English High Court removes arbitrator on the basis that he did not possess necessary qualifications

In Tonicstar Limited v Allianz Insurance and Sirius International Insurance Corporation [2017] EWHC 2753, the English High Court considered an application under Section 24 of the Arbitration Act 1996  (the Act) for the removal of an arbitrator on the basis that he did not satisfy the contractual stipulation as to relevant experience. This judgment is of particular interest given that questions of the removal of arbitrators do not often come before the courts (because they are, in institutional arbitration, typically decided by arbitral institutions so are not usually public). The Court decided to remove the arbitrator on the basis that he had experience of insurance and reinsurance law, rather than required experience in the business of insurance and reinsurance. This decision highlights the importance of the careful drafting of arbitration clauses which specify characteristics of an arbitrator.  It also serves as a reminder of the importance of precedent in the English judicial system.

Background

A dispute arose between the parties under a contract of reinsurance dated 12 February 2001 (the Contract) which incorporated the "Joint Excess Loss Committee, Excess Loss Clauses". These were a set of standard form clauses, published in January 1997 under the instructions of The Institute of London Underwriters.

The arbitration clause in the Contract provided for the appointment of three arbitrators and specified that "unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years' experience of insurance or reinsurance".

The dispute was referred to arbitration pursuant to the Contract.

The issue

The claimant applied pursuant to s24 of the Act to remove the respondents' nominated arbitrator, Mr. Schaff QC. Whilst the claimant accepted that Mr. Schaff had considerably more than ten years' experience of insurance and reinsurance law, it argued that he did not have more than ten years' experience of insurance or reinsurance within the meaning of the arbitration clause, as the clause required experience in the business of insurance or reinsurance.

The claimant relied on Company X v Company Y, unreported (17 July 2000) in which the Court had decided the exact same question of whether a QC with considerable experience as a lawyer in insurance and reinsurance disputes was qualified to act as an arbitrator within the meaning of the same Joint Excess Loss Committee arbitration clause.  In that case, the Court noted that this construction of the clause was supported by the fact that the default appointment bodies specified in the clause were the Chairman of the Lloyd's Underwriters' Association and the Chairman of the International Underwriting Association, both of whom were unlikely to be in a position to identify appropriate lawyers.

The respondents submitted that the decision in Company X v Company was obviously wrong, as the ordinary and natural meaning of "experience of insurance or reinsurance" included experience acquired by working with or on behalf of the insurance and reinsurance industry. Such a construction offered the parties the flexibility to nominate an arbitrator whose particular experience made them most suitable for the dispute in question. If the parties had wished to confine their choice of arbitrators to persons working within the insurance or reinsurance industry, they could have used language which made such intention clear.

As a separate and secondary issue, the respondents also argued that the Court had no power to grant the relief sought, as the Tribunal itself should first rule on its own jurisdiction pursuant to the following two provisions of the Act:

• Section 30(1)(b), which provides that the arbitral tribunal may rule on its own substantive jurisdiction as to whether the tribunal is properly constituted; and
• Section 24(2), which provides that if there is an arbitral or other institution or person vested by the parties with power to remove an arbitrator, the court shall not exercise its power to remove the arbitrator unless satisfied that the applicant has first exhausted any available recourse to that institution or person.

Decision

• No departure from precedent

As a starting point, the Court went back to first principles concerning the importance of case precedent, referring to Willers v Joyces [2016] UKSC 44 in which it was held that where there is a previous decision at first instance, a first instance judge should generally follow that decision unless there is powerful reason for not doing so.  The previous decision on the same issue in Company X v Company Y was made 17 months previously (with no subsequent challenge), just 7 months before the Contract was signed and in circumstances where the Joint Excess Loss Committee had produced a revised draft of the Excess Loss Clauses in November 2003 which did not alter the wording of the arbitration clause.  The Court also noted that the decision must have been fairly well-known in the reinsurance market and concluded that there would have to be a very powerful reason for the Court not to follow the decision in Company X v Company Y.

The Court concluded that the decision in Company X v Company Y was not "obviously wrong", as it could be supported by reference to the context of the clause, given it was drafted by a trade body. Therefore the Court granted the application despite Mr Schaff QC's undoubted experience of insurance and reinsurance derived from acting as counsel in those fields.

• Secondary issues

The Court found that it did have the power to grant the application. The two arbitrators appointed by the parties did not have the power to remove one of them, as the power to rule on questions of jurisdiction is different from the power to remove an arbitrator.

In light of the removal of Mr Schaff QC, the Court also determined as a practical matter that the contractual procedure regarding the respondent's appointment of an arbitrator could also apply to the re-appointment, albeit with "some manipulation" of the contractual wording.  It therefore ordered that the respondents had 30 days from the Court's decision to appoint a new arbitrator to fill the vacancy.

Comment

This decision emphasises the importance of precise drafting if an arbitration clause specifies particular characteristics required of arbitrators.  In particular, the clause should be clear not as to the relevant experience of the arbitrators, but also the capacity in which such experience has been obtained. This may mean amending standard form clauses. Such attention to detail at the drafting stage should minimise the risk of incurring the delay and costs associated with an arbitrator challenge.

This case also serves as a reminder, especially to those parties from civil law systems, of the importance of judicial precedent in English law. It is clear that the primary factor in the Court's decision was the previous judgment on the issue. This was the case even though the Court appeared to follow the judgment with some reluctance, concluding that absent the previous decision it may have decided that "the ordinary and natural construction of the phrase in question did not limit the fields in which experience of insurance or reinsurance could be acquired and that the "context" argument was not sufficiently strong to justify implying the suggested limitation that the relevant experience be acquired in the business of insurance or reinsurance".

Interestingly, the Joint Excess Loss Committee appears to have already responded to this decision in a practical way. The model form arbitration clause in the Joint Excess Loss Clauses has now been amended so that it expressly allows the parties to appoint lawyers or professional advisers to as arbitrators provided they have at least 10 years' experience of the industry. The new arbitration clause will be effective from 1 January 2018. Parties with contracts which incorporate the previous version of the Joint Excess Loss Clauses may wish to amend their arbitration clause to reflect this change, before any dispute arises.

For more information, please contact Chris Parker, Partner, Elizabeth Kantor, Senior Associate, or your usual Herbert Smith Freehills contact.