UK: Choose Your Battleground

Last Updated: 1 May 2001
Article by Jim Hobsley

In commerce it may be impossible to avoid disputes completely, but should a dispute arise it is at least possible to choose the forum for its resolution. So thought the insurers of the defendant in Wilson Homes Limited v Surrey Services Limited (in liquidation) another 1 . The claimant, having obtained judgment against the defendant in liquidation, sought to recover from its insurers pursuant to the Third Parties (Rights Against Insurers) Act 1930. The insurers had chosen arbitration as their preferred forum and the policy provided that "any dispute shall be referred to a QC of the English Bar".

Accordingly, when joined into the proceedings, the insurers applied for a stay under the Arbitration Act 1996 so that the matter could be referred to arbitration. However, the application was refused by Judge Anthony Thornton QC who decided that the clause did not record an agreement to arbitrate. In his view, such an agreement would require a clause which "identified the reference expressly as being to arbitration". The clause was a reference for the purpose of a non-binding opinion or, possibly, an expert determination.

On appeal, Longmore L J decided in favour of the insurers that "arbitration" need not be mentioned; "the important thing is that there should be an agreement to refer disputes to a person other than the Court". The insurers had no doubt by then incurred irrecoverable costs and wasted much time.

It is easy to see how, in insurance, minimal wording used on slips could cause similar problems. References on a reinsurance slip to an underlying policy containing an arbitration clause will not incorporate an arbitration clause in the reinsurance contract, because it is not an essential term. Related contracts must be consistent as well as precise. In Alshaya v Retek Information Systems Inc 2 , Mr Justice Garland struck out an arbitration clause in a licensing agreement because it was incompatible with a closely related maintenance agreement entered into by the same parties. The defendant’s alleged misrepresentation affected both agreements and it was clearly necessary for the dispute to be decided in the same forum. The judge decided that it would be incorrect for him to write the arbitration clause into the maintenance agreement, whereas he could write it out of the licence agreement.

Clearly, care must be taken when drafting contracts to ensure that the choice of forum is specified. First, the appropriate forum must be carefully chosen.

Arbitration has been in vogue in recent years, particularly in reinsurance disputes, and it has some advantages over court proceedings. In particular, disputes may be kept confidential. Clauses may also exclude the right to appeal to the courts which prevents adverse decisions from establishing a precedent. Absent "procedural mishaps", which the courts may order the arbitrator to correct (see Danae Air Transport SA v Air Canada 3 ), the courts seem prepared to allow such clauses, so that arbitration may have the advantage of finality; of course, for those on the losing side an apparently unjust decision might stand.

These points, good or bad, were part of the arbitration design. The major defect of arbitration is that it can be very inefficient. Documentary, oral and expert evidence may all be required by the arbitrator and, as parties tend to rely on counsel to put their case, significant savings in both costs and time may continue to be elusive.

Meanwhile court proceedings show signs of becoming more efficient following the introduction of the Civil Procedure Rules. Enforced adherence to time limits, coupled with an increased willingness of the parties to make constructive proposals for case management (and a corresponding willingness of the court to listen) should mean that evidence is gathered and the case analysed at an early stage. Part 36 offers can be used to force the other side to focus on the weaknesses in their case.

Whatever the forum, there may need to be a mechanism requiring the parties to collate and exchange evidence. Once the parties’ cases are prepared the question becomes who should decide the outcome, a judge, an arbitrator… or perhaps the parties themselves. Increasingly, it is the third option which is finding favour, the forum being mediation. There has been scepticism regarding the application of mediation to reinsurance disputes, where the parties are likely to be sophisticated and skilled in negotiation. However, that is true of commercial disputes generally and, according to the Civil Justice Reform Evaluation published by the Lord Chancellor’s Department in March 2001, over 130 ADR orders were made in the Commercial Court between May 1999 and June 2000, compared to 43 in the preceding 12 months. Commercial mediation statistics published by CEDR, the Centre for Dispute Resolution, confirm that, of 462 cases mediated last year, 82% settled on the day or shortly afterwards. Of these, insurance and reinsurance disputes account for a small but growing percentage. If mediation is the answer then the title of this article may be inappropriate. It is perhaps unhelpful to characterise any form of dispute resolution as battle. Doubly so in the case of mediation which is non-adversarial. Further, it is not possible for a party unilaterally to choose mediation. Although "compulsory mediation" exists in the US, for the process to succeed all parties must be willing. A mediation clause in a contract may not give the same degree of control as an arbitration clause, but it ensures that mediation is in the minds of the parties both at the pre-contract stage and if and when a dispute arises.


1 [2001] 1 ALL ER (comm) 449

2 [2001] LTL 05/02/01

3 [2000] 2 ALL ER 649

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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