Court Finds that P&I Club Member Must Play by the Rules

Types : Alerts

This guest post is authored by Peter Tonge, our 2017-2018 Fall-Winter Maritime & Transportation Intern.

In TransAtlantic Lines LLC v. American Steamship Owners Mutual Protection and Indemnity Association, Inc., ____F.Supp. 3d___ (2017), 2017 A.M.C. 1293 (SDNY, May 30, 2017), the dispute involved the American Club’s partial denial of insurance coverage to one of its members (TransAtlantic) for certain losses deriving from a maritime incident.  The American Club Rules stipulate that a Member can appeal a denial of coverage before the association’s Board of Directors, which is primarily composed of officers and representatives of the American Club’s members.  The Rules also provide that the decision is intended to be “final and binding” and can only be reviewed in a federal court under the deferential “arbitrary and capricious” standard of review.

The Board of Directors denied TransAtlantic’s appeal, issuing a 22-page decision.  TransAtlantic proceeded to file suit in the Southern District of New York, seeking de novo review of the decision to deny coverage, and bringing various claims against the defendants in contract and in tort, as opposed to a single challenge of the Board’s decision.  They alleged that the appeal procedure was “fundamentally unfair” for four reasons:

1. The Board had a financial interest in the decision, making it an impermissibly biased decision-maker.
2. The ADR procedure violated the American Club by-law which prohibits directors from acting upon a claim in which they have an interest.
3. It was “unlikely” that the Board meaningfully considered the appeal, since the claim was adjudicated at a regular Board meeting without oral argument.
4. The Board members may not have taken an oath of impartiality and failed to disclose their financial and personal interests.

TransAtlantic also argued that the ADR procedure violated public policy under New York state law.

The court declined TransAtlantic’s request for de novo review of the denial of coverage and rejected all of TransAtlantic’s above arguments. Significantly, the court referred to at least two previous court decisions in the Southern District that held American Club board hearings to be voluntary ADR proceedings that are subject to a deferential standard of review.[1] While the court referred to the P&I Club’s appeal process as a “somewhat unusual” ADR process, the court agreed that the American Club’s hearings “bear all the hallmarks of a voluntary ADR proceeding”. It was also noted that the Club Rules stipulated that decisions should be “final and binding”, subject to review in federal court under a deferential “arbitrary and capricious” standard of review. The court determined that no part of the Board’s justification for its decision was either arbitrary or capricious.

Further, the court held that TransAtlantic’s “fundamental fairness” arguments ignored the fact that any supposed bias was inherent to the ADR procedure to which members voluntarily agree when they join the association. By participating in the appeal proceedings without raising any complaint to the Board, TransAtlantic effectively waived its right to object to the decision.  The court also found the allegation that the Board did not meaningfully consider the appeal to be completely unfounded, given the fact that the Board took a month to consider the appeal before issuing its 22-page decision. Finally, TransAtlantic entered into an agreement that made no provision for Board members to have to take an oath of impartiality or disclose their financial or personal interests. The court reasoned that these are “the kind of niceties” that ADR procedures need not provide.

Regarding TransAtlantic’s argument that the Board decision violated public policy, the court held that neither part of the two-part test under New York law were satisfied, as is necessary for the public policy exception to prevail. Namely, the law did not prohibit, in an absolute sense, the matter decided by the arbitrator, nor did the decision violate a “well-defined constitutional, statutory or common law of the state.”

The court also denied TransAtlantic’s request to defer ruling on the American Club’s motion for summary judgment and allow discovery into the Board hearing. It was held that post-arbitration discovery was available only in limited circumstances and, in order to take discovery from the ADR panel itself, the litigant would have to provide “clear evidence of impropriety,” for example, bias or corruption. The court found that TransAtlantic had failed to do this.

Therefore, the court granted the American Club’s motion for summary judgment dismissing the appeal, thus, upholding the ADR decision, denying discovery and dismissing the complaint. The court’s decision makes it clear that a party to an ADR procedure cannot attack the very same procedure to which they knowingly and voluntarily agreed. It also reaffirms the unwillingness of courts to set aside decisions made in voluntary ADR proceedings.

[1] See Progress Bulk Carriers v. Am. S.S. Owners Mutual Prot. & Indem. Ass’n, Inc., 2013 AMC 1628, 1634-37, 939 F. Supp.2d 422, 427-29 (S.D.N.Y. 2013), aff’d, 2 F. Supp.3d 499 (S.D.N.Y. 2014)