UK: Disputes: Resolved

Last Updated: 16 December 2009
Article by Barlow Lyde & Gilbert LLP

Time spent at the outset determining how a dispute is to be resolved can assist in mitigating the effect of that dispute on the parties.

When negotiating a contract, the last thing the parties wish to dwell on is the possibility that the relationship will end acrimoniously. The key is to ensure that the dispute resolution process is certain, and the result of the dispute is, to the greatest extent possible, predictable.

Addressing these themes enables parties in dispute to effectively evaluate their positions, in turn facilitating early resolution of the dispute. The earlier a dispute is resolved, the less the parties will incur the substantial but inevitable expenditure involved in pursuing a dispute to judgment.

What law?

Choice of law clauses help to ensure that the contract reflects the parties' intentions. They need not be complicated, but should at least:

  • choose a governing law with a well-developed body of insurance and reinsurance law; and
  • avoid choosing a system of law that does not exist, such as 'UK law' or 'American law' (such clauses ought to choose 'English law' or the law of the desired American state).

Different considerations apply depending on the nature of the reinsurance contract being negotiated. In a facultative cover, ensuring the reinsurance and underlying insurance are governed by the same law will help ensure that the contracts are 'back-to-back'. This issue was highlighted by the recent Wasa v Lexington case, where differing applicable laws led to the reinsured's reinsurance not providing full cover for its liabilities to its original insured.

The same considerations, however, will not apply to a treaty and so it may be appropriate to depart from the law covering the underlying risks to ensure that disputes are decided under a developed, certain body of law.

As different legal systems treat familiar concepts differently, a party should be cautious if invited to agree a system of law with which they are not familiar. For example, a 'follow the settlements' clause may be viewed very differently under English law and New York law.

Which court?

Like choice of law clauses, jurisdiction clauses can be simple but, to be effective, should take account of a number of factors, including ensuring that:

  • the clause covers every conceivable dispute between the parties arising under the contract, including disputes as to the existence and validity of the contract;
  • the clause specifies whether jurisdiction is to be exclusive or non-exclusive:
    • An exclusive jurisdiction clause operates to make the court specified the only court which has jurisdiction to hear the dispute. All other courts are excluded.
    • A non-exclusive jurisdiction clause confers jurisdiction on the specified court in addition to any other court that may have jurisdiction. A non-exclusive jurisdiction clause will not prevent disputes over jurisdiction but it will narrow the number of competing jurisdictions.

Suggested clause

"This agreement shall in all respects be governed by and construed in accordance with English law and the parties irrevocably hereby agree to submit to the exclusive jurisdiction of the English Courts."

What about arbitration?

Arbitration has some important differences to litigation:

  • The parties choose the tribunal.
  • Arbitration proceedings are private and confidential - you don't wash your dirty linen in public.
  • Arbitration is a consensual process, the rules and procedure for which can be tailored to the particular needs of the dispute, either by agreement between the parties or determination by the arbitrators.
  • Arbitral awards are easier to enforce around the world because the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards has been widely accepted. No parallel exists in relation to the judgments of courts.
  • Arbitration agreements are more readily defensible than jurisdiction agreements. Although recent cases (especially the ECJ decision in West Tankers) have deprived the English courts of anti-suit injunctions to defend arbitration agreements within the EU, the New York Convention (referred to above) requires signatories' courts to give effect to arbitration agreements (a point that has been forcefully made by the Court of Appeal in the recent Youell v La Reunion Aerienne case). There is no parallel agreement in respect of jurisdiction agreements.

Drafting arbitration agreements

The consensual and tailored nature of arbitration means that there is a wider range of considerations to address in drafting arbitration agreements, including:

  • How many arbitrators are to be appointed? Most arbitrations have either one or three.
  • How are the arbitrators to be appointed?
    • One arbitrator: by agreement between the parties and, if no agreement can be reached, by reference to a third party (such as ARIAS or the chairman of Lloyd's or the IUA), or by the drawing of lots to decide between the parties' competing choices.
    • Three arbitrators: the parties will generally nominate one arbitrator each, and the third arbitrator will be chosen in the same manner as an arbitration with only one arbitrator.
  • Should the arbitrators have any particular qualifications? Two important factors are:
    • Experience: should the arbitrators have a set level of experience? For example, the arbitration clause recommended by ARIAS requires the arbitrators to have not less than 10 years of experience in (or advising) the insurance or reinsurance industry.
    • Availability: ensuring the selection of available arbitrators is key to effective, quick, dispute resolution. Consideration should be given to arbitrators who have retired from the market as well as those still active.
  • Where is the arbitration to be held?
  • Under what law? Note that this does not have to match the seat of the arbitration, as is the case with the Bermuda Form, which provides for an arbitration under New York law governed by English procedural rules.
  • Are the rules governing the arbitration to be set out at the outset (either in full in the clause or by nominating rules published by an arbitral institution such as ARIAS) or are they to be left open? Not setting out rules at the outset allows the rules to be agreed when a dispute arises, tailored to the particular needs and issues of that dispute.

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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