Date: 10-23-2009

Case Style: Century Indemnity Company v. Certain Underwriters at Lloyd's, London

Case Number: 08-2924

Judge: Greenberg

Court: United States Court of Appeals for the Third Circuit on appeal from the Eastern District of Pennsylvania (Philadelphia County)

Plaintiff's Attorney: Carter G. Phillips, William Sneed and Melanie Jo Triebel, Sidley Austin, L.L.P., Chicago, Illinois and Lawrence Nathanson, Siegal & Park, Mount Laurel, New Jersey

Defendant's Attorney: Mark J. Hill, Mark J. Hill & Associates, Philadelphia, Pennsylvania and John M. Wulfers, Hugh S. Balsam and Susan P. Jordan, Locke Lord Bissell & Brook, Chicago, Illinois

Description: This matter comes on before this Court on an appeal by
appellant Century Indemnity Company (“Century”) from two
orders of the District Court, one entered May 18, 2006,
granting a motion of appellee Certain Underwriters at
Lloyd’s, London (“Lloyd’s”) to compel arbitration of a
disputed claim based on a set of reinsurance-of-reinsurance
agreements, and one entered May 30, 2008, denying
Century’s motion to vacate an arbitration panel’s subsequent
award in favor of Lloyd’s. Inasmuch as we conclude both
that there was a valid agreement to arbitrate between Century
and Lloyd’s and that the dispute in this case falls within the
scope of that agreement, we hold that the District Court
properly compelled the parties to submit their dispute to
arbitration. Moreover, because we reject Century’s argument
that the arbitration panel deprived it of a fair hearing when the
panel excluded certain evidence that Century proposed to
introduce, we also hold that the District Court properly denied
Century’s motion to vacate the arbitration panel’s award.

II. BACKGROUND

A. Insurance, Reinsurance, and Retrocession
5
Insurance, the shifting of risk through contract, may
involve multiple layers of shifts. To start the process,
insurance companies issue policies under which the insurer
assumes certain risks in exchange for premiums that the
policyholders pay. The insurance companies then may pass
on all or part of the risk through reinsurance agreements, in
which another insurance company provides insurance of all or
part of the first insurer’s risk by accepting such risk in
exchange for a percentage of the original premium. 1
Reinsurance agreements covering classes or lines of business,
rather than a particular policy, are called reinsurance treaties.
Subsequently, reinsurers may seek to spread their exposure to
risk through further reinsurance. The reinsurance of
reinsurance is called a retrocession, and the reinsurers of
reinsurers—that is, reinsurers who assume retrocession risk
through retrocession al a greem en ts— are called
retrocessionaires.2

This case involves a dispute between Century, the
original reinsurer, and Lloyd’s, the retrocessionaire, arising
from three retrocessional agreements under which Lloyd’s
agreed to reinsure certain reinsurance treaties that Century’s
predecessor had formed with Argonaut Insurance Company
(“Argonaut”), another insurer that was the original insurer of
the insured in the policies underlying the litigation.

B. The Dispute

The material facts are not in dispute. Century’s
predecessor, the Insurance Company of North America

1

See Black’s Law Dictionary, Garner ed. at 1399 (9th ed., abr.,
2009) (hereafter “Black’s Law Dictionary”); Travelers Cas. &
Sur. Co. v. Gerling Global Reins. Corp., 419 F.3d 181, 183 n.2,
184 n.3 (2d Cir. 2005) (discussing reinsurance).

2

See Black’s Law Dictionary at 1432. The original reinsurer,
reinsured by the retrocessionaire pursuant to the retrocessional
agreement, is called the “retrocedent.”

6

(“INA”), reinsured Argonaut according to the terms of three
excess-of-loss treaties (the “reinsurance treaties”). Argonaut
had issued insurance policies to its insureds, Western
Asbestos Company and Western MacArthur Company
(together “Western”), to cover losses from Western’s
distribution of asbestos products. INA, Century’s
predecessor, then entered into three retrocessional agreements
with Lloyd’s (the “retrocessional agreements”), pursuant to
which Lloyd’s agreed to pay 90% of the losses in return for
90% of the premiums that accrued to Century’s predecessor
under the corresponding reinsurance treaties. 3

In the late 1970s, Western began receiving injury
claims from persons allegedly exposed to asbestos who
sought to hold Western responsible for injuries traceable to
their exposure. Western looked to Argonaut for coverage on
the insurance policies that Argonaut had issued and that
Western believed protected it against those claims, but
Argonaut resisted Western’s efforts, a position that led to
declaratory judgment litigation between Western and
Argonaut over the scope of the policies’ coverage.

Argonaut then sought reimbursement for its litigation
expenses from Century under its reinsurance treaties with
Century. Century concluded that the reinsurance treaties
entitled Argonaut to recover those expenses and, accordingly,
in 2001 made payments to Argonaut pursuant to the
reinsurance treaties.

After paying Argonaut, Century turned to Lloyd’s, its
retrocessionaire, for Lloyd’s’s 90% share of Century’s payout
to Argonaut pursuant to the retrocessional agreements
between Century and Lloyd’s. Lloyd’s refused to pay the
approximately $2.2 million that Century sought, contending
that it did not owe the reimbursement because Century should

3

Inasmuch as the distinction between Century’s predecessor,
INA, and Century is immaterial here, we will refer to both as
Century for the rest of this opinion.
7
not have paid Argonaut for the declaratory judgment litigation
expenses.

This lawsuit followed. Century sued Lloyd’s in the
Court of Common Pleas in Philadelphia County to recover the
amount that Century alleged that Lloyd’s owed it under the
retrocessional agreements.4 Lloyd’s answered the complaint
filed in state court, asserting that the retrocessional
agreements incorporated the reinsurance treaties’ arbitration
clauses and that therefore the dispute should be arbitrated, and
then Lloyd’s removed the case to the District Court pursuant
to 9 U.S.C. § 205.5 In the District Court, Century moved to

4

Century initially filed suit against Lloyd’s in federal court on
May 31, 2005, but voluntarily withdrew the suit to refile it in
state court. Century Indem. Co. v. Certain Underwriters at
Lloyd’s, No. 05-CV-6004, 2006 U.S. Dist. LEXIS 34177, at *3-
4 (E.D. Pa. May 18, 2006). It is ironical that the case ultimately
returned to the court system in which it originated.

5

Chapter 2 of the Federal Arbitration Act, 9 U.S.C. §§ 201-208,
implements the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards. Section 205 provides
in relevant part:

Where the subject matter of an action or proceeding
pending in a State court relates to an arbitration
agreement or award falling under the Convention, the
defendant or the defendants may, at any time before the
trial thereof, remove such action or proceeding to the
district court of the United States for the district and
division embracing the place where the action or
proceeding is pending.

As germane here, an arbitration agreement or arbitral award falls
under the Convention if it arises out of a legal relationship that
is (1) commercial and (2) between parties at least one of whom
is not a United States citizen. 9 U.S.C. § 202; see Standard Bent
Glass Corp. v. Glassrobots Oy, 333 F.3d 440, 448-49 (3d Cir.

8

remand the case to the state court and Lloyd’s moved to
compel arbitration.

Of course, it was not immediately obvious that Lloyd’s
was entitled to arbitrate because the retrocessional agreements
did not include arbitration provisions. Lloyd’s nevertheless
claimed that Century could be compelled to arbitrate their
dispute because the retrocessional agreements incorporated by
reference the arbitration clauses contained in the reinsurance
treaties. The arbitration clauses in the reinsurance treaties
state: “[i]f any dispute shall arise between the Company
[Argonaut] and INA [Century] with reference to the
interpretation of this Agreement or their rights with respect to
any transaction involved, the dispute shall be referred to
[arbitration].” App. at 59-60, 101, 127 (bracketed material
added). The retrocessional agreements between Century and
Lloyd’s contain language referring to and incorporating “all”
of the reinsurance treaties.

Lloyd’s contended that the incorporation-by-reference
provision in the retrocessional agreements incorporating “all”
of the reinsurance treaties effectively incorporated their
arbitration clauses, and thus the District Court could compel
Century to arbitrate their dispute. On May 18, 2006, the
District Court denied Century’s motion to remand and granted
Lloyd’s’s motion to compel arbitration, ruling that, as Lloyd’s
contended, the retrocessional agreements—though themselves
lacking arbitration clauses—incorporated by reference the
arbitration clauses contained in Century’s reinsurance treaties
with Argonaut. Century Indem. Co. v. Certain Underwriters
at Lloyd’s, No. 05-CV-6004, 2006 U.S. Dist. LEXIS 34177
(E.D. Pa. May 18, 2006).
2003). Here, the retrocessional agreements’ arbitration clauses
fall within the Convention because the retrocessional
agreements formed a commercial relationship between Century
and Lloyd’s and Lloyd’s is not a U.S. citizen.

9

The parties then pursued the arbitration proceedings. 6
Each party chose an arbitrator, and those two arbitrators chose
a third arbitrator or umpire. Once formed, the three-member
arbitration panel permitted discovery and briefing, and heard
arguments in July 2007. The panel, however, after reviewing
the evidence, receiving briefing, and hearing argument on the
issue, excluded certain evidence that Century proffered
relating to industry custom and the parties’ past course of
dealings. The panel predicated this determination on its belief
that the evidence was irrelevant because it regarded the
agreements as unambiguous and it believed that it could
discern their meaning without looking beyond their terms. On
December 12, 2007, over the dissent of the panel member that
Century had chosen, a two-person panel majority issued a
written opinion finding in Lloyd’s’s favor.

Century moved in the District Court to vacate the
arbitrators’ award, arguing that it had not agreed to submit its
dispute with Lloyd’s to arbitration and that, even if it did, the
majority award was subject to vacatur on both procedural and
substantive grounds under 9 U.S.C. § 10. On May 30, 2008,
after hearing oral argument, the District Court denied the
motion, a result that it reached by applying its prior ruling
compelling arbitration, which it refused to revisit, and by
concluding that the arbitrators’ decision did not evince a
manifest disregard of the law. Century then appealed to this
Court from the District Court’s orders compelling arbitration
and denying its motion to vacate the arbitrators’ award.

III. JURISDICTION AND STANDARD OF REVIEW

The District Court had subject-matter jurisdiction
under 9 U.S.C. § 203 to determine whether the removed
action related to a commercial arbitration agreement within

6

Century could not appeal immediately from the order
compelling arbitration. See 9 U.S.C. § 16(b)(3); Blair v. Scott
Specialty Gases, 283 F.3d 595, 599 (3d Cir. 2002).

10

the purview of the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards. We exercise
jurisdiction pursuant to 28 U.S.C. § 1291 and 9 U.S.C. §
16(a)(3) over this appeal from the District Court’s final
decision respecting an arbitration subject to the Federal
Arbitration Act.

Our review of a district court’s order compelling
arbitration, an order presenting legal questions concerning an
arbitration agreement’s existence and scope, is plenary.
USW, AFL-CIO-CLC v. Rohm & Haas Co., 522 F.3d 324,
330, 330 n.7 (3d Cir. 2008); Harris v. Green Tree Fin. Corp.,
183 F.3d 173, 176 (3d Cir. 1999); Pritzker v. Merrill Lynch,
Pierce, Fenner & Smith Inc., 7 F.3d 1110, 1113 (3d Cir.
1993); John F. Harkins Co. v. Waldinger Corp., 796 F.2d 657,
658-60 (3d Cir. 1986). When reviewing a district court’s
order confirming an arbitration award, we review the district
court’s findings of fact for clear error and its legal conclusions
de novo. China Minmetals Materials Imp. & Exp. Co., Ltd. v.
Chi Mei Corp., 334 F.3d 274, 278-79 (3d Cir. 2003) (citing
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-
48, 115 S.Ct. 1920, 1925-26 (1995)).

IV. DISCUSSION

Century raises two fundamental questions on this
appeal. The first question is whether the parties had entered
into a valid arbitration agreement such that the District Court
properly compelled Century to arbitrate its dispute arising
from the retrocessional agreements between Century and
Lloyd’s over Lloyd’s’s alleged obligation to reimburse
Century for a portion of Century’s payments to Argonaut for
declaratory judgment expenses under the reinsurance treaties
between Century and Argonaut. The second question,
assuming that the District Court properly compelled
arbitration, is whether the Court should have confirmed the
arbitration panel’s decision in favor of Lloyd’s, even though
the panel excluded the evidence that Century proffered to

11

show past dealings and industry custom. We address each in
turn.

A. Whether the District Court Properly Compelled
A rb itration B ase d on the R e tr oc essional
Agreements’ Incorporation of the Reinsurance
Treaties

In addressing the first fundamental issue, whether the
District Court properly compelled arbitration, we first outline
the applicable principles of arbitration law, then explain
certain standards that we apply, and finally turn to the
agreements at issue in this case.

1. The Federal Arbitration Act

The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.
(“FAA”), creates a body of federal substantive law
establishing and governing the duty to honor agreements to
arbitrate disputes. Green Tree Fin., 183 F.3d at 178-79 (citing
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 25 n.32, 103 S.Ct. 927, 942 n.32 (1983)). Congress
designed the FAA to overrule the judiciary’s longstanding
reluctance to enforce agreements to arbitrate and its refusal to
put such agreements on the same footing as other contracts,
Volt Information Sciences, Inc. v. Bd. of Trustees of Leland
Stanford Junior Univ., 489 U.S. 468, 474, 109 S.Ct. 1248,
1253 (1989); Buckeye Check Cashing, Inc. v. Cardegna, 546
U.S. 440, 443, 126 S.Ct. 1204, 1207 (2006), and in the FAA
expressed a strong federal policy in favor of resolving
disputes through arbitration. E.g., Moses H. Cone, 460 U.S.
at 24, 103 S.Ct. at 941; Kirleis v. Dickie, McCamey &
Chilcote, P.C., 560 F.3d 156, 160 (3d Cir. 2009).7 In

7

To the extent that the courts’ reluctance to enforce arbitration
agreements was based on their parochial desire to safeguard
their monopoly position with respect to the authority to resolve
disputes, they may take solace from the circumstance that the
adoption of the FAA and comparable state laws has given rise
to its own body of litigation.

12

particular, the FAA provides that as a matter of federal law
“[a] written provision” in a maritime or commercial contract
showing an agreement to settle disputes by arbitration “shall
be valid, irrevocable, and enforceable, save upon such
grounds as exist in law or in equity for the revocation of any
contract.” 9 U.S.C. § 2. The FA A ’s second chapter, 9
U.S.C. §§ 201-208, implements the United Nations
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, opened for signature June 10, 1958, 21
U.S.T. 2517, 330 U.N.T.S. 38, reprinted in 9 U.S.C. § 201
(historical and statutory notes) (“New York Convention”).
See Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15, 94
S.Ct. 2449, 2457 n.15 (1974); Standard Bent Glass Corp. v.
Glassrobots Oy, 333 F.3d 440, 448-49 (3d Cir. 2003); China
Minmetals, 334 F.3d at 279. Pursuant to this chapter,
arbitration agreements fall within the New York Convention
if they arise from commercial, legal relationships, such as
commercial contracts, except when those relationships are
entirely between United States citizens and otherwise are
domestic in nature.8 9 U.S.C. § 202. Actions under the New

8

9 U.S.C. § 202 states:

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 [9 U.S.C. § 2], falls
under the Convention. An agreement or award arising
out of such a relationship which is entirely between
citizens of the United States shall be deemed not to fall
under the Convention unless that relationship involves
property located abroad, envisages performance or
enforcement abroad, or has some other reasonable
relation with one or more foreign states.

See also Standard Bent Glass, 333 F.3d at 448-49, 449 n.13
(citing the New York Convention, Art. II, § 2) (An arbitration

13

York Convention are deemed to arise under the laws and
treaties of the United States. 9 U.S.C. § 203. The FAA
empowers district courts to compel arbitration in accordance
with agreements, 9 U.S.C. § 206, and to enforce awards, 9
U.S.C. § 207, falling within the New York Convention. The
domestic FAA applies to actions brought under the New York
Convention to the extent that the two are not in conflict. 9
U.S.C. § 208; China Minmetals, 334 F.3d at 280. The strong
federal policy favoring arbitration applies with special force
in the field of international commerce. Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 631, 105
S.Ct. 3346, 3356 (1985).

2. Compelling Arbitration

The strong federal policy favoring arbitration,
however, does not lead automatically to the submission of a
dispute to arbitration upon the demand of a party to the
dispute. Before compelling a party to arbitrate pursuant to the
FAA, a court must determine that (1) there is an agreement to
arbitrate and (2) the dispute at issue falls within the scope of
that agreement. Kirleis, 560 F.3d at 160 (citing Trippe Mfg.
Co. v. Niles Audio Corp., 401 F.3d 529, 532 (3d Cir. 2005));
China Minmetals, 334 F.3d at 281. This determination
applies equally in domestic and international arbitration
contexts. China Minmetals, 334 F.3d at 282 (citing Gen. Elec.
Co. v. Deutz AG, 270 F.3d 144, 152-56 (3d Cir. 2001)).
agreement falls within the New York Convention when the
agreement (1) is an agreement in writing to arbitrate the subject
of a dispute, (2) provides for arbitration in the territory of a
signatory to the Convention, (3) arises out of a legal
relationship, contractual or not, that is considered commercial,
and (4) is a legal relationship between parties at least one of
which is not an American citizen, or at least is a legal
relationship bearing some reasonable relation with one or more
foreign states).

14

For a court to compel arbitration, it initially must find
that there is a valid agreement to arbitrate because the basis
for contractual arbitration is consent, not coercion.
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52,
57, 115 S.Ct. 1210, 1216 (1995). Furthermore, the parties
might agree to the resolution of some but less than all of their
disputes arising out of a particular contract or relationship
through arbitration, see Volt Info. Scis., 489 U.S. at 479, 109
S.Ct. at 1256, and thus even if a court finds that the parties
have agreed to arbitrate some disputes it must find, to order
arbitration, that the parties have agreed to arbitrate the dispute
in issue. Because an arbitrator’s authority derives solely from
the parties’ agreement to submit their disputes to arbitration,
AT&T Technologies, Inc. v. Comm’ns Workers, 475 U.S.
643, 648-49, 106 S.Ct. 1415, 1418 (1986), a party cannot be
compelled to submit a dispute to arbitration unless it has
agreed to do so. U.S. Small Bus. Admin. v. Chimicles, 447
F.3d 207, 209 (3d Cir. 2006); China Minmetals, 334 F.3d at
289-90.9

To determine whether the parties have agreed to
arbitrate, we apply “ordinary state-law principles that govern
the formation of contracts.” First Options, 514 U.S. at 944,
115 S.Ct. at 1924; Perry v. Thomas, 482 U.S. 483, 492 n.9,
107 S.Ct. 2520, 2527 n.9 (1987); see Deutz AG, 270 F.3d at
154-55 (explaining that principles of First Options apply in
international as well as domestic arbitration context). These
principles must govern contracts generally; a state-law
principle that takes its meaning from the fact that an
agreement to arbitrate is at issue does not comport with
section 2 of the FAA and therefore is preempted. Doctor’s
Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-88, 116 S.Ct.
1652, 1655-56 (1996) (citing Perry, 482 U.S. at 492 n.9, 107
S.Ct. at 2527 n.9); Gay v. CreditInform, 511 F.3d 369, 394
(3d Cir. 2007).

9

We are not concerned here with the unusual situation in which
an act of legislation compels the parties to arbitrate a dispute.
See, e.g., 29 U.S.C. § 1401(a)(1).

15

Inasmuch as “federal law applies to the interpretation
of arbitration agreements,” once a court has found that there is
a valid agreement to arbitrate, regardless of whether the action
is in a federal or a state court the determination of whether “a
particular dispute is within the class of those disputes
governed by the arbitration clause . . . is a matter of federal
law.” China Minmetals, 334 F.3d at 290 (internal citations
and quotation marks omitted). See Gay, 511 F.3d at 388;
Green Tree Fin. Corp., 183 F.3d at 178-79. In determining
whether the particular dispute falls within a valid arbitration
agreement’s scope, “there is a presumption of arbitrability[:]
an order to arbitrate the particular grievance should not be
denied unless it may be said with positive assurance that the
arbitration clause is not susceptible of an interpretation that
covers the asserted dispute.” AT&T Techs., 475 U.S. at 650,
106 S.Ct. at 1419 (internal quotation marks and citations
omitted). See Rohm & Haas, 522 F.3d at 331 (citing AT&T
Techs.).

3. Whether the Retrocessional Agreements’
I n co r p o r a tio n -b y -R e fe r e n ce L a n g u a g e
Effected a Valid Agreement to Arbitrate
Between Century and Lloyd’s

With these general principles in mind, we turn to the
first of the two determinations necessary to decide whether
the District Court properly compelled arbitration: is there a
valid agreement between Century and Lloyd’s to arbitrate
their disputes? See Kirleis, 560 F.3d at 160. As we have
indicated, Lloyd’s does not rely on the retrocessional
agreements alone as a basis for contending that there was an
agreement to arbitrate for it could not do so inasmuch as those
agreements do not include arbitration clauses. Instead,
Lloyd’s asserts that Century is bound to arbitrate under an
incorporation-by-reference theory, a common device in
layered contracts likely to be in use in construction projects in
which there are contractors, subcontractors, and sureties and,
as here, when insurance companies spread risk among
themselves. According to Lloyd’s, even though it was not a

16

signatory to the original reinsurance treaties, it still may seek
to compel Century to arbitrate based on the reinsurance
treaties’ arbitration clauses because the retrocessional
agreements incorporated all of the provisions of the
reinsurance treaties, including their arbitration clauses,
thereby creating a valid agreement between Century and
Lloyd’s to arbitrate disputes arising from the retrocessional
agreements.

a. Two Threshold Issues Regarding the
Standards That Apply When Determining
Whether There Is a Valid Agreement to
Arbitrate

Before we consider Lloyd’s’s incorporation-by-
reference contention, we consider two threshold questions
concerning the legal standard that applies when determining
whether there is a valid agreement to submit a dispute to
arbitration. The first issue is whether the presumption in
favor of arbitration applies to both or only the second of the
two questions: (1) is there an agreement to arbitrate and (2)
does the particular dispute fall within the existing agreement’s
scope? The second issue is whether the “express” and
“unequivocal” standard to which courts have referred in
arbitration cases requires more of arbitration agreements than
it does of other contracts.

(1) Whether the Presumption in Favor of
Arbitration Applies to the Initial
Question Whether the Parties Agreed to
Arbitrate

The strong federal policy in favor of arbitration
manifests itself in a presumption favoring arbitration. But the
parties dispute whether this presumption applies to both or
only the latter of the questions (1) whether there is a valid

17

arbitration agreement between the parties and (2) whether a
particular merits-based dispute must be arbitrated because it is
within the scope of the valid arbitration agreement. See
Kirleis, 560 F.3d at 160. Though Century acknowledges that
there is a policy favoring arbitration that results in a
presumption that a particular merits-based dispute is
arbitrable, it argues that the presumption does not apply to the
threshold determination of whether the parties agreed to
arbitrate in the first place. Lloyd’s, on the other hand, argues
that the presumption applies to both questions. See Trippe,
401 F.3d at 532 (“When determining both the existence and
the scope of an arbitration agreement, there is a presumption
in favor of arbitrability.”) (emphasis added). Though we do
not agree with the District Court’s approach on this point in
which it relied on Trippe to conclude that the presumption
applies to both questions, we acknowledge that it was not
unreasonable for it to take that approach.

In Trippe, we addressed the question whether an audio-
equipment company could compel a manufacturer to arbitrate
their dispute pursuant to an arbitration clause in a distribution
agreement between the audio-equipment company and a third
party, even though the manufacturer was not a signatory to
that agreement. Id. at 530-32. The audio-equipment
company claimed that it could compel arbitration based on a
separate asset-purchase agreement between the manufacturer
and the third party under which the manufacturer assumed
certain of the third party’s assets and liabilities. Id. Applying
New York contract-law principles, we held that the
manufacturer was bound to arbitrate claims arising out of
obligations it had assumed expressly through the asset-
purchase agreement, but not those claims based on obligations
that the manufacturer had not assumed expressly, because
under New York law an assignee that has assumed an
assignor’s liabilities contained in an underlying agreement is
bound by an arbitration clause in that agreement. Id. at 532-
33.

18

Before reaching this conclusion, however, we stated in
Trippe that “[w]hen determining both the existence and the
scope of an arbitration agreement, there is a presumption in
favor of arbitrability.” Id. at 532. We then quoted from
AT&T Technologies, 475 U.S. at 650, 106 S.Ct. at 1419: “An
order to arbitrate the particular grievance should not be denied
unless it may be said with positive assurance that the
arbitration clause is not susceptible of an interpretation that
covers the asserted dispute.” Trippe, 401 F.3d at 532 (internal
quotation marks omitted).

But, as Century argues, the quotation in Trippe from
AT&T Technologies obscures the context of the quotation.
There the Supreme Court stated:

where the contract contains an arbitration
clause, there is a presumption of arbitrability in
the sense that an order to arbitrate the particular
grievance should not be denied unless it may be
said with positive assurance that the arbitration
clause is not susceptible of an interpretation that
covers the asserted dispute. Doubts should be
resolved in favor of coverage.

AT&T Techs., 475 U.S. at 650, 106 S.Ct. at 1419 (internal
citations and quotations omitted). Critically, the presumption
of arbitrability that the Supreme Court recognized applies
“where the contract contains an arbitration clause”—that is,
where it has been determined that there is a valid agreement
to arbitrate. Cf. Volt Info. Scis., 489 U.S. at 475, 109 S.Ct. at
1253 (the federal policy in favor of arbitration requires that
“ambiguities as to the scope of the arbitration clause itself
[be] resolved in favor of arbitration”).

But the question whether this presumption applies to
the threshold inquiry which requires a determination whether
there is an agreement to arbitrate in the first place is another
matter. The FAA does not require parties to arbitrate a
dispute when they have not agreed to do so. Id. at 478, 109
S.Ct. at 1255. The “liberal federal policy favoring arbitration
agreements . . . is at bottom a policy guaranteeing the

19

enforcem ent of private contractual arrangements.”
Mitsubishi, 473 U.S. at 625, 105 S.Ct. at 3353 (internal
citations and quotations omitted). Because “arbitration is a
matter of contract[,] a party cannot be required to submit to
arbitration any dispute which he has not agreed so to submit.”
AT&T Techs., 475 U.S. at 648, 106 S.Ct. at 1418 (internal
citations and quotations omitted). See China Minmetals, 334
F.3d at 281.

Therefore, some of the language in Trippe may be
misleading to the extent it suggests that there is a presumption
in favor of arbitration in the absence of an agreement to
arbitrate. As we have stated both before Trippe and since, a
party cannot be compelled to arbitrate unless that party has
entered into a written agreement to arbitrate that covers the
dispute. Kirleis, 560 F.3d at 160; Chimicles, 447 F.3d at 209;
China Minmetals, 334 F.3d at 289-90. We determine whether
a party has done so by applying “ordinary state-law principles
that govern the formation of contracts,” not by applying a
presumption in favor of arbitration. First Options, 514 U.S. at
944, 115 S.Ct. at 1924. See Kirleis, 560 F.3d at 160.

Several other courts of appeals have made it clear that
in their view the presumption in favor of arbitration applies to
the question whether a particular dispute falls within an
existing agreement’s scope, but not to the threshold question
as to the existence of an agreement between the parties to
arbitrate. See Sherer v. Green Tree Servicing LLC, 548 F.3d
379, 381 (5th Cir. 2008) (“We apply the federal policy
favoring arbitration when addressing ambiguities regarding
whether a question falls within an arbitration agreement’s
scope, but we do not apply this policy when determining
whether a valid agreement exists.”); Dumais v. Am. Golf
Corp., 299 F.3d 1216, 1220 (10th Cir. 2002) (“The
presumption in favor of arbitration is properly applied in
interpreting the scope of an arbitration agreement; however,
this presumption disappears when the parties dispute the
existence of a valid arbitration agreement.”) (citing First
Options, 514 U.S. at 944-45, 115 S.Ct. at 1924); McCarthy v.

20

Azure, 22 F.3d 351, 355 (1st Cir. 1994) (Once agreement
between parties has been proven, “the federal policy favoring
arbitration requires that any doubts concerning the scope of an
arbitrable issue be resolved in favor of arbitration,” but this
policy “does not extend to situations in which the identity of
the parties who have agreed to arbitrate is unclear.”) (internal
quotation marks omitted) (citing Moses H. Cone, 460 U.S. at
24-25, 103 S.Ct. at 941-42, and PaineWebber, Inc. v.
Hartmann, 921 F.2d 507, 511 (3d Cir. 1990)); Grundstad v.
Ritt, 106 F.3d 201, 205 n.5 (7th Cir. 1997) (“[T]he federal
policy favoring arbitration applies to issues concerning the
scope of an arbitration agreement entered into consensually
by contracting parties; it does not serve to extend the reach of
an arbitration provision to parties who never agreed to
arbitrate in the first place.”) (citing McCarthy, 22 F.3d at
355).

We are satisfied that to decide whether a party may be
compelled to arbitrate a dispute with another party, we must
determine (1) whether there is a valid agreement to arbitrate
between the parties and, if so, (2) whether the merits-based
dispute in question falls within the scope of that valid
agreement. Kirleis, 560 F.3d at 160. The presumption in
favor of arbitration applies to the second question but
probably does not apply to the first question. Id.; Chimicles,
447 F.3d at 209; see China Minmetals, 334 F.3d 280-81.
Though we have addressed the question of the applicability
vel non of the presumption in determining if there is a valid
agreement to arbitrate, we have done so because the District
Court addressed the point and the law as we have set it forth
on the point in various cases is unclear. We, however, need
not reach a definitive conclusion on the breadth of the
presumption in favor of arbitration, because even without
applying the presumption in this case we conclude that the
parties entered into a valid agreement to arbitrate.

(2) The “Express” and “Unequivocal”
Standard

21

A second issue that we address is the standard applied
to determine whether there is an agreement to arbitrate.
Century asserts that we have required arbitration agreements
to be “express” and “unequivocal” before compelling
arbitration, this standard “has prevailed for decades,”
Appellant’s opening br. at 21, and the purported agreement
here is unenforceable because it fails to meet that standard.
See Kaplan v. First Options, 19 F.3d 1503, 1512 (3d Cir.
1994) (stating the rule that an arbitration agreement “must be
‘express’ and ‘unequivocal’”) (quoting Par-Knit Mills, Inc. v.
Stockbridge Fabrics Co., 636 F.2d 51, 54 (3d Cir. 1980)),
aff’d on other grounds, 514 U.S. 938, 115 S.Ct. 1920
(1995). 01

In Par-Knit Mills, we considered whether a distributor
could compel a manufacturer to arbitrate their dispute over a
series of oral sales contracts pursuant to a related, written
sales contract’s arbitration clause signed by one of the
manufacturer’s production managers. The manufacturer
denied ever agreeing to arbitrate, claiming, instead, that its
production manager had signed the contracts intending to
confirm the goods’ delivery dates but not to obligate the
corporation to the written contracts’ various terms, including
the arbitration clause. Par-Knit Mills, 636 F.2d at 53. The
manufacturer supported this claim with an affidavit. Id. We
held that the district court erred in compelling arbitration
because the manufacturer’s unequivocal denial that it had
agreed to arbitrate, accompanied by a supporting affidavit,
created a genuine issue of fact requiring a jury determination
of whether there in fact had been a “meeting of the minds”
resulting in the formation of an agreement to arbitrate. Id. at
54-55.
10

See also Kirleis, 560 F.3d at 159, 161; China Minmetals, 334
F.3d at 282; Standard Bent Glass, 333 F.3d at 446; Sandvik AB
v. Advent Int’l Corp., 220 F.3d 99, 106 (3d Cir. 2000).

22

We explained that the genuine issue of fact as to the
parties’ intent prevented the court from finding, as a matter of
law, that the parties had formed an agreement to arbitrate, and
therefore also prevented the court from compelling arbitration
on that basis:

Before a party to a lawsuit can be ordered to
arbitrate and thus be deprived of a day in court,
there should be an express, unequivocal
agreement to that effect. If there is doubt as to
whether such an agreement exists, the matter,
upon a proper and timely demand, should be
submitted to a jury. Only when there is no
genuine issue of fact concerning the formation
of the agreement should the court decide as a
matter of law that the parties did or did not enter
into such an agreement. The district court,
when considering a motion to compel
arbitration which is opposed on the ground that
no agreement to arbitrate had been made
between the parties, should give to the opposing
party the benefit of all reasonable doubts and
inferences that may arise.

Par-Knit Mills, 636 F.2d at 54 (citations and footnotes
omitted). In Par-Knit Mills, there was a genuine issue of fact
as to whether the production manager was authorized to
execute agreements to arbitrate on behalf of the corporation,
and so the court, upon the manufacturer’s proper and timely
demand, was required to submit the question of the
agreement’s existence to a jury. Id. at 54-55. As we noted,
this is the familiar summary judgment standard, see Fed. R.
Civ. P. 56(c), and it applies in cases such as Par-Knit Mills
because the district court’s order compelling arbitration is “in
effect a summary disposition of the issue of whether or not
there had been a meeting of the minds on the agreement to
arbitrate.” Par-Knit Mills, 636 F.2d at 54 n.9; see 9 U.S.C. §
4 (district court should not order arbitration unless it is

23

“satisfied that the making of arbitration agreement . . . is not
in issue”).11

Following Par-Knit Mills, we have referred to the
requirement that an agreement be “express” and

11

9 U.S.C. § 4 provides in part that, upon a party’s valid petition
to compel arbitration,

[t]he court shall hear the parties, and upon being satisfied
that the making of the agreement for arbitration or the
failure to comply therewith is not in issue, the court shall
make an order directing the parties to proceed to
arbitration in accordance with the terms of the
agreement. The hearing and proceedings, under such
agreement, shall be within the district in which the
petition for an order directing such arbitration is filed. If
the making of the arbitration agreement or the failure,
neglect, or refusal to perform the same be in issue, the
court shall proceed summarily to the trial thereof. If no
jury trial be demanded by the party alleged to be in
default, or if the matter in dispute is within admiralty
jurisdiction, the court shall hear and determine such
issue. Where such an issue is raised, the party alleged to
be in default may, except in cases of admiralty, on or
before the return day of the notice of application, demand
a jury trial of such issue, and upon such demand the court
shall make an order referring the issue or issues to a jury
in the manner provided by the Federal Rules of Civil
Procedure, or may specially call a jury for that purpose.
If the jury find that no agreement in writing for
arbitration was made or that there is no default in
proceeding thereunder, the proceeding shall be
dismissed. If the jury find that an agreement for
arbitration was made in writing and that there is a default
in proceeding thereunder, the court shall make an order
summarily directing the parties to proceed with the
arbitration in accordance with the terms thereof.

24

“unequivocal” before a court may compel a party to arbitrate
in the context of emphasizing that a genuine issue of fact
regarding the arbitration agreement’s existence—such as
where the contract language is ambiguous or where one party
claims that it never received the terms of an agreement, that
the agreement was forged, or that the agreement was signed
by a person lacking a uthority to exec ute the
contract—prevents a district court from summarily
compelling arbitration.12 E.g., Kirleis, 560 F.3d at 159 (citing
Par-Knit Mills); Standard Bent Glass, 333 F.3d at 446
(“Arbitration clauses must be clear and unequivocal. Genuine
issues of fact will preclude an order to arbitrate.”); cf.
Emerson Radio Corp. v. Orion Sales, Inc., 253 F.3d 159, 163-
64 (3d Cir. 2001) (discussing determination of a contract’s
ambiguity).

Our cases, however, seem inconsistent in this respect:
we sometimes have regarded Par-Knit Mills’ “express” and
“unequivocal” language as stating a substantive standard
required of arbitration agreements to be enforceable,
seemingly without regard to the procedural posture of the
case. In particular, in First Options, 19 F.3d at 1512, we
stated that no party can be compelled to arbitrate unless that
party has entered into an agreement to do so, and we relied on

12

In Kirleis, 560 F.3d at 159-64, there was a genuine issue of
material fact with respect to the agreement to arbitrate because
a party’s unopposed affidavit stated that the party never had
received the document containing the arbitration provision and
never had consented to it. See also China Minmetals, 334 F.3d
at 281 (noting that party’s claim that underlying contract was
forged would create a genuine factual issue); Deutz AG, 270
F.3d at 153 (upholding district court’s submission to jury issue
whether parties had formed arbitration agreement, where
contract was ambiguous as to parent corporation’s obligation to
arbitrate); Sandvik AB v. Advent Int’l Corp., 220 F.3d 99, 101-
02, 106-10 (3d Cir. 2000) (affirming district court’s denial of
motion to compel arbitration pending resolution of factual issue
of whether signatory was authorized to bind corporation).

25

Par-Knit Mills in stating that “[t]hat agreement must be
‘express’ and ‘unequivocal.’” First Options, 19 F.3d at 1512
(quoting Par-Knit Mills). Notably, this statement can be read
to treat the “express” and “unequivocal” standard as a
substantive requirement that a purported arbitration agreement
must meet before a party may be compelled to submit a
dispute to arbitration regardless of whether there is a disputed
issue of fact as to the agreement’s existence. Some of our
cases have relied on this view of Par-Knit Mills’ “express”
and “unequivocal” language as a substantive requirement to
explain how parties may be bound by arbitration agreements,
even if they are not signatories to those particular agreements:

[t]he identification of the parties bound by the
agreement to arbitrate need not be confined to
the limited inquiry of identifying the signatories
to the arbitration agreement. Rather, the
dispositive finding is an ‘express’ and
‘unequivocal’ agreement between parties to
arbitrate their disputes.

In re Prudential Ins. Co., 133 F.3d 225, 229 (3d Cir. 1998)
(internal quotation marks partially omitted) (quoting First
Options, 19 F.3d at 1512). See also First Liberty Inv. Group
v. Nicholsberg, 145 F.3d 647, 650 (3d Cir. 1998) (quoting the
above from In re Prudential, 133 F.3d at 229); cf. Allstate
Settlement Corp. v. Rapid Settlements Ltd., 559 F.3d 164,
170 (3d Cir. 2009) (citing Trippe, 401 F.3d at 532)
(discussing theories under which arbitration agreement may
bind nonsignatory).

We therefore have used the “express” and
“unequivocal” language in two different ways when
considering whether there is an agreement to arbitrate. On the
one hand, we have stated the “express” and “unequivocal”
requirement to explain that genuine issues of fact as to
whether there is an agreement to arbitrate preclude

26

compelling a party to submit to arbitration;13 on the other, we
have used this language to state a substantive standard that
applies to the determination of an arbitration agreement’s
enforceability as a general matter.

Turning to the facts at hand, application of the
“express” and “unequivocal standard” cannot be in issue in
this case because there is “no genuine issue of fact concerning
the formation of the agreement”—Century and Lloyd’s
instead dispute the legal effect of the uncontested contractual
language—and thus if the “express” and “unequivocal”
requirement can be in issue here it only can be if that standard
is a substantive requisite for an enforceable arbitration
agreement. See Appellant’s opening br. at 15; Appellee’s br.
at 16.

In view of the absence of a dispute of facts, this case
involves contract construction and therefore requires a legal
determination. We reiterate that there is not a disputed issue
of fact here as Century does not make an assertion such as
that the retrocessional agreements were forged, the signatory
lacked authority to bind Century, or the actual words of the
contracts are ambiguous.14 Thus, it is not surprising that

13

This is not to say that after the trier of the facts resolves the
dispute a court, depending on what the trier of the facts
determines, cannot order that the parties submit to arbitration.

14

It is important to recognize that we are not suggesting an
absence of a dispute of fact as to the parties’ substantive rights
and obligations under their agreements with respect to the
questions the arbitrators addressed. In fact, there was such a
dispute and Century offered evidence to show that the
retrocessional agreements were ambiguous as to the parties’
intent with respect to Lloyd’s’s liability for the declaratory
judgment expenses underlying this litigation. Indeed, we
consider that dispute when addressing the second fundamental
question on this appeal, i.e., whether the District Court should

27

Century does not seek a jury trial to determine the parties’
intent with respect to the obligation to arbitrate and does not
ask us to remand for that purpose. Inasmuch as this case
involves contract construction, i.e., determining the legal
effect of the retrocessional agreements’ incorporation-by-
reference language, we reiterate that the “express” and
“unequivocal” standard we recognized in Par-Knit Mills is
inapposite here to the extent that the standard requires that
there not be a genuine issue of material fact as to an
arbitration agreement’s existence before a district court may
determine whether the agreement exists as a matter of law and
then, if it does, to compel arbitration based on the agreement.

Century nevertheless presses the “express” and
“unequivocal” language as a substantive standard.
Accordingly, Century relies on the rule that we stated in First
Options, 19 F.3d at 1512. E.g., Appellant’s opening br. at 21
(“The written agreement to arbitrate must be ‘express’ and
‘unequivocal.’”) (quoting First Options, 19 F.3d at 1512).
But there are two problems with this position. First, the
Supreme Court implicitly may have rejected the “express”
and “unequivocal” standard as a substantive rule. Upon
reviewing our opinion in First Options, after granting
certiorari as to two issues presented in our Court, the Supreme
Court affirmed but did so without approving a substantive
“express” and “unequivocal” standard. Instead, the Supreme
Court set forth the following guidelines with regard to
determining whether there is an arbitration agreement
between the parties:

When deciding whether the parties agreed to
a rb itra te a ce rtain m a tte r (in c lu d in g
arbitrability), courts generally (though with a
qualification we discuss below) should apply
ordinary state-law principles that govern the
formation of contracts. The relevant state law
here, for example, would require the court to see

have confirmed the award even though the arbitrators rejected
certain evidence that Century offered.

28

whether the parties objectively revealed an
intent to submit the arbitrability issue to
arbitration.

First Options, 514 U.S. at 944, 115 S.Ct. at 1924 (internal
citations omitted); cf. First Options, 19 F.3d at 1512 (quoting
Par-Knit Mills for the rule that to be valid an arbitration
agreement “must be ‘express’ and ‘unequivocal’”). The
“qualification” that the Supreme Court mentioned relates to
the question of who has the primary power to decide the
question of arbitrability, an issue not presented in the dispute
between Century and Lloyd’s. First Options, 514 U.S. at 944-
45, 115 S.Ct. at 1925-26; see id. at 942, 115 S.Ct at 1923
(distinguishing between disagreements over (1) a dispute’s
merits, (2) the arbitrability of the dispute, and (3) who should
have the primary power to decide the arbitrability of the
dispute).

But a study of the two opinions suggests that the
Supreme Court, far from adopting the substantive requirement
that arbitration provisions must be “express” and
“unequivocal” to be valid, in fact rejected it. See First
Options, 514 U.S. at 944, 115 S.Ct. at 1924; Blair, 283 F.3d at
603 (citing First Options, 514 U.S. at 944, 115 S.Ct at 1924)
(“A federal court must generally look to the relevant state law
on the formation of contracts to determine whether there is a
valid agreement to arbitrate under the FAA.”); Kirleis, 560
F.3d at 160 (citing First Options, 514 U.S. at 944, 115 S.Ct. at
1924, and Blair, 283 F.3d at 603).

And there is a second problem with Century’s position.
Even if the Supreme Court in First Options did not reject the
“express” and “unequivocal” standard outright to the extent
that it is substantive—i.e., the burden of persuasion applied to
whether arbitration agreements exist generally, rather than the
summary judgment standard applied in the arbitration
context—the applicable statutory language and other Supreme
Court precedent preclude us from requiring arbitration
agreements to be “express” and “unequivocal” in order to be
enforced. Section 2 of the FAA declares that written

29

arbitration agreements “shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2
(emphasis added). It is therefore not surprising that the
Supreme Court has explained that threshold limitations placed
specifically and solely on arbitration provisions are
antithetical to the goals and policies of the FAA. Doctor’s
Assocs., 517 U.S. at 687-88, 116 S.Ct. at 1656; see Gay, 511
F.3d at 394. It thus follows that requiring arbitration clauses
to meet more exacting standards than those imposed by the
applicable state-law principles on contracts generally would
offend Congress’s purpose in enacting the FAA: to put
arbitration provisions “upon the same footing as other
contracts.” Doctor’s Assocs., 517 U.S. at 687, 116 S.Ct. at
1656 (citing Scherk, 417 U.S. at 511, 94 S.Ct. at 2453
(internal quotation marks omitted) (stating that FAA’s
purpose is to “revers[e] centuries of judicial hostility to
arbitration agreements”)); Perry, 482 U.S. at 492 n.9, 107
S.Ct. 2527 n.9; cf. Progressive Cas. Ins. Co. v. C.A.
Reaseguradora Nacional de Venezuela, 991 F.2d 42, 46 (2d
Cir. 1993) (holding that FAA preempted state law requiring
that there be an “express, unequivocal agreement” to arbitrate
before parties would be compelled to arbitrate dispute—a
higher standard than that which applied to contracts
generally—because “[a] court may not, in assessing the rights
of litigants to enforce an arbitration agreement, construe that
agreement in a manner different from that in which it
otherwise construes nonarbitration agreements under state
law”).

A substantive “express” and “unequivocal” standard
impermissibly would require more of arbitration agreements
than of contracts generally to be enforced whenever the
standard differed from the applicable state-law principles of
contract law. See Progressive Cas., 991 F.2d at 46. Of
course, application of the standard in practice always or
almost always would differ from ordinary state-law contract
principles, as courts enforce contracts that are something less
than “express” and “unequivocal.” Indeed, sometimes courts

30

enforce contracts that rather than being “express” and
“unequivocal” simply are implied in law.15
In sum, when determining whether there is a valid agreement
to arbitrate between the parties, the first part of the two-step
inquiry, we apply ordinary state-law principles of contract
law. First Options, 514 U.S. at 944, 115 S.Ct. at 1924.
Because the FAA requires us to place arbitration agreements
on an equal footing with other contracts when determining
whether the parties have agreed to arbitrate, we cannot subject
a purported arbitration agreement otherwise within the scope
of the FAA and satisfying its requirements to a standard more
demanding than that which we would apply to other
agreements under the applicable state law. To be sure,
genuine issues of fact preclude summary judgment when
determining whether there is an agreement to arbitrate, just as
they do when determining the existence of any other contract.
See Fed. R. Civ. P. 56(c). But the FAA and Supreme Court
precedent forbid us from placing more stringent requirements
on arbitration agreements otherwise satisfying the criteria of
the FAA than on other contracts, such as a substantive
requirement that an arbitration agreement be “express” and
“unequivocal” to be enforceable, rather than the standard that
applies to contracts generally.16

15

Of course, in one respect Congress itself requires that
arbitration agreements be subject to more exacting standards
than most contracts as 9 U.S.C. § 2 requires that arbitration
agreements be in writing to be enforced, and thus the FAA
includes a requirement akin to a statute of frauds which states
enact to require that some but far less than all contracts be in
writing to be enforceable.

16

It is not too much to state that enforcement of a substantive
requirement that an agreement to provide for arbitration must be
“express” and “unequivocal” would be a partial reincarnation of
the courts’ pre-FAA hostility to arbitration.
31
b. Whether Century and Lloyd’s Agreed to
Arbitrate Disputes Arising from the
Retrocessional Agreements

H av in g a d d re s s ed these tw o prelim inary
issues—whether the presumption in favor of arbitration
applies to the initial question whether the parties agreed to
arbitrate (it probably does not), and whether in answering this
question we apply the substantive requirement based on our
caselaw that an agreement to arbitrate be “express” and
“unequivocal” to be valid and enforceable (we cannot)—we
return to the initial question: whether Century and Lloyd’s
agreed to arbitrate certain disputes, for if they did not do so
this case should not have been arbitrated. As we have stated,
to determine whether the parties agreed to submit any
disputes to arbitration, we apply “ordinary state-law principles
that govern the formation of contracts.” First Options, 514
U.S. at 944, 115 S.Ct. at 1924; see also Perry, 482 U.S. at 492
n.9, 107 S.Ct. at 2527 n.9; Kirleis, 560 F.3d at 160.

(1) Choice of Law: Pennsylvania Law
Applies

The question whether the parties agreed to arbitrate
certain disputes raises a choice-of-law issue. Though neither
party explicitly states that Pennsylvania law applies to the
question whether there is a valid arbitration agreement, they
seem to agree that Pennsylvania law does apply, because,
apart from federal cases, each predominantly cites
Pennsylvania state court cases on the issues in this case.
Moreover, the retrocessional agreements’ service-of-suit
clause contains a choice-of-law provision stating that “all
matters arising [from disputes brought pursuant to the service-
of-suit clause] shall be determined in accordance with the law
and practice of [the] Court” where the action is brought. App.
at 32. This provision suggests that to the extent that federal

32

law does not control this action, we should resolve this
dispute over payments under the retrocessional agreements in
accordance with the substantive law of Pennsylvania, the state
in which Century filed suit. Moreover, under that law the law
of the state in which an insurance contract is made governs
the contract. Crawford v. Manhattan Life Ins. Co., 221 A.2d
877, 880 (Pa. Super. Ct. 1966). The retrocessional
agreements were signed in duplicate in Pennsylvania and in
England. So even if the provision dictated only that
Pennsylvania’s choice-of-law rules applied, under those rules
Pennsylvania substantive law still would govern.17

(2) Principles of Pennsylvania Contract Law

We thus apply Pennsylvania contract-law principles to
determine whether the parties formed an agreement to
arbitrate. First Options, 514 U.S. at 944, 115 S.Ct. at 1924;
Perry, 482 U.S. at 492 n.9, 107 S.Ct. at 2527 n.9; Kirleis, 560
F.3d at 160 (internal citations omitted); see Murphy v.
Duquesne Univ. of the Holy Ghost, 777 A.2d 418, 429-30
(Pa. 2001) (discussing fundamental principles of contract
interpretation under Pennsylvania law); Quiles v. Fin. Exch.
Co., 879 A.2d 281, 285 (Pa. Super. Ct. 2005) (equating
principles for interpreting agreements to arbitrate with general
principles of contract interpretation). In general, to determine
whether a contract was formed under Pennsylvania law, a
court must look to: (1) whether both parties manifested an
intention to be bound by the agreement; (2) whether the terms
of the agreement are sufficiently definite to be enforced; and
(3) whether there was consideration. Blair, 283 F.3d at 603;
Shovel Transfer & Storage, Inc. v. Pa. Liquor Control Bd.,
739 A.2d 133, 136 (Pa. 1999); Quiles, 879 A.2d at 285. The
Pennsylvania Superior Court has explained that “[i]n
determining whether the parties agreed to arbitrate, courts

17

Even though the retrocessional agreements were signed in
duplicate in Pennsylvania and in England, neither party asserts
that English law applies here.

33

should apply rules of contractual construction, adopting an
interpretation that gives paramount importance to the intent of
the parties and ascribes the most reasonable, probable, and
natural conduct to the parties.” Id. at 287-88.

(3) Binding N onsign atories Through
Incorporation by Reference

We reiterate that even though the retrocessional
agreements do not include an arbitration provision, Lloyd’s
asserts that they incorporated the arbitration provision from
the reinsurance treaties between Argonaut and Century and
therefore Century and Lloyd’s agreed to arbitrate their
disputes. Pennsylvania courts have recognized the
incorporation-by-reference theory generally. “As a matter of
contract law, incorporation by reference is generally effective
to accomplish its intended purpose where . . . the provision to
which reference is made has a reasonably clear and
ascertainable meaning.” Bernotas v. Super Fresh Food Mkts.,
Inc., 816 A.2d 225, 231 (Pa. Super. Ct. 2002) (internal
quotation marks omitted), rev’d on other grounds, 863 A.2d
478 (Pa. 2004). See Roman Mosaic & Tile Co. v. Thomas P.
Carney, Inc., 729 A.2d 73, 77-78 (Pa. Super. Ct. 1999)
(subcontractor bound by terms of general contract
incorporated by reference into subcontract). As is significant
here, Pennsylvania courts have recognized incorporation-by-
reference provisions in an arbitration context. Integrated
Project Servs. v. HMS Interiors, Inc., 931 A.2d 724, 734-36
(Pa. Super. Ct. 2007) (discussing Bernotas and distinguishing
between enforceable incorporation or “pass-through” clauses,
such as those incorporating general contract’s arbitration
clause into subcontract, from unenforceable pass-through
clauses purporting to hold indemnitor liable for indemnitee’s
negligence); Cumberland-Perry Area Vocational-Technical
Sch. Auth. v. Bogar & Bink, 396 A.2d 433, 435 n.1 (Pa.
Super. Ct. 1978) (subcontractor bound by general contract’s
arbitration provision incorporated into subcontract to which
subcontractor was a party).

34

We note that the Pennsylvania Supreme Court in
Bernotas held that a contract’s general incorporation clause
will not incorporate another contract’s indemnification
provisions absent express and specific contract language to
that effect because of the longstanding policy to construe
indemnification provisions narrowly. Bernotas, 863 A.2d at
484 (concluding that, because courts traditionally construe
indemnification provisions narrowly, subcontract’s standard
incorporation clause was insufficient to incorporate general
contract’s indemnification clause against subcontractor to
hold subcontractor liable for general contractor’s negligence).

But we see no reason to apply that reasoning to the very
different question of whether an agreement’s incorporation-
by-reference provision applies so as to incorporate an
arbitration clause, because such a clause is quite different
from an indemnification clause.

In sum, under Pennsylvania law, arbitration provisions,
like other contractual provisions, may be incorporated by
reference through general incorporation provisions. We note
that, like the Pennsylvania courts, we have recognized
incorporation by reference as one theory for binding
nonsignatories to arbitration agreements. Allstate Settlement,
559 F.3d at 170 (citing Trippe, 401 F.3d at 532).18 At bottom,

18

In Allstate Settlement, we explained that “we have recognized
five theories for binding nonsignatories to arbitration
agreements: (1) incorporation by reference, (2) assumption, (3)
agency, (4) veil-piercing/alter ego, and (5) estoppel.” Allstate
Settlement, 559 F.3d at 170 (citing Trippe, 401 F.3d at 532)
(internal quotations omitted); see also, e.g., Mundi v. Union Sec.
Life Ins. Co., 555 F.3d 1042, 1045 (9th Cir. 2009); Bridas
S.A.P.I.C. v. Gov’t of Turkmenistan, 345 F.3d 347, 356 (5th
Cir. 2003); MAG Portfolio Consult, GmbH v. Merlin Biomed
Group LLC, 268 F.3d 58, 61 (2d Cir. 2001); Int’l Paper Co. v.
Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411,
416-17 (4th Cir. 2000).

35

the question remains one of the effect of the parties’ action in
incorporating the reinsurance agreements, including their
arbitration clause, as embodied in the agreements themselves,
to be determined by reference solely to the contents of the
agreements.

c. Construing the Retrocessional Agreements
Under Pennsylvania Law

There can be no question that the terms of the written,
signed retrocessional agreements are quite definite. See Blair,
283 F.3d at 603. There is no dispute that the reinsurance
treaties and the retrocessional agreements are valid contracts
and that they are mutually supported by consideration. Id.
(“When both parties have agreed to be bound by arbitration,
adequate consideration exists and the arbitration agreement
should be enforced.”). Our task, therefore, is to construe the
contracts to determine the effect of the parties’ inclusion of
the incorporation-by-reference provision solely by examining
the agreements’ contents. The question is limited to contract
construction: does the retrocessional agreem ents’
incorporation language result in an agreement between the
parties to arbitrate their disputes? See Appellant’s opening br.
at 15; Appellee’s br. at 16. L l o yd ’ s e m p h a s i z e s t h e
retrocessional agreements’ expansive incorporation clause
and argues that we should construe the retrocessional
agreements to have incorporated “all” of the reinsurance
treaties’ provisions, including the arbitration clause, because
that is precisely what the incorporation clause says. On the
other hand, Century emphasizes the phrasing of the
reinsurance treaties’ arbitration clause and argues that we
should not construe the retrocessional agreements to have
incorporated the arbitration agreement because the
incorporated arbitration clause specifies that it applies only to
Century and Argonaut, see Progressive Casualty, 991 F.2d at
45-48, and the purpose of the incorporation was to clarify the
parties’ obligations under the reinsurance agreements, not to

36

agree to a procedure for the resolution of disputes. See
AgGrow Oils, L.L.C. v. Nat’l Union Fire Ins. Co., 242 F.3d
777, 780-82 (8th Cir. 2001). We address each position in
turn.

d. Three Surety Cases in Which General
In c o r p o r a t io n P r o v is io n s E ffe c tiv e ly
Incorporate Arbitration Agreements

Lloyd’s argues that because the retrocessional
agreements provide that “all” terms and provisions of the
reinsurance treaties apply to the retrocessional agreements,
the parties must have provided for all of the treaties’ terms,
including the arbitration clause, to apply to the retrocessional
agreements. In support of this contention Lloyd’s relies for
the most part on a set of surety cases in the federal courts to
argue that a contract’s general incorporation clause effectively
can incorporate the underlying contract’s provisions,
including its arbitration clause. United States Fidelity &
Guaranty Co. v. West Point Constr. Co., 837 F.2d 1507 (11th
Cir. 1988) (per curiam); Exchange Mut. Ins. Co. v. Haskell
Co., 742 F.2d 274 (6th Cir. 1984) (per curiam); Commercial
Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386 (1st Cir.
1993). Lloyd’s contends that we should follow these cases to
hold that a party to a contract containing an arbitration clause,
such as the reinsurance treaties in this case, may be compelled
pursuant to that contract’s arbitration clause to arbitrate a
dispute with a third party arising under a second contract,
such as the retrocessional agreements in this case, where the
second contract incorporated the first contract’s terms through
a general incorporation-by-reference clause.

In West Point Construction the general contractor
sought to compel a subcontractor’s surety to arbitrate a
dispute pursuant to a performance bond that incorporated by
reference a subcontract between the general contractor and a
subcontractor. There were three relevant agreements. The
first agreement was the general contract between a county as
the owner and the general contractor to build a county justice

37

center. This general contract contained an arbitration clause.
The second agreement was the subcontract between the
general contractor and the subcontractor. This subcontract
contained its own arbitration clause as well as a separate
provision modifying that clause by referring to the general
contract’s arbitration clause. The third agreement was the
performance bond that the surety issued to the general
contractor on behalf of the subcontractor. This performance
bond incorporated the subcontract by reference and made the
subcontractor’s performance under the subcontract a
condition of the bond.

After the subcontractor defaulted, the general
contractor sought to recover against the surety and moved to
compel arbitration. The surety argued that the performance
bond’s incorporation-by-reference clause did not incorporate
the arbitration clause from either the subcontract or the
general contract. The Court of Appeals for the Eleventh
Circuit disagreed, holding that because the subcontract was
referred to in and made part of the bond, disputes arising
under the bond—including disputes concerning the adequacy
of the subcontractor’s performance under the subcontract, a
condition of the performance bond—were subject to
arbitration pursuant to the arbitration provisions of the
subcontract. West Point Constr., 837 F.2d at 1508. The court
found that, in these circumstances, “the incorporation of the
subcontract into the bond expresses an intention of the parties,
including [the surety], to arbitrate disputes.” Id.

Similarly, in Haskell, a case involving the construction
of a shopping center, the Court of Appeals for the Sixth
Circuit considered whether to enjoin arbitration between a
surety and the prime contractor. One of the relevant
agreements was the general contract between the general
contractor and the owner-developer to build the shopping
center. The general contract contained an arbitration clause
stating:

38

All claims, disputes and other matters in
question arising out of, or relating to this
contract or the breach thereof . . . which cannot
be settled by negotiation between the Contractor
and the Owner, shall be decided in accordance
with the Construction Industry Arbitration
Rules of the American Arbitration Association.

Haskell, 742 F.2d at 275.

The second agreement was the subcontract between the
general contractor and the subcontractor, pursuant to which
the subcontractor was to install the parking lot. This
subcontract incorporated by reference the general contract’s
obligations and responsibilities:

Subcontractor hereby assumes the same
obligations and responsibilities with respect to
his performance under this Subcontract, that
Contractor assumes towards Owner with respect
to his performance on the General Contract. If
the General Contract, which is hereby
incorporated by reference, fails or conflicts with
any provision of this Subcontract, or any
modification hereof, this Subcontract shall
govern.

Id.

The third agreement was the performance bond that an
insurance company as surety to the subcontractor issued in
favor of the general contractor. The performance bond
referred to the general contract, was conditioned on the
subcontractor’s performance under the subcontract,
indemnified the general contractor for losses sustained due to
the subcontractor’s failure to perform, and incorporated the
subcontract:

39

KNOW ALL MEN BY THESE PRESENTS,
That [the subcontractor], as principal and [the
insurance company] as Surety, are . . . bound
unto [the general contractor], in the sum of . . .
($108,000) Dollars . . ., jointly and severally,
firmly by these presents.
WHEREAS, [the general contractor] has been
awarded [the General Contract] by [the owner-
developer] for [the shopping center], and;
WHEREAS, the principal has entered into a
w ritten Subcontract w ith [the general
contractor] to perform . . . certain portions of the
work in connection with said [General
Contract], consisting of . . . as stated in
Subcontract No. 4234-06 . . . which Subcontract
is hereby referred to and made a part hereof.

Id. at 276.

When a dispute arose over the subcontractor’s
performance, the general contractor made a claim under the
performance bond against the surety and sought to arbitrate
the claim. The surety resisted and sought an injunction
precluding the arbitration. The district court, however,
compelled arbitration, and the Court of Appeals for the Sixth
Circuit affirmed the district court on appeal. The court of
appeals held that even though the performance bond did not
contain an arbitration clause, a court nevertheless could
compel the surety to arbitrate by reason of the arbitration
clause contained in the general contract because the
performance bond specifically incorporated by reference the
terms of the subcontract, and the subcontract in turn
incorporated the general contract’s obligations, including the
general contract’s duty to arbitrate. Id. at 276-77. The court
of appeals explained that “a party does not have to be a

40

signatory to the contract [containing the arbitration clause]
when the contract is specifically incorporated by reference in
the surety bond.” Id. at 276.

Finally, in Gilbane Building the Court of Appeals for
the First Circuit also compelled arbitration based on an
incorporated arbitration clause. In that case, a surety sought
to compel arbitration of a dispute over one of several separate
but related construction projects. The particular dispute that
the surety sought to arbitrate involved three agreements
structured in a column similar to those in West Point
Construction and Haskell: a prime contract, a subcontract, and
a performance bond.

The prime contract between the general contractor and
the project’s owner contained an arbitration clause stating that
“[a]ll claims, disputes and other matters in question arising
out of, or relating to this Agreement or the breach thereof, . . .
shall be decided by arbitration . . . unless the parties mutually
agree otherwise.” Gilbane Bldg., 992 F.2d at 388. The
subcontract between the general contractor and a structural-
steel subcontractor incorporated the terms of the prime
contract:

[The general contractor] shall be bound to [the
subcontractor] by the terms of this agreement, to
the extent that the provisions of the contract
documents between the owner and [the general
contractor] apply to the work of [the
subcontractor] as defined in this agreement[.]
[The general contractor] shall assume toward
[the subcontractor] all the obligations and
responsibilities that the owner, by those
documents, assumes toward [the general
contractor]. [The general contractor] shall have
the benefit of all rights, remedies, and redress
against [the subcontractor] which the owner, by
those documents, has against [the general
contractor].

41

Id. The subcontract defined “the contract documents” as the
prime contract, the conditions of that contract, and several
other related conditions. Id. at 388 n.2. The performance
bond incorporated the subcontract by reference: “Whereas,
[the subcontractor] has by written agreement . . . entered into
a Subcontract with [the general contractor] . . . which
Subcontract is by reference made a part hereof.” Id. at 388.

After the subcontractor ceased operations and
defaulted on its subcontracts, litigation ensued in which the
surety sought to compel arbitration of claims pursuant to the
arbitration clause contained in the prime contract. Though the
surety was not a signatory to the prime contract, it relied on
the incorporation-by-reference theory to justify its action in
seeking arbitration. Citing Haskell, the court of appeals
agreed with the surety and upheld the district court’s order
compelling arbitration. Id. at 388-89. Because the
subcontract in corp ora ted the prim e contract’s
obligations—with the general contractor assuming towards
the subcontractor all obligations that the owner had assumed
towards the general contractor under the prime contract, and
the subcontractor likewise assuming towards the general
contractor all obligations that the general contractor had
a s s u m e d to w a r d s t h e o w n e r u n d e r t h e p r im e
contract—including the obligation to arbitrate disputes arising
from the contract, the court of appeals held that the
subcontract obligated the general contractor to arbitrate
disputes with the subcontractor arising from the subcontract.
Id. And because the performance bond had referred explicitly
to the terms of the subcontract, the contractor was bound to
arbitrate its claim against the surety under the performance
bond as well. Id.

e. Declining to Incorporate Restrictively
Worded Arbitration Clauses That Refer to
the Immediate Parties

The foregoing opinions of three courts of appeals are
in harmony with the principle that a general incorporation

42

clause effectively can incorporate an arbitration agreement.
Nevertheless, Century argues that these cases are of limited
use in this case because in its view when an arbitration
agreement between one set of parties is incorporated by
reference into another agreement involving parties not bound
by the original agreement, a determination whether the parties
to the second agreement are bound to arbitrate depends on the
original arbitration agreement’s narrowness or breadth.
Focusing on whether an arbitration clause’s language is
“narrow” or “broad,” Century asserts that “the widely
accepted rule is that arbitration clauses that reference the
specific parties to which they apply—even if incorporated by
reference—are narrow clauses that do not support arbitration
of disputes beyond those between the specific parties
identified in the clause.” Appellant’s opening br. at 29. In
support, Century cites to Import Export Steel Corp. v.
Mississippi Valley Barge Line Co., 351 F.2d 503, 506 (2d
Cir. 1965), and Progressive Casualty, 991 F.2d at 45.
Import Export Steel involved maritime law, steel, and
the high seas but nonetheless resembles this reinsurance and
retrocession case because its result turned on an interrelated
set of contracts. There, a steel company signed a subcharter
agreement with a ship’s disponent owner to transport steel
coils from Germany to Louisiana.19 This subcharter
agreement, later amended, between the charterer-steel
company and the disponent owner contained an arbitration
clause that applied to “any dispute . . . between the Owners

19

A “disponent owner” is the party who originally charters the
ship. A “charter agreement” is a contract by which a ship’s
owner leases all or a principal part of the ship, often to a
merchant, for conveying goods on a predetermined voyage
(“voyage charter”) or for a predetermined period of time (“time
charter”). See Black’s Law Dictionary at 267. In Import Export
Steel, there was a prior charter agreement between the ship’s
actual owner and the disponent owner. 351 F.2d at 504-05.

43

and the Charterers.” Imp. Exp. Steel, 351 F.2d at 504-05.
Later, a third party and the disponent owner executed an
agreement under which the third party assumed the disponent
owner’s obligations and privileges under the subcharter
agreement, and, in exchange, the disponent owner agreed to
issue certain bills of lading.20 These bills of lading were
issued and designated the charterer-steel company as the
holder of each bill, the disponent owner as the shipper, and
the charterer-steel company’s affiliate as the notify party, i.e.,
the party to receive notice of delivery. The bills of lading also
incorporated by reference the subcharter agreement. Id.

The ship foundered before delivery, and both the
charterer-steel company and its affiliate sought to invoke the
subcharter agreement’s arbitration clause against the third
party to compel arbitration of liability for the lost cargo. Id.
The Court of Appeals for the Second Circuit ruled that the
charterer-steel company could enforce the arbitration clause
against the third party because the third party had assumed the
disponent owner’s obligations and privileges under the
subcharter agreement, to which the charterer-steel company
was a party, and also because the charterer-steel company
held the bills of lading that had incorporated by reference the
arbitration clause. Id. at 506 (explaining that holder of bill of

20

The Court of Appeals for the Fifth Circuit has explained:

A bill of lading is, in the first instance and most simply,
an acknowledgment by a carrier that it has received
goods for shipment. Secondly, the bill is a contract of
carriage. Thirdly, if the bill is negotiated . . . it controls
possession of the goods and is one of the indispensable
documents in financing the movement of commodities
and merchandise throughout the world.

Cargill Ferrous Int’l v. Sea Phoenix MV, 325 F.3d 695, 702 (5th
Cir. 2003) (internal citation omitted).

44

lading specifically referring to charter agreement and
incorporating charter agreement’s arbitration provision can
compel party to charter agreement to arbitrate dispute within
provision’s scope).

The court of appeals, however, refused to permit the
charterer-steel company’s affiliate to compel arbitration
because the affiliate was neither a party to the subcharter
agreement nor a holder, shipper, or cosignee under the bills of
lading. Id. at 505 (stating that nonparty claimant that is not
holder, shipper, or cosignee of bill of lading cannot use
charter agreement’s arbitration provision, even if agreement’s
terms are incorporated into bill of lading). In addition, the
court of appeals stated that the terms of a bill of lading
“should be carefully if not restrictively construed” because a
bill of lading is the only document regulating the relations of
the bill’s transferees and owner. Id. at 505-06. With this
consideration in mind, and noting that the arbitration clause
“was restrictive in scope in that it is limited to disputes
‘between the Disponent Owners and the Charters,’” the court
of appeals concluded that “[i]t would be unduly stretching the
language of this arbitration clause to say that [the affiliate], a
mere notify party . . . is one of the ‘Disponent Owners’ or
‘Charterers’” to which the clause applied. Id.

Almost 30 years later, the same court of appeals
distinguished Import Export Steel in Progressive Casualty. In
Progressive Casualty, a group of insurance companies insured
an oil company and then obtained reinsurance of that
coverage from a Venezuelan reinsurance company, RNV,
which, in turn, reached corresponding annual retrocessional
agreements with various retrocessionaires. 991 F.2d at 44.
One retrocessional agreement contained a provision stating
that it was “[s]ubject to” the underlying reinsurance contract.
Id. at 45. The reinsurance contract, in turn, included an
arbitration clause providing that “[a]ny question or dispute
arising between the contracting parties concerning the
interpretation of this Reinsurance Agreement . . . shall be

45

settled by arbitration.” Id. When a dispute arose, the
reinsurance company sought to compel its retrocessionaires to
arbitrate the dispute under the retrocessional agreement by
arguing that the retrocessional agreement through its “subject
to” clause incorporated the reinsurance agreement’s
arbitration clause. Id. at 45-46.

Applying New York law, the court of appeals held that
the retrocessional agreement contained a valid agreement to
arbitrate between the reinsurer and the retrocessionaire
because it effectively incorporated the reinsurance
agreement’s arbitration clause and the clause itself was not
worded so restrictively that it did not bind the
retrocessionaires. Id. at 45-48. Distinguishing Import Export
Steel, the court explained that while it previously had held
that “an arbitration agreement restricted to the immediate
parties does not bind a non-party, notwithstanding words of
incorporation or reference in a separate contract by which that
non-party is bound,” it also had held that “a broadly-worded
arbitration clause which is not restricted to the immediate
parties may be effectively incorporated by reference into
another agreement.” Id. at 47-48. The court concluded that
the arbitration clause in question, which called for arbitration
of disputes “between the contracting parties” without
specifying by proper name the identity of those parties, was
worded broadly enough to allow its effective incorporation
into other contracts:

Unlike the clause in Import Export, the
[reinsurance agreement’s arbitration clause] is
not restrictively worded by referring to the
immediate parties to that contract by name.
Rather, the [reinsurance agreement] merely
provides for arbitration of disputes between ‘the
contracting parties.’ We do not think it would
be ‘unduly stretching’ the language of the
clause to term the American Reinsurers and
RNV ‘contracting parties.’

46

Id. at 48 (internal citation omitted).

Century argues that we should adopt the principle of
Progressive Casualty and base our decision on whether the
arbitration provision is restrictively or broadly worded.
Inasmuch as the reinsurance treaties’ arbitration clause
provides for arbitration of disputes “between the Company
[Argonaut] and INA [Century],” Century contends that the
retrocessional agreements, in incorporating that clause, cannot
include an agreement to arbitrate disputes between Century
and Lloyd’s.

Century supports its argument with World Rentals &
Sales, LLC v. Volvo Construction Equipment Rents, Inc., 517
F.3d 1240 (11th Cir. 2008), a case in which the Court of
Appeals for the Eleventh Circuit addressed two separate sets
of agreements, one containing an arbitration clause and the
other incorporating it, related to franchising the sale and
leasing of construction equipment. In the first set, World
Rentals, the franchisee, entered into franchise agreements
with Volvo Rents, the franchisor, to sell and lease
construction equipment. These franchise agreements each
contained an arbitration provision stating that “all disputes . . .
arising between Franchisee and Franchisor shall be finally
resolved by arbitration.” Id. at 1242. The franchise
agreements also defined “Franchisor” as referring only to
Volvo Rents and specifically “not [to Volvo Rents’] corporate
parents or affiliates.” Id. at 1242-32.

In the second set of agreements, World Rentals
contracted with Volvo Finance, an affiliate of Volvo Rents,
for loans related to World Rentals’ franchise operations.
These loan agreements contained an incorporation provision
stating that “[a]ll schedules, exhibits, and other documents . . .
referred [to] in this Agreement . . . are hereby incorporated in
this Agreement by reference in their entirety as if fully
restated in this Agreement.” Id. at 1243. Elsewhere, the loan
agreements referred to the franchise agreements in defining
World Rentals’ failure to make payments under the loan

47

agreements and its default on the franchise agreements
between World Rentals and Volvo Rents as events of default
under the loan agreements.

After its business failed and World Rentals defaulted
on the loan agreements, it brought tort and contract claims
against both Volvo Rents and Volvo Finance in a district
court, and eventually moved to compel both Volvo units to
arbitrate. The district court denied World Rental’s motion as
to Volvo Finance. On appeal, addressing World Rentals’
argument that Volvo Finance could be compelled to arbitrate
because the World Rentals-Volvo Finance loan agreements
incorporated by reference the franchise agreements and thus
their arbitration clause, the court of appeals considered two
questions: first, was the arbitration clause incorporated? And
second, did the dispute fall within the terms of that arbitration
clause? Regarding the first question, the court concluded that
the loan agreements between World Rentals and Volvo
Finance unambiguously incorporated the franchise
agreements, including those agreements’ arbitration clauses.
Id. at 1245 (“[A]n arbitration clause can be incorporated even
if the relevant incorporation language does not specifically
refer to it.”) (citing J. S. & H. Constr. Co. v. Richmond
County Hosp. Auth., 473 F.2d 212, 215 (5th Cir. 1973)).

As for the second question, however, the court of
appeals held that the dispute fell outside the scope of the
arbitration clause. 21 Id. at 1246. Noting the proposition in
Progressive Casualty that “an arbitration agreement restricted
to the immediate parties does not bind a non-party,
notwithstanding words of incorporation or reference in a
separate contract by which that non-party is bound,” the court
of appeals explained that while there is a liberal policy

21

The court of appeals considered the issue whether Volvo
Finance and World Rents had agreed to arbitrate disputes arising
from the loan agreements as part of the “scope” question, rather
than as part of the initial “existence” question. See also Kirleis,
560 F.3d at 160 (citing Trippe, 401 F.3d at 532).

48

favoring arbitration agreements, “[t]here is no federal policy
favoring arbitration of disputes that the parties have
unambiguously excluded from their arbitration agreements.”
Id. at 1247 (citing Progressive Cas., 991 F.2d at 37, and Volt
Info. Scis., 489 U.S. at 479, 109 S.Ct. at 1256). In World
Rentals, the arbitration clause that was incorporated into the
loan agreements between World Rentals and Volvo Finance
unambiguously limited its application to disputes between the
franchisee, defined as World Rentals, and the franchisor,
defined as Volvo Rents, and expressly excluded any disputes
between World Rentals and Volvo affiliates such as Volvo
Finance. Id. In these circumstances, the court of appeals
concluded that Volvo Finance could not be compelled to
arbitrate its dispute with World Rentals because an order
compelling it to do so would “not only ‘unduly stretch,’ but
completely rewrite the arbitration clause, and compel a non-
party to arbitrate in the absence of ever having agreed to do so
in the first place.” Id. (quoting Imp. Exp. Steel, 351 F.2d at
506).

Century offers World Rentals in support of its claim
that restrictively phrased arbitration clauses cannot be
incorporated effectively through general incorporation-by-
reference clauses. But the cases we just discussed do not
reveal a widely observed, bright line rule. As the court of
appeals in World Rentals noted, an arbitration agreement
limited to the immediate parties effectively may be
incorporated by reference, despite its restrictive phrasing,
through different or additional incorporation language. Id. at
1247 n.6 (citing J. S. & H. Constr., 473 F.2d at 214 n.3). And
the reluctance to incorporate restrictively phrased arbitration
clauses that refer to the immediate parties did not preclude the
court in Haskell from recognizing that there was such an
incorporation. See Haskell, 742 F.2d at 275-76 (finding that
arbitration clause providing for arbitration of disputes “which
cannot be settled by negotiation between the Contractor and
the Owner” effectively incorporated by reference into
subcontract, and then to performance bond).

49

To support its claim that a “narrowly drafted”
arbitration clause incorporated by reference into a separate
contract, without more, cannot serve to bind parties not
specified in the original clause, Century also cites to Rice Co.
v. Precious Flowers Ltd., 523 F.3d 528 (5th Cir. 2008),
claiming that in Precious Flowers the Court of Appeals for the
Fifth Circuit applied Century’s proposed rule. A question in
Precious Flowers, an international-shipping case reminiscent
of Import Export Steel, was whether the shipper, by relying
on theories of agency and incorporation by reference, could
compel the vessel owner to arbitrate a dispute over liability
under a bill of lading, even though the vessel owner was not a
signatory to an agreement containing an arbitration provision
with the shipper.

Precious Flowers involved three interrelated contracts
among a vessel owner, Precious Flowers; a time-charterer and
disponent owner, IBN; and a shipper and voyage-charterer,
the Rice Company. The first agreement was a time-charter
agreement between vessel owner Precious Flowers and IBN,
pursuant to which IBN obtained the vessel and became its
disponent owner for a period of time. Id. at 532. This time-
charter agreement between Precious Flowers and IBN
contained an arbitration clause requiring that “all disputes
arising out of this contract shall be arbitrated at London and . .
. governed by English law.” Id. at 532 n.6. It also provided
that the time-charterer, IBN, could act on behalf of Precious
Flowers by signing bills of lading, albeit only “without
prejudice to [Precious Flowers].” Id. at 532.

The second agreement was a voyage-charter agreement
between IBN and the Rice Company, the shipper, pursuant to
which the Rice Company would ship its cargo of rice on the
vessel from the United States to Togo. Id. at 532-33. The
voyage-charter agreement between IBN and Rice Company
contained an arbitration clause providing that “any dispute . . .
between Owners and Charterers . . . shall be referred to
[arbitration].” Id. at 533. The court of appeals determined

50

that the voyage-charter agreement defined the term “Owner”
as the time-charterer and disponent owner, IBN, and defined
the term “Charterers” as the voyage-charterer Rice Company.
Id. at 532-35. It also determined that Precious Flowers was
not a party to this agreement. Id.

The third agreement was a bill of lading that would
have been issued by IBN and held by the Rice Company. 22
Id. at 533. This agreement, assuming it was signed, provided
that “[a]ll terms and conditions [of the voyage-charter
agreement], including the law and Arbitration Clause, are
herewith incorporated.” Id.

After rough seas related to Hurricane Rita damaged the
rice on board, allegedly due to unseaworthy hatch covers, the
Rice Company filed suit against the vessel itself, Precious
Flowers, and IBN, and moved to compel arbitration. Id. at
531. There was no dispute that the bill of lading incorporated
the voyage-charter agreement. The court of appeals first
addressed whether the voyage-charter agreement bound
Precious Flowers by its own terms, noting that the court
recognized the distinction between “broad” arbitration
provisions, such as those not restricted to particular parties or
types of disputes, and “narrow” ones, such as those restricted
to disputes “between the Owners and Charterers.” Id. at 536
(internal citation omitted); cf. Rohm & Haas, 522 F.3d at 331-
32 (discussing broad-versus-narrow distinction with respect to
scope of arbitration agreement).23 But the court of appeals

22

The ship sailed early, and the bill of lading never was signed,
but assuming it had been the case’s result would not have
changed. Precious Flowers, 523 F.3d at 535-36.

23

We note that Century quotes the Court of Appeals for the Fifth
Circuit to assert that that court recognizes Century’s broad-
versus-narrow rule in the context of determining whether parties
can be compelled to arbitrate. Appellant’s reply br. at 21 (citing
Precious Flowers, 523 F.3d at 536 (“[W]e do recognize the
distinction between a broad and narrow arbitration clause.”)).

51

emphasized that it did not follow this distinction between
broad and narrow clauses mechanically. Even in the case of
so-called broad arbitration clauses, if a particular dispute falls
outside an arbitration clause’s terms, whether worded broadly
or narrowly, the parties cannot be compelled to arbitrate.
Precious Flowers, 523 F.3d at 536; accord, Rohm & Haas,
522 F.3d at 332. The voyage-charter agreement’s arbitration
clause required arbitration only of disputes “between Owners
[defined as IBN] and Charterers [defined as the Rice
Company]”; as a matter of contractual construction, it was
straightforward that Precious Flowers could not be compelled
to arbitrate pursuant to the voyage-charter agreement because
Precious Flowers was not party to the agreement and was not
governed directly by the clause. Precious Flowers, 523 F.3d
at 536.

The Rice Company nevertheless argued that Precious
Flowers was bound to arbitrate the dispute pursuant to the bill
of lading, based on a combination of theories of incorporation
by reference and agency. The Rice Company argued that (1)
in the time-charter agreement Precious Flowers had
empowered IBN to ratify bills of lading as its agent, (2) IBN
then had ratified the bill of lading, thus binding Precious
Flowers, and (3) the ratified bill of lading incorporated the
terms of the voyage-charter agreement, including its
arbitration clause. Id. at 536.

The court of appeals rejected this argument because
Precious Flowers had not empowered IBN to bind it. It
explained that as a general matter, agency principles do not
offend the FAA’s fundamental rule that parties are not
required to arbitrate when they have not agreed to do so. Id.
In so stating, however, the court of appeals relied on its caselaw
addressing the question of an arbitration agreement’s scope, not
existence. Precious Flowers, 523 F.3d at 536 (citing Sedco, Inc.
v. Petroleos Mexicanos Mexican Nat’l Oil Co. (Pemex), 767
F.2d 1140, 1144-45 (5th Cir. 1985) (no dispute as to existence
of arbitration agreement)).

52

at 538 (“[W]here an agent signs a contract requiring
arbitration, the principal is bound by the arbitration
requirement.”). In Precious Flowers, however, the time-
charter agreement between Precious Flowers and IBN
expressly provided that even though IBN could ratify bills of
lading, it could do so only “without prejudice” to Precious
Flowers. Because Precious Flowers had limited the authority
of IBN as its agent, allowing it to sign bills of lading only
“without prejudice” to Precious Flowers, and because no
other agreement applied against it, Precious Flowers was not
bound to arbitrate the dispute with the Rice Company. Id. at
538-39.

In so concluding, the court of appeals distinguished
Cargill Ferrous International v. Sea Phoenix MV, 325 F.3d
695 (5th Cir. 2003), another admiralty case. In Sea Phoenix,
three documents were implicated: (1) a time-charter
agreement between the ship owner and the disponent owner,
(2) a voyage-charter agreement between the disponent owner
and the shipper containing an arbitration clause, and (3) a bill
of lading that was ratified by the shipper and the vessel owner
through its agent and that incorporated the voyage-charter
agreement’s arbitration clause. In these circumstances, the
vessel owner could compel the shipper to arbitrate their
dispute because the bills of lading between the vessel owner,
through its agent, and the shipper incorporated the arbitration
clause of the shipper’s voyage-charter agreement with the
disponent owner. Id. at 698-700.

In Precious Flowers, by contrast, the court of appeals
rejected an attempt to bind a nonsignatory to an arbitration
clause where it had not signed the arbitration agreement and
where it had not authorized its agent to sign an arbitration
agreement. It thus is true that the court ruled that the
arbitration clause which named the specific parties to which it
applied, did not bind the nonsignatory. But Precious Flowers
depended on the application of principles of agency, not on a
mechanical application of Century’s proposed rule that an

53
arbitration agreement restricted to the immediate parties does
not bind a nonparty, notwithstanding words of incorporation
or reference in a separate contract by which that nonparty is
bound.

f. Questions of Existence and of Scope

It seems clear that because Century predicated its
argument on its contention that an incorporated arbitration
clause’s narrow or broad phrasing determines whether there is
an arbitration agreement between the incorporating parties, it
risks confusing its proposed rule with the narrow-versus-
broad distinction relating to the separate question of an
arbitration agreement’s scope. Local 827, Int’l Bhd. of Elec.
Workers v. Verizon N.J., Inc., 458 F.3d 305, 310 (3d Cir.
2006). In particular, Century cites to Rohm & Haas, 522 F.3d
331-32, in asserting that we have refused to enforce
arbitration agreements and have respected clauses’ limitations
where such clauses are “narrow.” Appellant’s opening br. at
35-36; Appellant’s reply br. at 22.

In Rohm & Haas, a labor-dispute case, we addressed
whether certain employees who disputed denials of their
disability claims under an employee-benefits plan could
compel the company and the plan administrator to submit the
dispute to arbitration pursuant to a separate collective-
bargaining agreement’s grievance procedure. The first
agreement, effective 2000-2004, was the collective-
bargaining agreement between the company and the union
covering a particular facility (the “CBA”). The CBA applied
“only to the wages, hours, and working conditions of the . . .
employees” and created a dispute-settlement procedure for
disputes “involv[ing] wages . . ., hours . . ., and working
conditions.” Id. at 327-28. According to this procedure, if
other means fail, “either party [the union or the company]
may submit the matter to arbitration as described” in another
CBA provision. Id. at 328.

54

The second agreement, effective beginning in 2003,
was the employee-benefits plan. This plan provided certain
benefits to both union and non-union employees working at
various facilities, not merely the one covered by the CBA, and
the plan, as is common under such plans, vested the sole
discretion to interpret and apply the plan in an administrative
committee. Id. at 329. Moreover, the plan provided a
procedure for submitting claims, including a requirement for
claimants denied benefits to be notified of their statutory
rights to bring ERISA claims. 24 Unlike the CBA, the plan did
not provide for arbitration of disputes. Id. at 329-30. The
union was not a signatory to the benefits plan which,
significantly, did not incorporate or otherwise refer to the
CBA. Id. at 329. Addressing whether the CBA’s
arbitration clause should be deemed narrow or broad, we
concluded that the clause was broad because it did not
expressly exclude categories of grievances, such as issues
concerning disability benefits, from arbitration. Id. at 332.
But we emphasized that, regardless of whether an arbitration
clause is labeled as broad or narrow, the central questions
with respect to its application remain whether the parties
agreed to submit disputes to arbitration and whether the
particular dispute falls within the arbitration agreement’s
scope. Id.

There was no dispute that the CBA contained a valid
agreement between the company and the union to arbitrate
certain matters. Nevertheless, we concluded that the
employees and their union could not compel arbitration of
disputes arising from the benefits plan pursuant to the CBA’s
arbitration clause despite that clause’s broad wording because
the dispute over employee benefits was outside that clause’s
scope, which was limited to wages, hours, and working
conditions, and because neither agreement referred to or
incorporated the other: the CBA’s mention of a sickness plan
did not incorporate the benefits plan and the benefits plan did
24

See 29 U.S.C. § 1133.

55

not provide that adverse determinations were subject to the
CBA’s grievance procedure. Id. at 332-36.

We based our decision in Rohm & Haas on the scope
of a valid arbitration agreement. Accordingly, Century’s
attempt to apply the logic of Rohm & Haas to support its
contention that the parties did not form a valid arbitration
agreement is misplaced. Our decision in Rohm & Haas does
not confirm Century’s proposed approach to the
incorporation-by-reference question based on an incorporated
arbitration clause’s narrow-versus-broad or restrictive-versus-
unrestrictive phrasing.

Similarly, Century cites Chimicles, 447 F.3d at 210-11
to support its contention that we should not apply the
incorporation-by-reference clause in the retrocessional
agreements to form an agreement between Century and
Lloyd’s to arbitrate. In essence, Century reads Chimicles to
hold that a “narrow” arbitration clause when incorporated into
another contract cannot apply to disputes under that contract,
and thus, in its view, Chimicles supports our adoption of the
rule in Progressive Casualty: the incorporation of an
arbitration clause that specifies parties to which it applies
does not bind parties to the distinct agreement containing the
incorporation-by-reference clause.

In Chimicles, we considered whether two limited
partners in a partnership in receivership could compel the
partnership’s receiver to arbitrate a dispute over the
requirements of subscription agreements between the limited
partners and the partnership. The limited partners based their
argument on an arbitration clause contained in the partnership
agreement between the limited partners and the general
partner.

The partnership agreement was between an LLC as
general partner and certain investors as private limited
partners. The partnership agreement contained an arbitration
clause stating that “[t]he General Partner and the Private
Limited Partners . . . hereby agree that any and all
controversies . . . arising out of . . . this Agreement . . . shall

56

be settled by arbitration . . . .” Chimicles, 447 F.3d at 210.
The partnership agreement also included a choice-of-venue
clause providing that an “[a]ction to enforce any provision of
this Agreement or any action brought by the Partners against
the General Partner or the Partnership shall be brought
through arbitration in New Jersey, pursuant to [the arbitration
clause].” Id. The partnership agreement indicated that it was
a fully integrated contract. Id.

In the subscription agreements between each investor
and the partnership, each investor agreed to make certain
capital contributions to the partnership “in accordance with
the terms and conditions described herein and in the
Partnership Agreement.” Id. at 210. In addition, each
investor agreed “to be bound by all of the terms and
conditions of the Partnership Agreement.” Id. But neither
subscription agreement contained an arbitration clause, and
the subscription agreements indicated that they were fully
integrated contracts. Id.

When the partnership’s receiver sought to enforce the
investors’ contribution requirements under the subscription
agreements, the investors moved to compel arbitration
pursuant to the partnership agreement’s arbitration clause.
We rejected this effort on several grounds. We explained that
the partnership itself was not bound directly by the
partnership agreement because it was not a signatory to the
agreement. Even assuming that the subscription agreements
incorporated by reference the partnership agreement’s
arbitration clause, they did so against the investors and not
against the partnership itself. Id. at 209-10 (subscription
agreements providing that investors agree “to be bound by all
terms and conditions of the Partnership Agreement”). And
even if a court were to read the incorporation-by-reference
clause as binding against the partnership, the arbitration
clause was intended to apply to suits that the limited partners
brought, not to those that the partnership brought. Id. at 210-
11. Finally, even if the partnership somehow were bound to
arbitrate, we noted a provision in the partnership agreement

57

that would have negated that obligation in the circumstances
of the case. Id. In what did not seem to be a close case, we
concluded that the partnership had not formed an arbitration
agreement with the investors, so it could not be compelled to
arbitrate.

Century focuses on our statement in Chimicles that
“[e]ven assuming arguendo that [the incorporation clause of]
the subscription agreement incorporates by reference the
terms and conditions of the partnership agreement, the
arbitration provision does not apply to an action brought by
[the partnership or its receiver].” Id. at 210; Appellant’s
opening br. at 38-39. Century argues that this statement
“directs that the narrow arbitration clause in the [reinsurance
treaties] be interpreted according to its own terms, even if
incorporated into the [retrocessional agreements].”
Appellant’s reply br. at 26. But in concluding that the
arbitration provision did not apply to actions brought by the
partnership, even if incorporated, we also relied on the
incorporation clause itself, which incorporated the terms and
conditions of the partnership agreement only against the
limited partners. Chimicles, 447 F.3d at 210. Considering the
multiple bases for our conclusion that there was not an
agreement to arbitrate, Chimicles does not bear the weight
that Century would put on it.

g. John F. Harkins Co.

Lloyd’s asserts that we have rejected the rule proposed
by Century in John F. Harkins Co. v. Waldinger Corp., 796
F.2d 657 (3d Cir. 1986). In John F. Harkins, a construction
case involving a dispute between a primary contractor and a
subcontractor, the question was whether the primary
contractor and subcontractor intended the terms of the
principal contract between the project manager and primary
contractor, including the principal contract’s restrictive
arbitration clause, to govern the terms of the subcontract

58

between the primary contractor and the subcontractor, where
the subcontract included a broader arbitration clause but
incorporated the general contract’s obligations.

The principal contract between the project manager
and the primary contractor addressed arbitration of disputes,
providing for arbitration only of those disputes named in the
contract as arbitrable: “[i]n any case in which it is provided by
the terms of this contract that any specific dispute or specific
payment to be made shall be determined by arbitration, such
arbitration shall be conducted [in a certain manner].” Id. at
660-61. Elsewhere, the principal contract provided for
arbitration only of disputes over written change orders: “[i]n
case of disagreement as to the amount to be paid or allowed
[under a written change order], the Contractor shall promptly
comply with the order and the amount shall be determined by
arbitration as herein provided.” Id. at 661.

In contrast to the principal contract, the subcontract
between the primary contractor and the subcontractor
contained a broadly worded arbitration clause providing that
“[a]ll disputes . . . arising hereunder shall be subject to
arbitration . . . .” Id. at 660. The subcontract also included a
section referring to the principal contract. This section
provided that the subcontractor’s work and materials used
“shall be in strict accordance with the [principal]
CONTRACT DOCUMENTS.” Id. It also provided that
“SUBCONTRACTOR shall be bound by all provisions of
these documents and also by the applicable provisions of the
PRINCIPAL CONTRACT to which the CONTRACTOR is
bound, and to the same extent . . . .” Id.

Reviewing for clear error, we upheld the district
court’s interpretation—which was based on the provisions’
language and on extrinsic evidence that included an
unopposed affidavit stating that the parties intended the
subcontract’s “shall be bound” section to limit the
subcontractor’s rights against the primary contractor to those
of the primary contractor against the project manager—that
the parties intended the subcontract to incorporate the

59

principal contract’s more restrictive arbitration clause. Id. at
659-62. Under this interpretation, we upheld the district
court’s decision that arbitration must be enjoined because the
dispute did not fall within that clause’s scope.

Lloyd’s reads John F. Harkins as a basis for rejecting
Century’s distinction between the effects of incorporated
arbitration clauses that specify the parties to whom they apply
and those lacking such restrictions. Considering the case’s
standard of review and its facts, however, John F. Harkins
does not support Lloyd’s’s interpretation. But neither does it
compel a result based solely on an arbitration clause’s
specifying by name the parties to which it applies, because, as
seen in John F. Harkins, a second agreement’s incorporating
language may affect the application of that clause to new
parties. The result depends on the parties’ intent.

h. Incorporation by Reference for a Limited
Purpose

In an argument related to its claim that restrictively
worded arbitration clauses referring to the immediate parties,
when incorporated into another agreement, generally cannot
support arbitration of disputes between parties not identified
in the clause, Century also argues that the parties may intend
general incorporation clauses to have a limited purpose.
Here, Century contends that the parties intended the
retrocessional agreements’ incorporation language only to
clarify the scope of Lloyd’s’s “substantive” obligations under
the reinsurance treaties—that is, its liability—and not to
incorporate other obligations that Century characterizes as
“procedural,” such as the agreement to arbitrate. In
illustration, Century cites AgGrow Oils, 242 F.3d at 779.

In AgGrow Oils, a surety case, the Court of Appeals
for the Eighth Circuit considered a dispute between the owner
of a processing facility and the surety to a contractor hired by
the owner to build the facility. AgGrow Oils, the plant owner,

60

entered into a construction contract with a construction
company for it to build the processing facility. The
construction contract contained an arbitration clause stating
that “any controversy or Claim arising out of or related to the
Contract, or the breach thereof, shall be settled by arbitration
in accordance with the Construction Industry Arbitration
Rules of the American Arbitration Association.” Id. at 780
n.1. The construction company guaranteed that the completed
facility would reach a certain level of performance. Id. at
779. The construction contract also stated that it should “not
be construed to create a contractual relationship of any kind . .
. between any persons or entities other than [the plant owner
and the construction company].” Id. at 781.

In related contractual dealings, the construction
company purchased processing equipment from a
manufacturer and obtained engineering services from the
construction company’s own subsidiary. In addition, the
construction company’s surety issued a performance bond to
the plant owner guaranteeing the construction company’s
performance by binding the surety “to the [Plant] Owner for
the performance of [the construction company’s obligations
under] the Construction Contract, which is incorporated
herein by reference.” Id. at 779.

After construction was completed, the facility failed to
meet the construction company’s performance guarantees,
and a variety of disputes ensued that later were consolidated
into a single action. The surety then moved to stay the plant
owner’s suit and to compel the plant owner to arbitrate its
claim against the surety under the performance bond, based
on the construction contract’s arbitration clause that the surety
claimed was incorporated into the bond.
Applying North Dakota law, the court of appeals held
that the incorporation clause was ambiguous on the issue of
arbitrability. Id. at 781. The court found that the
incorporation clause’s main purpose was to clarify the
construction company’s performance obligations that the
construction company’s surety undertook to guarantee. But

61

the court found that the clause did not clearly reflect the
owner’s and the surety’s intent to provide for arbitration of
their disputes under the bond, particularly in light of the
performance bond’s provision referring to judicial settlement
of disputes and the construction contract’s provision stating
that the contract not create contractual relations between any
other parties. Id. The court further considered the purpose of
surety bonds generally: to provide recourse to an obligee
against a secondary obligor in the event of the principal
obligor’s failure to perform the underlying obligation. Id.

The court acknowledged that there were several
decisions concluding that performance bonds incorporating
the terms of underlying contracts also incorporated those
contracts’ arbitration agreements. Id. at 781-82.
Nevertheless, the court concluded that, in the circumstances it
confronted, the owner and the surety had not reached an
agreement to arbitrate disputes under the performance bond
because the purpose of the bond’s incorporation clause was to
define the scope of the surety’s liability, not to apply the
entirety of the construction contract to the bond:

Mindful of the fundamental principle that
arbitration under the [Federal Arbitration] Act is
a matter of consent, not coercion, we are
unwilling to construe an incorporation clause
whose obvious purpose was to clarify the extent
of the surety’s secondary obligation as also
reflecting a mutual intent to compel arbitration
of all disputes between the surety and the
obligee under the bond. . . . [W]e conclude there
was no such agreement to arbitrate.

Id. at 782 (internal citation and quotation marks omitted) (first
alteration in original).

Thus, even if an incorporated arbitration clause is not
restricted to the immediate parties in the original agreement,
courts may refuse to compel arbitration where the parties do
not intend to incorporate the agreement to arbitrate. Century
cites this decision to show that parties may incorporate a
62
separate contract into their agreement for certain purposes and
not others, and argues that the parties intended here for the
retrocessional agreements to incorporate the reinsurance
treaties only to clarify the extent of the obligations that
Lloyd’s assumed under the retrocessional agreements.

i. The Retrocessional Agreements

(1) The Agreement’s Language and
Structure

With the cases we have discussed in mind, we turn to
the agreements at issue in this case. The three reinsurance
treaties between Century and Argonaut largely contain
identical language and, so far as germane here, do not differ
materially. Article 15 of each treaty contains an arbitration
clause under which Century and the Company, defined
previously as Argonaut, agree to submit disputes to
arbitration:

If any dispute shall arise between the
Company [Argonaut] and INA [Century]
with reference to the interpretation of this
Agreement or their rights with respect to
any transaction involved, the dispute
shall be referred to three arbitrators, one
to be chosen by each party and the third
by the two so chosen. . . . The arbitrators
shall consider this Agreement an
honorable engagement rather than merely
a legal obligation; they are relieved of all
judicial formalities and may abstain from
following the strict rules of law. The
decision of a majority of the arbitrators
shall be final and binding on both the
C om pany [A rgonaut] and IN A
[Century]. The expense of the arbitration
and arbitrators shall be equally divided

63

between the Company [Argonaut] and
INA [Century]. Any such arbitration
shall take place in San Francisco,
California, unless some other location is
mutually agreed upon by the Company
[Argonaut] and INA [Century].

App. at 59-60, 101, 127 (bracketed material added). Notably,
this arbitration provision specifies the parties to whom it
applies. Cf. Progressive Cas., 991 F.2d at 47-48 (holding that
arbitration provision referring only to “contracting parties”
was “worded broadly enough to allow its incorporation by
reference into other contracts”).

We next turn to the three corresponding retrocessional
agreements between Century and Lloyd’s, each containing
essentially the same terms. Under the retrocessional
agreements’ Paragraph 1, Century ceded to Lloyd’s 90% of
the premiums and losses resulting from Century’s reinsurance
treaties with Argonaut: Century would pay Lloyd’s 90% of
the premiums it received from Argonaut, and, in exchange,
Lloyd’s would pay Century 90% of the losses that Century
paid to Argonaut under the reinsurance treaties.25 Paragraph 1
of each retrocessional agreement also refers to and
incorporates the corresponding reinsurance treaty in stating
that a copy of the treaty is attached and “made a part hereof.”
App. at 30, 71, 109 (Para. 1).

25

Paragraph 1 of the retrocessional agreements states in part:
[Century] agrees to cede and [Lloyd’s] agrees to accept
90% (ninety percent) of the liability which accrues to
[Century] under its Reinsurance Agreement . . . issued to
[Argonaut]. [Century] shall pay to [Lloyd’s] 90%
(ninety percent) of all premiums paid to [Century] under
the policy, and [Lloyd’s] shall pay to [Century] 90%
(ninety percent) of the losses and loss adjustment
expenses paid by [Century] thereunder.

App. at 30, 71, 109 (Para. 1).

64

Paragraph 2 of the retrocessional agreements provides:
Subject to the percentage allocation in the
preceding paragraph, all terms and provisions of
the [reinsurance treaty] shall be applied to this
agreement as if contained herein, and [Lloyd’s]
shall receive prompt notice of any change in the
Policy. Material changes are not binding on
[Lloyd’s] unless agreed.

App. at 30, 71, 109 (Para. 2). Thus, immediately after
Paragraph 1 incorporates the corresponding reinsurance
treaties, Paragraph 2 “applie[s]” them.

(2) Construing the Agreement

As we already have indicated, neither party claims that
the provisions of the retrocessional agreements are ambiguous
with respect to the first fundamental question on this appeal,
whether the parties entered into a valid arbitration agreement
establishing a mechanism for resolution of the dispute in this
case. Thus, we will seek to give effect to the parties’
agreements and thus their obligation vel non to arbitrate
disputes solely by making reference to the documents
themselves, taking the entire contracts into consideration and
assuming that the sophisticated parties to the agreements
chose their language, particularly that of the incorporating
provisions, carefully. See Murphy, 777 A.2d at 429-30. Our
approach recognizes that this case involves contractual
construction and that we are exercising plenary review rather
than applying the clearly erroneous standard applicable in
contract interpretation cases.26 See, e.g., John F. Harkins, 796

26

We cannot prejudice Century by our exercise of plenary
review because application of that standard of review only can
enhance the possibility of an appellant obtaining a reversal on an
appeal. Of course, if we attempted to ascertain the parties’

65

F.2d at 659-60. We are dealing with retrocessional
agreements designed to shift risk, defined through reference
to the underlying reinsurance treaties, from Century to
Lloyd’s. In this regard, Paragraph 1, it seems clear, is
intended to define the scope of Lloyd’s’s derivative liability.
See AgGrow Oils, 242 F.3d at 781-82 (noting that purpose of
incorporation by reference was to define surety’s secondary
liability). Paragraph 1 identifies the reinsurance treaty that
Lloyd’s will insure, attaches and incorporates that document
by reference, and specifies the percentage of that treaty’s
liabilities and premiums that Lloyd’s will assume. App. at 30,
71, 109 (retrocessional agreement para. 1) (emphasis added).

Paragraph 2 again refers to the reinsurance treaties, but
it does so in markedly different language. It “applie[s]” all
terms and provisions of the incorporated reinsurance treaty to
the retrocessional agreement:

Subject to the percentage allocation in the
preceding paragraph, all terms and provisions of
the Policy shall be applied to this agreement as
if contained herein, and [Lloyd’s] shall receive
prompt notice of any change in the Policy.
Material changes are not binding on [Lloyd’s]
unless agreed.

intent with respect to the specific issues involved here, we
would be engaging in a process equivalent to writing a work of
fiction because we do not find in the record any reason to
believe that when the parties were negotiating the retrocessional
agreements they intended to deal with the precise questions
involved in this case. Accordingly, though the parties surely
intended to be bound by the retrocessional agreements,
including the incorporation-by-reference clause, it would be
difficult to decide this case on a meeting-of-the-minds
determination similar to our process in Par-Knit Mills. Indeed,
we have no doubt that if the parties had foreseen the dispute
involved here, they would have dealt with it directly in the
retrocessional agreements and thereby avoided incurring the
significant cost and uncertain outcome of this litigation.

66

Id. (para. 2) (emphasis added). Considering Paragraph 1 and
2 together, see Murphy, 777 A.2d at 429-30, if Paragraph 2’s
incorporation provision only clarified the extent of Lloyd’s’s
derivative liability—something that Paragraph 1 just
accomplished—then Paragraph 2 would be superfluous.
Rather, Paragraph 2’s incorporating language, in differing
from Paragraph 1’s, suggests a different purpose. The
incorporation applies “all” terms of the pertinent reinsurance
treaty.

Indeed, this reiterative incorporation clause is phrased
more strongly and expansively than those in many of the
cases that the parties cite, including those in which the
provision was held to incorporate the arbitration clause. See,
e.g., Progressive Cas., 991 F.2d at 45-46 (finding arbitration
clause was effectively incorporated against nonsignatory
solely through “subject to” language). Applying the
retrocessional agreement to give effect to all its provisions as
Pennsylvania law directs that we do, Capek v. Devito, 767
A.2d 1047, 1050 (Pa. 2001), Paragraph 2 applies as to Lloyd’s
and Century the terms and provisions of the reinsurance
treaties, precisely what Paragraph 2 says.

Century also asserts that Paragraph 2’s introductory
clause, “[s]ubject to the percentage allocation in the preceding
paragraph,” indicates that only certain obligations were
incorporated because only “substantive” issues relating to
liability can be subject to the percentage allocation of risk and
premiums, while “administrative” provisions such as the
arbitration clause cannot. But Paragraph 2’s text does not
easily admit such a reading; its incorporating language is
inescapably broad. Thus, the more reasonable reading of
Paragraph 2 is that the parties applied “all” of the reinsurance
agreements’ terms and provisions to the retrocessional
agreement, except that Lloyd’s’s rights and obligations
respecting premiums and losses are defined as stated in
Paragraph 1 of the retrocessional agreements. The
reinsurance treaties’ arbitration provision does not conflict

67

with Paragraph 1’s allocation of liability and premiums, so the
provision may be applied to the retrocessional agreements.

(3) Language Absent from the Incorporation
Clauses

We note as well certain language that the
retrocessional agreements and the reinsurance treaties lack.
Many cases denying motions to compel arbitration have
involved contractual provisions that limited the applicability
of the incorporated arbitration clause. In Chimicles, for
example, a partnership was not compelled to arbitrate
pursuant to certain subscription agreements to which it was a
signatory because the subscription agreements, which
incorporated the terms of another agreement, including that
agreement’s arbitration clause, did so only as against the
limited partners, not against the partnership itself. Chimicles,
447 F.3d at 209-10. And even if it had bound the partnership,
the partnership agreement in that case also contained a
provision specifically excluding from arbitration the exact
circumstance in which the dispute in that case arose. Id. at
211.

Moreover, the retrocessional agreements do not limit
the parties against which the reinsurance treaties’ arbitration
clauses are applied. Cf. Chimicles, 447 F.3d at 209-10
(partnership not bound by arbitration agreement where
subscription agreements incorporated terms of partnership
agreement, including its arbitration clause, only against
limited partners and not against partnership itself). Nor is
there a specifically applicable contractual exclusion. Id. at
211 (partnership agreement that purportedly incorporated
arbitration clause also specifically excluded from arbitration
exact circumstance under which dispute in that case arose).

Similarly, in AgGrow Oils, the construction contract,
later incorporated into the subcontract, specifically provided
that it “should not be construed to create a contractual

68

relationship of any kind” other than that between the parties to
that contract. 242 F.3d at 781. And in World Rentals, 517
F.3d at 1242-43, the underlying contract’s arbitration clause
specifically defined the parties bound to arbitrate and, in an
unusual provision, explicitly excluded corporate parents or
affiliates. Cf. Precious Flowers, 523 F.3d at 532-35 (finding
that agency theory though applicable inadequate to bind
vessel owner where underlying contract authorized agent to
sign bills of lading only “without prejudice” to the vessel
owner).27 Century does not point to any such limiting
language here.

(4) Century’s Problems
Century points to certain problems with Lloyd’s’s

position that we should construe the retrocessional
agreements to incorporate “all” of the reinsurance treaties’
provisions, including their arbitration clause, as against
Century and Lloyd’s. First, applying each and every
provision of the reinsurance treaties to the retrocessional
agreements results in some duplication, because the
agreements and the treaties both contain provisions giving

27

We also note that the retrocessional agreements do not contain
language indicating an assumption of the obligations of the other
party to the underlying contracts. See Haskell, 742 F.2d at 275
(“Subcontractor hereby assumes the same obligations and
responsibilities with respect to his performance under this
Subcontract, that Contractor assumes towards Owner with
respect to his performance on the General Contract.”); Gilbane
Bldg., 992 F.2d at 388 (involving agreement stating “[general
contractor] shall assume toward [subcontractor] all the
obligations and responsibilities that the owner, by [the prime
contract], assumes toward [general contractor]. [General
contractor] shall have the benefit of all rights, remedies, and
redress against [subcontractor] which the owner, by [the prime
contract], has against [general contractor].”).

69

each party access to the other’s books, designating John F.
Sullivan Co. as intermediary, and providing for interim loss
payments upon request.

In addition, Century asserts that applying “all”
provisions produces absurd results. The reinsurance
agreements’ Article 8 refers to employer insurance. Century
argues that it is preposterous to conclude that the parties
intended through the incorporation clause to obligate Lloyd’s
on policies that Century issues directly to its own employees.
Similarly, Century claims that it is absurd to construe the
provisions covering lines of businesses through the
incorporation clause to make Lloyd’s liable on any policies
Century directly issued. We note, however, that the effect of
the parties’ agreement on these provisions is not before us,
and if it were the asserted absurdity possibly would be an
argument against concluding that the parties incorporated
these provisions against each other. On the other hand, it
surely would not be absurd for the retrocessional agreements
to incorporate the arbitration provisions of the reinsurance
treaties.

Moreover, Century has a more pointed problem of its
own. In view of its position here, it is significant that
Century’s position during arbitration suggested that the
incorporating provisions had broad effect. In this regard,
Century in its prehearing brief during the arbitration
proceedings directed the panel to the reinsurance treaties’
follow-the-fortunes clauses:

It cannot be disputed that the contracts at issue
contain the follow the fortunes and settlements
provisions. The contracts state that: ‘All loss
settlements made by the Company [Argonaut],
within the terms of this Agreement, shall be
unconditionally binding upon INA [Century],
and amounts falling to the share of INA
[Century] shall be payable by them upon
reasonable evidence of the amount paid[.]’
(XOL Treaties, Exhibit ‘2’, Article 10.)

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App. at 231-32 (immaterial footnote omitted) (quoting
reinsurance treaties). Century then argued that this provision
in the reinsurance treaties applied to Lloyd’s vis-à-vis Century
under the retrocessional agreements:

That means that Underwriters [Lloyd’s] are
bound by Century’s settlements with Argonaut
and must pay Century when Underwriters
[Lloyd’s] are presented with ‘reasonable
evidence of the amount paid’ by Century.

App. at 231-32 (immaterial footnote omitted). Consequently,
Century’s position is that at least some of the resinsurance
agreements’ provisions that were phrased restrictively by
referring to the immediate parties were “applied” to the
retrocessional agreements in a manner that involved
transposing the parties’ names—that is, provisions referring to
Argonaut and Century can refer, through their incorporation
into and then their “application” within the retrocessional
agreements, to Century and Lloyd’s. Indeed, Century
continues before us to maintain that the retrocessional
agreements contain follow-the-fortunes clauses. Appellant’s
opening br. at 47.28 Century’s position regarding the follow-
the-fortunes clauses thus strongly undercuts its position that
the parties did not provide for the incorporated arbitration
clause to apply vis-à-vis Century and Lloyd’s to their
disputes.

(5) The Forum-Selection and Service-of-Suit
Clause

28

Of course, it hardly can do otherwise because in a sense the
entire controversy in this case centers on Century’s argument
that Lloyd’s was obligated to follow Century’s fortunes when
Century made its payments to Argonaut.

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Century also argues that the retrocessional agreements’
service-of-suit clause indicates that disputes between the
parties should be resolved exclusively in the courts. The
provision in question states:

In the event of the failure of [Lloyd’s] hereon
to pay any amount claimed to be due hereunder,
[Lloyd’s] hereon, at the request of [Century],
will submit to the jurisdiction of any Court of
competent jurisdiction within the United States
and will comply with all requirements necessary
to give such Court jurisdiction and all matters
arising hereunder shall be determined in
accordance with the law and practice of such
Court.

App. at 32 (retrocessional agreement para. 12). Cf. AgGrow
Oils, 242 F.3d at 780-81 (reading performance bond’s clause
providing for judicial settlement of disputes to indicate
ambiguity as to intent to incorporate agreement to arbitrate);
Collier Dev. Co. v. Jeffco Constr. Co., 25 Pa. D. & C. 4th
193, 196-99 (Pa. C.P. 1995) (finding no intent to incorporate
agreement to arbitrate where subcontract expressly provided
different method for settlement of disputes). But service-of-
suit clauses do not negate accompanying arbitration clauses;
indeed, they may complement arbitration clauses by
establishing a judicial forum in which a party may enforce
arbitration. See Patten Secs. Corp. v. Diamond Greyhound &
Genetics, Inc., 819 F.2d 400, 406-07 (3d Cir. 1987); Suter v.
Munich Reins. Co., 223 F.3d 150, 155-56 (3d Cir. 2000);
Gaffer Ins. Co. v. Discover Reins. Co., 936 A.2d 1109, 1114-
15 (Pa. Super. Ct. 2007) (contract’s service-of-suit and
consent-to-jurisdiction clause does not override contract’s
arbitration clause because, giving meaning to whole contract
and to each provision if possible, provisions can coexist).
Here, the service-of-suit clause does not indicate that the
parties provided for the resolution of disputes only through
litigation.

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(6) Imprecision in Incorporation by
Reference

As our discussion of many cases demonstrates, the
scope of incorporation-by-reference clauses in practice can
lead to uncertainties when the clauses are translated from the
underlying contract to the incorporating one. Take, for
example, an arbitration clause in a contract between A and B
stating that the clause applies to “the contracting parties” but
not specifying the bound parties by name. Assume that this
clause then is incorporated into another agreement between B
and C. If the incorporated clause strictly preserved its
original, literal meaning, “the contracting parties” would
include only the parties to the original contract, i.e., A and B.
But courts nevertheless have held that such clauses, when
incorporated into subsequent contracts through general
language of incorporation, may apply to the parties to the
incorporating contract, i.e., B and C. See, Progressive Cas.,
991 F.2d at 44-46 (where arbitration clause provided for
arbitration of disputes “between the contracting parties” in
original agreement, incorporation-by-reference clause of
subsequent agreement could bind signatories to subsequent
agreement and thus require arbitration without unduly
stretching arbitration clause’s language). Parties employing
such general incorporation language therefore require for the
incorporation to be effective, and the courts perform, a certain
level of transplantation or translation to resolve the
imprecision inherent in general incorporation language.

This imprecision is at the heart of this case.
Nevertheless, having considered the agreements at issue here
in light of the cases and principles that we have discussed, and
after recognizing that it surely is difficult, if not impossible, to
reconcile all of these cases, we conclude that the most
reasonable, probable, and natural construction of the
incorporation-by-reference clause of the retrocessional
agreements is to apply the clause to include the arbitration
provision of the reinsurance treaties. The retrocessional

73

agreements’ general incorporation clause, the second of two
clauses containing incorporation language, makes clear that
the clauses incorporated “all” of the reinsurance treaties’
terms and provisions so as to “appl[y]” them to the
retrocessional agreements. By employing two incorporation
provisions, including one that “applied” “all terms and
provisions of the [indicated reinsurance treaty],” the parties
bound themselves by the arbitration agreement. This
agreement to be bound is all that Pennsylvania requires for
them to be bound. Pennsylvania law does not require and
under the FAA could not require an “express” and
“unequivocal” statement specifically referring to the
arbitration clause itself to incorporate that clause in another
agreement. Despite what we acknowledge are certain strong
arguments that Century advances in support of its contentions,
applying general principles of Pennsylvania contract law we
hold that the retrocessional agreements incorporated the
arbitration clause of the reinsurance treaties and thus formed
an agreement between Century and Lloyd’s to arbitrate
disputes.

4. Whether This Particular Dispute Falls
Within the Scope of the Valid Agreement to
Arbitrate

Having determined that there was a valid agreement to
arbitrate between Century and Lloyd’s, we turn to the second
and we think easier aspect of the first fundamental issue in
this case: whether the particular dispute in this case falls
within the scope of that agreement. See Kirleis, 560 F.3d at
160. Regarding this question, “there is a presumption of
arbitrability in the sense that [a]n order to arbitrate the
particular grievance should not be denied unless it may be
said with positive assurance that the arbitration clause is not
susceptible of an interpretation that covers the dispute.”
AT&T Techs., 475 U.S. at 650, 106 S.Ct. at 1419 (internal
quotation marks and citations omitted) (alteration in original).

See also Rohm & Haas, 522 F.3d at 331 (citing AT&T
Techs.). We have held, however, “that the presumption of

74

arbitrability does not apply in all circumstances. Where
the arbitration provision is narrowly crafted, we cannot
presume, as we might if it were drafted broadly, that the
parties here agreed to submit all disputes to arbitration.”
Local 827, Int’l Bhd., 458 F.3d at 310 (internal citation and
quotation marks omitted).

Century and Lloyd’s dispute whether the retrocessional
agreements obligated Lloyd’s to reimburse Century for
payments that Century made to Argonaut to cover expenses
under the reinsurance treaties. The reinsurance treaties’
arbitration clause, which we are holding that the
retrocessional agreements incorporate as against Century and
Lloyd’s, provides for arbitration of “any dispute . . . with
reference to the interpretation of this Agreement or [the
parties’] rights with respect to any transaction involved.”
App. at 59-60, 101, 127. Rather than excluding various
disputes from arbitration, this arbitration clause’s scope is
broad, and the presumption of arbitrability applies to it. And
because this arbitration clause is undoubtedly susceptible of
an interpretation that covers the dispute in this case, see
AT&T Techs., 475 U.S. at 650, 106 S.Ct. at 1419, we hold
that the dispute between Century and Lloyd’s over Lloyd’s’s
obligation with respect to the declaratory judgment expenses
falls within the scope of their arbitration agreement. Indeed,
it seems clear that the arbitration provision was written to
cover disputes exactly like the one between the parties here
and we would reach our result with or without the
presumption of arbitrability.

5. Whether The District Court Properly
Compelled Arbitration

In sum, under general principles of Pennsylvania
contract law, the retrocessional agreements each incorporated
and applied the pertinent reinsurance treaties’ arbitration
clauses. First, inasmuch as the terms of the unambiguous
retrocessional agreements reflect that the parties incorporated
the arbitration clauses to form agreements to arbitrate, the
incorporation resulted in valid agreements between Century

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and Lloyd’s to arbitrate certain disputes. Second, inasmuch
as the arbitration agreements’ scope included disputes arising
from the retrocessional agreements, the dispute in this case
over Lloyd’s’s obligations under the agreements falls within
that scope. Accordingly, because there was a valid agreement
to arbitrate between Century and Lloyd’s and because the
particular dispute here falls within the scope of valid
arbitration agreements, we hold that the District Court
properly compelled Century to submit the dispute to
arbitration.

B. Whether the Arbitration Award Should Be
Vacated Because the Arbitrators Excluded Certain
Evidence from Consideration
Having found that the District Court properly

compelled arbitration, we consider the second fundamental
question that Century raises on this appeal; whether the
District Court properly confirmed the arbitration panel’s
decision in favor of Lloyd’s. Century challenges the
arbitration panel’s decision, contending that the panel erred in
refusing to hear extrinsic evidence that Century sought to
submit regarding reinsurance industry custom and practice,
the parties’ course of dealing, and Lloyd’s’s own historical
corporate practice of paying as well as seeking reimbursement
for declaratory judgment expenses under reinsurance
contracts covering expenses. Century claims that this
exclusion deprived it of a fair hearing and therefore requires
the vacating of the award.

The FAA allows district courts to vacate arbitration
awards “only under exceedingly narrow circumstances.”
Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003) (citing
9 U.S.C. § 10).29 One such circumstance is “where the

29

Section 10(a) of the FAA states:

In any of the following cases the United States court in
and for the district wherein the award was made may

76

arbitrators were guilty of misconduct . . . in refusing to hear
evidence pertinent and material to the controversy.” 9 U.S.C.
§ 10(a)(3); Dluhos, 321 F.3d at 370. Section 10(a)(3)
“cannot be read, however, to intend that every failure to
receive relevant evidence constitutes misconduct which will
require the vacation of an arbitrator’s award.” Newark
Stereotypers’ Union No. 18 v. Newark Morning Ledger Co.,
397 F.2d 594, 599 (3d Cir. 1968). After all, even district
courts sometimes reject evidence that they should admit and
yet such erroneous rulings hardly can be characterized as
“misconduct.”

The cases make clear that vacatur pursuant to section
10(a)(3) is warranted only where “the arbitrator’s refusal to
hear proffered testimony ‘so affects the rights of a party that it
may be said that he was deprived of a fair hearing.’”
Teamsters Local 312 v. Matlack, Inc., 118 F.3d 985, 995 (3d
Cir. 1997) (quoting Newark Stereotypers’ Union No. 18, 397

make an order vacating the award upon the application of
any party to the arbitration—

(1) where the award was procured by corruption,
fraud, or undue means;

(2) where there was evident partiality or
corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of
misconduct in refusing to postpone the hearing,
upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the
controversy; or of any other misbehavior by
which the rights of any party have been
prejudiced; or

(4) where the arbitrators exceeded their powers,
or so imperfectly executed them that a mutual,
final, and definite award upon the subject matter
submitted was not made.

9 U.S.C. § 10(a).

77

F.2d at 599). See also Matteson v. Ryder Sys. Inc., 99 F.3d
108, 113 (3d Cir. 1996); Lessin v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 481 F.3d 813, 818 (D.C. Cir. 2007)
(“Every failure of an arbitrator to receive relevant evidence
does not constitute misconduct requiring vacatur of an
arbitrator’s award[;] a federal court may vacate an award only
if the panel’s refusal to hear pertinent and material evidence
prejudices the rights of the parties to the arbitration
proceedings.”) (internal citations and quotations omitted).
Unsurprisingly, application of this “extremely deferential
standard” generally results in the confirmation of an
arbitration award, Dluhos, 321 F.3d at 370, though this is not
to say that a court never can vacate an arbitrator’s award by
reason of his failure to consider relevant evidence.

Nevertheless a court reviewing an arbitrator’s decision to
reject evidence might uphold an award even if an appellate
court when reviewing a trial court’s erroneous rejection of the
evidence in similar circumstances might not find that the error
was harmless.

Certainly it is clear that “in making evidentiary
determinations, an arbitrator need not follow all the niceties
observed by the federal courts.” Lessin, 481 F.3d at 816
(citing Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20
(2d Cir. 1997)) (internal quotation marks omitted). Rather, an
arbitrator “need only grant the parties a fundamentally fair
hearing.” Id. (internal quotation marks omitted). In fact, the
reinsurance treaties incorporated into the retrocessional
agreements recognized as much as they directed the
arbitrators to regard the treaties as “honorable engagement[s]”
and, consistently with this characterization, relieved the
arbitrators of “all judicial formalities” and any obligation to
“follow[ ] the strict rules of law.” Moreover, inasmuch as
arbitrators “have wide latitude in how they conduct
proceedings,” Official & Prof’l Employees Int’l Union, Local
No. 471 v. Brownsville Gen. Hosp., 186 F.3d 326, 334 (3d
Cir. 1999), it is well within an arbitrator’s authority to refuse
to hear evidence that is of little relevance. See Lessin, 481
F.3d at 816; Ass’n of Flight Attendants, AFL-CIO v. USAir,

78

Inc., 960 F.2d 345, 350 (3d Cir. 1992) (“[I]f the arbitrators are
to receive evidence it must be up to them to decide issues of
relevance [or] admissibility of evidence.”).

Here, the arbitration panel refused to admit Century’s
proffered extrinsic evidence based on the panel’s
determination that the evidence was “irrelevant and
inadmissible.” App. at 175. The panel majority explained
that there was no need to resort to extrinsic evidence to
resolve ambiguities in the contracts because it had found the
contracts in question to be clear and unambiguous. Id.

According to Century, the excluded evidence was
pertinent and material under the follow-the-fortunes doctrine
as well as to the determination whether the agreements were
ambiguous, so its exclusion deprived Century of a fair
hearing. First, Century contends that the excluded evidence
was pertinent and material to the retrocessional agreements’
follow-the-fortunes clauses. Reinsurance contracts often
contain a follow-the-fortunes clause that “obligates the
reinsurer to indemnify the reinsured for any good faith
payment of an insured loss.” North River Ins. Co. v. CIGNA
Reins. Co., 52 F.3d 1194, 1199 (3d Cir. 1995). Such clauses
operate to prevent reinsurers from second guessing the
reinsured’s good faith settlements with its insured and from
obtaining de novo review of judgments of the reinsured’s
liability to its insured. Id. But follow-the-fortunes clauses
typically do not make the reinsurer liable for risks beyond
those it agreed to take in the reinsurance contract; a loss is not
reinsured if the original insurance policy does not contemplate
it or if the reinsurance agreement’s terms expressly exclude it,
and a reinsurer retains the right to question whether the
reinsured’s liability stems from such an unreinsured loss. Id.
at 1199-1200.

Second, Century contends that the proffered evidence
was pertinent and material to whether the retrocessional
agreements were ambiguous and therefore required extrinsic
evidence to ascertain the intent of the parties with respect to
the questions the arbitrators addressed. See Emerson Radio

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Corp., 253 F.3d at 164 (discussing determination of contract
ambiguity).30 Century argues that, at the very least, a
determination as to ambiguity required consideration of the
extrinsic evidence in addition to the parties’ proffered views.
Id. Century claims that the extrinsic evidence showed that the
term “expenses,” used in Paragraph 1 of the retrocessional
agreements, was at least ambiguous and that it was deprived
of a fair hearing by the evidence’s exclusion.

The panel concluded that the retrocession and
reinsurance were unambiguous. Even so, the panel held a
hearing at which it heard argument regarding the “proper
construction of the contracts between the parties,” App. at
173, and before which it received witness statements from
Century “setting all the evidence which they would wish to
lead in chief from” two witnesses it proposed, id. at 174, as
well as written submissions from both parties regarding
objections to that evidence.

The panel considered Century’s witness statements
containing the evidence that it would proffer in light of the
follow-the-fortunes clause and concluded that the evidence
was irrelevant or, at the very least, of very little probative
value to the resolution of the issues of the dispute. Inasmuch
as the question of whether the declaratory judgment expenses

30

As we have explained:

[W]hether a contract term is ambiguous is a question of
law that requires a court to hear the proffer of the parties
and determine if there [are] objective indicia that, from
the linguistic reference point of the parties, the terms of
the contract are susceptible of different meanings.
[B]efore we decide whether a contract is ambiguous, we
must consider the contract language, the meanings
suggested by counsel, and the extrinsic evidence offered
in support of each interpretation.

Emerson Radio Corp, 253 F.3d at 164 (internal citations and
quotations omitted).

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were within the terms of the original reinsurance treaties or
the retrocessional agreements was to be based on
constructions of those contracts, extrinsic evidence was
irrelevant. Id. at 175-76. The arbitration panel further
concluded that the witnesses’ testimony regarding prior
claims or payments by Lloyd’s would be of little or no
probative value without further inquiries into the precise
circumstances of each claim or payment. Id. at 175-76.

Based on its conclusion that the evidence was of little or no
probative value and only would add unnecessary expense and
delay to the proceedings, the panel excluded it. Id. Likewise,
based on its conclusion that the construction of the
reinsurance and retrocession was clear and unambiguous, the
extrinsic evidence was irrelevant to construing the contracts
more generally. App. at 173-75.

Considering the arbitrators’ wide latitude in making
evidentiary determinations, a latitude to which Century agreed
in the arbitration clause in the reinsurance treaties and thus,
by extension, agreed to in the retrocessional agreements when
they incorporated the treaties by reference, we cannot find
that there is a statutory basis to vacate the award. The
arbitration panel did not commit “misconduct in refusing to
hear evidence pertinent and material to the controversy.” 9
U.S.C. § 10(a)(3). Rather, the panel considered the evidence
and concluded, after receiving written submissions regarding
its substance and relevance, that it was irrelevant, a finding
that was within its authority to make. We emphasize that,
pursuant to the terms of the arbitration agreement, the
arbitrators were “relieved of all judicial formalities” and
permitted to “abstain from the strict rules of law.” App. at 59-
60, 101, 127. Because the panel’s evidentiary ruling based on
written submissions and a hearing falls far short of arbitrator
misconduct depriving Century of a fair hearing, we affirm the
District Court’s denial of Century’s motion to vacate the
arbitration award.

* * *

See: http://www.ca3.uscourts.gov/opinarch/082924p.pdf

Outcome: We construe the retrocessional agreements between
Century and Lloyd’s to incorporate the arbitration agreement
of the reinsurance treaties between Century and Argonaut,
Century’s reinsured, so that the arbitration agreement became
effective between Century and Lloyd’s, and we hold that the
dispute here fell within that arbitration agreement’s scope.
Consequently, we conclude that the District Court properly
compelled arbitration of the dispute arising from the
retrocessional agreements over Lloyd’s’s failure to pay
declaratory judgment expenses that Century had paid to its
reinsured under the reinsurance treaties. Moreover, we hold
that the arbitrators’ decision to exclude evidence Century
proffered based on the evidence’s irrelevance was well within
their authority in conducting the arbitration. We therefore
conclude that the District Court properly denied Century’s
motion to vacate the arbitration award under 9 U.S.C. §
10(a)(3). For these reasons, we will affirm the orders of the
District Court entered May 16, 2006, and May 30, 2008.
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