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English Commercial Court enforces obligation to resolve disputes by friendly discussion prior to arbitration
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21 July 2014
Many insurance and reinsurance disputes have significant international elements. So why has London arbitration become a favoured mechanism for dispute resolution, particularly with reinsurance contracts?
A good starting point in answering this question is the statement of general principle contained in Section 1 of the Arbitration Act 1996 (the act): "The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense; the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest."
Here, then, are some of the key elements that help to make London arbitration so effective: neutrality, commerciality and flexibility of procedure. Others are certainty and confidentiality.
A number of arbitration clauses also now allow those who have 10 or more years' experience of the (re)insurance industry to serve as arbitrators. A common constitution of an arbitration tribunal is to have two party-appointed market arbitrators and a jointly appointed third arbitrator, usually a QC or a retired judge. A legally qualified arbitrator will have a clear understanding of case management techniques, which are essential in preserving the efficiency and fairness for which London arbitrations have become known.
Although in the US the Insurance and Reinsurance Dispute Resolution Taskforce has issued protocols for the appointment of "all-neutral" panels, it is still not uncommon in US arbitrations for a party-appointed arbitrator to effectively act as an advocate for the party who appointed them. This often means that the decision on the outcome will fall, in the end, on the shoulders of the umpire, who may then seek to 'split the baby' rather than following strict legal principles.
In England, a party-appointed arbitrator cannot act as an advocate for the instructing party. Under Section 33(1)(a) of the act, the arbitrators are obliged to "act fairly and impartially" between the parties. Section 24(1)(a) provides that an arbitrator may be removed by the court where there are circumstances that give rise to justifiable doubts as to the arbitrator's impartiality. A fully neutral panel ensures a more objective appraisal of the evidence and issues in dispute.
Certainty and confidentiality
Grounds of appeal from an award under the act are very limited. A party can apply to the court to challenge an award on the grounds of "serious irregularity" affecting the tribunal, the proceedings or the award (Section 68 of the act). Alternatively, Section 69 of the act provides that a party can also apply to the court on a question of law arising out of the award. A number of threshold requirements must be met before the court will give permission to allow such an appeal.
The attractions of certainty are obvious. When litigation is subject to the appeal process, it can be dragged out for years and the associated costs can be significant. In arbitration, certainty of outcome and the limited availability of appeal means that there will be a once-and-for-all determination of the issue, which will allow the parties to deal with the effects of a decision, make any changes necessary as a result of the deliberation and then get on with their business.
Finally, it is an unbroken rule of English law that strangers are not permitted to attend an arbitration and an award cannot confer rights or obligations on those not party to the decision.
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It is sometimes argued against arbitration that its costs are usually equivalent to similar litigation, with the disadvantages that third parties cannot be joined and that there is no straightforward procedure for obtaining summary judgment. Arbitration, however, offers the opportunity for parties to tailor the arbitral procedures to suit the complexity of the issues in dispute, thereby mitigating the length and cost of the proceedings. The question is whether the parties are willing to grasp that opportunity.
London remains an attractive place for the insurance and reinsurance industry to arbitrate its disputes, principally because of its independent, impartial and commercially-minded arbitral panels.
Helen Clark is a partner at Kendall Freeman