurer.... An insured (other than another insurance company) is unlikely to agree that the results of such a proceeding will be binding, that is, judicially unreviewable on the merits under the [Federal Arbitration Act].”
Conceptually, whether the dispute is between an insurer and a reinsurer, on the one hand, or between a sophisticated insured, such as Dow Corning, and its direct insurer, on the other, should make no difference. Nonetheless, I suspect that the Dow Corning decision will seep into reinsurance disputes.
Lewis Hassett is a partner in the firm’s litigation group and chairs the firm’s insurance and reinsurance dispute resolution group. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Lew received his bachelor’s degree from the University of Miami and his law degree from the University of Virginia.