Professional Documents
Culture Documents
Chapter 10
ARBITRATION
INTRODUCTION
What is arbitration?
Arbitration is an agreement between two or more parties to resolve a dispute or difference between them. The dispute or difference is
resolved by a tribunal whose award is final and binding on the parties and enforceable in law. Appeals from the tribunals award are
permitted, but only in certain circumstances. The arbitration process is private and consensual and is usually derived from contract. It
provides an alternative to litigation but not to ADR which may still be used in conjunction with the arbitration process. An arbitration
agreement may specify in some detail how a dispute is to be referred to arbitration although a simple statement in writing as to an
agreement to arbitrate will also be sufficient.
International arbitration
Where one or more of the parties is situated outside of England, the parties may choose to have their dispute resolved in a jurisdiction
neutral to both parties and in accordance with international arbitration rules administered by institutions such as the London Court of
International Arbitration (LCIA) or according to ad hoc rules.
The impact of the most commonly used international arbitration rules are discussed further throughout this chapter.
Most reinsurance treaties (but not usually facultative agreements) contain clauses requiring the parties to submit their disputes to
resolution by arbitration rather than by court proceedings. Traditionally, insurers and reinsurers have favoured arbitration (often ad
hocthis is discussed further below) for a variety of reasons. For example, arbitration is perceived as enabling experts to hear a
dispute on a confidential basis and then give a non-binding decision. Arbitration is also thought to be quicker and cheaper than court
proceedings and can provide a neutral forum. In addition, enforcement of an arbitration award may be easier than enforcement of a
judgment of a foreign court. In the past reinsurance agreements have also frequently contained engagement clauses along the
following lines:
The arbitrators should interpret the reinsurance as an honourable engagement and should make their award with a view to effecting the general
purpose of the contract in a reasonable manner, rather than in accordance with a literal interpretation of the language, the true intention of the parties
being that the reinsurers should follow the fortunes of the reinsured.
Under English Law, the Court of Appeals decision in Home & Overseas Insurance Co. Ltd v. Mentor Insurance Co. (UK) Ltd
[1990] 1 W.L.R. 153 expressly recognised that the effect of the honourable engagement provisions within the arbitration clause of
excess of loss reinsurance contracts was to enable the arbitrators to consider the general purpose of the contracts and to depart if
necessary from the literal and ordinary meaning of the words so that the contracts could be construed as far as possible to achieve the
purposes of the transactions. This approach was reinforced by section 46(1)(b) of the 1996 Act by providing for arbitrators to decide
the dispute if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the
Robert Merkin
. The use of this provision by the parties will, however, usually exclude appeals on the law as, pursuant to section 69 of the 1996
Act, a court can hear an appeal on a point of English law only. This is discussed later in this chapter.
In practice, however, it is unclear what the honourable engagement clause means. For example does the clause allow arbitrators
to avoid laws of limitation? Does it allow arbitrators to apply different rules of construction when construing contracts? Whatever the
meaning and effect of honourable engagement clauses, they are perceived as being of benefit, whether rightly or wrongly.
Many of the other reasons given above for traditionally using arbitration to resolve reinsurance disputes have now also become
diluted and this is discussed in more detail in this chapter.
A hybrid?
In some circumstances parties may agree to arbitrate disputes of a certain type or value with other disputes being determined by
litigation or ADR.
ADR
ADR is used increasingly by parties in reinsurance disputes in advance of arbitration or litigation. It may take the form of either
negotiation, mediation, conciliation, mini-trial, non-binding arbitration, expert determination or early neutral evaluation.
Negotiationparties may enter into negotiations once a dispute has arisen. Alternatively, they may, in advance of any dispute
arising, include a clause in their agreement which provides that the parties enter into good faith negotiations in relation to any
dispute before resorting to litigation or arbitration. This effectively provides the parties with a cooling-off period, enabling them to
focus on the benefits of settlement rather than rushing into litigation or arbitration. It is usual for the parties to agree a time period
within which the parties will try to negotiate a settlement to their dispute and if there is no successful outcome within this period,
either party is then able to commence litigation or arbitration proceedings as appropriate.
Mediationan impartial third party will facilitate discussions between the parties with a view to the parties negotiating their own
solution to the dispute.
Conciliationusually appointed by agreement between the parties, a conciliator usually takes an active role in negotiations,
including possibly making recommendations as to what would be a fair resolution of the dispute.
Mini-trialboth parties present their legal cases to a panel consisting of a senior executive from each party and a neutral chairman
(usually a retired judge or senior lawyer). A non-binding decision will be given by the panel, which the parties may use as a basis for
settlement discussions.
Non-binding arbitrationAn appointed arbitrator may make a finding on a particular part of the case or based on a limited review
of the documents and evidence. The parties are not bound by the arbitrators decision but they can later agree to accept it.
Expert opinionAn independent experts opinion may be obtained on any aspect or aspects of the case at any stage in the dispute.
The parties are not bound by it but they may agree to accept it.
Early neutral evaluationAn independent opinion of the parties legal, factual and/or technical cases may be obtained with a view
to encouraging settlement between the parties. It may be done on an ad hoc basis or by using an ADR organisation (for example, the
City Disputes Panel, based in London).
In January 2007 the London Market adopted the CPR International Reinsurance Industry Dispute Resolution Protocol, a statement
of best practices aiming to encourage the early and efficient resolution of disputes between reinsurers and reinsureds. Reinsurers
are free to refer to it or incorporate it in their treaties and agreements or adopt it on a unilateral basis, as a statement of their own
policies and procedures. Parties to particular disputes may also adopt the protocol as a means of managing information exchange and
the protocol may also be modified by parties to meet the challenges of a specific matter.
Robert Merkin
The protocol provides a four step method for identifying and giving early notice of a dispute relating to a reinsurance contract,
exchanging information and documents to permit a commercially reasonable assessment of the issues in dispute, directly negotiating
with the parties to resolve the dispute and if required, introducing a neutral third party to facilitate negotiations through a mediation
procedure. Although the protocol is not legally binding it is anticipated that the reinsurance industry will use it and will gain
substantial economic benefits by doing so.
The protocol is available at www.InsuranceMediation.org
ARIAS
London Market insurers and reinsurers adopted the ARIAS rules with effect from January 1994. These rules have since been revised
and the revised rules took effect from 1 June 1997. They are specific to insurance and reinsurance disputes and may be used in any
venue in the world, although in the absence of the parties stating otherwise the venue of the arbitration will be London. ARIAS
provides a panel of independent arbitrators and mediators (many of whom have occupied senior positions as underwriters, brokers or
claims executives in the reinsurance sector) who provide assistance in the resolution of insurance and reinsurance disputes, primarily
through arbitration in London but also ADR. Most of the arbitrators and mediators are UK based, however some are based in Europe
and the USA. Most reinsurance disputes involving London Market insurers and reinsurers will be determined under ARIAS.
Institutional
Institutional arbitration is often known as administered or supervised arbitration. The main institution that tends to be used for
reinsurance arbitrations is the LCIA. An arbitral institution provides trained staff and a governing body to administer the arbitration
and advise users. In particular, the governing body will ensure that the arbitral tribunal is appointed, the arbitrators fees and expenses
and mode of payment are agreed and that time limits prior to the formation of the tribunal are complied with.
LCIA
The LCIA is London-based and was founded in 1892. It selects arbitrators to determine disputes. Its membership is extremely
international, with no more than one quarter of its members being allowed to be British nationals. Arbitrations under LCIA rules may
be held anywhere in the world, although in the absence of a contractual choice the place of arbitration will usually be London. It
operates according to revised rules which took effect from 1 January 1998. Strict confidentiality is maintained in arbitrations under
the LCIA as it does not publish any awards made under its rules. LCIA disputes typically relate to a diverse range of industries and in
2002 insurance-related disputes accounted for 6%. Despite the LCIA being London based, almost 80% of the parties involved in
Robert Merkin
disputes are not of UK nationality. It has an excellent reputation for administration and its fees (both for administration and
arbitrators) are broadly based on time spent, calculated using hourly or daily rates.
Appendix 4 sets out the key features of arbitration under the LCIA and ARIAS rules.
Cost
Arbitration is perceived as the cheaper alternative to litigation, but it should be noted that this tends to be borne out where the process
is swift and where the parties cooperate with each other in the arbitral process.
Another additional cost factor to be considered in arbitration is that arbitrators are paid by the parties, whereas judges are not. The
cost will obviously depend on a number of case-specific factors, but a full multi-jurisdictional arbitration involving a panel
constituted of three members could well turn out to be much more expensive than a Commercial Court trial.
Furthermore, it is also necessary for the parties to an arbitration to pay for the arbitration venue. This may amount to considerable
costs in long running international disputesfor example if, as is often the case in international arbitration, the parties are from two
different jurisdictions and the arbitration venue is in a neutral jurisdiction.
Flexibility
A major advantage of arbitration over litigation is that, if conducted properly, arbitration can be a more flexible forum in terms of
resolving disputes. Litigation, in English court proceedings, is governed by the CPR and active case management by the courts. In
contrast, section 1(b) of the 1996 Act states that:
(b) the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest.
This flexibility can be particularly useful in documentary matters such as disclosure and evidence where the parties may agree to limit
disclosure or witness evidence (in English court proceedings the courts may make these decisions). The advantage of flexibility in
litigation in relation to disclosure and evidence does, of course, depend upon the nature of the claim being pursued. If, for example, a
party has few documents, arbitration may not necessarily provide any real advantage over litigation.
Sadly, recent experience suggests that the disclosure process in reinsurance arbitrations all too often follows the costly and
time-consuming format of disclosure in litigation, where parties not only have to disclose a wide ranging variety of documents (in
short, documents that support both parties cases) but they also have to list each and every one of these documents. Also the parties
may have to apply to the court (the Commercial Court deals with applications arising out of arbitrations in England) to obtain
disclosure of documents from third parties, such as brokers.
A further example of the way in which arbitrations can be more flexible is the use of honourable engagement clauses (also
known as equity clauses) which were discussed in the previous section. As mentioned above, there is some uncertainty as to what
these clauses actually mean in practical terms.
Finality
Arbitration decisions are notoriously hard to appeal and therefore the parties are less likely to be subjected to the long-running and
Robert Merkin
costly appeals process sometimes experienced by parties who have their disputes heard by the English courts. The 1996 Act provides
that a party can appeal the decision of a tribunal in only very limited circumstances:
under section 67 to challenge the substantive jurisdiction of the arbitral tribunal;
under section 68 if there is serious irregularity affecting the tribunal; and
under section 69 on a point of law.
Appeals are considered in more detail in the section on Judicial Control of Arbitration, below. In each case, permission must be
sought from the courts in order to appeal the decision of the arbitral tribunal.
Furthermore, as discussed above, no appeal on a point of law is available where an honourable engagement clause is used. In
addition, the right to appeal on a point of law can also be excluded by the agreement of both parties.
Whilst the relative finality of arbitrations may be seen as attractive to parties when considering whether or not to include an
arbitration clause in their reinsurance contract, such limited rights of appeal will be, of course, unsatisfactory for a party who feels he
has been the victim of a poor decision.
Confidentiality
Confidentiality is generally perceived as being one of the principal benefits of arbitration as opposed to litigation and it is assumed
that parties to the arbitration, as well as the tribunal, are bound to keep even the existence of the arbitration confidential. However,
whether an implied obligation of confidentiality arises out of the nature of arbitration is controversial and there are discrepancies
between the laws of different countries and the rules of different arbitral institutions on the subject. In the absence of any express
provision in the arbitration agreement to keep the proceedings, documents, evidence, etc, confidential, it is necessary to look to the
national law which governs the proceedings, or to any relevant institutional rules, for guidance.
Looking therefore at the position under English law, although the 1996 Act is an extensive arbitration code, there are a small
number of areas which are not covered by the 1996 Act, including the issue of confidentiality. Until 1995 it had always been assumed
that the nature of the arbitration agreement between the parties implicitly required the proceedings to be kept confidential between the
parties and between themselves and the tribunal. This approach had been consistently followed by the English courts. However, in
1995, the High Court in Australia (Esso/BHP v. Plowman [1995] 128 A.L.R. 391) rejected the prevailing English view that a general
duty of confidentiality exists. The result of this controversial decision was that one of the parties could use information obtained from
the arbitral proceedings in court proceedings outside the scope of that arbitration.
Following on from this, attempts were made to formulate the principles of confidentiality in the draft Arbitration Bill, but it was
concluded that this would be too difficult and controversial.
Accordingly, under English law, one must fall back on the common law in order to determine the scope and extent of the duty of
confidentiality in arbitration. Under English law, a party to an arbitration agreement is subject to an implied obligation of confidence
not to make use of material generated in the course of the arbitration outside that arbitration (Ali Shipping Corp v. Shipyard Trogir
[1998] 2 All E.R. 136). This was earlier established in Dolling-Baker v. Merrett and Another [1990] 1 W.L.R. 1205, where it was
held that there exists an implied obligation of non-disclosure by the parties due to the very nature of arbitration. As a result under
English law, documents prepared for the purposes of the arbitration are confidential and are protected from disclosure in any
subsequent proceedings. The same applies to the award/judgment. However, the principle is subject to exceptions and qualifications:
information regarding an arbitration may be disclosed with the consent of the parties, where there is a legal requirement to do so or an
order of the Court, with the leave of the Court, where disclosure is necessary to protect the legitimate interests of an arbitrating party
Robert Merkin
Hassneh Insurance Co. v. Mew [1993] 2 Lloyds Rep. 243), or where disclosure is required in the public interest/interests of justice
(London and Leeds Estates Ltd v. Paribas Ltd (No. 2) [1995] 1 E.G.L.R. 102). The position is different, however, in certain other
jurisdictions.
The issue of confidentiality under English law was considered again in The Department of Economic Policy & Development, City
of Moscow v. (1) Bankers Trust Company & (2) International Industrial Bank [2003] EWHC 1377 (Comm) Q.B.D., 5 June 2003.
Here, the Commercial Court held that an application to the court made in respect of an arbitration, whilst being a form of disclosure,
could not be a breach of any duty of confidentiality. The Commercial Court also held that there can be no breach of the duty of
confidentiality in disclosing the fact of the commencement of arbitral proceedings, the existence of an arbitration or the result of that
arbitration where there is any legitimate reason to do so. Equally, disclosure of the existence of any challenge to an award, the
existence of consequent litigation and the result of that litigation does not amount to a breach. In the Moscow case, the Commercial
Court also held that disclosure to the investors of the result of an arbitral award was necessary, the situation being analogous to
disclosure to shareholders in a company if an arbitration dispute had a material impact upon its accounts. However, the Commercial
Court found that where the issues raised were not questions of law, the parties desire for privacy (implicit in their agreement to
arbitrate) should be respected in the context of any proceedings arising out of the award. The Commercial Court found that the
underlying arbitration itself and everything raised in relation to the underlying arbitration was confidential. This issue was considered
further by the Court of Appeal ([2004] EWCA Civ 314). Upholding the Commercial Courts decision in part, the Court of Appeal
commented that there could not properly be a blanket protection of non-publication in all cases that fell initially to be heard in private
and when preparing and giving judgment the court had to bear in mind that any judgment should be given in public where that could
be done without disclosing significant confidential information. The public interest in ensuring appropriate standards of fairness in
the conduct of arbitrations militated in favour of a public judgment in the context of judgments given on applications under section 68
of the 1996 Act and the factors militating in favour of publicity have to be weighed together with the desirability of preserving the
confidentiality of the original arbitration and its subject-matter.
In Hassneh (Hassneh Insurance Co. v. Mew [1993] 2 Lloyds Rep. 243) the court had held that an arbitrating party could properly
disclose an award and the reasons behind that award to a third party against whom it had a claim on the grounds that such disclosure
was necessary for the establishment or assertion of the arbitrating partys rights. The exception was not extended to the evidence and
pleadings in the arbitration proceedings which remained confidential. The Court of Appeal in Ali Shipping Corp v. Shipyard Trogir
[1998] 2 All E.R. 136, however, extended the exception in Hassneh to pleadings, written submissions, and the proofs of witnesses as
well as transcripts and notes of the evidence given in the arbitration.
Other exceptions have also traditionally been recognised by arbitration practitioners in England, including the fact that non-parties,
such as a parent company or an insurer, can have legitimate interests in being informed as to the contents of a pending arbitration.
Furthermore, it is recognised that a company might also have statutory and other duties to make disclosure of arbitration proceedings
or awards which have an effect on its financial position.
However, there may be disadvantages relating to having confidentiality in arbitration proceedings. In Insurance Company v.
Lloyds Syndicate [1995] 2 Lloyds Rep. 272 the court considered a similar situation to that in Hassneh but found on the facts that the
party wishing to make disclosure of an award to another was not able to demonstrate that it was necessary (as opposed to merely
helpful or persuasive) to disclose the award in order for that party to enforce or protect its rights. The Insurance Company case is a
prime example of one undesirable consequence that can arise out of the confidential nature of arbitration. In this case, the defendant
reinsured wished to disclose the interim arbitral award that had been made in its favour as against the lead reinsurers (the claimants)
to various other reinsurers who were part of the same syndicate as the claimants. The claimants applied for an injunction restraining
the defendants from disclosing the award to the other reinsurers. The court granted the injunction, thereby preventing the defendant
reinsured from disclosing the award that it had obtained against the reinsurer claimants in arbitral proceedings with other reinsurers,
even though the issues against the other reinsurers were virtually identical to those in respect of which the award had been made.
Clearly, from a reinsureds point of view, this is a very unsatisfactory situation. Had the dispute in respect of which the award been
made been litigated in the English courts, the judgment would have been in the public domain, and the legal principles, insofar as
they related to the same issues, would then have been binding on a court hearing the parallel proceedings between the reinsured and
its other reinsurers. Instead, the reinsured was forced to go through the time and expense of prosecuting a virtually identical claim for
a second time. Had the reinsured been able to disclose the earlier award to the other reinsurers with whom it was in dispute, it is likely
that this would have encouraged the other reinsurers to settle the claim against them. Furthermore, if a party has an arbitration award
made in its favour, it may find that, due to confidentiality, it is unable to disclose it to other organisations such as brokers and rating
agencies.
On the other hand, the decision of the Privy Council in Associated Electric Gas Insurance Services Limited v. European
Reinsurance Company of Zurich [2003] UKPC 11 provides some comfort to a party who succeeds in an arbitration. In this case, the
Privy Council was asked to decide whether a reinsurer (European Re) who had succeeded in an earlier arbitration against a reinsured
(Aegis) should be allowed to place the award before a later tribunal where the same principles that had been decided in the earlier
arbitration were in issue between the same parties in the later arbitration.
Aegis principal argument was that disclosure of the earlier award to the new tribunal would breach European Res obligation of
confidentiality in relation to the original arbitration and the terms of an express agreement that had been reached during the course of
the original arbitration. The parties had expressly stipulated that: The parties, their lawyers, and the Court of Arbitration agree as a
Robert Merkin
general principle to maintain the privacy and confidentiality of the arbitration. In particular they agree that the arbitration result
will not be disclosed at any time to any individual or entity, in whole or in part, which is not a party to the arbitration between Aegis
and European Re.
In finding against Aegis, the Privy Council stated that: The otherwise legitimate use of an earlier award in a later, also private,
arbitration between the same two parties would not raise the mischief against which the confidentiality agreement is directed the
essential purpose of arbitration is to determine disputes between the parties to the arbitration as Section 58 of the UK Arbitration
Act 1996 says, an award made by the Tribunal pursuant to an arbitration agreement is final and binding on the parties. It is
an implied term of an arbitration agreement that the parties agree to perform the award.
The Privy Council went on to say:
Taking these factors into account and construing this confidentiality agreement, that is to say, the mischief at which the clause is directed and the
fundamental purpose of an arbitration agreement, it becomes clear that it should not be construed so as to prevent one party from relying upon an
award as having given him rights against the other. But that is what the application for an injunction sought to achieve It will be appreciated that, if
the prohibition [against disclosure of any aspect of the arbitration] was to be given an unrestricted construction, it would mean that any award would
be unenforceable This would be fundamentally inconsistent with and frustrate the purpose of arbitration.
From a practical perspective therefore, it may be worth considering making express provision for confidentiality in the arbitration
agreement where appropriate. Alternatively, where there is no express provision in the arbitration agreement, the parties may consider
making a request to the tribunal to make appropriate provisions in a procedural order or the Terms of Reference. For completeness, it
is worth noting that the only international institutional rules that deal with the issue of confidentiality are those of WIPO (reflecting
the importance of confidentiality in the field of intellectual property disputes) and the LCIA.
Limited scope for summary judgment/other interlocutory procedures available in the courts
The powers given to a tribunal are either decided by agreement between the parties, or where the arbitration clause is silent and the
arbitration is governed by the 1996 Act, section 41 of the Act will apply. Section 41, however, does not contain any provisions for
making interim applications such as applications for a summary judgment. Consequently, where the parties have agreed to arbitrate
and it subsequently transpires that the claim lacks merit, the claim may continue to be heard at arbitration without granting the
tribunal the power to dispose of the claim summarily. The absence of any ability to award interim payments of any kind is
particularly important in the run-off market where reinsurers regularly take unmeritorious positions and can take the case to the end of
the arbitration process, at great cost and inconvenience to the reinsured without being ordered to pay any sums up front.
Robert Merkin
being arbitrated/litigated over and over again. The advantage of course for a party who receives an unfavourable award is that this
will not bind him in other disputes relating to the same issue. This is in contrast to court proceedings which establish precedents and
thereby create, on the whole, more certainty in relation to particular areas of the law. Lord Justice Mances comments in the Court of
Appeals decision in Sun Life Assurance Co. of Canada, American Phoenix Life and Phoenix Home Life v. Lincoln National Life
Insurance Co. [2004] EWCA Civ 1660 sum up the problems that arbitration can give rise to:
The resulting inability to enforce the solutions of joinder of parties or proceedings in arbitration, or to try connected arbitrations together other than
by consent, is well recognised Different arbitrations on closely interlinked issues may as a result lead to different results, even where the
evidence before one tribunal is very largely the same as that before the other. The arbitrators in each arbitration are appointed to decide the disputes in
that arbitration between the particular parties to that arbitration. The privacy and confidentiality attaching to arbitration underline this; and, even if they
do not lead to non-parties remaining ignorant of an earlier arbitration award, they are calculated to lead to difficulties in obtaining access, and about
the scope of any access, to material relating to that award.
will be treated as an arbitration clause (see the Court of Appeals decision in Walkinshaw v. Diniz [2000] 2 All E.R. (Comm) 237).
Robert Merkin
However, in order to avoid issues arising as to what disputes are covered by the arbitration clause it is prudent for the parties to
clearly set out its scope; that is, the range of disputes and claims that will be subject to the arbitration agreement. Three categories of
claim potentially fall within the scope of an arbitration agreement: contractual, tortious and statutory. It is advisable to draft the
arbitration clause as widely as possible to demonstrate the parties intent to submit the widest possible range of issues to arbitration.
The wording set out below is commonly used in arbitration clauses:
all claims, disputes and controversies arising out of or in connection with the contract.
The wording all claims, disputes and controversies encompasses the widest possible range of disputes. The wording arising
out of or in connection with this Agreement will encompass all quasi-contractual and tortious claims, including misrepresentation
and fraud.2
Although the wording set out above is wide, it is also advisable to specifically include issues relating to the existence, validity and
termination of a contract within the scope of the arbitration clause. This will prevent a party who is claiming that the underlying
contract is void or invalid from alleging that the arbitration clause is also invalid and that the claim relating to the existence, or
termination of the contract cannot be determined by the arbitral tribunal. For example, in Harbour Assurance Co. (UK) Ltd v. Kansa
General International Insurance Co. Ltd [1993] 1 Lloyds Rep. 455, a retrocession agreement contained an arbitration clause that
included the words all differences or disputes arising from the agreement. The claimant argued, inter alia, that the arbitration clause
was not wide enough to cover disputes about the alleged illegality of the underlying contract. The Court of Appeal held that the
arbitration clause could survive if the underlying contract was void for initial illegality. Although the doctrine of separability,
which provides for an arbitration agreement to survive any alleged termination or nullity of the contract (this is discussed further
below) is widely recognised, it is prudent to provide for this issue in the arbitration clause. The wording set out above will not,
however, enable the arbitrators to insert terms left unsettled by the parties (May and Butcher v. R [1934] 2 K.B. 17).
A widely drawn arbitration clause also determines the scope of the arbitral tribunals mandate or jurisdiction. This is discussed
further in the section on Jurisdiction of Arbitrators below. As an arbitral tribunal may not exceed its jurisdiction by deciding issues
which are not covered by the wording of the arbitration agreement, any matter not specifically dealt with in the arbitration clause will
fall to be resolved by litigation.
There have been a number of decisions in the reinsurance context which illustrate the importance of keeping the scope of an
arbitration clause as wide as possible. For example, in New Hampshire Insurance Co. v. Strabag Bau [1990] 1 Lloyds Rep. 61,
affirmed by the Court of Appeal at [1992] 1 Lloyds Rep. 361, the arbitration clause in a contract of insurance covered any
differences as to the amount to be paid under the policy, liability otherwise being admitted. The court held that the arbitration clause
did not apply to a claim in respect of which the insurer had not admitted liability. In another case, Overseas Union Insurance Ltd v.
AA Mutual and International Insurance Ltd [1988] 2 Lloyds Rep. 63 the court found that an arbitration clause which provided for
all disputes or differences in respect of this reinsurance . was wide enough to allow a dispute as to the existence of a collateral
contract and a claim for rectification to be referred to arbitration.
Seat of arbitration
In a purely national arbitration the problem of identifying the seat of arbitration (that is, the arbitral situs) does not arise as the seat
will simply be the relevant country, unless the parties agree otherwise. The situation is less straightforward in the context of
international arbitration when it becomes essential to determine the arbitral situs in the arbitration agreement. In choosing the seat of
arbitration, parties should consider matters such as:
a favourable legal environment (since a number of issues relating to judicial supervision of the arbitration will be subject to
the law and the courts of the arbitral situs, independent of the parties choice of sub stantive law);
whether the relevant situs is a New York Convention country (since only countries who are signatories to the New York
Convention will offer the arbitral award the protection of the New York Conventions enforcement regime). This is
discussed further in the final section of this chapter.
If parties fail to specify the seat of arbitration then the arbitral tribunal or the court will have to determine the seat, usually by
applying the proper law of the arbitration clause (Sumitomo Heavy Industries v. Oil & Natural Gas Commission [1994] 1 Lloyds
Rep. 45).
Number of arbitrators
Robert Merkin
Parties are free to choose the constitution of the arbitral tribunal. The arbitration agreement will usually provide for the arbitral
tribunal to consist of one or more (usually three) arbitrators. If the arbitration is governed by the 1996 Act, section 15(3) of the Act
provides that if there is no agreement between the parties on the number of arbitrators, the tribunal shall consist of a sole arbitrator. If
parties are not content with the appointment of a sole arbitrator and fail to agree on a procedure to resolve the appointment issue
either party can apply to the court under section 18 of the 1996 Act to ask it to exercise its powers set out in section 18(3)(a) to (d),
including the power to make any necessary appointments (s. 18(3)(d)).
In the context of international arbitration, the LCIA rules provide that if the arbitration clause is silent, then the relevant institution
will designate a sole arbitrator unless the circumstances justify a three-member tribunal. It is preferable to deal with this expressly in
the arbitration agreement and, generally speaking, the preference in international arbitration is three arbitrators, unless the amount in
dispute is small.
As regards selection of arbitrators the LCIA rules provide for each party to select an arbitrator and for the LCIA Court to appoint a
chairman. The rules also make provision for the selection process where the parties fail to nominate their arbitrator. The relevant
procedure for the LCIA is discussed further in Appendix 4.
The difficult issue is how to deal with the selection of arbitrators where there are more than two parties in the arbitration. Possible
solutions may be as follows:
make provision for an appointing authority to appoint all three (or sole) arbitrators; or
attempt to align the parties on two sides each of which may appoint a single arbitrator by joint action.
Language of arbitration
Parties are also advised to expressly stipulate the language of the arbitration. In the absence of any agreement the tribunal will most
probably apply the language of the contract.
Multi-party arbitration
In the reinsurance context there will often be a web of related or interdependent contracts either between the same parties or between
Robert Merkin
different parties. In this situation difficulties arise relating to the question of whether it is possible to consolidate different arbitration
claims into one multi-party arbitration, and/or allow the joinder of a third party or third parties. These issues in turn relate back to the
issue of whether the parties in question have consented to that type of arbitration (for example, if one agreement provides for ad hoc
arbitration in Switzerland and the other for LCIA arbitration in London, then in the absence of agreement between the parties, there
will be no scope to consolidate those arbitrations, even if they relate to the same parties and the same issues). These issues are
discussed in more detail on p. 402 of this chapter.
Joinder
As discussed earlier, there is very limited scope for joining a third party to an arbitration without its consent. This is because the
principle of party autonomy is so important that it will generally outweigh the benefits of joinder or intervention, even if that would
be in the interests of justice.
Parties may, however, consider using the LCIA rules which give the tribunal power to allow a third person to be joined to the
proceedings provided the third person and the contracting party wishing to join the third person agree in writing.
Consolidation
In England as discussed on p. 402, section 35 of the 1996 Act provides that parties may agree to consolidation of disputes, or may
agree to confer on a tribunal a power to order consolidation. Consolidation can only take place where the arbitration proceedings arise
from the same transaction or relate to the same subject matter and all the parties agree.
It is important therefore to ensure that related contracts contain arbitration agreements in the same (and preferably identical) terms,
such as in the case of institutional arbitration, referring to the same institution, same seat, same governing law, etc. In addition, it is
advisable to incorporate express consent to consolidation in the related contracts and to check whether the proposed consolidation
provisions are effective under the applicable law that has been chosen and any institutional rules.
Doctrine of separability
The doctrine of separability provides that an arbitration clause contained within an underlying commercial contract is nevertheless
separate and independent from it and generally survives the termination of the underlying contract. Alternatively, the arbitration
clause and the underlying contract incorporating it can be viewed as two separate contracts. The arbitration clause forms a collateral
contract which contains an obligation to submit a dispute to arbitration and if a dispute arises and the arbitration clause comes into
operation, it will constitute the contractual basis for the resolution of that dispute (Redfern and Hunter, Law and Practice of
International Commercial Arbitration, 3rd edn, 1999, p. 154).
At common law the doctrine of separability was first considered in Heyman v. Darwins Ltd [1942] A.C. 356, in which the House
of Lords held that an arbitration agreement is not terminated by a breach of the underlying contract. This was considered more
recently in a reinsurance context in the Harbour Assurance case (discussed above)3 and, in an insurance context, in XL Insurance Ltd
v. Owens Corning [2001] 1 All E.R. (Comm) 530.
In the XL case the insurance policy with Owens Corning contained an arbitration clause as follows:
any dispute, controversy or claim arising out of or relating to the Policy or the breach, termination or invalidity thereof shall be finally and fully
determined in London, England under the provisions of the Arbitration Act 1996
However, the governing law clause in the insurance policy stated that the policy had to be construed in accordance with the internal
laws of the State of New York, United States except insofar as such laws are inconsistent with any provision of this policy. XL
applied to the English court for an order to restrain Owens from pursuing the claim against XL in Delaware or in any forum other
than arbitration in London, relying on the arbitration clause set out above. One of the issues in the case was whether the arbitration
clause could be severed from the policy and be governed by different law, namely English law. Further, if so, could English law be
applied, not just to interpret the arbitration clause but to decide the very question of whether or not it was valid? Based on the
presumption that an arbitration clause is an agreement within an agreement, the court concluded that the parties had chosen English
law as the law governing the arbitration clause. The concept of separability has been enacted in section 7 of the 1996 Act. (For the
international rules on the doctrine of separability see UNCITRAL Arbitration Rules, Article 21.2.)
1 Section 3 of the 1996 Act defines the seat of the arbitration as the juridical seat of the arbitration, designated by the parties to the arbitration agreement, or
by any arbitral or other institution or person vested by the parties with the power to determine the seat, or by the arbitral tribunal, (if authorised by the parties),
or otherwise determined having regard to the parties agreement and all the relevant circumstances. A copy of the 1996 Act is available at
http://www.hmso.gov.uk.
2 See also the recent case of Fiona Trust & Holding Corporation &20 Ors v. Yuri Privalov &17 Ors [2007] EWCA Civ 20 in which the Court of Appeal held
that any arbitration clause in an international commercial contract should be liberally construed. The words arising out of should cover every dispute except a
dispute as to whether there was ever a contract at all. Although the words arising under the contract had sometimes been given a narrower meaning, that
should no longer be so.
3 See also Fiona Trust & Holding Corporation &20 Ors v. Yuri Privalov &17 Ors [2007] EWCA Civ 20 discussed above.
Robert Merkin