KX Reinsurance Co. v. General Reinsurance Co.

Issue Discussed: Functus Officio

Submitted by Linsey M. Routledge, Simone Bonnet

Date Promulgated: November 14, 2008

KX Reinsurance Co. v. General Reinsurance Co., (2008 WL 4904882)

Case Number: 08-cv-7807-(SAS)

Filed: 11/14/2008

Court: U.S. District Court for the Southern District of New York

Issues Decided:  Whether an arbitration panel exceeds the scope of its authority by retaining jurisdiction after adjudicating the parties’ submitted claims.

The United States District Court for the Southern District of New York held that an arbitration panel had exceeded the scope of its authority by retaining jurisdiction over a dispute after having rendered a final award on the parties’ claims.

Between 1975 and 1979, Petitioner KX Reinsurance Company (“KX”) entered into a series of excess of loss treaties with Respondents North Star Reinsurance Company (“North Star”) and General Reinsurance Corporation (“Gen Re”).  The treaties contained an arbitration clause requiring that the parties arbitrate any dispute arising from the interpretation of the Agreement or the rights of the parties regarding transactions. North Star and Gen Re each initiated separate arbitration proceedings against KX seeking amounts they claimed were owed to them by KX.  After consolidating their proceedings, North Star and Gen Re sought an interim award requiring KX to post security for its outstanding balances and current outstanding reserves under the treaties, and a final award requiring that KX: (1) pay all outstanding balances plus additional balances that might become due; (2) post a security for the outstanding balances; (3) post security for its share of North Star and Gen Re’s reserves on an ongoing basis; and (4) pay interest, attorney’s fees, and other appropriate relief.

In November 2007, the arbitration panel issued an interim order requiring KX to post a letter of credit for existing outstanding balances and reserves.  The order permitted Gen Re and North Star to “request additional security” after February 15, 2008, but did not set an end date for their right to do so.  The parties then settled some, but not all, of the claims at issue.  Following an arbitration hearing, the panel issued a final ruling on June 5, 2008, which made the interim order a provision of the final award.  The final award also ordered KX to pay on the three remaining claims presented by North Star and the two remaining claims presented by Gen Re, plus interest, attorney’s fees, costs and expenses.  The arbitration panel specifically denied Gen Re and North Star’s request for a claims protocol to govern future claims handling procedures, and stated in the final award that any “other requests put forward by the parties that have not been addressed in this Award are hereby denied.”  The arbitration panel also reserved the right to retain jurisdiction until all parties requested that the arbitrators step down.

Having complied with the final award and paid all outstanding balances on the five subject claims and having posted additional security to secure reserves on claims not addressed in the final award, KX asked the panel to confirm that it had officially disbanded.  Gen Re and North Star objected to the panel’s disbandment on the grounds that KX “had yet to pay balances due on several claims that were not addressed by the Panel in the Award,” and Gen Re sought to have KX post additional security.  The panel heard argument and refused to disband.

KX moved the District Court to confirm the entirety of the panel’s final award with the exception of its retention of jurisdiction.  The District Court, in surveying the doctrine of functus officio, noted that an arbitration panel that has decided the submitted issues lacks further power to act.  The court identified only three exceptions to the functus officio doctrine: (1) where the award is ambiguous; (2) where the award has an error on its face, or (3) where the award does not adjudicate submitted issues.  Otherwise, the District Court observed, “[a]rbitrators do not have the power to monitor the parties’ compliance with the award, unless that authority is specifically conferred on them through the parties’ submissions,” which power the parties in this instance had not conferred.

Gen Re and North Star argued to the District Court that the panel should remain active because “KX had yet to pay balances due on several claims that were not addressed by the Panel in the Award and requested that the Panel stay in place until those balances were paid,” and because they anticipated requesting further security from KX.  The District Court rejected those arguments.  First, the Court noted that because the arbitration panel had specifically instructed that “any claims not addressed in its Award should be deemed refused,” the panel’s attempt to retain jurisdiction “is not legally permissible according to the scope of authority granted to the Panel by the parties themselves.”  Second, the District Court noted that because “respondents had not submitted their claim for additional security in the arbitration demands, other claims were outside the parameters of the Panel’s authority.”  The District Court also found that the final award did not fall under any of the exceptions to the functus officio doctrine.

The District Court emphasized that “[a]ll of the submitted issues were adjudicated by the Panel.”  Thus, Gen Re and North Star’s request that the panel remain in place to address other claims that had not originally been submitted to the panel “would effectively allow the Panel unlimited authority and the power to exist indefinitely, thereby conferring upon it an unintended judicial character and obviating its clear function as an alternative to judicial proceedings.”  The District Court added that keeping the panel in place “would also deprive KX of its implicit right under the Treaties to choose the arbitrators and umpires it deems most suitable to resolve the specific issues in contention” with respect to any other claims that might arise.  The court therefore granted KX’s motion to vacate the panel’s retention of jurisdiction and confirmed the remainder of the final award.

[1] Linsey M. Routledge is Senior Counsel at Clyde & Co US LLP and Simone Bonnet is a Vice President of VALE Insurance Partners, LLC.