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BW ALERTS
July 2010
Construction News
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Tuesday, 28 November 2006
Litigate or arbitrate a reinsurance agreement?
The choice is restricted in Australia by the recent case of HIH v Wallace
Yesteryear
In the "good ole days", even when the writer started practising law in the insurance and reinsurance sector in London in the early 80's, disputes between reinsurers and reinsureds were relatively unusual. Such disagreements as arose tended to be resolved informally and, although arbitration clauses were often included in reinsurance contracts, there was not so often a need to follow through such procedures.
As the market broadened and losses developed to unexpected proportions (deriving particularly from the USA out of product liability such as asbestos), the number of disagreements as to how losses should be treated and the extent of their recoverability from reinsurers increased, however, as did the number of more formal arbitrations taking place. Lawyers became more closely involved, including barristers instructed to present their client's case to the arbitration panel, with the consequence that the formality of arbitration proceedings intensified becoming more like proceedings in court and such savings of time and costs as might originally have been anticipated from the arbitration procedure were eroded for a variety of reasons.
Pros and cons of Arbitration and Court Proceedings
Commentators have variously debated relevant issues, including: the benefits, or not, of sole arbitrators and panels of three; the involvement of legally qualified panellists; the increased difficulty of identifying appropriately market-experienced individuals with no conflict of interest (sometimes in line with particular requirements set out in the wording); quality of reasoning; and perceived confidentiality and consequent lack of precedential value of arbitration decisions amongst many others.
Of course, there may well be particular reasons why court proceedings will be considered more appropriate than arbitration. Multiple parties may be involved, including parties not subject to any prescribed arbitration procedure. Brokers are an obvious example and where they are felt to have some responsibility or liability for a difficulty that has arisen, it may well be that court procedures will be the way to bring everyone into the fray. It will generally be desirable to have all interested parties involved in just one set of proceedings, if possible.
Another potentially significant advantage of litigation is that a Court decision will be binding and so, by reference to existing precedent, it may well be easier to predict an outcome in this forum. Of course, sometimes setting a precedent may not be considered desirable!
By the very nature of the beast, if a reinsurance disagreement has not been capable of resolution "amicably", it is likely that the issues will be complex and involve significant sums of money and volumes of documents such as to justify either court or arbitration proceedings. The overriding principle of court procedures facilitating the "just, quick and cheap resolution" of issues should also be noted although, doubtless, views on whether outcomes are in line with the principle will differ.
It will always be prudent for parties to reconsider the appropriateness of any particular prescribed dispute resolution procedure at the various stages of dealings – particularly when the contract is made and if a disagreement arises, but a benefit analysis should be ongoing. Whatever the effect of an existing contractual situation, the parties are always free to agree separately to a different way of seeking to resolve matters, subject only to any control any relevant Tribunal might wish to apply, such as Supreme Court case management criteria.
HIH V RJ Wallace
The very recent case of HIH v RJ Wallace, in the Supreme Court of New South Wales, identified a restriction that impacts on the reinsurers' position, however. In New South Wales, there is no potential for a reference to arbitration against the wishes of the reinsured. Justice Einstein considered the affect of the Insurance Act 1902 which applies in New South Wales (to be distinguished from the more widely considered Insurance Contracts Act 1984, which expressly does not apply to reinsurance) and held that section 19 of the Insurance Act 1902, should apply equally to reinsurance as it does to insurance arrangements. Accordingly, an arbitration clause will not bind the (re)insured unless the dispute has already arisen and they agree to arbitration at that stage. The relevant wording in this case was in fairly standard form used in Australian reinsurance arrangements and comprised both a submission to the New South Wales courts' jurisdiction and to arbitration to take place in Australia, but the right to choose arbitration rests, by reference to this court decision, only with the reinsured - a significant and undoubtedly unexpected outcome for many entering into a contract with arbitration as a stated dispute resolution procedure.
Where the jurisdiction of another Australian State or Territory applies, a reinsurer seeking to have proceedings stayed by reference to the International Arbitration Act 1974 as Wallace did, may encounter a different problem. The International Arbitration Act implemented Australia's obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to recognise the operation of an arbitration agreement unless the agreement is "null and void, inoperative or incapable of being performed". Justice Einstein looked at this aspect and reached the view that he could not infer, in the particular circumstances of the Wallace reinsurance, the existence of a written contract such as to satisfy the requirements of the International Arbitration Act 1974. The Wallace syndicate at Lloyds of London argued that the reinsurance arrangement was evidenced by a slip (summary document) scratched (marked up, initialled and stamped) by or on behalf of the syndicate in accordance with normal Lloyds procedures, but Justice Einstein did not consider that there was adequate evidence of the reinsured's (HIH) agreement to the incorporation of the arbitration clause.
Of course, everyone in the Australian market will be very much aware of the focus that APRA has applied to 'contract certainty' and a similar focus has been applied by the UK's Financial Services Authority so that, going forward, it may be expected that where arbitration is the preferred procedure for dispute resolution, it will be properly specified in a finalised contract in line with APRA's requirements, but, at least in New South Wales, the reinsurer's position will not actually be improved because of the effect of s19 of the Insurance Act, which, Justice Enstein has decided, makes the "agreement" to arbitrate "inoperative" in the context of the International Arbitration Act. The effect of this decision should be carefully considered by reinsurers and reinsureds alike both in relation to existing contracts and those to be made in the future in the context of whether disputes should best be resolved in arbitration or court proceedings.
It is interesting to note, as final comment on the value of court decisions rather than in arbitration, that, in the recent HIH case, the underlying dispute concerns whether the Wallace syndicate, as reinsurer, is obliged to pay HIH losses before they are actually paid in line with the English House of Lords decision in Charter Re v Fagan. That was a test case brought to the English courts in the 1990's, by agreement of the parties, with the intention of obtaining a binding decision on which the reinsurance market could rely in cases of insolvency.
Colin Porter
Partner
Blackstone Waterhouse Lawyers
Phone: 61 2 8216 1515
cporter@blackstonewaterhouse.com.au
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