Reinsurance agreements, and more frequently, liability and property insurance policies issued to sophisticated insureds, contain arbitration agreements. When parties enter into agreements to arbitrate their disputes, they usually recognize that they are forgoing a jury trial, that the hearing will be more limited than a trial in state or federal court, and that their right to appeal is limited severely.
There are other limitations, however, that parties should consider before entering into an agreement to arbitrate. One of those limitations relates to discovery, and the Second Circuit ruled last week that a party may not obtain discovery from a non-party to the arbitration. See Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, No. 07-1197-cv, slip op. at 2 (2d Cir. Nov. 25, 2008).
In complex arbitrations, the parties frequently seek pre-hearing discovery. Often, that discovery will need to include documents from a person or entity who is not a party to the arbitration. The Federal Arbitration Act (“FAA”) does not allow such discovery. Section 7 of the Act provides:
The arbitrators selected either as prescribed in this title or otherwise, or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case
Therefore, under the FAA, the only time an arbitrator may issue a subpoena is for the hearing on the merits.
In many cases, parties routinely obtain discovery from third-parties. This approach is consistent with one of the goals of arbitration – to resolve the matter efficiently. If a party cannot obtain documents from a third-party until the hearing, then when the third-party produces the documents at the hearing, the proponent of the evidence may seek an adjournment of the hearing in order to review the new paper.
Nevertheless, the Second Circuit recently ruled that a party in arbitration may not seek discovery from a third-party. In Life Receivables Trust, the court held:
This appeal places squarely before us a question that has divided the circuits: Does section 7 of the Federal Arbitration Act, 9 U.S.C. § 7, authorize arbitrators to compel pre-hearing document discovery from entities not parties to the arbitration proceeding? The Eighth Circuit has held that it does, see In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir. 2000); the Third Circuit has determined that it does not, see Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 2004); and the Fourth Circuit has concluded that it may — where there is a special need for the documents, see Comsat Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275 (4th Cir. 1999). Like the Third Circuit, we hold that section 7 does not enable arbitrators to issue pre-hearing document subpoenas to entities not parties to the arbitration proceeding, and therefore reverse the order of the United States District Court for the Southern District of New York (Owen, J.).
Now there is a clear split in the Circuits on this question. Until the Supreme Court resolves the split, or Congress amends Section 7 of the FAA, then the right to pre-hearing discovery from third-parties will vary, depending on where you are litigating.
If you or your client is evaluating whether to resolve disputes by arbitration, the right to discovery, and the scope of discovery in arbitration, is an important consideration.