The judgment of the Supreme Court of the United Kingdom in Halliburton v. Chubb has rightfully prompted worldwide commentary. Its implications for arbitrator disclosure are both profound and unsurprising. What has received precious little attention, though, is the arbitral decision that preceded that judgment. The outcome of that arbitration, which would typically be confidential, is public as a result of Halliburton’s unsuccessful attempt to remove the third arbitrator (or “chair”).
According to the judgment, the arbitral Tribunal found that Halliburton’s settlement of the underlying exposure to the loss of the Deepwater Horizon (“DWH”) was unreasonable. Having “lived with” the matter and had personal responsibility for its outcome for a decade on behalf of ACE/Chubb, there is much this author cannot disclose about that arbitral decision and the process that led to it. Those of us who have experience dealing with insurance disputes, however, will note that the finding that the settlement was unreasonable is remarkable. Why would the Tribunal reach such an unusual conclusion? Publicly available information holds a possible answer.
- It was widely known that Halliburton had posted a $1.3 billion loss-contingency provision for the multi-district litigation arising out of the DWH disaster.
- Judge Carl J. Barbier had already held that the indemnity agreement was binding, and that Halliburton’s only potential liability to the underlying plaintiffs was for punitive damages, if any.
- This was a bench trial, and that trial was already concluded. Indeed, Judge Barbier had finished writing the judgment.
- Halliburton settled two days before the judgment was to be released, and the settlement would not prevent that from happening. Two other defendants remained, so the outcome as to liability for punitive damages, if any, for all of them, would be revealed with that judgment. To be fair, this was only the first of two unusual aspects of this settlement.
- The settlement was facilitated by the creation of a new “settlement class.” This was the second unusual aspect. Due Process requires any putative member of such a class to have a reasonable time to receive notice and decide whether to opt out. This process required many months to conclude, and as a result the opt-out deadline would follow long after the judgment as to liability, if any, for punitive damages would be released.
- Halliburton Won.
The combination of both unusual “settlement” features is unprecedented in this author’s experience, and for good reason. As it happened, virtually no plaintiffs opted out, which was to be expected. Halliburton prevailed months earlier, so a share of more than a billion U.S. dollars was better than nothing. But had Halliburton lost, every plaintiff could have opted out and Halliburton would have been faced with precisely the downside the “settlement” was supposed to extinguish: litigation over the magnitude of punitive damages. One could therefore say that this was not a settlement at all, but rather a guarantee that the plaintiffs would be paid a ten-figure sum even if they lost.
In short, Halliburton could not possibly have prevailed in the coverage case because it paid well over a billion U.S. dollars and received nothing in return. The “peace” it sought by “settling” was a mirage. Plainly, no one on Halliburton’s legal team recognized this structural failure. Had anyone perceived this timing problem, at the very least, Judge Barbier would have been faced with a joint motion to delay the judgment until after the opt-out deadline for the new settlement class had expired. No such motion was made.
All of this was known to the public, and obviously Halliburton, contemporaneously. The implications of these facts this author leaves to others.
John C. Lenzen, FCIArb