The Burlington Insurance Company, et al. v. Trygg-Hansa Insurance Company AB

The Burlington Insurance Company, First Financial Insurance
Company and Burlington Insurance Group, Inc. (collectively referred
to as "Burlington") seek appellate relief from a judgment entered
in the Middle District of North Carolina, affirming the second
arbitration award in this extensive litigation. The district court
determined the award issued by the second arbitration panel was
ambiguous and attempted to clarify that ambiguity by submitting a
single question to the arbitrators. After receiving responses from
only two of the arbitrators, the court determined the second
arbitration panel intended its award to incorporate the first
arbitration award for a total award to Burlington of $2 million.

For the reasons stated below, we reverse and remand.

I

In 1999, Burlington Insurance Company and First Financial
Insurance Company first commenced arbitration with Trygg-Hansa
Insurance Company AB ("Trygg") to resolve disputes arising out of
reinsurance contracts between the parties.1 The first arbitration
panel dealt solely with claims arising from these reinsurance
contracts and Burlington Insurance Group took no part in the first
arbitration. The panel awarded amounts to all three parties,
resulting in a net award of $4.8 million to be paid by Trygg to
Burlington Insurance Company and First Financial Insurance Company.
That same year, in addition to the arbitration, Burlington
filed a lawsuit against Trygg alleging various state law claims.
These claims were held to be governed by the arbitration clauses in
the parties' contract, and a second arbitration panel was convened
to hear these claims.2 On May 24, 2005, the second panel issued
its award (Award II):

Trygg shall pay Burlington the sum of $2 million. This
sum shall be in satisfaction of all claims between the
parties under all of their contracts, including the
Memorandum of Agreement (as amended), the Reconfirmation
of Agreement, the $3 million and $6 million promissory
notes and the first excess of loss treaties. In
determination of this sum, the Panel considered Trygg's
obligation of approximately $4.8 million . . . all
accrued interest thereon through the date of payment
specified . . . below, and the note(s) evidencing the
loan from Trygg to Burlington. That note(s) shall be
considered to be fully paid by Burlington as a result of
Trygg's payment of the $2 million ordered herein.

The district court determined that Award II was ambiguous because
it was unclear whether Award II incorporated the amounts Trygg owed
under the first arbitration award or if Award II supplemented the
amounts due under the first arbitration award. On December 2,
2005, the district court sent the following question to the panel
members, requesting only a "yes" or "no" answer:

Was the panel's intent to make an award in Award II
separate from and in addition to Award I, meaning Trygg-
Hansa owes approximately $4.8 million to Burlington
Insurance and First Financial under Award I and the
additional amount of $2 million to Burlington Insurance,
First Financial, and Burlington Insurance Group, Inc.
under Award II, for a total of approximately $6.8 million
due from Trygg-Hansa?

Two panel members responded in the negative and one panel member
did not respond.

On May 16, 2006, the district court issued a memorandum
opinion and order, holding that the partial response from the
arbitrators was sufficient to determine the panel's intent, and
Award II incorporated the first arbitration award, so the total
amount awarded to Burlington after both rounds of arbitration was
$2 million. The district court confirmed Award II, vacated the
prior judgment that confirmed the first arbitration award of $4.8
million, and entered a separate judgment against Trygg for the $2
million awarded in Award II.

II

The appellate court reviews the district court's decision to
confirm an arbitration award de novo. See Peoples Sec. Life Ins.
Co. v. Monumental Life Ins. Co., 991 F.2d 141, 145 (4th Cir. 1993).

The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-14, governs the
court's review of the arbitration award and a court is to confirm
an arbitration award unless the award is vacated, modified or
corrected under the limited grounds specified in sections 10 and 11
of the Act. See 9 U.S.C. § 9. Although not provided for in the
FAA, the court may also remand the arbitration award back to the
panel if the award is ambiguous. See Colonial Penn Ins. Co. v.
Omaha Indem. Co., 943 F.2d 327, 333-34 (3rd Cir. 1991); Mutual
Fire, Marine & Inland Ins. Co. v. Norad, 868 F.2d 52, 58 (3d Cir.
1989); Americas Ins. Co. v. Seagull Compania Naviera, S.A., 774
F.2d 64, 67 (2d Cir. 1985); Island Creek Coal Sales Co. v. City of
Gainesville, 764 F.2d 437, 440 (6th Cir.), cert. denied, 474 U.S.
948 (1985); La Vale Plaza, Inc. v. R.S. Noonan, Inc., 378 F.2d 569,
573 (3d Cir. 1967).

We find that the district court properly determined that Award
II was ambiguous, as opposed to silent, on the issue of awarding a
setoff. See, e.g., Int'l Union of Operating Eng'rs, Local 841 v.
Murphy Co., 82 F.3d 185, 190 (7th Cir. 1996) ("[W]e assume the
arbitrator's failure to mention offsets in his ruling means that no
offset was granted, not that the ruling is ambiguous."). During
the second arbitration, Trygg presented the possibility of
offsetting the amount awarded by the second arbitration panel with
the amount awarded in the first arbitration panel. The panel's
reference to the first arbitration award in Award II leads to
different interpretations of the panel's intent on the issue of
offsetting the awards. Burlington interpreted Award II as
supplementing the amount awarded by the first arbitration panel,
for a total amount of approximately $6.8 million. Trygg
interpreted Award II as awarding an offset and incorporating the
amount awarded by the first arbitration panel, for a total amount
of $2 million. Given the two opposing, and equally valid
interpretations of the award, the district court properly
determined that the award should be remanded to the arbitrators for
further clarification. See, e.g., Americas Ins. Co. v. Seagull
Compania Naviera, S.A., 774 F.2d 64, 67 (2d Cir. 1985)(stating that
"a court should not attempt to enforce an award that is ambiguous
or indefinite" and the award "should be remanded to the arbitrators
so that the court will know exactly what it is being asked to
enforce"); Mutual Fire, Marine & Island Ins. Co., 868 F.2d at 58
("A district court itself should not clarify an ambiguous
arbitration award but should remand it to the arbitration panel for
clarification.").

We find, however, that the procedure employed by the district
court to clarify the ambiguity was unsuccessful. The district
court chose to submit only one question to the arbitrators and
limited the response of the arbitrators to only a "yes" or a "no."
Prior to submitting the question to the arbitrators, the court and
the parties acknowledged that a negative response would fail to
3On November 28, 2005, the court and the parties conducted a
telephone conference to discuss the question to be submitted to the
arbitrators on remand. The court, in responding to Trygg's concern
about what a "no" response would mean, stated "[i]f [the
arbitration panel] comes back with a no, I would be tremendously
surprised, because I think I understand what they intended to do
originally. If they come back with a no, I don't think there is
any way to shortstop this thing; it's open to a real mess. . . . If
they say no, I would have no idea what they meant, then." (J.A.
clarify the ambiguity and further inquiry would be necessary.3
Upon receiving negative responses from only two of the arbitrators,
however, the district court decided not to submit additional
questions to the arbitrators. Additionally, while the court and
parties reasonably presumed that the arbitrators would meet and
confer before responding, it appears that they did not. Two of the
arbitrators submitted responses but the third arbitrator never
received the court's question nor submitted a reply. We are,
therefore, unable to discern, without any further discovery into
the arbitrators' intent, how the one-word response from two of the
arbitrators resolved the ambiguity. We find that the district
court erred in confirming Award II because it is still unclear
whether the second arbitration panel awarded a setoff with the
first arbitration award. Because we find Award II to still be
ambiguous, we do not need to decide the issue of whether the second
arbitration panel exceeded its authority if their intent was to
award a setoff.

Accordingly, we vacate the district court's judgment and
remand to the district court.

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http://pacer.ca4.uscourts.gov/opinion.pdf/062082.U.pdf

VACATED AND REMANDED

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