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September 30, 1992



The opinion of the court was delivered by: CHARLES S. HAIGHT, JR.



 In this action, plaintiffs are American insurance companies and retroceded reinsurers of risks covered by the defendant reinsurer, a Venezuelan company. Two casualty claims submitted by the insured have given rise to disputes between plaintiffs and defendant with respect to the parties' rights and obligations under the reinsurance policy between them.

 Invoking this Court's diversity jurisdiction, 28 U.S.C. § 1332(a)(2), plaintiffs seek declaratory relief, 28 U.S.C. § 2201, that they are not liable on one of the casualties, and are entitled to the return of monies they paid to defendant on the second.

 Defendant now moves under the Federal Arbitration Act, 9 U.S.C. §§ 1, 3 (the "Arbitration Act"), and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 U.S. 2517, T.I.A.S. No. 6997, codified at 9 U.S.C. §§ 201-207 (the "New York Convention"), *fn1" to stay the action pending arbitration. Plaintiffs cross-move to enjoin defendant from proceeding with arbitration.


 Petroleos de Venezuela ("PDVSA") is an oil and gas exploration and development company owned by the Venezuelan government. PDVSA sought insurance from a group of Venezuelan insurance companies (the "direct insurers"). In addition to marine hull and pollution risks, the direct insurers covered the risk of a surface blowout of a drilling site. The direct insurers reinsured their risk with defendant C.A. Reaseguradora Nacional de Venezuela ("RNV"). RNV decided to retrocede this risk through a London based broker, Sedgwick Marine and Cargo Ltd. ("Sedgwick"). *fn2" Sedgwick placed ninety percent of this risk in the London reinsurance market. The remaining ten percent was placed in the American reinsurance market through an affiliate of Sedgwick, Fred. S. James & Co., Inc. ("James"). James placed the risk with New York Marine Managers, Inc. ("NYMM"), which acted as the underwriting agent for plaintiffs. *fn3" Beginning in 1983, plaintiffs entered into a series of one year retrocession agreements with defendant. Shortly before each agreement was entered into, NYMM and Sedgwick would discuss the terms of coverage. On the basis of these discussions, Sedgwick would then present NYMM with an insurance application or "slip". A slip is a broad outline of an insurance agreement. As is the practice in the insurance industry, the gaps in the slip were filled in by a more detailed document, known as the "policy," issued subsequently and also sent by Sedgwick or James to NYMM to be signed.

 The dispute in the case at bar concerns the agreement providing coverage for the year 1989. NYMM signed the slip for the 1989 coverage on February 16, 1988. On May 19, 1988 the parties agreed to Endorsement No. 6, which among other things contains the London Following Clause. The London Following Clause provides:

 This Insurance is subject to the same terms and conditions as London Underwriters' Policies and it is agreed, with or without previous notice, to follow the leading London Underwriters in regard to alterations, extensions, additions, endorsements and attaching and expiry dates and also in regard to survey and settlement of claims and returns, whether liable or not liable, even if settlement is made 'without prejudice' or on 'ex gratia' basis.

 Murphy Reply Declaration Ex A. at 3.

 The policy in question was signed on August 31, 1988. It contains the phrase "Subject to Facultative Reinsurance Agreement" ("FRA"). According to RNV, this phrase referred to an agreement entered into 1977 by PDVSA, the direct insurers, and some London based reinsurers. The FRA contains administrative provisions, including timing of payments, provisions for letters of credit, and an arbitration clause. Wood Declaration P 7.

 The arbitration clause is contained in Article XVII of the FRA, which provides in relevant part:

 Any question or dispute arising between the contracting parties concerning the interpretation of this Reinsurance Agreement, which cannot be otherwise arranged shall be settled by arbitration in London, England.

 Each party shall appoint, within thirty (30) days after the arbitration is required, an Arbitrator, and the Arbitrators shall appoint an Umpire. The said Arbitrators and the Umpire shall be executive officers of Insurance or Reinsurance Companies.

 On August 8, 1989, defendant, through Sedgwick, submitted to plaintiffs through NYMM a claim for a blowout at a drill site, the CARI-6. On October 23, 1989 defendant, again through Sedgwick, submitted a claim of $ 1 million for expenses incurred to control a blowout of the TEJERO 2E well. In June 1990 NYMM paid out $ 1 million to cover the CARI-6 claim. On December 10, 1990 NYMM rejected defendant's TEJERO 2E claim, stating that it was not covered by the policy. On December 11, 1990, NYMM, acting for plaintiffs, informed Sedgwick that the $ 1 million payout for the CARI-6 claim was made in error and was not covered by the policy.

 In this action, plaintiffs seek a declaration that the TEJERO 2E well claim is not covered by the terms of the retrocession and an order to compel defendant to return the $ 1 million dollars paid on the CARI-6 well claim. Defendant moves to stay the action because the parties agreed to arbitrate disputes. Plaintiffs deny the existence of a contract binding them to arbitrate, and cross-move to enjoin arbitration.

 The case for defendant RNV is that the arbitration agreement in the 1977 Facultative Reinsurance is binding on plaintiffs by virtue of that agreement's incorporation in the policy, and that the disputed claims are arbitrable under the clause.

 The case for plaintiffs is that, for several reasons, they are not bound by that arbitration clause, and that in any event the disputes at bar do not fall within its scope.


 While these considerations impact upon the scope of an arbitration agreement, they have nothing to do with the first prong of judicial inquiry: whether the parties agreed to arbitrate in the first place. "Dispute resolution by arbitration is and must be consensual." Continental Group v. NPS Communications, Inc., 873 F.2d 613, 617 (2d Cir. 1989). A party seeking to compel another to arbitrate a particular dispute must show that its adversary agreed to do so. That is true under New York law. "Parties to a commercial transaction 'will not be held to have chosen arbitration as the forum for the resolution of their disputes in the absence of an express, unequivocal agreement to that effect; absent such an explicit commitment neither party may be compelled to arbitrate.'" Matter of Marlene Industries Corp. v. Carnac Textiles, Inc., 45 N.Y.2d 327, 333, 408 N.Y.2d 410, 413 (1978), quoting Matter of Acting Supt. of Schools of Liverpool Central School Dist. [United Liverpool Faculty Assn.], 42 N.Y.2d 509, 512 (1977). It is equally true under federal law. "Arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." McAllister Brothers v. A&S Transportation Co., 621 F.2d 519, 522 (2d Cir. 1980), quoting United Steel Workers v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582 (1960). Where the making of a binding arbitration agreement is at issue, the Arbitration Act provides for summary trial in the district court. 9 U.S.C. § 4.

 In approaching these issues, the parties debate at some length which of two international conventions governs the case.

 Seeking to compel arbitration, defendant relies upon the New York Convention, Article II(1) of which provides:

 Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

 The Arbitration Act, 9 U.S.C. § 202, implements the Convention by providing:

 An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title, falls under the Convention.

 Those provisions of the Arbitration Act implementing the Convention form Chapter 2 of the statute. 9 U.S.C. § 208 provides:

 Chapter 1 applies to actions and proceedings brought under this chapter to the extent that that chapter is not in conflict with this chapter or the Convention as ratified by the United States.

 Chapter 1 of the Act includes, at 9 U.S.C. § 3, the provision upon which defendant relies in seeking a stay pending arbitration that section provides:

 If any suit or proceeding be brought in any of the court of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

 Plaintiffs say that the New York Convention does not apply to the case at bar because Venezuela, where defendant is incorporated, does not adhere to the Convention. Rather, plaintiffs contend that the case is governed by the Inter-American Convention on International Commercial Arbitration ("Inter-American Convention"), enforceable in ...

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