Dispute Resolution: An International Perspective. Jonathan Sacher and Neil Owen

Transcription

1 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.

2 96 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. 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 somewhere 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 Arbitrators Subpoena Powers and Federal Enforcement

3 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 gentleman). 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

4 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 enforceable in certain circumstances, including: that it is not a bare Arbitrators Subpoena Powers and Federal Enforcement

5 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

6 100 (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 Arbitrators Subpoena Powers and Federal Enforcement

7 101 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 determination 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 person 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 documents, information and material relating to the facts in dispute and to arguments and submissions upon the matters in dispute; and

8 102 (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 construction 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 Arbitrators Subpoena Powers and Federal Enforcement

9 103 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 defending 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'

10 104 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 ombudsman 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. Arbitrators Subpoena Powers and Federal Enforcement

11 105 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 determination. 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.

12 106 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 leading 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. Arbitrators Subpoena Powers and Federal Enforcement

13 107 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

14 108 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. Arbitrators Subpoena Powers and Federal Enforcement

15 109 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

16 110 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 Arbitrators Subpoena Powers and Federal Enforcement

17 111 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.

18 112 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. Arbitrators Subpoena Powers and Federal Enforcement

19 113 Endnotes: 1 London Special Wording ("LSW") Walford v Miles (1992) AC 128 (HL) 3 Petromec Inc v Petroleo Brasilero SA (Court of Appeal) [2005] EWCA Civ LSW LSW FOS Annual Review 2006/7 : Chief Ombudsman's report