A federal court in Washington held that an arbitral award dismissing the matter on jurisdictional grounds, rather than the merits, does not have a collateral estoppel effect over later litigation.

In Farmers Insurance Co. of Washington v. Liberty Mutual Insurance Co., No. C07-1363RSL, 2008 WL 336794 (W.D. Wash. Feb. 4, 2008), Farmers defended the owner of the car involved in an accident and Liberty defended the driver, both defendants in a car accident. Liberty settled the claim with the plaintiff. Farmers proceeded to defend the owner, and after a jury verdict in favor of the plaintiff, Farmers filed for arbitration seeking a contribution toward the verdict and for attorney fees. Both companies were parties to a Special Arbitration Agreement (Agreement) for intercompany disputes.

The arbitrator's award dismissed the matter on the ground that Liberty had exhausted its policy limits, an affirmative defense pled by Liberty and one which deprived the arbitrators of jurisdiction under the Agreement. Farmers subsequently filed suit for contribution of attorney fees.

Liberty, citing the arbitration award, moved for dismissal under the doctrine of issue preclusion. The Court denied the motion on the ground that Liberty did not meet its burden of showing that the arbitration award was a final judgment, which is a prerequisite to issue preclusion.

Moreover, as the Court explained, the Agreement expressly contemplated litigation in the event that the arbitrators lacked jurisdiction. The arbitrators lacked jurisdiction under the Agreement because Liberty exhausted its policy limits, but the policy limits did not apply to attorney fees. Accordingly, collateral estoppel did not apply, and Farmers could seek contribution for attorney fees in court.