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Much Ado About Nothing? Arbitration Clauses in Insurance and Reinsurance Contracts: Are They Still Effective?

Jun.09.2009

These days it is very rare to find an insurance contract that does not contain some form of dispute resolution clause, and increasingly, arbitration is the favoured form of dispute resolution. When underwriters and insureds agree to refer a dispute to arbitration, there is an expectation that the contractually agreed mechanism will be adhered to in the event of a dispute arising. For this reason, English courts have historically been willing to grant anti-suit injunctions to restrain a party from commencing or pursuing proceedings in a foreign court in breach of an arbitration agreement, and to provide for the dispute to be arbitrated in England.

Recent European case law has raised some doubt as to whether arbitration clauses in insurance contracts will continue to be enforceable in European jurisdictions, albeit, English courts, so far, have continued to uphold the parties’ agreement where possible. This article discusses the implications of the recent West Tankers decision on insurance and reinsurance contracts, and the consequential effect on arbitration clauses generally.

Legal basis for anti-suit injunctions in England
Following the decision of The Angelic Grace [1995] 1 Lloyd’s Rep 87, the English courts have been willing to grant anti-suit injunctions in order to restrain parties from commencing or pursuing proceedings in a foreign court in breach of a jurisdiction or arbitration agreement. Lord Millet explained:

“There is no good reason for diffidence in granting an injunction to restrain foreign proceedings on the clear and simple ground that the defendant has promised not to bring them.”

As a result of this, and other similar decisions by the English courts, London has developed as an active and well-respected centre for arbitration and other forms of dispute resolution. Indeed, many insurance contracts covering international risks include arbitration clauses that stipulate London as the chosen seat of arbitration, and English law as the governing law.

The seat of the arbitration will usually determine which law will govern the procedure of the arbitration (referred to as the curial law). Where London is the seat of the arbitration, the procedural law of the arbitration will be English law, which includes the English Arbitration Act 1996.

For example, in C v D [2007] EWCA Civ 1282, the Court of Appeal held that by choosing London as the seat of the arbitration, the parties must be taken to have agreed that proceedings challenging the award should only be those permitted by English law, even though the law of the contract was governed by New York law. Any claim for a remedy which goes to the existence or scope of the arbitrator’s jurisdiction or to the validity of an existing interim or final award is agreed to be made only in the place designated as the seat of the arbitration. Thus, the Court of Appeal upheld Cooke J’s opinion that the seat of the arbitration was “analogous to an exclusive jurisdiction clause”.

European interference

The law as it was

The ability of national courts in EU member states to grant an anti-suit injunction was limited by the Brussels Regulation which came into force on 1 March 2002. Subsequent case law determined that national courts may not issue anti-suit injunctions to restrain court proceedings commenced in an EU member state in breach of a jurisdiction agreement. However, other cases carved out an exception for anti-suit injunctions granted to restrain breaches of arbitration agreements (see Gasser GmbH v MISAT srl (Case C-116/02 [2003] and Turner v Grovit (Case C-159/02 [2004] ECR I-3565). Historically, the reason given for these exceptions was the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which provides an effective and efficient mechanism for the enforcement and recognition of arbitration agreements, and awards in signatory jurisdictions.

The law as it now is

The law has now changed. In Allianz SpA v West Tankers Inc (Case C-185/07), the European Court of Justice (“ECJ”) held that the grant of anti-suit injunctions restraining proceedings which were brought in breach of an arbitration agreement in an EU member state was not consistent with the Brussels Regulation. As a result of West Tankers, anti-suit injunctions are no longer available in the courts of European member states to restrain proceedings brought in breach of a purported arbitration agreement.

English Law Interpretation of West Tankers
English courts have indicated they will apply West Tankers where the facts strictly fall within the analysis of the ECJ’s decision (see Youell & others v La Reunion Aerienne & others [2009] EWCA Civ 175). However, the English courts seem determined to find ways around applying West Tankers where possible.

In National Navigation Co v Endesa Generacion SA [2009] EWHC 196 (Comm), the claimant sought a declaration that a Spanish judgment was unenforceable because the proceedings had been pursued in breach of an arbitration agreement. Gloster J refused to recognise the Spanish judgment on the basis that a claim for a declaration was different than a request for an anti-suit injunction, and therefore the court was not bound by West Tankers.

The judge’s decision was based on point made obiter in Philip Alexander Securities v Bamberger [1997] ILPr 73 which held that a judgment given in breach of an arbitration clause is unenforceable as contrary to public policy. Therefore, although the English courts may be bound to follow West Tankers in refusing to grant anti-suit injunctions to restrain proceedings in other member states, they will not necessarily be bound to enforce judgments obtained in breach of arbitration agreements.

And most recently, in Roger Shashoua and others v Mukesh Sharma [2009] EWHC 957 (Comm), the English Commercial Court determined that West Tankers was not applicable to proceedings commenced in a non-member state court, in this case India, on the grounds that the West Tankers decision was concerned with ensuring the courts of one European member state did not interfere with the laws of another, as per the Brussels Regulation.

Conclusion
Although there has been some limitation in the ability of English courts to enforce arbitration clauses and restrain proceedings in foreign courts, insurers should be pleased to note that the English courts continue to try to enforce the agreement of the parties where possible.

However, a court can only enforce an arbitration clause as far as its scope will allow. An arbitration clause should include provisions to give the arbitrators the power to decide all disputes that may arise between the parties, and provide for an efficient procedural framework that will allow for an arbitral award that is capable of being enforced. It should exclude the jurisdiction of courts, to the extent possible, from the dispute resolution process. Further, it is essential that policies covering international risks contain clear provisions setting out the parties’ choice of applicable and procedural law as well as the arbitral seat. By doing so, underwriters will increase their chances that the arbitration clause will be effective as they intended it to be.

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