Reinsurance E-Alert

January 2008 

London v New York: where to challenge an arbitration award under the Bermuda Form?

The Court of Appeal (CA) was recently given the opportunity to consider the Bermuda Form for the first time. The CA had to consider whether the choice of London as the seat of arbitration in the Bermuda Form operates to grant the English courts exclusive jurisdiction on the validity of arbitration awards, even though the Bermuda Form is governed by the laws of New York.

Background

The Claimant was a New Jersey Company which obtained liability insurance from the Defendant, a US insurer, on the basis of a policy written on the Bermuda Form (the "Policy"). A number of claims were made to the Claimant who had to pay a substantial amount of damages. The Claimant made demands for indemnification under the Policy for the full policy limit of US$100 million.

The Defendant declined to pay, and in May 2005 the Claimant initiated arbitration proceedings in London. The tribunal granted an award in favour of the Claimant, following which the Defendant threatened to apply to a New York court to challenge the award on the ground that the tribunal's findings constituted a "manifest disregard of New York law". The Claimant sought and obtained an anti-suit injunction from the English court, which gave rise to the first instance decision in this matter (to see our E-Alert concerning this first decision, click on the following link: reinsurance_e-alert_-_curial_law_will_reign_152023.pdf

The Decision

The CA endorsed the decision of Cooke J at first instance. The CA agreed that the choice of London as the seat of arbitration was determinative of the matter in that by choosing the seat, the parties had expressly or impliedly agreed that proceedings seeking to challenge the arbitration award would only be those permitted by English law. The CA pointed out that the apparent discrepancy within the Bermuda Form between the choice of law (New York) and the seat of the arbitration (London) was intentional and aimed to create a balance between the needs of insured and insurers. The Bermuda Form was developed in the context of a crisis in the US liability insurance market brought about by decisions from US courts that had substantially widened insurance coverage. The aim of the form was to move the dispute resolution process to London to avoid such difficulties in the future.

The choice of seat meant the Defendant could not argue that English judicial remedies to challenge the award were not permitted (notably because the relevant clause referred to the framework of the English Arbitration Act 1996), and therefore they had to argue instead that New York judicial remedies were also permitted. The CA would not accept that parties could chose which law would apply to challenge an arbitration award as this would lead to more uncertainty and more litigation. The CA concluded that a choice of seat for the arbitration is, in effect, analogous to an exclusive jurisdiction clause. The CA also rejected the argument put forward by the Defendant that the choice of the law of New York as the substantive law of the Policy could operate to import a method of challenge to the arbitration award not permitted under English law.

Finally, the CA also commented on arguments on the law of the arbitration agreement, although strictly speaking, those points did not need to be decided upon (and so the comments are "obiter dicta"). The CA agreed there may be circumstances where the law of the arbitration agreement, which can be distinct from the law of the substantive agreement, may also be distinct from the law of the seat of the arbitration (known as lex fori). This happens rarely, but when it does, the law to be applied is that with which the arbitration agreement has its closest and most real connection. The CA said this was more likely to be the law of the seat of the arbitration. This is because the agreement to arbitrate will usually have a closer and more real connection to the place where the parties have chosen to arbitrate if they have deliberately chosen to arbitrate in one place disputes that have arisen under a contract governed by the law of another place. In any case, the CA found that in this particular case there were "strong pointers" to the arbitration agreement being governed by English law, not least the provision that the award from the London tribunal should be final and binding.

Conclusion

This is another decision from the English judiciary which is strongly supportive of arbitration and which indicates clearly that jurisdiction clauses will usually be enforced by the English courts. In this context, it is interesting to note that the CA considered whether it should establish a precedent for costs to be ordered on an indemnity basis as against a party that has acted in breach of a jurisdiction, arbitration or anti-suit clause. The CA felt it was not suitable to make such an order in this case, partly because the Defendant had indicated they would not issue proceedings in the US if they were restrained from doing so, meaning they would not, in fact, breach the arbitration clause. The CA however left open the possibility of such a ruling being made in a different context.

The decision is also a useful reminder that the Bermuda Form has been effectively drafted in that it operates exactly as intended: the law of New York applies, but cases must be heard by arbitration tribunals in London and, if awards are challenged, by the English Courts.