Locke Lord QuickStudy: Ex-Parte Communications in Violation of Arbitration Agreement Void Arbitration Award

In 1964 the Four Seasons released a song called ‘Silence is Golden.’ More than 50 years later, that may still be a good rule to follow in arbitrations.

The United States Court of Appeals for the Sixth Circuit recently considered a question as to the propriety of ex parte communications between a party and the party-appointed arbitrator. Applying Michigan law, the Sixth Circuit held that ex parte communications void an award if they violate the parties’ arbitration agreement. Star Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 15-1403, 2016 BL 267734 (6th Cir. Aug. 18, 2016).

In that case, National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) reinsured Meadowbrook Insurance Group (“Meadowbrook”) pursuant to a Treaty which contained an arbitration clause requiring that any dispute arising out of the parties’ agreement be submitted to arbitration subject to Michigan law. Id. at * 2-3. A dispute arose and Meadowbrook demanded arbitration. Id. at *3.

During the parties’ organizational meeting, it was determined that ex parte communications would cease after the filing of the first pre-hearing brief. Id. at *3. A scheduling order followed, which was subsequently amended, memorializing that agreement. Id. *4. Although both the scheduling order and amended scheduling order clearly provided when ex parte communications would cease, neither order contained any provision addressing when, if at all, ex parte communications could resume.

Following the arbitration hearing, the panel issued an interim final award in National Union’s favor essentially resolving all substantive issues, leaving open only questions regarding damages. Id. at *6. Documents submitted in support of National Union’s request for attorneys’ fees (i.e. counsel’s timesheets) revealed that National Union’s party-appointed arbitrator had communicated on an ex parte basis with National Union’s counsel on three separate occasions before the final award issued. Id. at *8. A number of other issues arose and Meadowbrook sought to have the interim award and final awards vacated by the United States District Court for the Eastern District of Michigan, who confirmed the awards. Id. at *11-12.

On appeal, Meadowbrook argued that the District Court erred when it confirmed the awards because of the improper ex parte communications and the Court of Appeals agreed. Id. at *13. Under Michigan law, an arbitration award can be vacated if an arbitrator engaged in “misconduct prejudicing a party’s rights.” Id. at * 13 (citing Mich. Ct. R. 3.602(J)(2)(b)). The Court held that ex parte communications with an arbitrator are grounds to vacate an arbitration award if those communications violate the parties’ arbitration agreement, irrespective of the prejudicial effect. Id. at * 17. Since the parties’ scheduling order forbade ex parte communications after the filing of the first pre-hearing brief, the awards were void. Id.

The Court of Appeals rejected National Union contention that it was common practice in reinsurance arbitrations for parties to communicate with their party-appointed arbitrator after the panel issues a dispositive ruling on the merits, concluding that the parties’ arbitration agreement, as set forth in their scheduling orders, was not ambiguous on the subject of when ex parte communications must cease. Accordingly the Court of Appeals reversed the District Court and vacated the interim and final arbitration awards. Id. at *17.