Disputes arise regarding liability for losses on seven insurance policies underwritten by All American Insurance. Sphere Drake Insurance, previously known as Odyssey Re (London), denies any agreement to reinsure these risks, despite contracts found in All American's files. A broker, Euro International Underwriting (eiu), represented Sphere Drake but allegedly exceeded its annual limit of risks in agreeing to reinsure All American’s policies. Sphere Drake argues that All American was aware of this overstepping, thus eiu lacked both actual and apparent authority.
The parties agree that if Sphere Drake’s defense is valid, it is not liable for the losses, and they concur on the extent of liability if eiu had authority. However, the key disagreement lies in which tribunal has the jurisdiction to determine eiu’s authority as Sphere Drake's agent. Sphere Drake seeks resolution in federal court due to diversity jurisdiction under 28 U.S.C. § 1332(a)(2), while All American claims the parties agreed to arbitration based on language in the slip policies signed by eiu.
The relevant slip policy includes specific terms regarding indemnification and exclusions, governed by Illinois law, with an assertion that the arbitration agreement also follows Illinois jurisdiction. All American argues there are two arbitration clauses: one stating the arbitration contract is governed by Illinois law and another indicating that the reinsurance follows all terms of the original contract, which includes an arbitration clause. Sphere Drake counters these claims and argues that even if arbitration clauses were present, they do not negate the court's authority to determine whether eiu was an agent capable of binding Sphere Drake, asserting that arbitration would be circular in this context.
The district court ruled in favor of Sphere Drake by determining that the slip policy does not mandate arbitration. The judge concluded that the last subparagraph is merely a choice-of-law clause, and any arbitration requirement must be explicitly stated elsewhere. The initial subparagraph does not incorporate the Unicare policy's arbitration provision because it only references the 'clauses and conditions on the original contract' as outlined in the 'CLASS' section, which lacks arbitration language. Consequently, Sphere Drake is not obligated to arbitrate, and the court denied All American's motion to compel arbitration, also enjoining it from pursuing arbitration. All American appealed this decision, arguing that the interpretation of the first subparagraph should include all terms of the underlying contract, including arbitration provisions. The court noted that the interpretation requiring the reinsurance to follow only the 'Class' section's terms would render the reinsurance arrangement ineffective, as it lacks essential terms and conditions. The court referenced established case law indicating that a follow-form reinsurance agreement typically includes all terms of the underlying contract, including arbitration agreements. It concluded that the 'General Conditions' section does incorporate the arbitration agreement from the Unicare policy, thus allowing the court to address whether the authority of eiu to bind Sphere Drake is subject to arbitration. This dispute is properly within the court’s jurisdiction to resolve, as it pertains to whether a reinsurance agreement exists, rather than a matter for arbitration. The court emphasized that legal documents cannot 'agree' to terms; rather, it is the parties involved that must consent to arbitration.
EIU's agreement to the slip policy raises questions about its authority to represent Sphere Drake. If All American produced a policy allegedly signed by Sphere Drake's CEO, but a clerk forged the signature, Sphere Drake would not be obligated to arbitrate or pay, as established in *Chastain v. Robinson-Humphrey Co.*. The Federal Arbitration Act, under Section 2, states that an arbitration agreement is valid unless grounds for revocation exist. A lack of authority is one such ground, necessitating judicial determination of an agent's authority.
All American contends that *Prima Paint Corp. v. Flood, Conklin Mfg. Co.* indicates that disputes regarding fraud in the inducement should be resolved by arbitrators unless specifically excluded. This interpretation, however, contradicts the principle that arbitration is contractual, allowing parties to seek judicial resolution unless they explicitly agree otherwise. In *Prima Paint*, the arbitration clause was deemed valid and broad enough to encompass related disputes, implying that a claim of fraud does not negate the existence of an agreement but rather questions the intent behind it.
In contrast, a claim of forgery or lack of authority presents a different scenario: if a signature is forged, then no valid contract exists, and hence, arbitration cannot be compelled. Unlike the *Prima Paint* situation, where a valid agreement existed, cases involving forgery require judicial intervention because they question the very existence of the contract. Additionally, while disputes over consideration may complicate the issue of enforceability, they do not preclude the possibility of private arbitration agreements that a court may not enforce.
A claim of missing consideration will be adjudicated by a court, meaning if an agreement lacks consideration, it will not proceed to arbitration, as established in Gibson v. Neighborhood Health Clinics, Inc. Courts, not arbitrators, determine whether a contract exists, particularly regarding an agent's authority to bind a principal. Appellate courts universally agree that disputes over an agent’s authority are not arbitrable unless parties expressly agree to arbitrate such issues. This principle allows courts to assert jurisdiction based on statutory authority rather than party consent, contrasting with arbitrators, who lack similar authority.
All American's argument referencing Colfax Envelope Corp. v. Chicago Graphic Communications Union is addressed; Colfax does not assert that arbitrators handle all contract formation disputes. Instead, it indicates that if a signed contract has a clear arbitration clause, ambiguities regarding enforceability are for arbitrators to resolve. If essential elements of an agreement are missing, parties must demonstrate that the arbitration clause is invalid due to fraud, lack of consideration, or assent. Courts retain the authority to decide if an agent had the power to bind a principal to a contract. The ruling affirms that Sphere Drake must arbitrate only if it is determined that eiu had the authority to bind it to the reinsurance contracts. The case is remanded for a determination of eiu's authority, with no arbitration proceeding unless further issues arise.
