Arbitration or ADR?

In Turville Heath Inc v Chartis Insurance Uk Ltd [2012] EWHC 3019 TCC, The UK High Court held that a clause providing for loss to be assessed under an insurance policy by way of a so-called "arbitration" procedure was non-compliant with the Arbitration Act 1996 and therefore not a genuine arbitration clause. The court found, however, an alternative way to allow the procedure, which was more akin to ADR, to avoid wasting the substantial sums which the parties had already spent on the process. Michael Mendelblat examines the court's decision and its implications.

The Facts

The claim arose out of a fire at the insured's property and, although liability was admitted, there was a substantial dispute between the parties as to both the building costs and professional fees.  The sum in issue was over £1 million.

The policy contained a clause headed "arbitration".  This provided that in the event of a dispute as to the amount of loss, either party could make a written demand that each select an independent appraiser.  The appraisers would then select an "arbitrator" or he would be appointed by a nominating body.  The independent appraisers would then appraise the loss and submit any differences to the arbitrator.  A decision in writing agreed by the two appraisers or either appraiser and the "arbitrator" would be binding on the parties. 

There had been substantial correspondence between the parties as to the extent of the loss but this had not succeeded in resolving the dispute.  The parties had already appointed independent appraisers who had carried out substantial work in appraising the loss.  However the insured was dissatisfied with progress and commenced Court proceedings. The insurer applied for the proceedings to be stayed under section 9 of the Arbitration Act 1996.

What did the clause mean?

It was necessary to decide whether this clause was a true arbitration clause within the meaning of the 1996 Act.  The court held that it was not.  The proper interpretation of the process was that the arbitrator had to reach agreement with one of the two appraisers in order for his decision to be binding.  However section 1 of the 1996 Act provided that the object of arbitration was to obtain the fair resolution of disputes by an impartial tribunal.  It was implicit that the arbitrator alone made the decision and not the arbitrator in conjunction with someone else.  By contrast an arbitrator may be entitled to seek advice from experts or legal advisers but the decision remains his own.

The Result

The process prescribed by the policy was likely to lead to a course of negotiation between the appraisers and the arbitrator and any decision reached as a result would not be that of the arbitrator alone.  The appraisers could not themselves become arbitrators as they had already acted as advocates for the party instructing them.  Any decision of the "arbitrator" with which neither independent appraiser agreed would be of no effect and litigation would ensue.  Therefore the application for a stay failed.

The court was prepared to grant a stay of the proceedings under its inherent jurisdiction.  It noted that the insured had freely participated in the process when it was first invoked and a substantial amount of work had been done by each of the independent appraisers, whose combined fees totalled some £100,000.  The appraisers should not be very far from identifying their differences and there should be prospects of the "arbitrator" and at least one of the appraisers reaching agreement, albeit after negotiation.  A nominating body could appoint the "arbitrator" albeit that, strictly speaking, his role was at most similar to that of an arbitrator.  The court determined that its discretion should be exercised in favour of granting a stay rather than, as it put it, "pulling the plug" at the present stage in the "arbitration".

Comment

The decision indicates that, where appropriate, the court will have regard to the course of action which is likely to produce a speedier and more economic solution and, in this case, this approach militated strongly in favour of allowing the parties to continue with the course of action they had already embarked on which was, in any event, more akin to ADR than arbitration.

The process chosen by the parties has some parallels with the "med-arb" procedure, whereby a mediator becomes an arbitrator if the mediation does not succeed. However, by contrast with a mediator, appraisers are paid by their instructing parties to promote their case and are not truly independent of them.

The issue of enforcement of a procedure of this type may be problematic but probably the successful party would seek to enforce through the courts any decision reached on the basis that the parties had agreed to abide by such decision as a matter of contract, as is done for experts' decisions.