Ian McKenna and Claire Walter ask whether the days of the arbitration clause are numbered
Arbitration has always been a popular means of dispute resolution in the reinsurance market. Traditionally, insurers and reinsurers have always preferred to resolve their disputes with their peers confidentially, cost-effectively and in a less acrimonious fashion than by issuing proceedings in the Commercial Court.
Indeed, arbitration clauses go back to the days when disputes in the reinsurance market were rare and the parties would agree to be bound by the determination of one of a group of well-respected market individuals.
However, times have changed, and fundamentally. There has been an explosion in reinsurance disputes for well-known reasons. So does the arbitration process fulfil the needs of the global reinsurance market today or may we see the demise of the arbitration clause in insurance and reinsurance contracts?
Arbitration practice today
Although traditionally parties could agree their own rules of procedure, this rarely occurs in practice today. Most reinsurance arbitrations are conducted in accordance with either the Arbitration Act 1996 or the ARIAS (UK) rules, and the parties may agree to follow the Civil Procedural Rules.
This means that many arbitrations are now conducted in accordance with the practice and procedure of the Commercial Court.
Perceived disadvantages of arbitration include:
- incorporation - significant costs and delay can sometimes be incurred on arguments as to whether an arbitration clause has been incorporated into the contract in dispute;
- identifying a suitable arbitrator - it can be difficult to identify arbitrators who meet the qualifications specified in the arbitration clause.
Whilst the ARIAS (UK) qualification clause ("(including those who have retired) with not less than ten years' experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry") remedied the difficulty in finding active market participants who were willing to act as arbitrators, there is still only a finite number of market arbitrators with the necessary qualifications and with the relevant experience and expertise of arbitration proceedings. Availability for a particular dispute can also be an issue, particularly as many arbitrations involve a three-man tribunal;
- default provisions - when a party does not appoint an arbitrator and the default provisions in the clause (if any) have to be invoked, this can cause further delay;
- procedural delay - while most claimants or defendants would not ignore a court order, parties may choose to drag out arbitral proceedings at every stage. The tribunal's remedies to prevent delaying tactics are limited, and may lead only to the making of an adverse costs order against the defaulting party. Section 41 of the 1996 Act sets out the powers of a tribunal in the event of a party's default, and includes the power to make peremptory orders. However, if, for example, one party chooses to ignore a peremptory order, the other party may be powerless, needing to apply to the court for an order requiring the defaulting party to comply with the peremptory order and incurring further costs. This can be particularly difficult and time-consuming if the defaulting party is overseas and beyond the jurisdiction of the Commercial Court. Even if the tribunal decides that it may "proceed to an award on the basis of such materials as have been properly provided to it", the defaulting party can still apply for more time and may be granted an extension for reasons of fairness despite its default. Another tactic is to ignore the arbitration proceedings completely and then to raise a challenge to the tribunal's substantive jurisdiction or to challenge whether there is, in fact, a valid arbitration agreement.
To some extent, section 73 of the 1996 Act attempts to combat a situation where a party belatedly raises an objection, but the inevitable delay caused while such challenges are made can be very frustrating indeed;
- no third parties - in the article entitled "To join or not to join" published in the November 2003 issue of Global Reinsurance, we explained that the broker (or other third party) cannot be joined as a party to any arbitral proceedings between a reassured and reinsurers so that claims against third parties may have to be held over and determined in subsequent litigation;
- expense - unfortunately, nowadays arbitration proceedings as expensive - if not more so - as running the same dispute in the Commercial Court.
Whilst on some occasions the parties will agree to save costs by abandoning the strict listing of documents during the disclosure process, the costs of three arbitrators reading pleadings, correspondence, bundles, skeleton arguments, dealing with interlocutory applications and attending a hearing inevitably increases costs considerably. The arbitrators' costs also have to be paid in full before the tribunal will hand down the arbitration award;
- mediation - whereas the Commercial Court can order parties to attempt to resolve their dispute through mediation (and make adverse costs orders against a party who unreasonably refuses to mediate), no such provisions exist in standard arbitration clauses. Parties can, of course, agree to mediate and this is a very useful process where the parties wish to maintain an otherwise good commercial relationship; and
- appeal on a point of law - an appeal cannot be brought under Section 69 of the 1996 Act unless it is made with the agreement of all the other parties to the proceedings or with the leave of the court, nor can it be brought if the appellant has not first exhausted any available arbitral process of appeal or review. Leave to appeal is only granted in very limited circumstances and the criteria for giving leave are relatively difficult to satisfy.
Our market research has informed us that most insurers and reinsurers, whilst becoming very aware of the perceived disadvantages of arbitration, may nonetheless ultimately prefer arbitration as a dispute resolution mechanism for the following reasons:
- confidentiality - parties can resolve their dispute privately without the whole market being aware either of the dispute or of the issues in dispute. This can protect commercial relationships and reputations and avoid a precedent being set on a particular wording. However, it is important to remember that the cloak of confidentiality can be lost in a number of instances as follows:
(i) word inevitably gets out - although the precise detail of the arbitration award usually does not, the outcome and key determinations do;
(ii) in the context of third party proceedings, the contents of an award can be disclosed in later proceedings if such disclosure is reasonably necessary to protect the legal rights of a party in the original arbitration, such as where there are Commercial Court proceedings between a reassured and its broker; and
(iii) if an award is appealed, the dispute may enter the public domain.
CPR Rule 39.2 sets out the general rule that a hearing is to be in public.
There is no similar general rule in relation to arbitration claims, so a party can apply for an order to have arbitration claims heard in private in accordance with CPR 62.10(1). However, if a party does not so apply, the hearing will be deemed to be public if the hearing involves either determination of a preliminary point of law under section 45 of the 1996 Act or an appeal on a point of law under section 69. In Department of Economics, Policy & Development of the City of Moscow v (1) Bankers Trust Co (2) International Industrial Bank, the Commercial Court considered whether a claimant could make public an arbitration award made in private.
The court found that where there are matters of law and a court makes a decision in order to clarify the law for the parties to the arbitration and others, the proceedings will normally be in public unless the court considers otherwise. The effect of automatic publications of proceedings challenging an award would be contrary to justice and the public interest in allowing the parties the freedom to resolve their disputes as they wish;
- a tribunal with market experience - it is a significant advantage to have an issue determined by people who understand the market and its principles, are familiar with the different types of insurance and reinsurance and how they work, are familiar with policy wordings and who have often written the class of business that is in dispute in the matter being heard before them. If the right arbitrators are appointed, often the parties need not adduce expert evidence and this can save time and costs. It is also an enormous advantage being able to choose one's arbitrator as opposed to finding out shortly before a trial which judge is going to hear the trial; and
- giving evidence - an arbitration is a much less intimidating environment than a court when it comes to being cross-examined. Arbitrators are rarely impressed by hostile cross-examinations and also can be more understanding about the nature of the evidence given, for example, in relation to an underwriter's understandably imperfect recollection regarding a risk written some time ago.
There is a perception that it is easier for a party effectively to ignore and/or delay the arbitration process than it would be as a party to court proceedings. Organisations such as ARIAS (UK) have tried to resolve these problems through a number of initiatives including the imposition of time limits to streamline the arbitration process. However, some contracts still contain arbitration clauses which do not currently adopt the rules laid down by ARIAS and similar organisations. Ultimately, it is up to the tribunal in each case to strike the right balance between 'punishing' an unresponsive and/or delaying party and acting with the utmost fairness to all parties throughout.
In conclusion, perhaps there is the need for a market-wide initiative to adopt such rules or to insert agreed time limits and default clauses into arbitration clauses currently used in the market. Arbitrations remain (often for very good reasons) a popular form of dispute resolution in the reinsurance market and when all parties conduct themselves properly and in a timely fashion, the value of having experienced market peers resolving a dispute on a confidential basis cannot be overestimated. It is, therefore, probably premature at this time to talk of the demise of the arbitration clause.
Ian McKenna is a partner and Claire Walter is an assistant solicitor in the London-based insurance and reinsurance group of law firm Mayer, Brown, Rowe & Maw LLP.