The case concerned a Contract of Reinsurance incorporating the Joint Excess Loss Committee (JELC) Excess Loss Clauses. Clause 15.5 included the following provision: "Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years' experience of insurance or reinsurance."
Allianz appointed a QC with more than ten years' experience of insurance or reinsurance as their arbitrator. TonicStar accepted that the QC had more than ten years' experience of insurance or reinsurance law, but argued that the phrase "experience of insurance or reinsurance" required an arbitrator to have experience in the business of insurance or reinsurance itself. TonicStar sought (and obtained) an order pursuant to section 24 of the Arbitration Act 1996 that the QC be removed as an arbitrator on the grounds that he was not qualified to act as an arbitrator.
The case was somewhat unusual in that an earlier, unreported decision [Company X v Company Y dated 17 July 2000] on the interpretation of JELC Clause specifically decided that the phrase "experience of insurance or reinsurance" required the tribunal to consist of persons from the trade or business of insurance and reinsurance (not lawyers).
At first instance, Mr Justice Teare said that, uninhibited by that earlier decision, he might have decided that the QC satisfied the qualification requirement in Clause 15.5. However, as a first instance judge, he felt bound to follow the earlier decision – not having been persuaded that there were sufficiently powerful reasons for departing from it.
In reaching this decision he was influenced by the fact that: the wording of the clause was not altered when the Joint Excess Loss Committee produced a new edition of the JELC Clauses in 2003; he thought that the decision must be fairly well known in the reinsurance market; and the decision had stood unchallenged for 17 years.
Interpretation of Clause
In the Court of Appeal, Lord Justice Leggatt concluded that the interpretation of Clause 15.5 adopted in Company X v Company Y was not defensible. Nothing in the wording of the clause or its context justified the exclusion of persons with expertise in insurance and reinsurance law from appointment.
Lord Justice Leggatt also rejected an alternative interpretation that Clause 15.5 refers to experience of insurance or reinsurance and not to experience of reinsurance law.
He concluded that there is no such thing as insurance or reinsurance “itself” which is separate and distinct from the law of insurance and reinsurance – making the following distinction: “Unlike sports, engineering and telecommunications, which are clearly distinct from the law regulating these activities, no similar distinction can be drawn between insurance and reinsurance law and insurance and reinsurance “itself” … It is precisely because the practical and legal aspects of insurance and reinsurance are so intertwined that both market professionals and lawyers who have specialised in the field for many years are commonly appointed as arbitrators in insurance and reinsurance disputes.”
He concluded that, if the parties intended to exclude lawyers from eligibility, clear wording would be required which Clause 15.5 did not contain.
Overturning a settled meaning?
Lord Justice Leggatt was not under the same constraint as Mr Justice Teare to follow the earlier decision. However, he recognised that the Court of Appeal may be reluctant to overturn an established interpretation of a clause in a standard agreement for 2 reasons: (1) the earlier decision may form part of the background against which the parties have contracted; and (2) following an established interpretation promotes certainty in commercial law.
That said, he concluded that neither of these concerns were good reasons to prevent the court from holding that Company X v Company Y was wrongly decided. In particular he pointed to the fact that whilst certainty is important, so too is the ability of the legal system to correct an error and “… if a decision is untenable, it should not in any case be allowed to stand.”
As we highlighted in our previous Blog, the new JELC arbitration clause, which became effective on 1 January 2018, now specifically includes lawyers within those eligible for appointment as an Arbitrator.
Nevertheless there are still lessons to be learned from TonicStar.
In general commercial arbitration, institutional rules seldom specify particular qualifications that an arbitrator must have. However, it is not uncommon to see the parties themselves including specific selection criteria in the arbitration clause itself. The drafting of such clauses is not always straightforward.
For example an arbitration clause requiring arbitrators to have “at least 10 years’ experience in the luxury hotel business” can mean very different things to different people and it is not always easy to ensure that the required qualifications are sufficiently clearly expressed and understood by both parties.
Where industry experience is a requirement it’s advisable to specify whether that includes experience from working with or on behalf of that industry (for example lawyers and professional advisers) or is limited to those working within the industry itself. In TonicStar, Lord Justice Leggatt suggested that some activities (like sports and engineering) are clearly distinct from the law regulating them, however it may not be easy to draw that distinction in practice absent express wording in the arbitration clause.
An example of this is the new JELC arbitration clause which now provides: “The Arbitrators shall be persons (including those who have retired) with not less than 10 years’ experience of insurance or reinsurance within the industry or as lawyers or other professional advisors serving the industry.”
In the commercial context, this flexibility can be crucial as it is often difficult to predict the precise nature of the disputes that might arise at the time the arbitration clause is drafted. For example, at the drafting stage of a complex IT contract, the parties may feel that expertise in IT systems is an essential qualification for an arbitrator. However, in practice, IT disputes often centre around the application and interpretation of key contractual provisions rendering legal qualifications at least, if not more, useful than IT expertise.
Ideally arbitration clauses should give the parties the flexibility to select an arbitrator who is best suited to their particular case. In cases where this is not possible, because an arbitration clause includes overly restrictive or inappropriate selection criteria, the parties may be able to reach an agreement that the requirements are no longer necessary. Where this is an option, it is best to secure a clear, written waiver of the requirements at the outset of the arbitration to avoid the risk of the appointment being challenged at the end of the process as a defence to enforcement.