The facts are interesting.  The dispute arose over the failure of the umpire and one of the party-arbitrators to disclose that they were serving as panel members in another arbitration.  The other arbitration was a dispute over some similar issues, involved related parties, and included a common witness who testified in both proceedings – in a contradictory fashion.  The federal district court found that there was a material conflict of interest and that the arbitrators’ failure to disclose this conflict of interest warranted vacating the arbitral award.

In reversing the lower court, the Second Circuit unanimously held that evident partiality as that term is used in the Federal Arbitration Act § 10(a)(2) may be found only ‘where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.  It ruled that Scandinavian Re had not met the burden of establishing that the arbitrators’ failure to disclose their role in the two arbitrations was indicative of bias and constituted a conflict of interest that should lead to vacating the arbitral award.  Their concurrent service in these arbitrations, according to the court, did not automatically suggest that they were not impartial nor did it show a predisposition to rule in a particular way in the arbitration even if the issues in the other concurrent arbitration were similar.

Even though Scandinavian Re argued that it was misled by the arbitrators’ repeated assurances to the parties that they understood themselves to be obligated to make thorough and ongoing disclosures, the Second Circuit disagreed that vacating the award was appropriate because an arbitrator failed to consistently live up to his or her announced standards for disclosure or to conform in every instance to the parties’ respective expectations regarding disclosure. 

The Court observed, it would have been better for the arbitrators to have disclosed the fact of their involvement in the other case but that the remedy of vacating the award was not necessary. Despite the outcome in this case, the court did offer the following comment on the importance of timely and full disclosure by arbitrators:  Disclosure not only enhances the actual and apparent fairness of the arbitral process, but it helps to ensure that that process will be final, rather than extended by proceedings like this one.

Scandinavian Reinsurance Company Limited v. Saint Paul Fire and Marine Insurance Company, Docket No. 10-0910-cv, 2012 U.S. App. LEXIS 2082 (2nd Cir. Feb. 3, 2012), rev’g 732 F. Supp. 2d 293 (S.D.N.Y. 2010).

Ava Kanner

The Judge was not persuaded by the objections made by other Lehman officers who argued that the release of insurance funds to effect the settlement might not leave enough money to cover settlements of other investor lawsuits (see In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555).

The settlement still must be approved by the federal judge overseeing the class action case.

For further information, see: http://www.reuters.com/article/2011/10/19/lehman-idUSN1E79I0YB20111019

David Cherepacha

Seven former directors – from Structured Asset Securities Corp, Lehman’s mortgage-backed securities issuer – are objecting to a proposed settlement of $90 million to settle a class action investor lawsuit against Lehman’s former CEO and 13 other executives, to be funded by a directors’ and officers’ liability insurance policy.   The objecting directors are concerned that the settlement may not leave sufficient insurance proceeds to settle a separate class action lawsuit brought against them.    The insurance policy reportedly has limits of US $250 million.

The dispute will come before a U.S. Bankruptcy Court Judge, who has been asked to authorize the release of the funds (In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555).  

The case gives rise to difficult priority and equity issues among insured directors and officers given that there may well not be sufficient insurance limits under the policy to defend and settle all the outstanding claims.  For this reason, it will be interesting to see how the Court resolves these conflicting claims to the available insurance proceeds. 

For further information, see: http://www.reuters.com/article/2011/09/09/us-lehman-idUSTRE78801420110909

 David Cherepacha

The program included the following presentations:

“Traditional Surveillance”
by David Cherepacha

“Tracking Plaintiff’s Online – Surveillance in the 21st Century”
by Ava Kanner

“PIPEDA, Surveillance Guidelines and Privacy Issues”
by Jodi Skeates, Legal Counsel, Canadian Life and Health Insurance Association

The program provided an overview of the current law relating to:

• Use of surveillance cameras within the business context and related privacy obligations
• Retaining investigators
• Use of surveillance and investigative evidence in the litigation context
• Use of Facebook and other social media inside and outside of the workplace
• Social media as evidence in litigation
• Motions for production of social media pages
• Uses of social media in wrongful dismissal cases

The presentations can be found on our Resources page.

The appellant company agreed that it was obligated to provide an indemnity to the former directors under its By-laws and Section 136 of the Ontario Business Corporations Act.  However, it argued that its obligation to pay legal fees did not arise until after the conclusion of the lawsuit.   The action was still at the pleadings stage.  The former directors sought an order requiring the company to advance an indemnity for legal fees from time to time.

Justice Goudge for the Court of Appeal stated, in part:

Section 136(2) of the OBCA allows the corporation (subject to a specified repayment condition) to pay advances of the legal expenses that the corporation may indemnify under s. 136(1). More importantly, s. 136(4.1), under which these proceedings are brought, allows the corporation to do the same (with the court’s approval), if the action is brought by or on behalf of the corporation itself and the individuals are made parties to it by virtue of their association with the corporation. Thus, s. 136 provides for advancement of the same legal costs, charges and expenses that may be indemnified by the corporation. In short, the legislature has made advancement a part of the statutory indemnification scheme, recognizing the reality that requiring an individual to fund his or her costs of litigation until its conclusion before being provided with indemnification would seriously impair the objective of indemnification itself.

From a directors’ and officers’ insurance perspective, the decision is interesting because the Court of Appeal expressly rejected the appellant’s argument that the motions judge should have considered whether there was proof of an inability on the part of the former directors to pay for the litigation without the advances and, in particular, the presence of insurance to fund the former directors’ defence.

David Cherepacha

W3i Mobile, a provider of mobile content to cellular phone users, sued its insurer for failing to defend and provide an indemnity for the expenses associated with two class actions brought by users of its mobile content.   The lawsuits alleged that W3i Mobile billed cellular telephone users for unauthorized mobile content in violation of various state consumer protection statutes, among other allegations.

The Court of Appeals found that the products exclusion in the directors and officers section of the policy applied to preclude coverage for the claims.   This exclusion provided that the insurer was not liable for any claims,

. . . alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving . . . any goods or products manufactured, produced, processed, packaged, sold, marketed, distributed, advertised or developed by [W3i Mobile].

The Court of Appeals noted that the class action claims alleged that customers were billed erroneously or without authorization for mobile content, being W3i Mobile’s “product”.   The Court rejected M3i Mobile’s characterization of the claims as being merely billing disputes.  In particular, the Court emphasized the words “in any way involving” in the products exclusion clause wording.

Sometimes, broadly worded exclusion clauses are “read down” and/or are found to be ambiguous by courts.   However, this decision is a good example of an American appeal court giving effect to a broadly worded exclusion clause.

David Cherepacha

The issue before the Federal Court of Appeal was whether Captains and Chief Engineers exercised “management functions” within the meaning of section 3(1) of the Canada Labour Code, as doing so would exclude them from unionization. 

The case before the Federal Court of Appeal raised important questions on the extent of a captain’s management powers in the age of technology. In the past, ship captains were no doubt the de facto managers of their vessels. Onboard a ship sailing at sea, there was no greater authority than the captain himself. The captain  had  the  power to discipline employees, enforce company policies, and make autonomous decisions.

With the advent of new technology, and especially with improvements in communications technology, captains are now connected more readily to shoreside management. This in turn, gives shoreside management greater control over the actions of a captain at sea.

In this new age of technology, are the core management powers of captains diminished? Or are their fundamental roles as the highest authority onboard a vessel unchanged? The answers to these questions not only have significant implications for labour relations but also for the shipping industry in this country.

In the result, despite our able and thorough submissions, the Federal Court of Appeal dismissed the application for judicial review, allowing the Board’s order permitting the unionization of ship Captains and Chief Engineers to stand.

Randy Ai

The Board allowed First Capital’s appeal and concluded that the development was not a conversion under the Growth Plan as contemplated by Policy 2.2.6.5 and that it conformed to the Toronto Official Plan, including sections 2.2.4 and 4.6.3.

The decision provides further direction into the interpretation of the undefined term “major retail” in the Growth Plan (beginning at page 6). The Board cited the 1780 Markham Road case [http://www.omb.gov.on.ca/e-decisions/pl070485-Jan-03-2008.pdf] where “major retail” was defined as constituting “big boxes” of approximately 125,000 square feet, and concluded that, in this case, the portion of expansion onto “employment lands” which totals approximately 73,700 square feet was not major retail under the Growth Plan.

Also noteworthy (beginning at page 10) is the Board’s conclusion that OP policy 4.6.3 does not restrict large scale, stand alone retail stores to existing lots with direct frontage on major streets; rather, the policy is met where the development proposal as a whole has access to a major street.

The City is considering amendments to its employment lands policies [http://www.toronto.ca/legdocs/mmis/2010/pg/bgrd/backgroundfile-29918.pdf]. Stay tuned for more…

Isaiah Banach

After the demise of the company, an action was begun against Frank Dunn and Douglas Beatty alleging that they had committed certain Wrongful Acts, a term defined in the insurance policy issued by Chubb.  The policy was a claims made policy and covered the 2001 period.  There were allegations that wrongful acts were committed by Dunn and Beatty in both 2001 and 2003. 

The insurer Chubb agreed to pay defence costs for Dunn and Beatty for proceedings relating to the 2001 conduct but refused to cover the full defence costs for other proceedings arising out of both the 2001 and 2003 conduct.  Chubb argued that it was not responsible for the defence costs that related to the 2003 conduct.  It was an important issue because the policy that covered the 2003 conduct had been rescinded by Chubb.

The issue before the Court arose out of a special endorsement to the policy that required Chubb to pay 90% of defence costs where there was a claim that included both covered and uncovered losses.  Chubb argued that the claims still had to fall within the period of 2001 policy.

The Application’s Judge and the Court of Appeal agreed that the endorsement in the policy applied.  The Court relied on the plain language of the endorsement and held that there was no condition that the whole claim relate to the 2001 policy period for the 90% allocation of defence costs to apply.  

The words in the policy prevail!

Ava Kanner

According to Towers Watson, the trend towards increasing policy limits can be attributed to an increased potential for litigation and a heightened concern over the threat of regulatory investigations.    According to the survey, 21% of respondents indicated that they had increased their D&O limits as compared to their prior D&O policy.  (In a 2008 survey, only 12% of respondents had reported an increase to their limits over the previous year.)   A further 75% of respondents said that their limits had stayed the same (as compared to 86% in the 2008 survey).   Only 3% of respondents said that they had decreased their limits.

Other survey highlights include:

• 54% of respondents said that they had not conducted an independent review of their D&O program within the past two years.

• 35% of private organizations bought excess Side A coverage. 

• More than 80% of public company respondents purchased excess Side A coverage.

• 35% of non-profit and 22% of private company respondents said they were not sure how their D&O program was structured.

A copy of the press release issued by Towers Watson can be found at: http://www.businesswire.com/news/home/20110222006279/en/Growing-Number-Companies-Increasing-Directors-Officers-Liability

David Cherepacha