Australia: Reinsurers win decade-long battle in High Court

Last Updated: 10 October 2011
Article by Mark Lindfield

On Wednesday, 5 October 2011, the High Court brought to an end a reinsurance dispute which has spanned a decade.1 Mark Lindfield, who advised the reinsurers, explains in this article how they were successful in persuading the court that commercial arbitration in Australia is not merely a matter of private contractual arrangements. Instead, it operates within a statutory scheme that requires arbitrators to provide reasons for their awards when asked to do so by disputing parties.

For different reasons, the High Court's decision is important for the reinsurance industry and for parties involved in commercial arbitration.

What insurers and reinsurers need to know

The High Court has clarified the application of the relief found in s18B of the Insurance Act 1902 (NSW) to reinsurance treaties written prior to 1 September 2009. Because of this dispute, the New South Wales Government enacted regulations clarifying that s18B has no application to reinsurance contracts after 1 September 2009. Reinsurers and cedants should not unthinkingly agree to standard arbitration clauses in their reinsurance treaties. Instead, they should consider:

  • whether all disputes under a reinsurance treaty should be resolved by arbitration or perhaps only disputes relating to quantum
  • given the size of the Australian reinsurance market, whether it is more efficient to resolve disputes by meetings between the parties' senior representatives, failing which the parties can litigate and be subject to judicial case management, and
  • whether principles of justice and fairness have any useful role in reinsurance arbitrations.

What parties to commercial arbitration need to know

  • arbitration awards are tied to the exercise of public authority and so parties cannot expect that courts will merely rubber-stamp awards that are demonstrably erroneous
  • the adequacy of arbitrators' reasons depends on the nature of the dispute and the circumstances of the case. In more complex matters, arbitrators can reasonably be expected to provide more detailed reasons than in simple disputes
  • for those matters that remain subject to arbitration under the Commercial Arbitration Act 1984 (NSW), a failure to provide adequate reasons can amount to both a manifest error on the face of the award and strong evidence of an error
  • this is also relevant to those States where new uniform commercial arbitration legislation has not yet commenced
  • the Commercial Arbitration Act 2010 (NSW) commenced on 1 October 2010. It permits appeals from awards only if the parties agree. Although it requires arbitrators to provide reasons (unless the parties otherwise agree) it replaces the test of manifest error with a test of whether the decision is 'obviously wrong' and it replaces the test of strong evidence of error with a test of 'serious doubt'
  • it remains to be seen whether a failure to provide adequate reasons has the effect of making a decision under the new Arbitration Act 'obviously wrong' or 'open to serious doubt'
  • the High Court's decision does not affect recent amendments to the International Arbitration Act 1974 (Cth) which give the force of law to the UNCITRAL Model Law on International Commercial Arbitration.

Comment

The High Court was correct in overturning the Court of Appeal's decision (please click here to read entire case background).

Reinsurers did not argue that arbitrators are always required to provide the same detailed reasoning as judges in litigated disputes. Rather, the arbitrators here had provided no reasons as to why the novel application of an obscure statute supported an award in favour of Gordian, in the interests of 'justice and fairness'. Reinsurers argued that if the arbitrators had embarked upon the task of identifying any such reasons, it would have been clear to them that no reasoning supported a finding that it was 'reasonable' to require the reinsurers to indemnify Gordian.

The Court of Appeal described the arbitrators' remarkable conclusion as an 'evaluative' process that was dealt with 'throughout' their reasons. Nowhere was that reasoning made express, yet the Court of Appeal found that the decision required 'no further explanation by way of reasons'.

What the Court of Appeal, and some commentators, appear to have overlooked is the right of disputing parties to be able to identify clear reasons from arbitrators presiding over complex matters. Although finality in arbitration awards is important, so too is confidence in the outcome. Parties who have asked arbitrators to provide reasons for their decision are entitled to have them. Where no reasons can support the arbitrators' decision, the award must be in error.

The High Court's resolution of this dispute should be welcomed by parties to complex arbitration proceedings. The Court of Appeal's statements about the adequacy of arbitrators' reasons had set the bar too low.

At DibbsBarker, we have extensive experience acting for both reinsurers and cedants in reinsurance disputes. We also have extensive commercial arbitration experience. Contact us if you would like to discuss the implications of this judgment for your business.

Footnote

1 Westport Insurance Corporation v Gordian Runoff Limited [2011] HCA 37.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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