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Keywords

contractbreach of contractarbitrationstatuteappealarbitration clause
contractarbitrationprecedentappealarbitration clausecondition precedent

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Selcke v. New England Ins. Co., 995 F.2d 688

Facts

Centaur, an insolvent insurance company, brought a breach of contract suit against NERCO, claiming over $4 million under four reinsurance contracts. NERCO acknowledged owing most of this amount but countered that Centaur owed it and its affiliates over $33 million under other contracts, asserting a right to set off the amounts owed. The contracts included an arbitration clause for disputes over interpretation, which became the focal point of the legal proceedings.

Centaur claims that NERCO owes it more than $4 million under four reinsurance contracts. NERCO admits owing most of this amount to Centaur but claims that Centaur owes it and its affiliates more than $33 million under other reinsurance contracts and that NERCO is entitled to set off what it owes Centaur against what Centaur owes it.

Issue

Whether the dispute over NERCO's claimed right to setoff is subject to arbitration under the contracts' arbitration clause.

Whether the dispute over NERCO's claimed right to setoff is subject to arbitration under the contracts' arbitration clause.

Rule

The arbitration clause in the contracts stipulates that any irreconcilable differences regarding the interpretation of the agreement must be submitted to arbitration, and Illinois law implies a right of setoff in contracts with insolvent insurance companies.

Each of the four contracts on which Centaur's suit is based contains an arbitration clause which provides (with immaterial variations in wording and punctuation) that 'should an irreconcilable difference arise as to the interpretation of this Agreement, it is hereby mutually agreed that, as a condition precedent to any right of action hereunder, such difference shall be submitted to arbitration.'

Analysis

The court determined that the dispute regarding the setoff was indeed an interpretive disagreement under the arbitration clause, despite the source of the implied term being statutory. The court reasoned that the right of setoff, while created by statute, is an implied term of the contract and thus falls within the scope of arbitration. The court emphasized that the nature of the dispute—whether it arises from express or implied terms—should not affect the parties' agreement to arbitrate.

The court determined that the dispute regarding the setoff was indeed an interpretive disagreement under the arbitration clause, despite the source of the implied term being statutory.

Conclusion

The court reversed the district court's order denying the stay pending arbitration and instructed that the matter be submitted to arbitration.

The order denying the stay pending arbitration is reversed, with instructions to grant it.

Who won?

NERCO prevailed in the appeal because the court found that the dispute over setoff was arbitrable under the terms of the contracts.

NERCO prevailed in the appeal because the court found that the dispute over setoff was arbitrable under the terms of the contracts.

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