Mediation - A Rival To Arbitration In Reinsurance Disputes?

By Peter Mann and Raymond Giblett

Key Point

• Reinsurers must be fully informed about all aspects of the dispute resolution process before they choose to include clauses restricting a party to any particular means of dispute resolution.

It has been said that arbitration "antedates all the former legal systems".¹

. Originally used by merchants and traders in medieval times, arbitration's growth in the last 15 years has hinged on the business community's recognition that it provides a flexible and effective alternative to costly and time-consuming litigation. However, despite this, there is at times a perception that arbitration is increasingly imitating traditional court procedure, and recognition that the courts often recommend or require mediation prior to a court hearing.² As a result, business is increasingly opting for alternative means of dispute resolution such as mediation and expert determination.

An example of this is in the context of reinsurance. Arbitration is a common method of dispute resolution in the insurance industry, particularly in relation to reinsurance disputes. While the use of compulsory arbitration clauses in contracts of direct insurance is curtailed by section 43(1) of the Insurance Contracts Act 1984 (Cth), this Act does not apply to reinsurance. As a result arbitration clauses, although rare in contracts of direct insurance, occur regularly in the context of reinsurance.

A compulsory arbitration clause in a reinsurance treaty generally stipulates at what stage of the dispute resolution process arbitration will become mandatory. For example, a clause may specify that if a dispute cannot be resolved by negotiation then it must be referred to arbitration. Compulsory arbitration clauses commonly stipulate that arbitration must be conducted in accordance with and subject to the Institute of Arbitrators and Mediators' Rules for the Conduct of Commercial Arbitrations or those rules set out by the United Nations Commission on International Trade Law ("UNCITRAL"). The arbitration clause also frequently sets out certain additional rules that must be followed such as what background and expertise arbitrators should have. An important aspect of many reinsurance treaty clauses is the rule that arbitrators may "dispense with judicial formality" and that arbitrators should have regard to customary practice in the insurance industry rather than strict legal interpretation of the terms of the agreement.

Mediation and expert determination

Despite the popularity of arbitration clauses in reinsurance contracts, it is not uncommon in Australia for these to be replaced with clauses allowing for the resolution of disputes via other mechanisms of dispute resolution such as mediation or expert determination - or a clause allowing for resolution via arbitration only after other forms of alternative dispute resolution have failed. Which clause is used may depend on the cedent (ie. the insurer passing the risk to the reinsurer). Reinsurers will be more comfortable agreeing to a mediation clause with a sophisticated cedent, while preferring arbitration clauses with less sophisticated clients.

In Australia, even in reinsurance arbitration clauses are not used as exclusively as in overseas jurisdictions. Approximately 70 percent of non-life reinsurance contracts contain arbitration clauses with a relatively high 30 percent containing mediation or expert determination clauses.

While this does not amount to a trend favouring mediation clauses over arbitration clauses, there is a definite, and peculiarly Australian, trend towards including both a mediation and arbitration clause in a contract of reinsurance. The reason for this, aside from the issue of arbitrations mirroring litigation, is that there is an apparent court preference for mediation and expert determination prior to a more formal arbitration or court hearing. This has led to reinsurers concluding that if a dispute is to end up in the court room and the court is to refer it to mediation or expert determination, such a clause should be included in the reinsurance contract from the outset so as to provide certainty as to the preferred process.

However, the move away from arbitration clauses should not occur without reinsurers being aware of the potential drawbacks associated with other forms of alternative dispute resolution. For example, in terms of mediation, George Golvan QC, from his experience, has outlined a number of pitfalls:

• the mediator must take control of the mediation process, including the time for mediation, location, what issues are raised in the dispute, and who will put the first offer on the table;
• the failure of the mediator to listen to the issues raised by the parties to a dispute; and
• the refusal of parties to make further concessions in the negotiations.³

While an arbitrator has the ability to determine the dispute, a mediator's role is merely to encourage the parties to reach their own solution for the dispute.

In terms of expert determinations, an example of a drawback is with regard to procedural assistance. In respect of arbitrations, statutes typically provide for assistance by the courts where procedural difficulties arise. If the parties to an arbitration agreement cannot agree on the appointment of an arbitrator, or an arbitrator's impartiality is doubted, there are legislative procedures to help facilitate arbitration and ensure it stays on foot.

In contrast, if the expert determination process breaks down because, for example, the parties cannot decide upon the appointment of an expert, or if the agreement between the parties is incomplete as to a procedure necessary for the expert determination to be effective, then the agreement to use the expert determination may be unenforceable and therefore void. For this reason it is important that mechanisms are in place within the contract to enable a third party to decide upon a mediator or expert in the event that the parties cannot reach an agreement.

Australian reinsurance contracts exhibit a proportionately higher use of mediation or expert determination clauses than their international counterparts. There is also a clear trend in this country, not seen elsewhere, towards including both mediation and arbitration clauses in the one reinsurance contract as the Australian courts have proven to be more likely to refer a dispute to mediation or expert determination.

In order to revert this trend back towards arbitration there may be a need for arbitration to be simplified through amendments to the Commercial Arbitration Acts. However, both mediation and expert determination possess their own issues. This highlights the need for reinsurers to be fully informed about all aspects of the dispute resolution process before they choose to include clauses restricting a party to any particular means of dispute resolution.

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.