Massachusetts Federal Court Holds That Arbitrator Should Determine The Preclusive Effect Of A Court’s Confirmation Of A Prior Arbitration In A Pending Arbitration

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Nat’l Cas. Co. v. OneBeacon Am. Ins. Co., No. 12-cv-11874-DJC, 2013 U.S. Dist. LEXIS 92840 (D. Mass. Jul. 1, 2013).

A Massachusetts federal court held that the issue of whether a court judgment confirming an arbitration award had a preclusive effect in a pending arbitration was for an arbitrator to decide, not a court.  On a motion to compel arbitration, the court also rejected the cedents’ request to disqualify an umpire candidate from consideration. 

Cedents sought recovery for losses arising out of asbestos and silica claims brought against the cedents by several policyholders from reinsurers who were parties to a treaty reinsurance program.  The cedents demanded arbitration against one reinsurer and the arbitration panel ruled that the reinsurer was not obligated to pay for aggregated asbestos and silica losses as ceded.  The court confirmed the panel’s decision. 

After the cedents brought a similar arbitration demand against the treaty reinsurers that were not parties to the first arbitration, the reinsurers sought declaratory relief regarding the preclusive effect of the court’s confirmation of the first panel’s decision on the second arbitration. 

In reaching its decision, the court noted that, generally, if the underlying action is arbitrable, the preclusive effect of a prior arbitration on a subsequent arbitration is for the arbitrator to decide.  A court would have to decide whether the issues were “identical,” which would in turn require the court to interpret the language of the reinsurance contracts and the underlying claims.  The court found such an inquisition into the merits inappropriate. 

The court noted that while the First Circuit had not yet addressed the issue, the Ninth Circuit has rejected the argument that a confirmation of an earlier arbitration award invests a federal court with the authority to consider a res judicata defense in a subsequent suit.  While judgment entered upon a confirmed arbitration award has the same force and effect under the FAA as a court judgment, it is not wholly parallel to a court judgment for all purposes.  A res judicata defense, as with other affirmative defenses such as laches and statute of limitations, is a component of the merits of the dispute and is thus an arbitrable issue.  Accordingly, the court held that the final judgment in the prior arbitration did not automatically have preclusive effect; that question was for the arbitrators in the second arbitration to decide.

On the issue of the cedents’ challenge to the umpire candidate, the court pointed out that the FAA frowns upon a court removing an arbitrator for any reason prior to the issuance of an arbitral award.  In this case, not only had there not yet been an arbitral award, but the challenged candidate had not even been selected to serve as umpire and the arbitration panel had yet to be determined.