English Court of Appeal reinstates the appointment of an arbitrator on the basis that he qualifies for appointment under the arbitration clause

In Allianz Insurance and Sirius International Insurance Corporation v Tonicstar Limited [2018] EWCA Civ 434, the English Court of Appeal has reversed the decision of the High Court on whether a party-appointed arbitrator met the contractual requirements as to requisite experience. The Court of Appeal held that that an English QC with experience of insurance and reinsurance law was sufficient to comply with a contractual clause requiring arbitrators to have "experience of insurance and reinsurance".

This decision is of particular interest as such challenges to arbitrators rarely come before the courts. It highlights once again the importance of drafting arbitration clauses clearly, particularly where parties require their arbitrators to possess certain qualifications or experience.

The first instance decision

As we previously reported here, the parties entered into a contract of reinsurance in 2001 which incorporated the "Excess Loss Clauses" of the Joint Excess Loss Committee ("JELC"). The arbitration clause contained the following provision:

"Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years' experience of insurance and reinsurance."

The appellants appointed Mr. Schaff QC to act as an arbitrator. The respondent successfully applied under s24 of the Act to remove Mr. Schaff on the basis that he did not satisfy the above requirement. The respondent's argument was that whilst Mr. Schaff had considerably more than ten years' experience of insurance and reinsurance law, he did not have more than ten years' experience in insurance or reinsurance itself.

The respondent relied on the precedent set by an unreported Commercial Court case called Company X v Company Y, which had considered an identical clause and decided that a QC who had more than ten years' experience of acting in insurance and reinsurance disputes did not qualify for appointment under the clause.

The judge at first instance in Tonicstar granted the application.  He was not persuaded that there were sufficiently powerful reasons for departing from the decision in Company X v Company Y.  He relied on the following factors in reaching that conclusion: (i) the wording of the arbitration clause was not altered when the JELC produced a new addition of the clauses (ii) the decision must have been fairly well-known in the reinsurance market and therefore formed part of the relevant background and (iii) that decision had stood unchallenged for 17 years. However, he granted permission to appeal, recognising that the Court of Appeal would not be constrained from departing from the first instance decision in the same way as the High Court.

Court of Appeal decision

Interpretation of the clause

The Court of Appeal turned first to the meaning of the arbitration clause. It noted that it did not say that the person appointed as an arbitrator must have been employed in the insurance or reinsurance industry for at least ten years. In fact, the clause did not impose any restriction on the way in which that experience had been acquired.

The Court also did not consider that the context of the clause justified reading any such limitation into the clause – the fact that JELC clauses are drafted by a trade body did not mean that only members of the trade would be suitable to arbitrate disputes between parties who incorporate the clauses in their contract. Indeed, the contract clearly required the tribunal to apply the laws of England. Given that the arbitrator's task is to decide the dispute by applying the law, it reasoned that you might expect parties to expressly exclude persons with expertise in the law if that is their intention. Finally, the Court of Appeal was also not persuaded by the suggestion that the Chairmen of the Lloyd's Underwriting Association and the International Underwriting Association would not be able to identify any lawyers suitable for appointment as arbitrators.

The Court of Appeal rejected the respondent's argument that there was a distinction between experience of insurance and reinsurance itself, and insurance and reinsurance law. It therefore concluded that there was no clear expression of any intention to restrict the parties' freedom of choice by excluding a lawyer from eligibility to act as arbitrator.

Departure from precedent

The Court of Appeal then addressed the secondary question of whether to depart from the decision in Company X v Company Y. It noted that there would be two key reasons for adhering to the previous decision: first, earlier decisions may form part of the relevant background against which the parties have contracted, and second, adherence to an established interpretation provides certainty in commercial law.

In this case however, the contract was entered into only 7 months after Company X v Company Y was decided, and, as that case was not reported, it was not realistic to regard that decision as forming part of the relevant background reasonably available to the parties at the time of contracting. The Court also concluded that even had the contract been made more recently, its decision would have been the same, as the assumption that court decisions have been taken into account should not be carried too far (and may depend on the degree of publication of the decision in question), and context must not be used to impose on the text a meaning which it cannot reasonably bear. As regards legal certainty, certainty is also enhanced if contractual language is interpreted in accordance with its natural meaning, and there is value in the ability of a legal system to correct error. It therefore concluded that the decision in Company X v Company Y could not be defended and should be overruled.

Comment

This decision highlights yet again the importance of clear drafting of arbitration clauses, particularly when specifying the characteristics required of arbitrators. If parties intend to limit their pool of potential arbitrators to those with particular trade experience, then they should explicitly say so in their clauses. It is a reasonable assumption that the parties intend their arbitrator(s), whose task is generally to decide a dispute by applying the law, to have, or be able to have, a legal background.

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