This article was written by Patric McGonigal (Partner).
Earlier this year, the Court of Appeal in England (the “CA”) considered the removal of an arbitrator for lack of qualification, specifically, experience of insurance or reinsurance (“(re)insurance”): Allianz Insurance & ano v Tonicstar Ltd & others (2018).
Clause 15 of the Joint Excess of Loss Committee (“JELC”) terms provided:
“Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than then years’ experience of insurance or reinsurance.”
Allianz sought to appoint a senior London insurance counsel (Alistair Schaff Q.C.) as their arbitrator in a reinsurance dispute. In response, Tonicstar challenged the appointment on the basis that clause 15 required industry experience as opposed to experience of advising the industry on legal issues. The dispute arose in connection with reinsurance losses arising out of the attacks on the World Trade Centre in 2001.
High Court Upholds Challenge
At first instance, the challenge to the appointment was upheld as the High Court felt bound to follow an earlier unreported decision in X Co v Y Co (17 July 2000) involving essentially identical facts. In X Co, the High Court treated the parties’ adoption of the JELC terms as an indication of their intention to have what amounted to a “trade” arbitration where the trade in question was the (re)insurance market and not the law – regardless of how specialised in (re)insurance law a particular individual may have been. The High Court in Allianz felt that as X Co had stood for over 17 years, there would need to be more sufficiently powerful reasons to depart from it. Similarly, the High Court felt that had the parties intended on including lawyers, it would have expected express wording to that effect to have been added to clause 15 (e.g. “…or as lawyers or other professional advisors serving the industry…”). Otherwise, clause 15 could have been read to include not only solicitors, barristers and accountants but also ship owners and other insureds who devoted a significant amount of their time to insurance matters.
Court of Appeal Disagrees
X Co v Y Co
The CA disagreed, dismissing each of the reasons relied upon in support of the challenge to Mr Schaff’s appointment and overturning the decision in X Co. The CA noted that although the JELC terms were drafted by a trade body, this did not necessarily mean that only members of that trade should be considered suitable for appointment. Equally, the fact that a default power of appointment rested with the Chairmen of Lloyd’s did not signify that only persons who had worked in the insurance industry were qualified or that the Chairmen would not be able to identify a suitable lawyer if they wished. Similarly, the fact the tribunal had a discretion under the contract to choose not to apply strict rules of evidence did not mean that lawyers would not be necessary – the same discretionary power for tribunals already exists in England and in any event, the JELC terms require a tribunal to apply English law – arguably, a much more powerful contrary indication that lawyers should not be disqualified.
As for the risk highlighted in X Co that if a broader interpretation was allowed, a ship owner could also then be appointed – the CA noted it was implicit that the experience required by clause 15 must be of sufficient quality to allow the appointee to act as an arbitrator in a reinsurance dispute. Therefore, just because a ship owner purchases insurance cover does not mean they satisfy this requirement. However, it also does not preclude the appointment of other individuals such as a shipowner if they do in fact have the relevant experience.
Looking at the natural meaning of the language used, the CA noted that the actual words used in clause 15 do not refer to ‘employment’ in the insurance industry – rather they refer only to insurance experience. No restriction is placed on how that experience was gained.
Allianz Insurance v Tonicstar Ltd
In Allianz, a slightly different approach was taken by the applicants. They emphasised that no mention of experience of insurance ‘law’ is made in clause 15, only insurance and simply because a lawyer may have experience of insurance law does not mean they also know how to set an underwriting rate for a risk, what endorsements to include or what reinsurance cover to buy. In the same way, a construction lawyer’s experience and knowledge would be quite different to an engineer’s and a sports lawyer’s experience could not on its own satisfy a requirement for 10 years’ experience of sports.
The CA would not accept this approach saying that no similar distinction could be drawn between experience of (re)insurance law and (re)insurance. The practical and legal aspects of (re)insurance are so intertwined that both market professionals and lawyers who have specialised in the field are commonly appointed. (Re)insurance contracts create legal rights and obligations and competent market professionals need some understanding of the law, whether in terms of the duty to disclose facts, how losses may occur years after the period of cover may have expired or the handling of claims. By the same token, lawyers need to have an understanding of the practical aspects of the business and this is gained from taking instructions from clients, working with expert witnesses and reviewing (re)insurance contracts.
In short, the AC held that no reason relied upon in the High Court in either X Co or Allianz provided any legitimate basis for restricting appointments to members of the insurance industry.
As for concerns raised regarding the status of the judgment in X Co as representing a long-settled meaning of clause 15 which the market has relied upon for 17 years, the CA was sceptical and concluded that in any event, it was not possible to defend that meaning on any rational basis. The CA acknowledged the importance of certainty in commercial law and the role it plays in informing parties’ negotiations and decisions in relation to (re)insurance coverage. However, in this instance, the X Co judgment was not reported, did not appear to have been mentioned in any textbook and was decided only seven months before the contract with Tonicstar was made. It was therefore unlikely that the parties would have been aware of it and had it in mind when considering arbitrator qualifications or when incorporating clause 15 into their contract. Moreover, even if this analysis was wrong, the CA could not see any significant detriment arising if the range of persons eligible for appointment was wider than expected and included senior lawyers with over a decade’s worth of experience.
So far as the CA was concerned, the High Court decisions in both cases were plainly wrong and ought not to be upheld.
In concluding and although not relevant to the contract in question, the CA also noted that clause 15 was in any event revised as of 1 January 2018 and the new clause 27.4 of the JELC terms now states:
“The Arbitrators shall be persons (including those who have retired) with not less than 10 years’ of experience of insurance or reinsurance within the industry or as lawyers or other professional advisors serving the industry.” (emphasis added)
This (largely unsurprising) decision will be welcomed as it recognises the common practice of appointing both market professionals as well as lawyers as arbitrators in (re)insurance disputes. It also underlines the importance that is attached to the actual words that are used in carefully drafted contracts. As such, if parties wish to ensure that only arbitrators with a specific qualification or experience are appointed, it is essential that this intention is made clear in their arbitration clause so that the uncertainty of time consuming and costly battles in court of this type are avoided.