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First Circuit Highlights The Importance of Carefully Crafted Arbitration Clauses

by ~ Michael Mullins (Email) (Web Site) ~ and ~ Ashley Harrison (Email) (Web Site)

Reinsurance arbitrations are becoming increasingly contentious not only with respect to substantive issues, but also with respect to procedural concerns. In Fantastic Sams Franchise Corp. v. FSRO Assoc. Ltd., 683 F.3d 18 (1st Cir. 2012), the U.S. Court of Appeals for the First Circuit addressed one such procedural issue: whether an arbitration could involve more than two parties.


Fantastic Sams is a franchisor of hair salons. It entered into thirty-five licensing agreements with “regional owners located across the United States, and each of those agreements contained an arbitration provision. The regional owners, in turn, entered into separate licensing agreements with the individual owners of particular Fantastic Sams salons.

A dispute subsequently arose between Fantastic Sams and its regional owners. While the parties agreed that the dispute was subject to arbitration, they could not agree on the form of that arbitration.

The regional owners had previously formed a non-profit corporation, the Fantastic Sams Regional Owners Association (the “Association), to promote their business interests. Rather than demand scores of individual arbitrations with the franchisor, the regional owners, acting collectively through the Association, demanded a single arbitration against the franchisor. In response, the franchisor filed a petition in federal court pursuant to the Federal Arbitration Act to stay the arbitration and to compel each regional owner to arbitrate its claims on an individual basis.

The Arbitration Arguments

Each of the franchisor-regional owner contracts contained a broad agreement to arbitrate “any controversy or claim arising out of or relating to this Agreement or with regard to its interpretation, formation or breach or any other aspect of the relationship between the parties. In the ten oldest of these agreements (those executed in or before 1988), this broad grant of arbitration was the only operative language. In the remaining twenty-five agreements (all executed after 1988), however, the arbitration provisions contained additional caveats, including a prohibition on certain forms of arbitration (“no arbitration shall be conducted on a class-wide basis), and a positive expression of the parties intent concerning the form of arbitration (“any arbitration  shall be of [regional owner’s] individual claim only).

The Broad Grant Of Arbitral Authority

In 2011, the federal district court in Boston held that when “the arbitration clause at issue is broad in scope, such as where it provides for arbitration of ‘any kind of controversy pertaining to the contract, the question of whether the parties had authorized an action like that of the Association was a decision for the arbitrators -- not the court -- to make. In other words, whether the parties had agreed to an association-wide arbitration was “a matter of contract interpretation which the parties have agreed to submit to arbitration. Consequently, for the arbitration agreements that contained no class-wide prohibition and no positive statement of the parties intent, the franchisor’s motion to compel individual arbitrations was denied.

On appeal, the franchisor argued that the U.S. Supreme Court’s decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), requires express consent by the parties to proceed with a class-wide arbitration. Similarly, the franchisor argued that Stolt-Nielsen requires an express contractual provision allowing association-wide arbitration in order for the court (or arbitration panel) to permit that form of arbitration.

The First Circuit held that the franchisor was reading Stolt-Nielsen too broadly, because in Stolt-Nielsen the parties had stipulated that their arbitration was unambiguously silent on the issue of class arbitration. In other words, the agreement in Stolt-Nielsen was not silent “merely in the sense that the agreement made no express reference to class arbitration, but silent because “the parties were in complete agreement regarding their lack of intent.

In contrast, the franchisor and the Association “vigorously dispute both [the arbitration provision’s] meaning and the intentions underlying it. The Court found it “conceivable that the arbitrators might find more than mere silence in the arbitration agreements broad grant of authority, because “additional evidence could reveal the [post-1988] change in language reflects a conscious choice by the parties to exclude some forms of arbitration, available prior to 1988, after that date. Moreover, “there may be other evidence of intent presented to the arbitrators, such as industry practice.

In affirming the District Court’s decision, the First Circuit joined the Second and Third Circuit Courts of Appeal in holding that Stolt-Nielsen does not require “express contractual language evincing the parties intent to arbitrate collectively. The result is that broad arbitration agreements, without concomitant caveats or clawbacks, will likely result in arbitrators (rather than a court) determining the form that an arbitration will take. Moreover, such an arbitral determination will likely be accompanied by discovery, and evidence of industry custom and practice, to investigate whether any implicit intent concerning the form of arbitration can be ascribed to the parties.

The Class-Wide Prohibition

Because of the express intention of the parties (discussed below), neither the District Court nor the First Circuit relied on the contract language contained in some of the agreements providing that “no arbitration shall be conducted on a class-wide basis. But the Association’s arguments (and the judicial reaction to those arguments) is instructive. For example, the First Circuit could not “say as a matter of law that the regional owners “associational action in this case is equivalent to a class action, because the Association did not seek to represent any absent parties or parties who were not signatories to at least one contract with the franchisor. Rather, association membership was comprised exclusively of regional owners. Moreover, the confidentiality of the arbitration could be maintained, because there was no need for the arbitrators to provide public notice to certify a class. Thus, while the First Circuit was not called upon to decide the issue, it appears that the court was persuaded by the Association’s attempt to argue creatively around the “class-wide prohibition.

The “Individual Claim Mandate

Unlike the parties class-wide prohibition, their positive expression of intent (“any arbitration  shall be of [regional owner’s] individual claim only) afforded the court -- and counsel for the Association -- little room within which to maneuver. The District Court found the clause to “manifest the signatories clear intent that any particular arbitration proceeding should address a regional owner’s individual grievance only. The Association did not appeal this portion of the District court’s opinion.

Perhaps most remarkable about the parties positive statement of intent is the relative speed with which the franchisor was able to enforce it. It took only seven weeks from the date the franchisor filed its motion to compel individual arbitrations to the date the District Court granted its motion. Moreover, the court applied the terms of the contract as written, without requiring discovery into the parties intention or the industry’s custom and practice. An arbitration panel likely would not have dispatched the motion nearly as quickly or efficiently.

Reinsurance Implications

Reinsurance contracts typically contain broad agreements to arbitrate “any controversy. Consequently, one can imagine that a group of companies (e.g., a group of participating reinsurers on a subscription-based treaty) could demand a multi-party arbitration such as the one the Association demanded in Fantastic Sams. If the reinsurance contract’s broad grant of authority is unaccompanied by additional language addressing the breadth of the proceeding, parties could find themselves litigating a procedural sideshow rather than the merits of their case. There are, however, model arbitration clauses available in the reinsurance market that expressly address the scope of arbitration. See, e.g., Brokers & Reinsurance Markets Association, Arbitration Clause 6A (“If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party.); 6N (“If more than one reinsurer is involved in arbitration where there are common questions of law or fact and a possibility of conflicting awards or inconsistent results, all such reinsurers shall constitute and act as one party.). Parties to a reinsurance contract should consider including such express clauses within their contracts. Doing so may eliminate at least one point of contention from the arbitration process.

The Fantastic Sams decision reminds contracting parties to memorialize their expectations concerning the form of arbitration they envision. It also highlights an arbitration clause that is likely to move parties expeditiously into an arbitration aimed at the substance of their dispute, rather than bogging them down in court proceedings (or arbitration-ordered discovery) directed at their procedural expectations.The quality of these hermes birkin bag,replica bvlgari watches,replica porsche design watches and porsche design replica watches are excellent.

Michael Mullins is a partner in the Boston office of Day Pitney LLP. Ashley Harrison is an associate in the firm’s Hartford office. They can be reached at and, respectively.

 2012 Day Pitney LLP. All rights reserved.

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