The Argonaut Decision: A Federal Court Declines An Invitation To "Rewrite" An Arbitration Agreement Provision Regarding The Selection Of Arbitrators

An Illinois federal judge recently reaffirmed the rule that requires courts resolving disputes under arbitration agreements to defer to the express language of such agreements. See In the Matter Of the Arbitration Between Argonaut Midwest Ins. Co. v. Gen Reinsurance Corp., No. 96 C 6437, 1998 WL 474142 (N.D. Ill. Aug. 6, 1998).

In Argonaut, the court was asked to resolve a dispute that involved the appointment of arbitrators under an arbitration agreement in a reinsurance contract. According to that agreement, in the event of an arbitration between the parties, Argonaut and its reinsurer, Gen Re, each were to nominate an arbitrator. The arbitrators were to be officials of insurance or reinsurance companies. In addition, the agreement gave one party the right to choose both arbitrators if the other party failed to appoint its arbitrator within thirty days after receiving a written request to do so.

Instituting the process under the arbitration agreement, Argonaut sent a demand for arbitration to its reinsurer. Gen Re, in turn, nominated Mr. Robert Brownley to serve as its arbitrator. Subsequently, Mr. Brownley retired and ceased to be an active official of an insurance or reinsurance company.

After Mr. Brownley retired, Argonaut wrote to Gen Re, objecting to Mr. Brownley serving as Gen Re's arbitrator and requesting that Gen Re appoint another arbitrator. Gen Re did not, however, comply with Argonaut's request.

The Argonaut court considered whether Gen Re had forfeited its right to appoint an arbitrator when it failed to comply with Argonaut's request to replace Mr. Brownley. Argonaut argued that under the terms of the arbitration agreement Argonaut was entitled, by virtue of Gen Re's failure to appoint a replacement for Mr. Brownley, to select both arbitrators. The court rejected Argonaut's argument, finding that, even though Gen Re did not respond to Argonaut's later request to nominate a replacement for Mr. Brownley, it had complied with the terms of the arbitration agreement when it appointed Mr. Brownley within the appropriate time period.

The court compared the situation in Argonaut with the facts in Evanston Ins. Co. v. Kansa Gen'l Int'l Ins. Co. Ltd., No. 94 C 4957, 1995 WL 23063 (N.D. Ill. Jan. 13, 1995). In Evanston, the reinsurer, Kansa, nominated an arbitrator after receiving Evanston's initial arbitration demand. Later, when Evanston asked Kansa to appoint a replacement arbitrator, Kansa refused. The Evanston arbitration agreement, which was similar to that involved in Argonaut, permitted one party to select both arbitrators if the other party did not select its arbitrator within the prescribed time period. Evanston urged the court to find that Kansa's refusal to appoint a replacement arbitrator entitled Evanston to appoint both arbitrators. By its refusal, the insurer argued, the reinsurer had forfeited its right to nominate an arbitrator.

The Evanston court held that Kansa's written refusal to nominate a replacement arbitrator did not result in a forfeiture by the reinsurer of the right to nominate its arbitrator. Rejecting Evanston's argument, the court interpreted the Evanston arbitration agreement to mean that if one party never nominates an arbitrator after the initial demand for arbitration is made, the other party can select both arbitrators. In other words, according to the express language before the Evanston court, the right of one party to choose both arbitrators -- a forfeiture by the other party -was "triggered by inaction" by the other party only at the time of the initial demand for arbitration. Subsequent inaction was not addressed by the terms of the agreement and therefore could not result in a forfeiture.

The Argonaut court followed the same reasoning used by the court in Evanston, and held that Gen Re's failure to comply with Argonaut's request that Mr. Brownley be replaced was not a basis for depriving Gen Re of its right to designate an arbitrator. In particular, the Argonaut court found that Gen Re's inaction in failing to respond to Argonaut's request was not a complete failure to nominate an arbitrator and that it therefore could not trigger Argonaut's right to appoint both arbitrators. To hold otherwise, the court observed, would contradict the clear intent of the agreement to have each party choose an arbitrator.

The Argonaut court also found unsupported Argonaut's claim that the retirement of Mr. Brownley after he had been nominated by Gen Re would disqualify him from service as an arbitrator. The court recognized that the agreement required nominated arbitrators to be officials of insurance or reinsurance companies. However, because Argonaut offered no basis for interpreting the agreement as requiring the appointee to remain actively employed by an insurance or reinsurance company throughout the arbitration, the court declined to do so.

In support of its decision, the Argonaut court reasoned that the result of such an approach would be contrary to the purpose of arbitration because it could lead to an unending proceeding -- one that would have to be started again and again as successive arbitrators retired. The court also relied on the general rule that prevents federal district courts from ruling on "pre-award challenges to nominated arbitrators based on possible bias or prejudice." The court did find that the possibility of a review of an arbitrator's resume qualifications was not precluded, however, and noted that such a challenge might present a different case.

Following the Argonaut decision, insurers and reinsurers alike can rest assured that, at least in Illinois, the express language in their arbitration agreements will be given its full force and effect. By the same token, where a given result is not specified in an arbitration agreement, such a result will not be imposed on the parties.