Market Arbitrators: A thing of the past?

Posted on 17 November 2017 by Sonia Campbell & Gavin Lubczanski

Market Arbitrators: A thing of the past?

In light of the recent decision in Tonicstar Ltd v Allianz Insurance Plc and Sirius International Insurance Corporation [2017] EWHC 2753 (Comm) ("Tonicstar"), insurance and reinsurance companies expecting their disputes to be determined with input from at least one industry arbitrator should review their arbitration clauses without delay.

The issue

The Court was asked to determine whether a QC with more than ten years' experience of insurance/reinsurance law was sufficiently experienced to satisfy a clause in a reinsurance contract which stated: "Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance.”

The facts

The Claimant had underwritten liability risks of the Port of New York ("PONY"). Following the World Trade Centre attack in September 2001, PONY incurred liabilities, which were settled in May 2011 in the sum of around US$47.5m. This gave rise to the Claimant's claim against the Respondent's reinsurers, who had reinsured the Claimant's risk.

The reinsurance contract incorporated the "Joint Excess Loss Committee, Excess Loss Clauses". Arbitration commenced in April 2017. Clause 15 of the contract was entitled "Arbitration" and provided for each party to appoint an arbitrator.

Clause 15.5 of the contract stated: “Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance.” The Respondents appointed Mr. Alistair Schaff QC as their party-appointed arbitrator. The Claimant objected on the basis that although Mr. Schaff had more than ten years' experience of the law of insurance and reinsurance, he did not have experience in the business of insurance or reinsurance itself. The Claimant applied pursuant to s.24 of the Arbitration Act 1996 for the removal of Mr. Schaff as an arbitrator.

The Court's findings

The Judge noted that, where there is a previous decision at first instance, a first instance judge should generally follow that decision unless there is a powerful reason for not doing so (Willers v Joyce [2016] UKSC 44).

On that basis, Mr. Justice Teare followed the unreported decision of Morison J in Company X v Company Y (2000). He decided that Mr. Schaff should be removed because, as a lawyer, he did not possess the requisite qualifications to sufficiently satisfy the terms of the arbitration agreement.

Counsel for the Respondents submitted that if the parties had wished to exclude lawyers as potential arbitrators, they could have used language which made that intention clear. He further submitted that there was good commercial sense in relying on the ordinary and natural meaning of the phrase 'experience in insurance or reinsurance' as it would provide a greater degree of flexibility when nominating an arbitrator.

The Judge sympathised with Counsel's submissions and stated that "had I not been inhibited by the decision of Morison J. I might well have accepted it." He went on to state that "uninhibited by that decision I might well have decided that the ordinary and natural construction of the phrase in question did not limit the fields in which experience of insurance or reinsurance could be acquired and that the “context” argument was not sufficiently strong to justify implying the suggested limitation that the relevant experience be acquired in the business of insurance or reinsurance".

Notwithstanding his obiter comments, the Judge held that Mr. Schaff could not be appointed as an arbitrator in this case and, after confirming the Court's power to grant the relief sought, provided that the Respondents would have 30 days from the Court's decision to appoint a new arbitrator.

The Judge also granted permission to appeal, presumably because of his views of the meaning of the phrase. Clearly, the Court of Appeal will not be bound by the previous decision.

Comment

Despite upholding the traditional approach taken by the market in relation to this clause, the decision opens up the possibility that lawyers with experience in insurance and reinsurance may in the future satisfy the requirement of this type of arbitration clause.

Historically, in disputes between reinsureds and reinsurers, parties would insist on a market professional also being on the Tribunal in order to ensure that the nuances of market practice were relayed to the (usually) legally qualified Chair of the Tribunal.

If there is a risk that Tribunals in reinsurance disputes will be comprised solely of lawyers, parties may feel short-changed and unhappy with the final Award if they consider that the market practice points have not been fully understood. That said, before objecting or amending this type of clause, parties ought to look at the pool of potential market arbitrators and whether there are sufficient numbers to select and appoint.

In the event that the case is successfully appealed, the potential pool of arbitrators available to hear reinsurance disputes is likely to change drastically.

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