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Journal of Reinsurance/IRU

95

Dispute Resolution: An International Perspective

By

Jonathan Sacher and Neil Owen

About the Author: Jonathan Sacher is the Senior Reinsurance and Insurance

Partner and Head of the Litigation and Dispute Resolution Department of

Berwin Leighton Paisner LLP. He specialises in reinsurance/insurance

litigation and arbitration for a wide variety of UK and international insurers,

reinsurers and brokers. He is a former Chairman of the British Insurance Law

Association. He is also a member of the London Court of International

Arbitration and an associate member of the Chartered Institute of Arbitrators.

Most recently, Jonathan led the successful team of lawyers on the leading case

which went to the English Court of Appeal on access to brokers' records

(Goshawk v Tyser). He is recognised as a reinsurance "guru" and "leading

light" by Chambers Directory. The Legal 500 comments "The renowned

Jonathan Sacher is building an impressive practice... recommended by clients

for its close attention to detail".

Neil Owen is a Senior Associate with Berwin Leighton Paisner LLP, with

experience in both the insurance and reinsurance sectors, and is a former life

reinsurance underwriter in the London Market. He has worked on a wide

range of coverage disputes including property, casualty, fidelity, aviation,

business interruption, professional negligence, life/personal accident, and

financial institution risks, applying the practical and commercial experience

gained from his involvement in the market.

Neil has also been involved in the conduct of insurance and reinsurance

litigation, arbitration and dispute resolution matters, both in the UK and

overseas, notably in the US, France, Denmark and the Philippines. He also

provides advice on treaty wordings and exclusion clauses and provides advice

on the insurance related aspects of corporate transactions.

96

Arbitrators’ Subpoena Powers and Federal Enforcement

Historical Wranglings

Well, let's start with the first dispute of them all (which we do

not believe was in England!) Adam and Eve; their first

argument, in fact mankind's first argument, involved an apple

and perhaps, fortunately some might say, no lawyers present!

(Although there was a very powerful Judge hovering some-

where above!)

Of course, disputes about how well Britney Spears can sing or

how well the LA Galaxy team played, are not disputes that

warrant or are readily resolved through a dispute resolution

process.

How then do we resolve our differences? Well, thankfully,

some methods by which commercial disputes (and disputes in

general) were resolved in the past, no longer exist. In the days

of the likes of Attila the Hun or Genghis Khan, you might not

Berwin Leighton Paisner LLP is a premier, full service law firm with over

650 lawyers and over 170 partners based in London, Brussels, Paris and

Singapore. BLP's Reinsurance and Insurance Group advises on all aspects of

insurance, from corporate transactions and regulatory work through to

dispute resolution, arbitration and litigation. The firm also acts for insureds,

advising on policy wordings and insurers, reinsurers, brokers, agents and

other intermediaries on transactions, regulatory matters and disputes. The

team has substantial experience in dealing with major UK and international

insurance and reinsurance issues in all classes of business.

Abstract: Dispute Resolution has been with us for thousands of years, even

longer than reinsurance! We do not plan to discuss litigation in this paper

but to consider a variety of dispute resolution mechanisms which are

available in the insurance/ reinsurance context, particularly in the UK.


97

quite get a chance to put your case!

In the Dark Ages and into the Middle Ages, if the dialogue

ended, you might face a trial by ordeal, trial by battle, or

perhaps a duel (which was only legal if you were a gentle-

man). In fact, it was quite common for each gentleman

involved in the duel to have a 'second', a sort of professional

advisor. Not many of today's lawyers would sign up for that,

particularly as the duellers decided the terms on which the

duel would be fought and that often included the 'second'

taking over, to the death of course.

Today, thankfully, we try to resolve disputes, even in the

ancient world in which we live in Europe, by a variety of now

quite familiar methods, often without resorting to the courts.

Negotiation

When things go wrong, most commercial parties, including in

the insurance and reinsurance area, try the natural route of a

negotiation.

For a negotiation to be successful, it requires a degree of

compromise by both parties. In many cases, having failed to

reach agreement, the parties become either entrenched in their

views or relations have broken down to such an extent that

there is simply no desire to negotiate.

However, negotiation is an extremely useful tool in either

resolving issues or narrowing them. Whilst you might not be

98


able to reach agreement on every aspect of the dispute,

narrowing the issues may provide the platform for future

resolution or in the very least, shorten the time period (and

thus cost) of having the dispute determined in more formal

surroundings.

In most cases, the decision to negotiate is voluntary to the

parties. However, for the reasons cited above, it may be

preferable to compel the parties to attempt to negotiate a

settlement. That may lead the parties to agree to include a

provision in the contract which requires the parties to first try

and resolve the dispute by negotiation. An example of a

London Market wording in use provides:

"In the event that a dispute arises between

Underwriters and the Insured/Reinsured out of or

otherwise in relation to this agreement, then:

(a) Any party to the dispute shall, without

prejudice to any other right or entitlement they may

have, give written notice to the other party (the

"Dispute Notice") requiring them within 7 days of this

notice to negotiate (whether in a face to face meeting

or by teleconference) in good faith as to how the

dispute can be resolved… "1

The English Courts did initially refuse to recognise the

enforceability of conditions requiring a party to negotiate, due

to lack of certainty.2 However, now such clauses are enforce-

able in certain circumstances, including: that it is not a bare


99

agreement to negotiate; that the agreement to negotiate was

made in good faith; and the parties deliberately and expressly

entered into it.3

Even in the absence of such clauses, the courts of some

jurisdictions (for example the Philippines) will compel parties

to try and negotiate a settlement before court proceedings can

continue. In some jurisdictions, the courts are less

prescriptive, but will still expect the parties to attempt to

resolve their disputes away from the courts. For example, for

the past decade, most of the standard directions of the English

Court, contain a requirement that the parties attempt to

resolve their dispute using other means. In fact, the court's

use of the phrase "ADR" is expressed to be deliberately wide;

encompassing all alternative forms of dispute resolution; not

just the 'traditional' ones of mediation and arbitration.

If the parties do not include a provision in the draft court

directions order, for a reference to ADR, the court will want

to know why. The clear emphasis is to move the parties away

from relying upon the courts to resolve their differences. The

court process is a blunt instrument for resolving what are in

many instances, very technical, market specific, issues. The

need for an alternative dispute resolution forum/mechanism is

therefore very compelling.

Mediation

This is, of course, just an extension of face-to-face negotiation

discussed above, with the involvement of a neutral third party

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(mediator) who is charged with facilitating discussion and

negotiating a settlement between the parties. The parties may

provide for a reference to mediation as a first step in

resolving the dispute. An example London Market Wording

provides:

"In the event of any dispute of whatever nature arising

out of any aspect of this Agreement, the parties agree

to submit the dispute to mediation, expert

determination or such other recognised alternative

dispute resolution process as they shall agree is

appropriate…"4

The mediator does not normally produce a written opinion or

determination on the dispute and has no power to compel the

parties in any direction. The mediation process is considered

confidential and neither party may make reference to it in any

continuing court proceedings, where the mediation process

has been exhausted without agreement.

In the UK, a party who refuses to take part in a mediation will

likely be penalised by the courts when they come to decide the

award of lawyers' fees ("costs") to the winning party. The

general rule in the UK is for the loser to pay the winner's costs

(which is usually between 70-90% of costs incurred). In some

cases, this sum can exceed the amount in dispute. A party

who succeeds at trial may find their victory to be pyrrhic, if

the court declines to award the winner its costs incurred from

the date of its failure to engage in the mediation process and,

if the court (as is likely) also orders the winner to pay the


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loser's costs from that date.

Expert determination

Some contract wordings provide for the parties to refer their

dispute to an "expert" for determination. An example London

Market wording provides:

"[The parties shall refer] the matters in dispute to an

independent expert for an expert determination. The

parties agree that they will not be bound by the deter-

mination of the expert. The expert:

(i) will be a person agreed between the parties

within 10 days of the dispute being referred to expert

determination or failing this, the expert will be a per-

son appointed by the [ ] Insurance Law Institute

(or other appropriate professional body as agreed by

the parties);

(ii) will act as an expert and not as an arbitrator;

(iii) will proceed in such a manner as he or she

thinks fit without being bound to observe the rules of

natural justice or the rules of evidence;

(iv) will take into consideration all documents,

information and other written and oral material that

the parties place before him or her including docu-

ments, information and material relating to the facts in

dispute and to arguments and submissions upon the

matters in dispute; and

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(v) will act with expedition to provide the parties

with a determination in writing within 35 days of the

referral to him or her of the matters in dispute."5

In the above form, the expert's decision does not bind the

parties. The parties could, of course, agree to make it

binding. Indeed, part of the purpose for having a dispute

referred to an Expert would be to have some finality to the

dispute.

Adjudication

The use of an adjudication process to determine disputes is

now common in the construction industry in the UK and

followed a major review in the UK of the way in which

disputes were dealt with. A major concern was that construc-

tion dispute resolution (whether in Court or by arbitration)

was costly and typically took a very long time to conclude.

This was a major problem in an industry reliant on cash flow.

A further concern was that those at the "bottom" of the

industry (i.e. sub-contractors) tended to be squeezed by those

further up the chain, in terms of payment, and the use of "pay

when paid" clauses was widespread.

The "Adjudicator" is either appointed by the parties or, in

default, by one of the industry bodies. The adjudicator's

decision is binding and must be complied with. There is a

right of appeal (to court) but the grounds are limited.

Furthermore, a party cannot use the appeal process to delay

having to comply with the adjudicator's decision. The court


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will compel a party to comply with the adjudicator's decision

even if an appeal is pending. Adjudication is designed to be

a faster, simpler and relatively less expensive method of

dispute resolution compared to arbitration and litigation.

The adjudication process has been described as "quick and

dirty", with the emphasis on speed. This has, in some

instances, been at the expense of accuracy, which in turn

increases the prospects of an appeal on the adjudicator's

decision. In addition, the adjudication process is in danger of

becoming blighted by the growing volume of case-law which

has followed appeals against adjudicators' findings.

Despite these drawbacks, there is an obvious appeal and

advantage to using the scheme. The use of an adjudication

scheme to settle construction disputes has also been adopted

in Australia and New Zealand.

Insurers and reinsurers could benefit from having their

dispute adjudicated upon quickly. In the case of the defend-

ing party, it might enable them to release reserves against

claims quicker than under the present systems. There is also

the benefit of having the adjudication conducted by someone

within the industry, having the necessary expertise to

determine complex, technical issues.

There are, then, many parallels which can be drawn between

the use of this system in the construction industry and the

insurance/reinsurance market. The main obstacle lies is the

international dimension of insurance/reinsurance. The 'teeth'


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of the adjudication process is having immediate and speedy

access to the court system. This means putting a legislative

framework in place and having a court system that is able to

respond. These measures have been addressed in the UK but

for this process to work there would need to be universal

adoption of this process.

Ombudsman

The word "ombudsman" is of Swedish origin. It is the fusion

of the word ombud (representative) and man. The ombuds-

man appears officially in 1809, in Sweden, with the function

of listening to complaints from citizens against the actions of

government departments. Before the Swedish experience,

there had been "listeners". In ancient Rome, the Tribune of the

Plebeians listened to the complaints of the citizens. The

Ombudsman performs a quasi-judicial function, determining

disputes within the scope of its authority.

The function of the original ombudsman as an arbiter of

complaints against public bodies has diversified into other

areas, such as in the retail finance/insurance markets. In the

UK, the Financial Ombudsman Service ("FOS") established

by the Financial Services and Markets Act 2000 ("FSMA")

enables customers to complain against any business providing

financial services, including insurance. It is primarily limited

to retail customers, although small businesses and charities

are permitted to make use of the scheme. It is therefore not

available in wholesale markets, such as the reinsurance

market.


105

Since the inception of the FOS in April 2000, it has handled

over 500,000 complaints from consumers.6

The Ombudsman service provides an alternative avenue for

customers to pursue their claim. It is not compulsory and, at the

moment, the courts do not penalise customers who do not use

it. The Ombudsman will, however, not consider a claim until

all the complaints procedures of the business against which a

complaint is made, have either been exhausted or shown to

have failed. The emphasis from the Ombudsman is therefore

on the parties to try and reach a settlement. The Ombudsman is

not, however, a mediator. It is an independent evaluation

evidence. The Financial Ombudsman Service publishes its

decisions. However, there is no binding precedent set by its

decisions.

The process is not always quick but it is inexpensive. There are

no fees to be paid by a customer making a complaint. The

whole procedure is conducted on paper. There is no oral

representation or examination of witnesses. The Ombudsman's

decision (as far as the UK is concerned) is binding upon the

business but not the customer. It is usual for the Ombudsman

to give a provisional finding which the parties can accept,

although it is open to either party to request a final determina-

tion. There is no right of appeal from a final determination of

the Ombudsman. The customer can reject the Ombudsman's

final determination and commence court proceedings but, as the

Ombudsman's decision is not confidential, the company could

make reference to it in court proceedings.

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Arbitration

If negotiations break down, the claimant may consider resorting

to litigation or arbitration as a means of resolving the dispute.

In the context of international contracts, arbitration rather than

litigation will usually provide the most effective means of

resolving the dispute.

International arbitrations have a major commercial advantage

as a uniform process largely independent of the local legal

systems. The United Nations Convention on the Recognition

and Enforcement of Foreign Arbitral Awards, 1958 (the 'New

York Convention') has been adopted by many countries and is

free from the intervention of the State. The New York

Convention creates the structure for international arbitration

and is said by commentators to be the most effective instance of

international legislation in the history of commercial law.

The origins of Arbitration can be traced back to the ancient

Greeks, who recognised that not all disputes could or should be

resolved before the courts. In the Middle Ages, the resolution

of commercial disputes outside of the forum of the courts, could

be conducted through the guild merchant which began life in

the 11th Century. Guilds were to be found in many of the lead-

ing cities of Europe. They were craft or trade societies, whose

members tended to congregate in a common area for both

practical and material convenience. Since their members were

engaged in, and controlled, most forms of trade and commerce,

the guilds were wealthy and, as a consequence, they came to

exercise considerable power and influence.


107

The guilds would regulate their own affairs, preventing unfair

practices and determining commercial disputes. This system

enabled merchants and traders to avoid the courts. The

emphasis was on speed, simple procedures and privacy. The

arbitrator chosen was usually a respected merchant familiar

with trading practices and with a reputation for fairness. The

motivation for such a system remains as strong today as it was

then.

The most common reasons for choosing arbitration (over

litigation), then and now, were recognised as being:

Neutrality

Parties to a contract with an international element are

frequently unwilling to allow disputes to be resolved in

the courts of a country connected with one of the other

parties. This is motivated by a concern that the court

'local' to one of the parties might be more favourably

disposed towards them. In arbitration, with the ability

of the parties to choose (or have some involvement in

the choice of) the arbitral tribunal, this concern is

alleviated.

Expertise of the tribunal

Litigation is time-consuming and costly. The need to

explain technical matters to a judge who is not familiar

with the issues involved in the dispute will inevitably

lengthen the trial process and push up costs. This

problem may be resolved by choosing arbitrators who

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have a background in the relevant industry or business

sector and who therefore understand the technical

issues and commercial realities involved.

Privacy

Unlike most court proceedings, arbitrations in Europe

are usually carried out in private and confidentiality

normally attaches to the proceedings and the arbitrators

findings (the Award).

Flexibility

National rules of court procedure usually contain

detailed rules, forms and precedents that must be

followed. By way of contrast, arbitration permits the

parties at the time of contracting (or subsequently by

agreement) to agree or shape the procedure that will be

followed.

Finality

Arbitral awards are usually final and not subject to a

review on the merits. As a result, the lengthy appeal

procedures, which can result in parties being subject to

years of litigation, can be avoided.

Cost

This is always highlighted as one benefit of arbitration

over litigation. However, aside from the greater degree

of finality offered, arbitrations can of course exceed the

costs of litigation by some considerable margin.


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Enforceability

This is perhaps the single most important advantage

arbitration has over litigation. Enforcing a civil

judgment quickly in any jurisdiction usually requires the

country in question to have entered into an appropriate

treaty with the country whose courts have made the

judgment. If there is no treaty allowing this, a fresh

action must be commenced in the courts of the country

where enforcement of the judgment is being sought.

This may lead to the matter being re-litigated with little

or no regard for the original decision of the foreign

court. In turn this leads to a duplication of costs and

often puts the successful litigant in no better position

than if it had started proceedings in that jurisdiction in

the first place.

By way of contrast, the New York Convention enables

the enforcement of an arbitration award obtained in one

jurisdiction, in another signatory country.

Differences in arbitration: UK/US

Any paper for ARIAS US written by an English lawyer would

not be complete without the comment on the differences in the

English/Bermudan arbitration process and that in the USA.

Perhaps influenced by the role of the arbitrators operating in the

medieval guilds, or those operating to resolve disputes in the

Lloyd's coffee shop in the 17th Century, the difference in

procedure defines the process on the opposite sides of the

Atlantic. Unfortunately those who left Europe in the early 17th

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Century to settle in the "US" left behind many things in the

ancient world, including some aspects of dispute resolution!

Here are some differences.

Selection of the arbitrators:

In the UK, prior to and during the process of appointment, the

parties may not discuss the merits of their claim with the

arbitrators.

All communications with the appointed arbitrator throughout

the arbitration process should be copied to the other arbitrators

(comprising the tribunal) and the other parties to the arbitration.

Confidentiality:

In England, arbitration proceedings are confidential to the

parties (as a matter of common law).

Law and "Equity":

English arbitrators must apply English law unless the parties

specifically agree otherwise.

Both the US and UK recognise what are known as "honourable

engagement" clauses which entitle arbitrators to look to the

general purpose of the contracts and to depart, if necessary,

from the literal and ordinary meaning of the words in order to

give effect to the purposes of the transactions. In England,

"honourable engagement" clauses are only valid in arbitration

agreements entered into after 31 January 1997.


111

The Award:

In the UK, statute requires that the arbitrators give a written,

reasoned Award unless the parties agree to dispense with this

requirement.

Legal Fees/Security

Arbitrators generally award legal fees to the winning party and

do not award pre hearing security against a defendant.

Appeal

In theory, there is a right of appeal on a matter of law but in

practice this is extremely difficult and there has been only one

successful appeal of a reinsurance arbitration award in the past

10 years.

The Future

As discussed, commerce has wanted a forum for settling its

disputes which is:

Quick;

Simple;

Private.

The notion of arbitrations being quick and simple would be

considered laughable to those in Greece, Rome or Medieval

times if they saw how, for example, reinsurance arbitrations are

conducted today. In fact it would horrify the authors of the

1889 Arbitration Act in England or even the authors of the

Arbitration Act 1979 which became law in England before the

huge growth in the reinsurance arbitration industry which

followed the APH claims explosion.

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There is today in many instances, little difference between

arbitration and court proceedings, particularly where the

tribunal comprises lawyers. In some respects, the notion of the

parties being 'in control' of the dispute and its procedure (one of

the considered benefits of arbitration) is practically lost when a

tribunal is comprised entirely of lawyers. There is very often

little connection with the market. The decision of the tribunal

may be legally and technically correct, but if that is what the

parties wanted, then why choose arbitration?

The process is also not particularly quick. There do not seem to

be the same tight controls on timetabling in arbitrations as there

are in court proceedings. All of which adds to cost. A three

person arbitration tribunal is going to be expensive, not to

mention the additional costs of facilitating the hearing.

Perhaps the two remaining benefits are international

enforceability and "privacy" which still attaches to European

arbitrations.

The challenge for the future will be to wind back dispute

resolution procedures to produce the results that business

sought to achieve 900 years ago.

Editor's Note:

This article emanated from a presentation made during the 2007 Annual

Meeting of ARIAS.US.


113

Endnotes:

1 London Special Wording ("LSW") 1145

2 Walford v Miles (1992) AC 128 (HL)

3 Petromec Inc v Petroleo Brasilero SA (Court of Appeal) [2005] EWCA

Civ 891

4 LSW 1637

5 LSW 1145

6 FOS Annual Review 2006/7 : Chief Ombudsman's report

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