CMS Cameron McKenna partner Alex Denslow on which disputes will evade the London market’s drive to contract certainty

Tug of war - who will win Giles?

Most people who worked in the London Market during the middle part of the last decade will recall how contract certainty shone an uncomfortable spotlight on the subscription sector.

Damaging headlines emanating from the Silverstein affair and the World Trade Center insurance arrangement led to the creation of the Market Reform Group to help deliver agreement of terms prior to policy inception and to ensure that post-inception amendments were documented and agreed as endorsements market wide. To its credit, the market has met this challenge with vigour.

Arbitration clauses and law and jurisdiction clauses ought to have been two of the most obvious beneficiaries of contract certainty, for the reason that loose incorporation wording will fail to incorporate these specific clauses by general reference. Seven years on, however, the incorporation and interpretation of these clauses continues as a source of dispute. One very recent case in the English courts suggests that while the London market continues to participate in unusual contract structures, ambiguities may simply be inevitable.

In British American Insurance (Kenya) Ltd v Matelec Sal and Thika Power Ltd the court decided that a London arbitration clause was binding, notwithstanding an inconsistent provision which had granted exclusive jurisdiction to the Kenyan courts.

BIA and Matelec/Thika had agreed that a single document constituted both a contract of insurance relating to cargo to be used in the construction of a Kenyan power plant, and a contract of reinsurance for 95% of the direct risk. The document did not clearly identify which terms belonged to the insurance or reinsurance contracts, and which belonged to both.

The original policy document contained a law and jurisdiction clause that stated only the word ‘Kenya’. The policy was amended by endorsement nearly two months after inception, prompted by the insureds’ financers receiving advice that English governing law was preferable throughout. The endorsement changed the law and jurisdiction clause so as to identify English law, the jurisdiction of the Kenyan Court, and London arbitration. 

In its decision, the court found that the governing law element of the endorsement applied to both the insurance and reinsurance contracts. Notably, it inferred from the unusual approach of incorporating separate insurance and reinsurance contracts into one document a desire to ensure that the contracts would, insofar as possible, be identical.

The court also confirmed two principles applicable when dealing with contractual inconsistencies:

  • Where the language of the parties can be construed in two different ways, the court should generally adopt the interpretation that will make more commercial sense (Rainy Sky v Kookmin Bank). The court found that identical arbitration clauses would enable disputes under the linked contracts to be decided by the same tribunal, and could not see any good reason for the parties to seek disputes to be decided under different regimes. Negating any suggestion that the location of the one Kenyan insured should play a role, it also placed weight on the fact that not all of the insureds were based in Kenya, and that, being a marine policy, disputes were likely to require investigation in other parts of the world.
  • Where two provisions are on the face of it inconsistent, then the court should do its best to reconcile those provisions, going to the margins of what can conscientiously and fairly be done but no further (Pagnan Spa v Tradax Ocean Transportation). The court rejected the suggestion that preventing the insured from commencing proceedings in Kenya would be crossing this line; it was important to avoid a situation that would have a potentially damaging impact for insurers.

The case is a new example of an old market problem; failure to secure clarity in policy wordings will increase the likelihood of disputes. It acts as a reminder to include express language and make clear where insurance and reinsurance contracts are intended to be back-to-back, while also providing a particular warning to those using a single document for both a direct and reinsurance policy. Ambiguities fuel disagreement, and in that form of documentation ambiguities are inevitable. 

To the extent that an insurer/reinsurer’s position may be prejudiced by alternative dispute forums, the case reaffirms the importance of properly incorporated law and jurisdiction and dispute resolution clauses. Notwithstanding the London market’s drive to contract certainty, it is clear that these disputes continue to arise.

By CMS Cameron McKenna partner Alex Denslow