Sphere Drake Ins. v. Clarendon Nat'l Ins.

• Decision Date: 24 May 2001
• Docket Number: DEFENDANTS-APPELLEES,PLAINTIFF-APPELLANT,Docket No. 00-9464
• Citation: 263 F.3d 26
• Parties: (2nd Cir. 2001) SPHERE DRAKE INSURANCE LIMITED,, v. CLARENDON NATIONAL INSURANCE COMPANY AND CLARENDON AMERICA INSURANCE COMPANY, Argued:
• Court: U.S. Court of Appeals — Second Circuit

Page 26

263 F.3d 26 (2nd Cir. 2001)

SPHERE DRAKE INSURANCE LIMITED, PLAINTIFF-APPELLANT, v. CLARENDON NATIONAL INSURANCE COMPANY AND CLARENDON AMERICA INSURANCE COMPANY, DEFENDANTS-APPELLEES.

Docket No. 00-9464

UNITED STATES COURT OF APPEALS For the Second Circuit

Argued: May 24, 2001

Decided: August 28, 2001

Plaintiff appeals the judgment entered on October 10, 2000 in the United States District Court for the Southern District of New York (Hellerstein, J.), granting defendants' motion to dismiss the complaint and compel arbitration.

Affirmed in part, reversed in part and remanded.

James I. Rubin, Butler, Rubin, Saltarelli & Boyd, Chicago, IL (Thomas R. Misero, Wilson, Elser, Moskowitz, Edelman & Dicker, L.L.P., New York, Ny, R. Douglass Bond & Mark A. Schwartz, Butler, Run-in, Saltarelli & Boyd, Of Counsel) for Plaintiff-Appellant.

Gary M. Zinkgraf, Foley & Lardner, New York, NY (h. Barry Vasios, Gilbert, Segall and Young Llp, Of Counsel) for Defendants-Appellees.

Before: Cardamone, Parker, and Cudahy^*, Circuit Judges.

Cudahy, Circuit Judge

Through its agents, Sphere Drake Insurance Limited (Sphere Drake) agreed to reinsure certain insurance contracts that had been issued by Clarendon National Insurance Company and Clarendon America Insurance Company (collectively "Clarendon"). Unhappy with the terms of these reinsurance contracts, Sphere Drake brought a declaratory judgment action, seeking to have the contracts declared void and to avoid arbitration in spite of the contracts' arbitration clauses. Clarendon moved to dismiss the action, pursuant to Rule 12(b)(6), and to compel arbitration. Clarendon argued in support of its motion, and the district court ruled, that the contracts were subject to their arbitration clauses, and that, accordingly, the contracts' validity should be resolved in arbitration. The district court granted Clarendon's motion to dismiss and compel arbitration. Sphere Drake appeals. We affirm in part, reverse in part and remand for further proceedings consistent with this opinion.

I.

Sphere Drake is a British company in the business of providing both direct insurance and reinsurance. In January 1997, Sphere Drake issued a binding authority to Horace Holman International Limited ("HHI"), which authorized HHI to accept direct insurance and reinsurance business on Sphere Drake's behalf. With Sphere Drake's approval, HHI appointed Euro International Underwriting Ltd. ("Euro") to operate the binding authority.

Clarendon comprises two New Jersey companies having their principal place of business in New York. Clarendon is a direct writer of workers' compensation insurance, and, at the time of the transactions here at issue, engaged Raydon Underwriting Management Company Limited (Raydon) as an underwriting manager. As underwriting manager, Raydon accepted insurance business on behalf of Clarendon and purchased reinsurance that protected Clarendon from some of the risk that accompanied this business. Raydon was owned by Stirling Cooke Brown Holdings Limited (Stirling Cooke), which also acted as an agent for Clarendon in acquiring reinsurance.

In 1997 and 1998, Euro and Stirling Cooke entered into-or, as Sphere Drake alleges, only attempted to enter into-six reinsurance contracts¹ pursuant to which Sphere Drake agreed to reinsure certain insurance policies issued by Clarendon. Clarendon and Sphere Drake both performed on the contracts without complaint until, in a letter dated March 31, 1999, Sphere Drake informed Clarendon that it had discovered that the six contracts here at issue were fraudulently induced by Euro and Stirling Cooke. Sphere Drake concluded by stating that it was unilaterally disavowing its obligations under each contract, but was willing to repay the amount of all premiums paid on the contracts to date by Clarendon. Not satisfied with this turn of events, Clarendon demanded arbitration of what it considered to be Sphere Drake's breach of the contracts in accordance with the following arbitration clause that was contained in each contract:

Disputes between the parties arising out of this Reinsurance which cannot be resolved by compromise, including but not limited to any controversy as to the validity of this Reinsurance, whether such disputes arise before or after termination of this Reinsurance shall be submitted to arbitration.

As a result of Clarendon's demand for arbitration, Sphere Drake brought this action in district court, seeking a declaration that the contracts-including the contracts' arbitration clauses-were unenforceable because the contracts were void ab initio.

In attempting to convince the district court that the contracts were void and therefore non-arbitrable, Sphere Drake argued that Euro (which accepted the contracts on Sphere Drake's behalf) breached its fiduciary duty by accepting all business that Stirling Cooke provided without evaluating the reasonableness of the accompanying risks, leading to contracts that were "commercially absurd" and "economically disastrous." Following oral argument on Clarendon's motion, the district court read its decision from the bench, holding that this dispute was subject to the contracts' arbitration clauses. In reaching its decision, the district court relied primarily on the rule of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), which held that a party claiming fraud in the inducement of a contract would have to bring that claim before an arbitrator because it did not allege that the fraud in the inducement related to the arbitration clause specifically. Because Sphere Drake did not allege any wrongdoing related specifically to the arbitration clause, the district court held that Prima Paint directed arbitration. Sphere Drake appeals.

II.

On appeal, Sphere Drake argues that the district court should not have compelled arbitration of Clarendon's breach of contract claim (and Sphere Drake's defenses to these claims) because the contracts-and thus the arbitration clauses in the contracts-are unenforceable. An order compelling arbitration is reviewed de novo. Nat'l Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129, 132 (2d Cir. 1996).

A.

This action technically arises under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("CREFAA"), as enforced by Chapter Two of the Federal Arbitration Act ("FAA"), 9 U.S.C.A. § 201 et seq. (West 1999), because the parties reside in different countries and both of those countries-the United States and the United Kingdom-are signatories to the CREFAA. See 9 U.S.C.A. § 201 note, at 515. The CREFAA provides that:

The court of a Contracting State, when seized of an action in a matter in respect to which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

CREFAA, done June 10, 1958, art. 2, para. 3, 21 U.S.T. 2517 (entered into force by the United States Dec. 29, 1970), reprinted at 9 U.S.C.A. § 201 note, at 511. A similar provision in Chapter One of the FAA provides that:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court.... [U]pon being satisfed that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.

9 U.S.C.A. § 4 (West 1999). As is evident from both 9 U.S.C.A. §§ 4 and 206, a strong presumption of arbitrability is established by the FAA. See Sandvik AB v. Advent Int'l Corp., 220 F.3d 99, 104 (3d Cir. 2000); United States Fire Ins. Co. v. Nat'l Gypsum Co., 101 F.3d 813, 816 (2d Cir. 1996); Bergesen v. Joseph Muller Corp., 710 F.2d 928, 933 (2d Cir. 1983). Indeed, "the Supreme Court has instructed that `any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.'" Chelsea Square Textiles, Inc. v. Bombay Dyeing & Mfg. Co., 189 F.3d 289, 294 (2d Cir. 1999) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)). However, in spite of the FAA's presumption in favor of arbitration, a court may compel arbitration under the Act only if the agreement is not "null and void, inoperative or incapable of being performed." CREFAA, art. 2, para. 3.² If the making of the agreement to arbitrate is placed in issue-as Sphere Drake attempts to do by alleging that the contracts in which the arbitration provisions are found never came into existence-the court must set the issue for trial. However, the party putting the agreement to arbitrate in issue must present "some evidence" in support of its claim before a trial is warranted. See Interocean Shipping Co. v. Nat'l Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir. 1972); Almacenes Fernandez, S.A. v. Golodetz, 148 F.2d 625, 628 (2d Cir. 1945) ("To make a genuine issue entitling the plaintiff to a trial by jury, an unequivocal denial that the agreement had been made was needed, and some evidence should have been produced to substantiate the denial."). Before we turn to the merits, we must first detail the governing law, for the parties rely heavily on cases that may, without further explanation, appear conflicting.

Sphere Drake argues that it has placed the making of the agreement for arbitration in issue by showing that the contracts which contain the arbitration clauses are themselves void ab initio as a result of Euro's alleged failure to act within the scope of its agency. In making its argument, Sphere Drake relies heavily on Interocean Shipping Co. v. Nat'l Shipping &...