There is general dissatisfaction with the operation of the arbitral process in the London market. Simon Twigden and Tina Rhodes have three suggestions to improve the process.
As almost all reinsurance treaty wordings contain arbitration clauses, there is little doubt that arbitration was and remains the primary method of dispute resolution in the reinsurance industry.Historically, those arbitration clauses often contained honourable engagement or equity clauses, intended to allow arbitrators to disregard the strict rules of law and to determine the dispute in accordance with general notions of equity and fairness. Such a provision was entirely consistent with the perception that any dispute between parties to a reinsurance treaty should be determined by their peers in the reinsurance industry in an informal and cost effective way. Indeed, many arbitration clauses specifically provided for the arbitrators to be executive officers (retired or active) of insurance or reinsurance companies.Overall, the arbitration tribunal was charged with giving effect to the intention of the parties to the reinsurance treaty, it being appreciated that that intention may not have been adequately documented by the Slip and, moreover, by the treaty wording produced by the brokers and signed many months, if not years, later. Arbitrators drawn from the market would understand the “deal” agreed between reinsured and reinsurer; they would give effect to that deal irrespective of the words used in the treaty language, and would do so quickly and effectively.
The parties' original intentions in choosing arbitration rather than litigation as the method of dispute resolution for treaty disputes have little resemblance to the actual conduct of reinsurance arbitrations in this country.
Arbitration proceedings are conducted in a rigid, formal way, often simply mirroring court procedures. Formal court-like pleadings are exchanged (that are indecipherable to many people) and amended/re-amended many times; discovery can take months, if not years to complete, and the proceedings are conducted with most of the trappings of the English Commercial Court. Frequently, the third arbitrator is a lawyer (generally a QC or a retired Judge) who controls and, at least to some extent, dominates the proceedings. Quite naturally, such a senior lawyer can be instinctively intimidating to all but the strongest in character of the party-nominated laymen arbitrators.
There is general dissatisfaction with the operation of the arbitral process in the London market. Not least because it can be both phenomenally expensive and time consuming for those reinsurance practitioners (including cedants, reinsurers and retrocessionaires) involved in that process. Also, the arbitration award finally issued may not reflect the parties intentions (described above) in opting for arbitration, as opposed to litigation. In other words, despite all the money and time spent on the process, the award issued can be a too technical and legalistic interpretation of the contract that is both light years away from market practice and what was the “real” deal between the parties.
Three suggestions to improve the arbitration process
Move away from court pleadings
There is no legal requirement that formal pleadings be used along the same lines as those required in court proceedings. They are generally unhelpful in identifying the issues to market arbitrators and, not least, can add significant expense to the arbitration. They are difficult for everyone (i.e. the parties/clients and market arbitrators) but some lawyers to understand and strike at the heart of supposedly informal, cost-effective means of dispute resolution called arbitration.Section 34 (1) (c) of the Arbitration Act 1996 (“the Act”) provides that, unless the parties agree otherwise, the tribunal may decide “whether any and if so what form of written statements of claim and defence are to be used, when these should be supplied, and the extent to which such statements can be later amended”. Therefore, it is up to the parties to agree on how the issues in dispute should be identified and, absent such an agreement, the arbitration tribunal will decide that issue.
Accordingly, we would suggest that the next time you receive an Arbitration Notice and, at the same time or a few days later, detailed formal Points of Claim, that you send the Points of Claim back to the party who sent them to you, with a polite enquiry as to why these have been served. You should stress to that party that no agreement had been reached on the forms of statement of claim and defence and that you wish to make representations to the arbitration tribunal on this and other procedural matters. In other words, do not get trapped into a “court-like” pleadings without, first, very carefully considering whether this traditional court approach is, indeed, the best way to proceed in your arbitration proceedings. It is our view that, in the vast majority of cases, it is not.
Move away from court procedures
There is no requirement that arbitration proceedings be conducted in the same way as court proceedings. Indeed, Section 33 of the Act mandates that the arbitration tribunal shall “adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined”. We submit that this places a very clear onus on the arbitrators to craft a set of procedures that are appropriate to the circumstances of the case and not simply to fall-back on court procedures that may well be inappropriate for the fair resolution of that case.
Section 34 of the Act sets out a non-exhaustive list of procedural powers available to the arbitration tribunal. In the Departmental Advisory Committee Reports on Arbitration Law published in February 1996 and supplemented in January 1997 (“the DAC Reports”) (endorsed as an official commentary on the Act), this section is described as follows: “We have produced a non-exhaustive check-list because we think it will be helpful both to arbitrating parties and to their arbitrators. We cannot emphasise too strongly that one of the strengths of the arbitral process is that it is able much more easily than any Court system to adapt its procedures to suit the particular case. The list of powers helps the tribunal (and indeed the parties) to choose how best to proceed, untrammelled by technical or formalistic rules.”
Therefore, the next time you are served with a Discovery Request in an arbitration (especially if you are the cedant!), we suggest you carefully consider whether such discovery (and associated delays and expense) is warranted and is appropriate to a fair resolution of the dispute in question. If not, make the necessary representations to the Tribunal, respectfully reminding it of its mandatory duty set out at Section 33 of the Act.
Move away from reasoned awards
Unless the parties otherwise agree (or have been deemed to agree) to dispense with reasons for the arbitration award, it is a legal requirement in England that reasons be given. This is provided for in section 52 of the Arbitration Act 1996 which states, at sub-section 4: “The award shall contain the reasons for the award unless it is an agreed award or the parties have agreed to dispense with reasons.”
Indeed, it was stated in the DAC Reports that: “To our minds, it is a basic rule of justice that those charged with making a binding decision affecting the rights and obligations of others should (unless those others agree) explain the reasons for making that decision.”
However, in the reinsurance context, there are a number of practical consequences of awards having to be reasoned. Many non-lawyer market arbitrators feel uncomfortable in drafting a detailed arbitration award and, as a result, readily agree to the involvement of a senior lawyer as the presiding arbitrator or Umpire. This can have a number of consequences:
• the senior lawyer can “dominate” the proceedings acting, to a large extent, as a sole arbitrator with the role of the two party-nominated market arbitrators relegated to that of providing expert/technical assistance to that lawyer.
• the involvement of the lawyer can often result in the adoption of court like pleadings and procedures that are difficult for the party-nominated arbitrators to follow and meaningfully input. For instance, it has been known for all preliminary procedural matters to be left to the lawyer who “understands” the issues that arise on pleadings, discovery etc.
• fundamentally, and irrespective of the “equitable” latitude that may be contained in the arbitration clause, the lawyer will instinctively provide a strict legal interpretation of the rights and obligations of the parties to the dispute. He/she will not necessarily give effect to the underlying “deal” but will, instead, apply strict legal principles of construction to the language used in the treaty. This may not end up with the “right” result, as anticipated by the original contracting parties when they opted for arbitration by market people as the means for resolving any disputes that may arise.
Thus, the involvement of the lawyer (primarily, perhaps, as a result of the requirement on the arbitration tribunal to provide a reasoned award unless the parties agree otherwise) as the presiding arbitrator can fundamentally affect the procedure and substantive award of the arbitration. If the consequence of a reasoned award is effectively, to result in a strictly legal determination of the dispute by a Judge or senior QC then - apart from reasons of confidentiality - there would seem little point in agreeing to arbitrate in the first place. Indeed, the confidential nature of the arbitral process constitutes perhaps a further argument in support of unreasoned awards, as arbitration awards do not provide a body of useful precedent for the reinsurance community.
By agreeing to an unreasoned award, the parties are - in effect - acting consistently with the original decision to arbitrate: namely, that any dispute between them will be decided by market people, not lawyers, who understand their business and will give effect to their agreement irrespective of any shortcomings in the language of that agreement. Perhaps, we may suggest, that the “basic rule of Justice” referred to in the DAC reports referenced above needs to be balanced against another basic rule of justice, namely that the “right” decision is ultimately reached by the (re)insurance executives identified in the original arbitration clause, without unnecessary delay or expense.
Finally, an agreement to dispense with reasons will also exclude the right to appeal to court on any question of law arising out of that award (Section 69 of the Act). Such an approach would result in certainty for the parties as, absent one of the limited grounds set out in the Act, any award issued will not be subject to more expensive and time consuming court proceedings.
Arbitration faces a long fight to restore its battered reputation among the reinsurance community. We hope London market arbitrators, that small clique of reinsurance professionals, seize back the initiative from the lawyers and contribute fully to the new age of arbitration heralded by the Arbitration Act 1996. The latter must involve arbitration being a real alternative to litigation, and our three suggestions outlined above should be considered in that context.
Simon Twigden is a partner and Tina Rhodes is a senior English solicitor and US attorney (New York) in the insurance and reinsurance group at Paisner & Co.