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Not Qualified: The lessons of TonicStar v Allianz

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Summary: One of the advantages of arbitration is that it gives the parties the opportunity to participate in the selection of an arbitrator and to specify the qualifications that an arbitrator should have. This article considers the problems that can arise where an arbitration clause requires an arbitrator to have specific qualifications.

One of the great attractions of arbitration over litigation is that it gives the parties the opportunity to participate in the selection of an arbitrator who will resolve their disputes. The choice of arbitrator can be critical to the outcome which may be why 38% of respondents to QMUL 2015 arbitration survey cited arbitrator selection as one of the most valuable characteristics of arbitration.  

In some sectors (typically insurance, commodities and shipping) provisions in standard form contracts will specify the kind of arbitrator to be chosen in the event of a dispute.  For example, in commodity arbitrations, the tribunal is generally made up of people involved in the trade, rather than lawyers.

In general commercial arbitration, institutional rules seldom specify particular qualifications that an arbitrator must have.  Nevertheless, it is not uncommon for the parties themselves to include specific selection criteria in the arbitration clause itself.  Examples include clauses that require an arbitrator to have specific professional qualifications or experience of a particular industry or sector. 

Selection criteria give the parties confidence that disputes will be resolved by someone with the requisite skills and experience.  In some cases arbitrator qualifications can be a good thing.  For example, in international commercial arbitration it is often desirable to require arbitrators to be fluent in the language of the contract.  However, requiring arbitrators to have specific qualifications can also give rise to problems as illustrated by the recent decision of Mr Justice Teare in TonicStar Ltd v Allianz [2017] EWHC 2753 (Comm).

The case concerned a Contract of Reinsurance incorporating the Joint Excess Loss Committee (JELC) Excess Loss Clauses.  Clause 15 dealt with arbitration and 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 is somewhat unusual in that there is an unreported decision [Company X v Company Y dated 17 July 2000] on the interpretation of JELC clause 15 which held 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).  In TonicStar,  Mr Justice Teare accepted that there was force in the argument that the ordinary and natural meaning of the phrase included individuals with experience of working with or on behalf of the insurance industry (including lawyers).  However, he was not persuaded that the earlier decision was obviously wrong and, as a matter of precedent, felt bound to follow the decision. 

The TonicStar case concerned the interpretation of an industry standard clause and the new JELC arbitration clause, which will become effective on 1 January 2018, now specifically includes lawyers within those eligible for appointment as an Arbitrator.  Nevertheless, the decision highlights the importance of ensuring that any contractually agreed criteria for arbitrator selection are clearly defined.

Arbitration clauses that require an arbitrator to have specialist experience can be particularly tricky.  For example a clause requiring arbitrators to have “at least 10 years’ experience in the luxury hotel business” can mean different things to different people so it’s important to make sure that qualifications are clearly expressed and understood by both parties.  Also, as with TonicStar, 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.

A good example of this is the standard ARIAS (UK) arbitration clause that provides

Unless the parties otherwise agree the arbitral tribunal shall consist of persons … with not less than ten years’ experience of insurance or reinsurance as persons engaged in the industry itself or as lawyers or other professional advisers.

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.

Retaining flexibility also avoids the danger of selection criteria that significantly limit or restrict the pool of available arbitrators.  Hashwani v Jivraj [2011] UKSC 40 illustrates the problems that can arise if qualification requirements are too prescriptive.  The case concerned a joint venture agreement where both parties were members of the Ismaili community.  The arbitration clause in the joint venture agreement included an arbitrator qualification requirement that all arbitrators "...shall be respected members of the Ismaili community and holders of high office within the community".  One party appointed a retired Commercial Court judge as arbitrator and the appointment was successfully challenged on the grounds that it did not meet the qualification requirement.

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.

This blog first appeared on Practical Law Arbitration Blog on 29 November 2017.

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