United States District Court, N.D. Illinois
March 8, 2004.
SPHERE DRAKE INSURANCE LIMITED, Plaintiff, V. ALL AMERICAN LIFE INSURANCE COMPANY, Defendant
The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff Sphere Drake Insurance Limited ("Sphere Drake") seeks to
confirm an arbitration award that invalidated six reinsurance contracts
between Sphere Drake and Defendant All American Life Insurance Company
("All American").*fn1 In response to Sphere Drake's motion for summary
judgment, All American filed a cross motion to vacate the arbitration
decision on several grounds, including the evident partiality of one of
the panel members. This court granted All American's motion on that
basis, see Sphere Drake Ins. Ltd. v. AH American Life Ins. Co.,
No. 01 C 5226, 2002 WL 1008464 (N.D. III. May 17, 2002), but the Seventh
Circuit reversed. Sphere Drake Ins. Ltd. v. All American Life ins.
Co., 307 F.3d 617 (7th Cir. 2002), cert. denied,
123 S.Ct. 1754 (2003). All American has now renewed its motion to vacate on
three other grounds: (1) All American did not receive a fundamentally fair
hearing; (2) the panel members exceeded their authority in issuing the
decision; and (3) the panel exhibited a manifest disregard of the law.
Sphere Drake opposes the motion and also seeks to strike certain new
evidence submitted by All American in support of that motion. For the
reasons set forth here, both motions are denied. BACKGROUND
The facts of this case have been presented in this court's May 17, 2002
Memorandum Opinion and Order, see Sphere Drake Ins., 2002 WL
1008464, at *1-5, and in the Seventh Circuit's decision in Sphere
Drake Ins., 319 F.3d at 619-20. This opinion assumes the reader's
familiarity with these earlier decisions.
All American is an insurance company that has underwritten reinsurance
for insurers issuing personal accident and occupational coverage directly
to individuals and employers.*fn2 (Affidavit of Andrew S. Amer ("Amer
Aff.") ¶ 2.) As part of those reinsurance underwriting activities,
All American purchased its own reinsurance protection, called
retrocessional coverage, to further spread the risk.*fn3 (Id.)
In 1997, All American purchased, through its underwriting agent WEB
Management LLP ("WEB"), retrocessional protection from Euro International
Underwriting Ltd. ("EIU"), which was Sphere Drake's underwriting agent.
(Id.) The retrocessional protection consists of seven
reinsurance contracts. Stirling Cooke Brown Reinsurance Brokers Limited
("Stirling Cooke"), which purported to act on behalf of All American, is
the reinsurance broker that placed the majority of the business EIU had
accepted on behalf of Sphere Drake. (PI. Response, at 2.)*fn4 All American paid Sphere Drake premiums under the reinsurance contracts
until March 1999, when Sphere Drake sought to rescind the contracts and
return the premiums. (Amer Aff. ¶ 3; Ex. C15 to PI. 56.1, at
5-7.)*fn5 Sphere Drake claims it discovered that Stirling Cooke had
"induced and colluded with EIU to breach the fiduciary duties EIU owed to
Sphere Drake, and induced EIU to operate its agency for the benefit of
Stirling Cooke and its affiliates rather than for the benefit of Sphere
Drake." (PI. Response, at 2.) One of those Stirling Cooke affiliates was
WEB, All American's managing general agent. (Ex. C15 to PI. 56.1, at 1.)
As a result of ElU's and Stirling Cooke's collusive activities, Sphere
Drake alleges, there were "multiple accumulations by Sphere Drake on the
same losses, concentrating and often spiraling rather than transferring
or dissipating the risk." (Ex. E to Amer Aff., at 4.) In addition, "the
vast majority of this business was written on terms that were obviously
and profoundly uneconomical to Sphere Drake."*fn6 (Id.)
Sometime after March 1999, Sphere Drake initiated court proceedings
against EIU and Stirling Cooke in England.*fn7 (Ex. N to PI. 56.1, at
27; PI. Response, at 2.) On June 11, 1999, All American commenced
arbitration proceedings against Sphere Drake in the United States. The
parties ultimately agreed to submit six of the seven contracts to an
arbitration panel consisting of two party-appointed arbitrators, Robert
Mangino for All American and Ronald A. Jacks for Sphere Drake, and a
third arbitrator, Robert M. Huggins, who was selected jointly by both
parties. (PI. 56.1 ¶¶ 7-10.) The seventh contract is the subject of pending
litigation before Judge William T. Hart of this court, Sphere Drake
Ins. Ltd. v. All American Life Ins. Co., No. 99 C 4573.
After the parties had appointed the arbitration panel on the six
contracts, they agreed to submit position statements to the panel members
setting forth the issues and defenses. (PI. Response, at 3; Def. Mem., at
7.) The parties agreed that Sphere Drake would submit its position
statement first, followed by All American. In its position statement,
Sphere Drake argued, in part, that the six contracts were void ab
initio because All American's agent, Stirling Cooke, knew that
Sphere Drake's agent, EIU, was acting outside the scope of its authority
in accepting the business brokered by Stirling Cooke. (PI. 56.1 ¶ 17;
Ex. E to Amer Aff., at 1.) All American responded that EIU had proper
authority to enter into the contracts with Sphere Drake and that they
were all valid and enforceable. In an apparent attempt to avoid any risk
that All American would be held responsible if Stirling Cooke were found
to know about ElU's allegedly limited authority, All American also
Simply put, there was no agency relationship
between Stirling Cooke and All American or between
Stirling Cooke and WEB; Stirling Cooke had no
authority to bind either AH American or WEB and
neither All American nor WEB entered into any form
of agency agreement with Stirling Cooke.
(Ex. F to Amer Aff., at 4.) See also Sphere Drake Ins., 307
F.3d at 619.
At an April 11, 2001 organizational meeting, Sphere Drake requested
permission to file a motion for judgment on the pleadings, claiming that
All American had admitted in its position statement that Stirling Cooke
did not have authority to bind All American. In Sphere Drake's view, All
American had made a judicial admission that Stirling Cooke did not have
the capacity to make a valid offer to EIU and, thus, there were no
binding contracts. (PI. 56.1 ¶ 41; Ex. E to PI. 56.1, at 45-48; Ex.
C2 to PI. 56.1, at 5.) All American responded that the position
statements did not constitute pleadings and that the statements were
being taken out of context. (Ex. C 16 to PI. 56.1, at 8-10.) All American
also argued that (1) Stirling Cooke had authorization from All American's underwriting agent, WEB, to bind the coverage; (2) Sphere Drake
never argued in its opening position statement that Stirling Cooke lacked
such authority; (3) Sphere Drake waived its right to contest the
existence of the contracts by accepting premium payments; (4) Stirling
Cooke was All American's agent under Illinois agency law; and (5)
granting Sphere Drake's motion would deprive All American of a fair
hearing by denying the company its right to take discovery and present
evidence. (Def. Mem., at 9; Ex. K to Amer Aff.)
On July 5, 2001, after reviewing the parties' written submissions and
hearing oral argument on the motion, the arbitration panel, in a 2 to 1
decision, issued a Final Award in Sphere Drake's favor. The panel found
that All American's position statement was a pleading and that the
company had made a judicial admission that Stirling Cooke was not
authorized to contract with EIU. (Ex. C3 to PI. 56.1, at 1-2; Ex. M to
Amer Aff., at 1-2.) The arbitrator selected by All American, Robert
Mangino, vigorously dissented, finding the majority's decision an
"extraordinary and unprecedented departure from applying industry
practice and procedures to reinsurance disputes." Mangino stated that All
American did not receive due process because it was not permitted to
engage in discovery and present evidence in the case. He also disagreed
with the majority's conclusion that there was no binding contract, noting
that "Sphere Drake accepted premiums pursuant to the contracts from All
American." (Ex. N to Amer Aff.)
On July 6, 2001, Sphere Drake moved this court to confirm the Final
Award and All American responded with a cross motion to vacate. On May
17, 2002, the court granted All American's motion, finding that Ronald
Jacks, Sphere Drake's chosen arbitrator, demonstrated evident partiality.
Sphere Drake Ins., 2002 WL 1008464, at *6-11. The Seventh
Circuit reversed that decision on October 9, 2002. Sphere Drake
Ins., 307 F.3d at 620-23. On February 19, 2003, All American renewed
its motion to vacate, arguing that it did not receive a fair hearing and
that the arbitrators exceeded their authority and improperly disregarded
Illinois law in reaching their decision. In support of that motion, All
American seeks to introduce certain new evidence that, it says, demonstrates Stirling Cooke's authority to bind the six
contracts at issue: trial testimony from the case pending before the
English commercial court (the "UK Action"), and discovery conducted in
the case pending before Judge Hart (the "Unicare Litigation"). Sphere
Drake opposes the motion to vacate and has moved to strike all references
to this additional evidence.
"Federal courts extend extraordinary deference to the decisions of
arbitrators," and once a dispute has been resolved through arbitration,
the role of a reviewing court is extremely limited. Stulberg v.
Intermedics Orthopedics, Inc., 997 F. Supp. 1060, 1063 (N.D. III.
1998) (citing United Paperworkers Int'l Union, AFL-CIO v. Misco,
Inc., 484 U.S. 29, 36-37 (1987)); Moseley, Hallgarten, Estabrook
& Weeden, Inc. v. Ellis, 849 F.2d 264, 267 (7th Cir. 1988). "The
court may not `consider the disputants' arguments afresh,' Dean v.
Sullivan, 118 F.3d 1170, 1171 (7th Cir. 1997), nor may it overturn
the arbitrator's decision on the ground that the arbitrator committed
serious error." Ganton Technologies, Inc. v. International Union,
United Automobile, Aerospace and Agricultural Implement Workers
of America, U.A.W., Local 627, _ F.3d 2004 WL 253562 (7th Cir. Feb.
12, 2004). As the party challenging the arbitration award, All American
bears the substantial burden of proving grounds for vacation.
Middlesex Mutual Ins. Co. v. Levine, 675 F.2d 1197, 1201 (11th
All American claims that the Final Award must be vacated because (1)
All American was denied a fundamentally fair hearing; (2) the panel
members exceeded their authority in issuing the award; and (3) the panel
exhibited a manifest disregard of the law. The court addresses each
argument in turn.
I. Fundamentally Fair Hearing
A federal court may vacate an arbitration award where the challenging
party shows that "the arbitrators were guilty of misconduct in refusing
to . . . hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any
party have been prejudiced." 9 U.S.C. § 10(a)(3). As the Seventh
Circuit has stated, "[i]t is clear that an arbitrator must provide a
fundamentally fair hearing." Generica Ltd. v. Pharmaceutical Basics,
Inc., 125 F.3d 1123, 1129-30 (7th Cir. 1997) (citing Iran
Aircraft Indus. v. Avco Corp., 980 F.2d 141, 146 (2d Cir. 1992) ("an
arbitral award should be denied or vacated if the party challenging the
award proves that he was not given a meaningful opportunity to be heard
as our due process jurisprudence defines it").
A hearing is fundamentally fair if it "meets the minimal requirements
of fairness adequate notice, a hearing on the evidence, and an
impartial decision by the arbitrator." Slaney v. International
Amateur Athletic Federation, 244 F.3d 580, 592 (7th Cir. 2001). At
the same time, parties who have chosen to submit their disputes to
arbitration "should not expect the same procedures they would find in the
judicial arena." Id. (citing Generica, 125 F.3d at
1130). An arbitrator must give the parties an adequate opportunity to
present their evidence and arguments, but it is only when "the exclusion
of relevant evidence actually deprived a party of a fair hearing that it
is appropriate to vacate an arbitral award." Id.
All American contends that the arbitration hearing was fundamentally
unfair because (1) All American never in fact admitted that Stirling
Cooke lacked authority to bind the reinsurance contracts; (2) All
American's position statement was not a "pleading" and did not support
dismissal "on the pleadings"; and (3) the purported admission is not
dispositive of all the claims.
A. The Admission
The arbitration panel agreed with Sphere Drake that All American had
admitted that Stirling Cooke did not have authority to bind the six
contracts because it did not have an agency relationship with All
American or WEB:
Simply put, there was no agency relationship
between Stirling Cooke and All American or between
Stirling Cooke and WEB; Stirling Cooke had no
authority to bind either All American or WEB and
neither All American nor WEB entered into any form
of agency agreement with Stirling Cooke. (Ex. F to Amer Aff., at 4.) All American argues that the panel
misconstrued these statements which, it says, relate to "Stirling Cooke's
lack of any general agency authority to act on behalf of All
American or WEB, not the more narrow issue of whether Stirling Cooke had
received specific instructions from WEB to bind the six contracts," (Def.
Mem., at 15.) In support of this interpretation, All American notes the
following additional language from the same paragraph in its position
The only relationship between Stirling Cooke and
WEB was that of a silent investor twice removed,
with no control over any management or
underwriting decisions whatsoever. Rather,
Stirling Cooke served only as the "intermediary"
between WEB and EIU nothing more.
Accordingly, Sphere Drake may not impute Stirling
Cooke's knowledge and conduct to All American or
(Ex. F to Amer Aff., at 4; Def. Mem., at 15.) All American claims that
its position statement cannot be read to address Stirling Cooke's legal
competence to enter into the reinsurance contracts because Sphere Drake's
position statement never challenged such competence. (Def. Mem., at 16.)
The flaw in All American's position is that "[f]actual or legal errors
by arbitrators even clear or gross errors do not
authorize courts to annul awards." Flexible Mfg. Sys. Pty. Ltd. v.
Super Products Corp., 86 F.3d 96, 100 (7th Cir. 1996) (quoting
Gingiss Int'l, Inc. v. Bormet, 58 F.3d 328, 333 (7th Cir.
1995)). Though couched in terms of its right to receive a fair hearing,
All American's argument essentially asks this court to find that the
panel's interpretation of the two sentences at issue was wrong. To allow
such a review would transform arbitration from "a commercially useful
alternative method of dispute resolution into a burdensome additional
step on the march through the court system. That is why courts will not
overturn an arbitration decision for mere errors of judgment as to law or
fact." Id. (citing Eljer Mfg., Inc. v. Kowin Development
Corp., 14 F.3d 1250, 1255 (7th Cir. 1994)). All American had an
opportunity to brief the issue and present oral argument before the
panel; in fact, All American presented the very arguments it has raised
here regarding the "proper" interpretation of the disputed statements. The court
will not vacate the award merely because the panel did not agree with All
B. The Pleading
All American next argues that the panel erred in treating the parties'
position statements as formal "pleadings" for purposes of a motion for
judgment on the pleadings. All American views position statements as
informal documents designed to provide arbitrators with an overview of
the case, noting that unlike a judicial complaint, position statements
are not required under the relevant arbitration clause or applicable
federal arbitration law. (Def. Mem., at 17) (citing Practical
Guide (ARIAS U.S.), Chap. Ill, at 2 (suggesting that parties should
submit position statements "to apprise the [arbitration] panel,
generally, of the background of the case and to provide a frame of
reference for the procedural decisions the panel will make at the
Organization Meeting")). Sphere Drake claims that position statements and
judicial pleadings both serve a notice function, and argues that the
panel appropriately concluded that All American should not be permitted
to change its facts mid-stream. (PI. Response, at 14-16.)
The court does not see anything inherently improper in the panel's
decision to treat the position statements as "pleadings" that may contain
judicial admissions. In the parallel Unicare Litigation, Judge Hart
expressly stated that position statements before arbitration panels are
the equivalent of "pleadings." Odyssey Re (London) Ltd. v. All
American Life Ins. Co., No. 99 C 4573, slip op., at 14-15 (Docket
No. 28) (N.D. III. Mar. 30, 2000) (Illinois International Commercial
Arbitration Act provides for filing a statement of the claimant's claim
and a statement of respondent's defense; "[t]hat would be the equivalent
of pleadings in a court action"). In other contexts, courts have found
position statements susceptible to interpretation as judicial admissions.
See, e.g., N.L.R.B. v. United Sanitation Serv., Division of Sanitas
Serv. Corp., 737 F.2d 936, 940 (11th Cir. 1984) (in unfair labor
practices case, employer's position statement "constitute[d] an admission that a key meeting . . . actually took place");
Frazier v. Indiana Dep't of Labor, No. IP01-198CTK, 2003 WL
21254567, at *4 (S.D. Ind. Mar. 24, 2003) ("an employer's position
statement in an EEOC proceeding may be admissible [at trial] to the
extent it constitutes an admission"); Khan v. Sanofi-Synthelabo,
Inc., No. 01 Civ. 11423 JSMDF, 2002 WL 31720528, at *3 (S.D.N.Y.
Dec. 3, 2002) ("the EEOC Position Statement may stand as a party
The mere fact that Sphere Drake submitted its position statement first
does not mean that All American's position statement could not contain
judicial admissions or be deemed a pleading. (Def. Mem., at 18.) All
American agreed to that schedule and cites no authority for the
proposition that the order in which position statements are filed is
determinative on either issue. Significantly, All American did set forth
its claims and counterclaim defenses in its position statement (titled
"AH American's Statement of the Case"); analogously, answers, replies,
counterclaims, and responses to counterclaims all constitute pleadings.
See Odyssey Re (London), slip op., at 15 (citing FED. R. Civ. P.
7(a) and 735 ILCS 5/2-602, 2-603). Nor is it relevant that Sphere Drake
did not argue that Stirling Cooke lacked authority to bind All American
in its opening statement (Def. Reply, at 5)*fn8; Sphere Drake was
certainly entitled to raise that defense once All American opened the
door to it. All American may regret its strategic decision to disavow
Stirling Cooke's agency relationship, but that is not a basis for
vacating the arbitral award.
All American argues that the panel was required to accept its
interpretation of the two sentences which All American insists
was "entirely reasonable under the circumstances" (Def. Reply, at 7)
because on a motion to dismiss, all reasonable inferences must be
drawn in favor of the nonmoving party. (Id.) See Flannery v.
Recording Industry Ass'n of America, 354 F.3d 632, 640 (7th Cir.
2004) (quoting Martinez v. Hooper, 148 F.3d 856, 858 (7th Cir.
1998)) (in deciding a motion to dismiss, court asks "whether there is any
possible interpretation of the complaint under which it can state a claim"). Even assuming this is the proper
standard for reviewing a position statement submitted in an arbitration,
the fact that reasonable inferences must be drawn in favor of the
nonmoving party does not prevent dismissal where "inferences[,] while
theoretically plausible are inconsistent with the pleadings." Holman
v, Indiana, 211 F.3d 399, 407 (7th Cir. 2000).
In its position statement, All American affirmatively disavowed an
agency relationship with Stirling Cooke and continued to do so throughout
the arbitration proceedings. At the same time, All American insisted that
its disavowal did not mean what Sphere Drake said it meant and was not
intended to imply that Stirling Cooke lacked authority to bind All
American. Even if the panel erred in rejecting All American's proffered
interpretation, there is no evidence that the panel did not afford that
interpretation the proper deference before doing so. See Lee v. City
of Chicago, No. 01 C 6751, 2003 WL 22071475, at *2 (N.D. III. Sept.
4, 2003) (quoting Coates v. Illinois State Bd. of Educ.,
559 F.2d 445, 447 (7th Cir. 1977)) ("the court need not `strain to find
inferences favorable to the plaintiff' that are not evident from the face
of the complaint").
Significantly, All American admittedly had an opportunity to present
its theories to the panel both in its response to the motion for judgment
on the pleadings and at oral argument. Compare Tempo Shain Corp. v.
Bertek, Inc., 120 F.3d 16, 21 (2d Cir. 1997) (arbitration panel's
refusal to hear testimony from the only witness who could rebut and/or
support certain claims amounted to "fundamental unfairness and misconduct
sufficient to vacate the award"); Hoteles Condado Beach, La Concha
and Convention Ctr. v. Union de Tronquistas Local 901, 763 F.2d 34,
40 (1st Cir. 1985) (vacating arbitration award where arbitrator refused
to give any weight to the only testimony available to refute or
substantiate one party's claims). The fact that the panel did not see a
need to hold a full hearing to resolve the issue does not render its
decision unenforceable. See Sheldon v. Vermonty, 269 F.3d 1202,
1207 (10th Cir. 2001) ("if a party's claims are facially deficient and
the party therefore has no relevant or material evidence to present at an
evidentiary hearing, the arbitration panel has full authority to dismiss the claims without
permitting discovery or holding an evidentiary hearing").
More problematic is the fact that All American did not have an
opportunity to withdraw or amend the admission. "As a general matter, a
party should be granted an opportunity to amend his claims prior to a
dismissal with prejudice." Sheldon, 269 F.3d at 1207 n.5.
Exceptions to this general principle include "undue delay, bad faith or
dilatory motive on the part of the movant, repeated failure to cure
deficiencies by amendments previously allowed, undue prejudice to the
opposing party by virtue of allowance of the amendment, [or] futility of
amendment." King v. Cooke, 26 F.3d 720, 723 (7th Cir. 1994)
(quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). See also
Cadelli v. United Transp. Union, 132 F.3d 38 (Table), 1997 WL
785180 (9th Cir. 1997) (quoting American Title Ins. Co., 861
F.2d at 226) ("[f]actual assertions in pleadings and pretrial orders,
unless amended, are considered judicial admissions conclusively
binding on the party who made them") (emphasis added).
Here, Sphere Drake does not argue that it would have been prejudiced by
an amendment, or that Ail American acted in bad faith in making the
statement. It argues, instead, that All American should not be allowed to
admit something one minute and take it back the next after discovering
that the admission produces an unsatisfactory result. (PI. Response, at
15-16) (citing Homel v. Sun Ins. Office, Ltd., No. Civ A.
92-0442, 1993 WL 56028, at*4 (E.D. Pa. Feb. 27, 1993)) ("to permit a
party in its pleadings to get away with being a prevaricating chameleon
would visit an injustice on the other party, and make such a mockery of
the sanctity of judicial pleadings"). All American contends that it is
not changing its allegations but clarifying them in response to Sphere
Drake's "newly asserted arguments." (Def. Reply, at 9.)
Though the court does not believe that All American is trying to
"mock. . . the sanctity of judicial pleadings," there nonetheless does
not appear to be a basis for All American's claim that it was denied a
fair hearing because it did not have an opportunity to amend its position
statement. First, All American never asked to amend its position statement. As
a result, All American is left to argue that when it "clarified its
intent during the briefing and oral argument on the motion to dismiss,
the panel was required to accept this clarification as an amendment to
the [position] Statement." (Def. Reply, at 8.) A party, however, "cannot
amend his complaint via a response to a motion to dismiss." Gale v.
Hyde Park Bank, No, 02 C 3663, 2004 WL 170321, at *3 (N.D.
III. Jan. 20, 2004) (citing Car Carriers, Inc. v. Ford Motor
Co., 745 F.2d 1101, 1107 (7th Cir. 1984)). See also E.E.O.C. v.
Admiral Maintenance Serv., LP., 174 F.R.D. 643, 646 n.1 (N.D. III.
1997) (noting that "[m]otions, which are not pleadings, are discussed in
[FED. R. CIV. P.] 7(b)"). But see Form v. Peters, 996 F.2d 1219
(Table), 1993 WL 134054 (7th Cir. 1993) (noting that two other circuits
"have held that a plaintiff can make a valid request for leave
to amend the complaint in a response to a motion to dismiss") (emphasis
More importantly, All American did not actually seek to withdraw or
amend its statement; the company has at all times stood by its assertion
that Stirling Cooke did not have any agency relationship with All
American or WEB. All American confirmed that position most recently in
its reply memorandum in support of this motion;
All American's assertion that Stirling Cooke had
no agency relationship with WEB or All American
was not a mistake, it was in hindsight
`inadvertently' ambiguous to the extent that it
gave Sphere Drake the opportunity to misconstrue
the statement as admitting that Stirling Cooke
never received specific instruction from WEB to
accept ElU's quote an interpretation never
contemplated or intended by AH American.
(Def. Reply, at 8.) Again, All American did not ask for leave to amend
its position statement; rather, All American merely asked the arbitrators
to accept All American's interpretation of the disputed statements.
This distinguishes King v. Cooke, cited by All American, in
which the defendants filed an answer admitting that they were
deliberately indifferent to the plaintiff's medical condition and that
the indifference constituted cruel and unusual punishment under the
Eighth Amendment; and admitting the factual basis for the plaintiff's state law claims.
26 F.3d at 722. When the defendants filed a motion for summary judgment,
the plaintiff responded with a motion for judgment on the pleadings based
on the admissions in the answer. The defendants, realizing that they had
mistakenly admitted the plaintiff's allegations, moved for leave to amend
the answer. Id. at 722. The district court granted the
defendants' motion and the Seventh Circuit affirmed, finding that the
admissions were inadvertent and that the amendment was not prejudicial to
the plaintiff, Id. at 723-24. Here, conversely, All American
denies that it made a mistake and does not seek to change the statements
giving rise to the admission. (Def. Reply, at 8.)
Even if the arbitrators had allowed a formal amendment, moreover, the
court is uncertain the result would have been any different. All American
finds it significant that Stirling Cooke was an intermediary capable of
entering contracts, even if not an agent. However, "[t]he law generally
views the intermediary who negotiates the insurance contract as the agent
either of the insured or the insurer, not as a party pursuing its own
objectives." Feinstein v. Nettleship Co. of Los Angeles,
714 F.2d 928, 932 (9th Cir. 1983). "Whether an insurance intermediary is an
agent of the insured or an agent of the insurer is generally a question
of fact." American Ins. Corp. v. Sederes, 807 F.2d 1402, 1405
(7th Cir. 1986). Here, AH American does not claim that Stirling Cooke was
Sphere Drake's agent and, as noted, affirmatively denies that Stirling
Cooke was its own agent. On these facts, the court cannot say that All
American was denied a fair hearing merely because the panel did not deem
All American's responsive memorandum an amendment to its position
statement, or accept All American's interpretation of the disputed
C. The Effect of the Admission
Anticipating this result, All American argues that it was denied a fair
hearing because the admission regarding Stirling Cooke's lack of agency
authority is not decisive on the issue whether the parties entered into
binding contracts. All American claims that it should have been allowed to present evidence that Sphere Drake ratified the contract and/or
is estopped from denying the existence of the contract because it
accepted premium payments, approved bordereaux reports,*fn9 paid
disbursements on claims, and waited more than a year to rescind the
contracts and attempt to return the premium payments. (Def. Mem., at
19-20; Def. Reply, at 10.)
When an agent acts without authority in entering into a contract on
behalf of a principal, the principal may nonetheless ratify the contract
by retaining the benefit of the transaction or taking a position that is
inconsistent with nonaffirmance upon learning of the unauthorized
transaction. Sphere Drake Ins. Ltd. v. All American Life Ins.
Co., ___ F. Supp.2d ___, 2003 WL 22232840, at *11 (N.D. Ill. Sept. 22,
2003) (Hart, J.) See also Stathis v. Geldermann, Inc.,
295 III. App.3d 844, 858, 692 N.E.2d 798, 808 (1st Dist. 1998);
American Ins. Co. v. Meyer Steel Drum, Inc., No. 88 C 0005, 1990
WL 92882, at *4 (N.D. III. June 27, 1990)) ("[a]n acceptance of benefits
under a contract is conduct sufficient to constitute a ratification
binding on the party accepting the benefits as if it had signed the
contract"). "For ratification to occur, the principal must, with full
knowledge of the act, manifest an intent to abide and be bound by the
transaction." Stathis, 295 III. App.3d at 858, 692 N.E.2d at
808 (citing Peskin v. Deutsch, 134 III. App.3d 48, 55,
479 N.E.2d 1034, 1039 (1st Dist. 1985)).
In this case, Stirling Cooke was not acting on behalf of Sphere Drake;
it was purporting to act on behalf of All American, and All American
denied that Stirling Cooke had authority to do so. In other words, Sphere
Drake was not the "principal" capable of ratifying the acts of Stirling
Cooke. (PI. Response, at 17-18.) To the extent ratification is "part of
the law of agency," Abraham v. North Ave. Auto, Inc., No. 00 C
1764, 2001 WL 1002067, at *4 (N.D. Ill. Aug. 24, 2001), All American could not properly argue that Sphere Drake ratified Stirling
Cooke's acts and, thus, was not denied a fair hearing on that basis.
All American does not deny this. Instead, AH American argues that its
theory is not based on such agency principles but, rather, on the
"well-established tenet that a party to a contract may be held to ratify
the existence of the contract and/or be estopped from denying the
contract's validity by partial performance." (Def. Reply, at 10-11.) "A
party that accepts the benefits of an agreement is estopped from denying
the existence of that agreement." Wasserman v. Autohaus on Edens,
Inc., 202 III. App.3d 229, 238-39, 559 N.E.2d 911, 918 (1st Dist.
1990). Even assuming All American has a viable argument under these part
performance and estoppel theories, All American did not argue them to the
arbitration panel, limiting itself solely to the issue of ratification.
(Ex. K to Amer Aff., at 10-11.) Nor did All American raise either issue
in its position statement. "The failure to pose an available argument to
the arbitrator waives that argument in collateral proceedings to enforce
or vacate the arbitration award." Ganton Technologies, F.3d
2004 WL 253562. See also Hallmark & Johnson Properties, Ltd. v.
Taylor, 201 III. App.3d 512, 519, 559 N.E.2d 141, 146 (1st Dist.
1990) ("where the theory of equitable estoppel is not pleaded, it is
waived"); Sky walker Communications of Indiana, Inc. v. Skywalker
Communications, Inc., 333 F.3d 829, 831 (7th Cir. 2003) (part
performance defense waived where it was not raised before the district
court). Thus, the court cannot say that All American was denied a
fundamentally fair hearing with respect to the issues that were before
the arbitration panel.
II. Scope of Authority
Under 9 U.S.C. § 10(a)(4), an arbitration award may be vacated if
"the arbitrators exceeded their powers, or so imperfectly executed them
that a mutual, final, and definite award upon the subject matter
submitted was not made." The scope of arbitration is determined by the
arbitration agreement and the issues submitted by the parties.
Lefkovitz v. Wagner, 291 F. Supp.2d 764, 771 (N.D. Ill. 2003) (citing American Postal Workers Union,
AFL-CIO, Milwaukee Local v. Runyon, 185 F.3d 832, 835 (7th Cir.
1999)). Ail American argues that the panel improperly decided a legal
issue reserved for the courts and a factual issue that was never
presented to the panel.
A. Legal Issue
All American claims that "whether or not Stirling Cooke was legally
competent to effectuate the reinsurance transaction as an `intermediary'
acting at the specific direction of AH American is an inquiry that goes
to contract formation." (Def. Mem., at 20.) Questions of contract
formation, All American argues, are to be decided by courts, not
arbitrators. (Id. at 21.) In support of this argument, All
American cites the Seventh Circuit's decision in this case, which notes
that "[m]any appellate courts have held that the judiciary rather than an
arbitrator decides whether a contract came into being." Sphere Drake
Ins., 256 F.3d at 591. Where a dispute is about an agent's authority
to bind a principal to the contract, the court said, the issue is not
arbitrable unless the parties separately agreed to "arbitrate disputes
about whether they have agreed to the contract's substantive promises."
Id. All American claims that it never agreed to arbitrate the
issue of Stirling Cooke's legal competence to bind the six reinsurance
contracts because (1) the issue was never raised until Sphere Drake
sought judgment on the pleadings, and (2) once it was raised, AH American
"strenuously objected to the panel entertaining Sphere Drake's motion."
(Def. Reply, at 13-14.)
Sphere Drake responds that the parties did in fact agree to submit the
issue of contract formation to the arbitration panel. From the outset,
Sphere Drake contended that "the reinsurance contracts were void ab
initio, because Sphere Drake's agent and Stirling Cooke had
fraudulently conspired." (PI. Response, at 19-20.) In responding to
Sphere Drake's position statement, AH American never suggested that the
issue of contract formation was outside the panel's jurisdiction, or that
the case was not subject to arbitration. (Id. at 20.) In Sphere
Drake's view, that fact distinguishes the cases cited by All American, in which one party
resisted arbitration entirely. See, e.g., Sphere Drake Ins., 256
F.3d at 589 (Sphere Drake expressly argued that it should not be required
to arbitrate the agency issue); Sphere Drake Ins. Ltd. v. Clarendon
Nat'l lns. Co., 263 F.3d 26, 30 (2d Cir. 2001) ("[i]f the making of
the agreement to arbitrate is placed in issue . . . the court must set
the issue for trial"); N & D Fashions, Inc. v. DHJ Indus.,
Inc., 548 F.2d 722, 729 (8th Cir. 1976) (whether purchasing agent
had authority to enter into a binding arbitration agreement on behalf of
buyer was a question for the courts "because it goes expressly to the
making of the agreement to arbitrate").
All American knew that Sphere Drake challenged the validity and
existence of the six reinsurance contracts and agreed to submit the
parties' disputes regarding those contracts to arbitration. Prior to
receiving All American's position statement, Sphere Drake may not have
expressly challenged the contracts on the basis of Stirling Cooke's
authority, or lack thereof, to bind All American, but that is certainly
encompassed within the broader issue of whether the contracts were
generally valid. To be sure, All American objected to the merits of
Sphere Drake's motion and to the panel entertaining the motion before a
hearing on the evidence, but that is not the same as objecting to the
panel's authority to consider the argument at all. Compare AGCO Corp.
v. Anglin, 216 F.3d 589, 593 (7th Cir. 2000) ("[i]f a party
willingly and without reservation allows an issue to be submitted to
arbitration, he cannot await the outcome and then later argue that the
arbitrator lacked authority to decide the matter"). Thus, All American
has not established that the panel exceeded its authority in deciding
whether the parties entered into binding contracts.
B. Factual Issue
For similar reasons, All American's objection that the panel exceeded
its authority in deciding whether Stirling Cooke had authority to bind
All American is also unavailing. All American correctly notes that Sphere
Drake initially argued only that Stirling Cooke was aware that EIU did not have authority to bind Sphere Drake. (Def. Mem., at 22-23.) As
a result, All American contends, the issue of Stirling Cooke's authority
to bind All American was not "in dispute" and could not be decided by the
arbitration panel. (Id. at 23) (citing AGCO, 216 F.3d
at 593-94 (arbitrators exceeded their authority where there was strong
evidence that one party "never intended to have the arbitration clause
cover the present controversy"); Eljer Mfg., 14 F.3d at 1257
(arbitrator exceeded his powers where arbitration clause did not
authorize him to arbitrate disputes between Eljer and a third party that
was not a signatory to the arbitration agreement); Roadway Package
Sys., Inc. v. Kayser, 257 F.3d 287, 301 (3d Cir. 2001) (arbitrator
exceeded authority by deciding whether employer's discharge system lacked
due process, not whether employee's discharge was contrary to the
collective bargaining agreement as was his charge)). The court disagrees.
Sphere Drake at all times claimed that Stirling Cooke engaged in
misconduct in securing the six reinsurance contracts. In response to
statements made for the first time in All American's position statement,
Sphere Drake additionally challenged Stirling Cooke's authority to bind
All American. Under either theory, the underlying issue was whether the
six contracts were valid, an issue which the parties clearly agreed to
submit to the arbitration panel. None of the cases cited by All American
establishes that a party cannot expand its theory of recovery under a
particular issue, or that an issue is not "in dispute" if it was raised
in response to an opposing party's statement of the case. As noted, All
American never challenged the panel's authority to decide the issue of
contract validity; the company only challenged the merits of Sphere
Drake's arguments and the panel's decision to address those arguments
without first conducting a full hearing. Thus, there is insufficient
evidence to support All American's claim that the panel exceeded its
authority by deciding whether Stirling Cooke had authority to bind All
American and create valid contracts. III. Manifest Disregard of the Law
In its final challenge to the arbitration award, All American argues
that the panel exhibited a manifest disregard of the law. "When
arbitrators demonstrate a manifest disregard for the applicable law,
courts will not enforce the award." National Wrecking Co. v.
International Bhd. of Teamsters, Local 731, 990 F.2d 957, 961 (7th
Cir. 1993). See also Health Servs. Mgt. Corp. v. Hughes,
975 F.2d 1253 (7th Cir. 1992) (to vacate an arbitration award "it must be
demonstrated that the majority of arbitrators deliberately disregarded
what they knew to be the law in order to reach the result they did"). The
"manifest disregard" principle arises in two situations: (1) an arbitral
order requires the parties to violate the law; and (2) an arbitral order
"does not adhere to the legal principles specified by contract, and hence
[is] unenforceable under § 10(a)(4)." George Watts & Sons,
Inc. v. Tiffany and Co., 248 F.3d 577, 581 (7th Cir. 2001)
(Easterbrook, J.) See also Butler Mfg. Co. v. United Steelworkers of
America, AFL-CIO-CLC, 336 F.3d 629, 636 (7th Cir. 2003) ("an
arbitral decision is in manifest disregard of the law only when the
arbitrator's award actually orders the parties to violate the law").
All American claims that the panel "deliberately disregarded what the
arbitrator knew to be the law in order to reach a particular result,"
(Def. Reply, at 11) (quoting National Wrecking, 990 F.2d at
961). Specifically, the panel allegedly ignored that under Illinois law,
(1) a contract can be formed through an intermediary who is not a general
agent, and (2) "even where the requisite elements of contract formation
are not present, a binding contract may nevertheless exist based on
partial performance under theories of estoppel and/or ratification."
(Def. Mem., at 26, 27.) Even assuming this is true, however, as Sphere
Drake points out, manifest disregard of the law requires a showing that
the decision requires the parties to violate the (aw, or it exceeds the
arbitrators' authority under § 10(a)(4). This court has already
determined that the panel did not exceed its authority in issuing its decision, and All American does not
suggest that the decision requires either party to violate the law.
George Watts & Sons, 248 F.3d at 581.
All American urges that George Watts & Sons does not set
forth the exclusive test, nor overrule the pronouncements set forth in
National Wrecking and Health Servs. Mgt.
regarding the manifest disregard of law doctrine. Those cases, All
American says, require a court to vacate an arbitration award if the
arbitrator disregarded Illinois substantive law. (Def. Reply, at 12.) The
George Watts & Sons court, however, rejected that argument.
The court noted that the law on the issue had been unsettled, but
reconciled earlier cases such as the ones cited by All American as
There is, however, a way to understand "manifest
disregard of the law" that preserves the
established relation between court and arbitrator
and resolves the tension in the competing lines of
cases. It is this; an arbitrator may not direct
the parties to violate the law.
248 F.3d at 580. An error in applying substantive law does not
constitute a manifest disregard of that law. See id. ("[a]n
error of law is not a ground . . . for vacating or modifying an award");
Mollison-Turner v. Lynch Auto Group, No. 01 C 6340, 2002 WL
1046704, at *4 (N.D. Ill. May 23, 2002) ("there must be something beyond
and different from mere error in law or failure on the part of the
arbitrator to understand or apply the law"). Thus, under George
Watts & Sons, the panel's award cannot be vacated on grounds of
manifest disregard of the law.
For the reasons stated above, AH American Life Insurance Company's
Renewed Motion to Vacate (Docket No. 84) is denied. Sphere Drake
Insurance Company Limited's Motion to Strike (Docket No. 90-1) is denied as moot. Sphere Drake's request to
confirm the Final Award is granted.