Insurance/Reinsurance: Bermuda form arbitration clause

Background

The defendant was a US insurer, which issued an insurance policy to the claimant. The policy was a claims made policy in Bermuda form: the policy was governed by New York law and contained a London arbitration clause referring to the Arbitration Act 1996 under English law (the “Act”). The wording of the arbitration clause made it plain that any award would be full and final thus limiting any right to appeal.

In May 2005, the claimant initiated arbitration proceedings against the defendant in London. The tribunal made an award and the defendant applied to correct it stating that it constituted “a manifest disregard of New York law” and intimating that a US Federal District Court would have jurisdiction to vacate the award.

The claimant applied for an injunction and a declaration that the award was final and binding. The claimant argued that because the policy included a clause incorporating the Act and specifying London as the seat of arbitration then any potential challenge to an award must be governed by the law of England and Wales and must be heard by a London court. The defendant sought to rely on the New York governing law clause as a means to challenge the award under New York law.

Decision

The principle issue before the court was to determine whether the law governing the arbitration - English law - had priority over the substantive governing law of the policy - New York law - when considering a challenge to the arbitration award. Cooke J held that any challenge to the award must be in a London court and decided under English law.

In reaching its decision, the court considered that:

• The policy was governed by the internal laws of the State of New York but also incorporated English procedural law into the policy with the inclusion of the Act. Therefore, the parties incorporated the framework of the Act and agreed that it should apply to any arbitration between them. The parties also included London as the seat of arbitration, which implied that the English courts would have supervisory jurisdiction over the arbitration.
• The parties expressly agreed to limit any right of appeal to an arbitration award whilst at the same time agreeing to the application of the Act, which includes a mandatory provision to challenge the award on the grounds of procedural irregularity or bias. Allowing the defendant to appeal the award in New York would amount to a breach of the agreement to arbitrate.
• Cooke J forcefully attacked the defendant’s challenge to the English court’s jurisdiction as follows: “Such a challenge usurps the function of the English court which has power to grant injunctions to protect its own jurisdiction and the integrity of the arbitration process. In such a case there is an infringement of the legal right of C[laimant] (both contractual and statutory rights) under English law and an abuse of the process of this court in the usurpation of its exclusive jurisdiction to supervise arbitrations with their seat in this country.”

The court therefore decided that the New York courts would not have the authority to decide this issue and only the London courts could hear the challenge under the Act as specified in the policy wording. The injunction sought by the claimant was also granted in order to prevent the defendant from bringing an action in New York and thereby breaching the wording of the agreement.

This dispute highlights the difficulties of arbitration clauses in cross-jurisdictional insurance contracts and raises questions as to why the Bermuda form has become the wording of choice in many insurance policies.

The Bermuda form itself is typically used in excess liability policies, but similar clauses appear in reinsurances as well.

What the Bermuda Form has to offer
Inevitably, the issue of substantive law provided for in an insurance contract (either expressly or impliedly), or applied by a Tribunal, can have a significant bearing on the result of a dispute.

In the US, certain States tend to be regarded (not always fairly) as more pro-plaintiff, whereas others are seen as adopting a more balanced approach. New York law, adopted in the Bermuda form, tends to be regarded as falling into the latter category. Although wishing to take advantage of the perceived procedural advantages of English arbitration, US insureds are less comfortable with the unfamiliarity of English substantive law, which is sometimes regarded as less flexible in its remedies.

Procedures
One of the perceived benefits of the Bermuda form is to combine New York law with English procedures, which are regarded as less burdensome than the equivalent procedures in the US. In particular, discovery procedures tend in practice to be slightly less burdensome than in the US, both as regards disclosure of documents and, moreover, the absence of depositions.

On the other hand, combining New York law with English procedure can run the risk of a duplication of time and cost, as both parties end up having to employ both English and US lawyers.

One of the perceived advantages of the English arbitration process is that all of the arbitrators are expected to be neutral, whereas in the US it is often the case that party-appointed arbitrators will be expected to lean towards the party responsible for their appointment.

Furthermore, an English arbitration award (unless specifically agreed otherwise) will always be a written reasoned award, whereas the default position in the US is that arbitration panels do not have to give reasons for their decisions.

An English arbitration award will ordinarily be subject to appeal in the event of either (i) a serious procedural irregularity or (ii) manifest error of law - if the decision is “obviously wrong” - under Section 69 of the Arbitration Act 1996. The parties are, however, free to agree that there should be no appeal under Section 69. This is often the case under the Bermuda form, and was the case in the policy wording in C v D. Disapplying Section 69 has the effect that an arbitration award will always be final, unless there was some procedure irregularity or bias, and can therefore strengthen the arbitrators’ power to arrive at equitable commercial conclusions, rather than being hidebound by strictly following the law.

Conclusion
The Bermuda form is a popular clause in certain forms of insurance policies and is adopted to take advantage of the perceived benefits of combining English arbitration with New York law. However disputes still arise regarding the Bermuda form as is demonstrated in the recent case of C v D in which the court affirmed that the governing law of the entire policy could not override the procedural law of the arbitration. The case demonstrates that attempts to obtain the benefit of both English and New York laws run the risk of generating satellite disputes.

The Bermuda form itself, though, is not the only form of words which can be used to combine the advantages of one jurisdiction as the seat of the arbitration, and the basis for the procedures governing the arbitration, with the substantive law of a different jurisdiction. Carefully drafted arbitration clauses can indeed offer best of both world solutions, and minimise the risk of satellite litigation of the type experienced in C v D.

Further reading: [2007] EWHC 1541 (Comm)