The U.S. District Court for the Middle District of North Carolina has compelled arbitration over a party’s objection that the dispute at issue was not within the scope of the arbitration clause and that arbitration was precluded by the opposing party’s failure to seek it sooner. The court concluded that a merger clause in the contract amendment containing the arbitration clause and the broad language of the arbitration clause rendered the dispute about a separate agreement incorporated into the amendment and subject to the arbitration clause and ruled that there was no actual prejudice to preclude the invocation of the arbitration clause.
In concluding that delay did not preclude arbitration, the court found significant the fact that the party opposing arbitration had agreed in a Rule 26(f) report to allow the opposing party to file a motion to compel, which greatly undermined the party’s prejudice argument.
North Carolina Mutual Life Insurance Co. entered into a coinsurance agreement with Max Re Ltd. pursuant to which Max Re and later a successor agreed to reinsure certain liabilities in North Carolina Mutual policies. North Carolina Mutual and Max Re’s successor subsequently entered into a novation agreement with Port Royal Reassurance Company SPC Ltd. pursuant to which Port Royal replaced Max Re’s successor as reinsurer. The parties also entered into an amendment to the coinsurance agreement that contained an arbitration clause and a merger clause related to the coinsurance agreement. The amendment also incorporated a trust agreement related to the reinsurance obligations of the various parties to the amendment.
In September 2016, North Carolina Mutual filed suit claiming mismanagement and misappropriation of trust assets in violation of the trust agreement. The parties engaged in settlement negotiations, and several parties reached an agreement in March 2017. The court then stayed the remaining portion of the action until September 2018. The settlement agreement, however, fell apart and the court lifted its stay in April 2018. North Carolina Mutual subsequently filed an amended complaint, which Port Royal answered, that invoked the arbitration clause as an affirmative defense. More than a year later, the parties filed their Rule 26(f) report. The parties agreed in that report that Port Royal could file a motion to compel arbitration by a certain date. Port Royal thereafter filed its motion to compel.
North Carolina Mutual opposed Port Royal’s motion, arguing that (1) its claims against Port Royal were not within the scope of the arbitration clause and (2) Port Royal was in “statutory default” and could not invoke the arbitration clause because years had elapsed since the action was filed.
The Middle District of North Carolina rejected both arguments.
First, the court concluded that North Carolina Mutual’s claims, which related to the trust agreement, were within the scope of the amendment’s arbitration clause. That clause was broad and encompassed “any dispute or claim arising out of or relating to” the parties agreement, which included the trust agreement because of the amendment’s merger clause, which evidenced an “intent … to ‘roll up’ several separate agreements [including the trust agreement] into one integrated contract.”
Second, the court explained that in order to preclude arbitration based on “statutory default,” the party objecting to arbitration had to establish “actual prejudice.” The court analyzed two factors to determine whether such prejudice existed: (1) the degree of Port Royal’s delay in seeking arbitration; and (2) the nature and extent of Port Royal’s litigation activities. Although the court recognized that this action had been pending for years, it noted that the case’s history included a settlement agreement and a stay. The court also emphasized that North Carolina Mutual agreed in the Rule 26(f) report that Port Royal could file a motion to compel arbitration, which “greatly undermine[d] [North Carolina Mutual’s] claim of prejudicial delay.” Port Royal’s litigation activity, meanwhile, was limited to filing answers, participating in a pretrial conference, and moving to compel.
The court also rejected North Carolina Mutual’s argument that the court should deny arbitration because North Carolina Mutual would have to prosecute litigation and arbitration simultaneously if the court compelled arbitration. The court noted that North Carolina Mutual “took on that risk when it brought its claims in federal court while being party to a contractual agreement with a mandatory arbitration provision.”
North Carolina Mutual Life Insurance Co. v. Stamford Brook Capital, LLC, No. 1:16-cv-01174 (M.D.N.C. Apr. 10, 2020).
