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Third Circuit Clarifies the Roles of Court and Arbitrator
     A trash removal business in New Jersey needed new workers’ compensation. It entered into a Reinsurance Participation Agreement with a captive insurance group, believing, as they say, that this agreement provided true workers’ compensation insurance. In fact, it was a retrospective reinsurance treaty. The agreement contained an arbitration provision. The ensuing dispute played out in South Jersey Sanitation Co., Inc. v. Applied Underwriters Captive Risk Assur. Co., Inc. (3d Cir. October 25, 2016).

     South Jersey sued Applied Underwriters for fraud, seeking monetary damages and rescission of the contract. Applied moved to compel arbitration of the dispute, pursuant to the arbitration provision. South Jersey opposed that move, asserting that the court must bar enforcement of the arbitration provision because it is part of a contract allegedly procured by fraud. The Third Circuit disagreed and ordered arbitration.

     Applying the Federal Arbitration Act, the Court noted that the claim of fraud in the inducement addressed the contract as a whole, not the arbitration provision specifically. The provision is valid and enforceable. It will be up to the arbitrator to decide the merits of South Jersey’s fraud and monetary damage claims.  

Editor’s Note:  What if the arbitrator decides that the contract should be rescinded - does that not also rescind the arbitration provision?

© November 2016, Law Offices of John C. Lane 

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