UK: Large Insureds – Large Risks – Large Problems: How Do You Resolve Them?

The last concern on anybody’s mind when entering into a new deal is how disputes are to be resolved in the event of something going wrong. However, particularly in respect of tailor-made global insurance programmes, the parties have the opportunity of thinking creatively when drafting such programmes so as to avoid unnecessarily adversarial proceedings - if there is a genuine problem.

The two traditional methods of dispute resolution are, of course, litigation and arbitration. Without any choice of dispute resolution then the parties will be reduced to relying upon litigation in any one of the various jurisdictions. This may be more or less attractive, depending upon the reliability of the local judiciary and system. Clearly, a jury trial in Texas will be less attractive to Underwriters than litigation in a London Commercial Court. Arbitration is the traditional form of contractual dispute resolution – in other words, this is an alternative to litigation as a procedure which is chosen by the parties. This may have certain advantages which are discussed below.

LITIGATION

There is little doubt, however, that litigation is the least appropriate method of dispute resolution for a global risk transfer programme where the parties to it may wish to retain a commercial relationship. As a result of local regulatory requirements, it will be difficult to ensure that a consistent jurisdiction clause is applicable throughout the programme. Perhaps more importantly, however, litigation, which is the natural result of a jurisdiction clause is the most adversarial and the least flexible of all the options available to the parties. Before turning to arbitration however, any imaginative drafts person for this type of programme may wish to insert a intermediate step before either litigation or arbitration is considered.

MEDIATION

The topic of alternative dispute resolution has been flavour of the month for several years. Most frequently, it is promoted in the form of mediation which may be a useful diplomatic tool in bringing the parties together during the course of a dispute. However, it is rarely an appropriate method of resolving a dispute early in its formation, particularly where it is of a substantial size. Underwriters in particular will have insufficient confidence in their knowledge of the facts and their legal position to mediate. Therefore, what other alternatives are left to the parties?

NEUTRAL EVALUATION

Another form of alternative dispute resolution and frequently overlooked in the United Kingdom is neutral evaluation. In its original form, it is usually a voluntary procedure entered into by the parties whereby they refer, on the basis of agreed facts, certain issues to a third party for a legal evaluation of the merits of the claim. The final evaluation by the third party will not be binding upon the parties but it may well be a sufficient guide to enable them to resolve their differences. Frequently, the neutral evaluator will be in the judiciary or a retired judge or something similar.

In the context of a global insurance programme, it would be a simple process to write into the programme a position similar to nominated loss adjusters but instead describe the position as a nominated legal evaluator. Thus, a solicitor or barrister familiar with the particular type of risk transfer programme would be nominated. The programme would require that before any matter is referred to the final dispute resolution process, the parties must refer their legal dispute (which could be as a whole or in sequential parts) to the legal evaluator. He should remain independent but have the opportunity of seeking the views and documentation from each interested party prior to arriving at an evaluation of the respective merits. Clearly, after he provides his evaluation, he should step to one side and he could no longer be involved or instructed by another party. However, providing that the evaluator is respected by the contracting parties, his views may assist in resolving disputes at an early stage. Indeed, it is a very similar process to loss adjustment but instead of dealing with quantum it would deal with legal liability.

Thus, a sensible non-adversarial dispute resolution process could be set in place.

Clearly, because the process would be nonbinding there should be limits upon the powers of the evaluator to incur costs and disbursements, otherwise the parties could end up paying for the same process twice over. However, all of these matters, including privilege, could be sensibly dealt with in an intelligently drafted clause.

There are many reasons why a contractually agreed arbitration is a more sensible and flexible method of dispute resolution to litigation, its main rival. Mediation could, of course, be built into the process of arbitration but it can never be a substitute for a flexible, adversarial process. Further, one must assume that either the legal evaluator was unsuccessful in bringing the parties together or, alternatively, such a clause was not included in the programme. The parties should therefore include an arbitration clause as the next and final stage in the dispute resolution process. They could also include a mediation provision within the arbitration procedure but mediation can occur, in any event, at any stage in the dispute resolution process without a contractual obligation.

The first and foremost reason for including an arbitration provision rather than litigation is that it is more likely to be recognised by the local jurisdiction in the local policies. For example, it is likely that an arbitration clause in the direct policy, particularly in respect of large risks, such as the ones discussed in this article, may well circumvent the requirements of the Brussels Convention on jurisdiction, thus, allowing the parties to designate their chosen arbitration domicile rather than allowing the Insured various options. It is also more likely to be enforced in the United States where most State and Federal Courts recognise the desirability of private arbitration. Further, even in the most severely regulated regimes, it is unlikely that the regulations will bar arbitration as an alternative process.

The regulation may require the arbitration to take place in that local jurisdiction, such as Mexico, and even apply Mexican law but it is unlikely to forbid the chosen arbitration regime. For example, the parties may choose to rely upon an ARIAS arbitration clause which could, in certain jurisdictions, be amended to incorporate the regulatory requirements as suggested above. However, even though the arbitration may have to take place in that local jurisdiction, the procedure will be designated by the clause and, most importantly, either the third arbitrator/umpire or, if it is a sole arbitrator clause, the arbitrator will be chosen by a respected independent party (for example, the Chairman for the time being of ARIAS) rather than, for example, the Chairman of the local Chamber of Commerce or worse still, the drawing of lots or the picking of straws.

Frequently, the cost of arbitration is added to by the use of three arbitrators and, of course, it must be remembered by parties to arbitration that, unlike litigation they will be liable for the cost of not only the arbitration panel but any facilities used by that panel in the course of Tribunal hearings. In many agreements, it is unnecessary to create a three arbitrator panel which is, in effect, a Court of Appeal. Providing the parties can agree in the arbitration agreement upon a respectable panel of arbitrators from which to choose (for example, certain commercial barristers chambers or firms of solicitors) then one arbitrator may be sufficient. However, there is only a limited right of appeal from arbitration in the United Kingdom and this is fairly standard throughout the world. Therefore the parties must be comfortable with the panel they have chosen.

It is wise within the arbitration clause, to agree some form of procedure whilst allowing a degree of discretion to the panel but, most importantly, the parties should decide on the type of arbitration they require. For example, it is quite common in reinsurance arbitration clauses to include an honourable engagement clause allowing the arbitrators to dispense with strict rules of evidence etc. In the United States, the roles of the party chosen arbitrators (in contrast to the third arbitrator) are primarily that of an advocate for the party by whom he or she was nominated. Such an arbitration is unsatisfactory when the parties are paying for unnecessary "book ends" as this task can be adequately performed by the legal representation of each side. However, as it is intended that the clause is to be utilised throughout the various jurisdictions it is important that the clause is clear on these issues. This will, of course, be helped by choosing a particular arbitration regime such as ARIAS, LCIA or ICC etc.

It is also important within the arbitration clause to choose the governing law for the programme and this should not only cover the substantive law of the contract but also the procedure of the arbitration. The parties will require flexibility because as indicated above some jurisdictions will stipulate the law. Therefore, the choice of law should be in three stages:

1. the law to be chosen by the parties for the particular claim; or
2. in the absence of agreement by the parties, a particular choice of law (for example, English); unless
3. local regulations require a specific choice of law in which case that choice of law should be applied.

The primary aim of the draftsman, in respect of the procedure, should be to allow flexibility and the parties control of the proceedings. This may be one of the disadvantages of using a recognised arbitration regime, because most will have their own specified procedural rules. Frequently, these do follow substantially a litigation procedure. An imaginative draftsperson may wish to either amend those rules, which can be undertaken contractually between the particular parties, or incorporate specific requirements into the contract.

The clause should allow as much opportunity for party discussion and agreement as possible, whilst also ensuring a degree of certainty. It should never be forgotten that the primary purpose of the arbitration clause is to avoid the inflexibility of Court litigation and that it should not be the intention of an arbitration clause to simply replicate litigation.

In conclusion, with some imagination, the sting can be taken out of dispute resolution. A combination of a neutral legal evaluator and a flexible form of arbitration could provide consistency throughout the programme and the opportunity for the parties to retain their commercial relationship whilst resolving their disputes as amicably as possible.