UK: Forum shopping in arbitration

Recent events in the US, and the market disputes that are highly likely to follow, underline the need to consider carefully where to arbitrate. There are some major differences between the arbitration process in the US and that before an English tribunal and the parties to any dispute will want to give thought to the potential impact on the final outcome. A form of this article has also appeared in Insurance Day and Global Re.

Unlike commercial litigation, forum shopping in arbitration is more like window shopping; you stare through the glassy window at what’s available and come back another day to actually sample the goods. Parties to a commercial contract with an international element choose the arbitration seat during their contractual discussions (if not, a court will, if necessary, later determine the parties’ implied choice). One might suppose that all tribunals, wherever they sit, when directed to apply the same substantive law to a dispute, will reach the same decision; as we see below this may not in fact be the case. The choice of arbitration seat will have repercussions and parties are well advised to give careful thought to such matters at the outset.

To take a topical example, consider Hurricane Katrina, which is widely being described as the costliest natural catastrophe in history – with estimates of insured damage ranging between $35 billion and $60 billion. It will undoubtedly have a huge impact on the global and London reinsurance markets. It is also inevitable that future disputes will arise with reinsurers of these exposures. Most reinsurance contracts nowadays contain arbitration clauses, and there is inevitably going to be an international dimension to some of these disputes (particularly with respect to reinsurances written by London Market Reinsurers of the direct carriers on the homeowners/commercial property market). Although the majority of these reinsurances will be subject to arbitration in the US, and the majority of retrocession protections purchased by London Market (Direct) Reinsurers will be subject to arbitration in England, it is possible that some disputes that arise between parties may be arbitrated before a tribunal in the US while other similar disputes will be arbitrated before a panel in England. The outcome of these apparently similar disputes, even if the same system of law is to be applied, may in fact differ, especially if there are no agreed procedural rules for that arbitration specified at the outset in the parties’ arbitration agreement. The reason for this can be attributed to some of the differences in the way US and English arbitrations are conducted and regulated by procedures, as well as the mindset of US and English tribunal members.

In England, impartiality of arbitrators is fundamental: Section 24 of The Arbitration Act 1996 empowers the removal of any arbitrator upon the application of a party, if circumstances exist that give rise to justifiable doubts as to an arbitrator’s impartiality. The requirement that arbitrators be impartial exists in the US but there is no specific right of removal. However, in English proceedings parties are expected not to communicate with arbitrators without notice to the other. It is not permissible to beauty-parade potential arbitrator appointees to an English tribunal, or to question them in relation to their general approach to issues that are likely to arise in the arbitration reference.

In the US, the process of appointment is completely different. For example, in a three-person tribunal in the US, very often what is procured by each party is an arbitrator who will have been cherry-picked to be an advocate for it for at least part of the arbitration process, and who will lobby the third appointed member of the tribunal. This, needless to say, constitutes a potentially different arbitration dynamic to that of an English panel.

The directions that US/English arbitrators will give prior to a hearing will generally follow the procedures adopted by the courts of their jurisdiction. Both tribunals are conferred wide powers to fix procedures. Differences in case presentation however will often arise: in England statements of case, confined to statements of fact, are invariably exchanged, whilst in US proceedings, the parties’ statement of positions will usually combine statements of law, fact and argument.

Very often the ability to compel third parties to produce documents or other evidence in an arbitration will be highly relevant to its ability to make its case or not before a particular tribunal. Both in the US and in English procedure, third party discovery may be ordered by arbitrators. However there can be differences as to when that third party discovery must be produced. In England, tribunals may agree that a third party should produce documents pursuant to a witness summons in advance of any final hearing. This is obviously a very useful tool for preparing cases and even to assist settlement. In the US, the Courts are not unanimous as to when such third party discovery may be ordered and specifically whether this may be ordered in advance of the final hearing.

A further, more obvious, difference between US and English arbitration is the deposition process in the US arbitration process. Whilst witness statements and expert reports are invariably exchanged before a final hearing in English arbitration, unlike the US there is no taking of oral testimony by way of discovery; in the US, with opposing parties able to put questions to other parties’ witnesses or potential witnesses within a deposition process, positions (and arguably merits) can crystallise more quickly, again leading to a potentially different settlement dynamic.

The conduct of the actual hearing is broadly similar whether one is arbitrating before a US panel or an English tribunal. It is also very often the case for example that reinsurance treaty wordings will contain what is referred to as an equity clause or an honourable engagement clause - essentially directing arbitrators not to bind themselves to strict rules of procedure and law. Arguably, it is more often the case that US panels are more willing and inclined to follow such directions. Indeed, in US arbitrations it is not necessary to follow formal rules of evidence as it would be in Court proceedings, and all of this promotes, in many cases, a more merit-driven determination of issues than that of an English panel, who are often particularly mindful that their awards may be subject to Court review on a point of law (see below). Under US laws, as arbitrators have broad powers to fashion appropriate remedies, it is often said that a US panel will be inclined to "split the baby" i.e. to give each party something, and that is often said to be a function of the fact that in the US reasoned awards are often not produced and substantive appeal of such decisions is simply not possible.

In England, as mentioned, an appeal on a point of law is permissible on certain legal grounds (the decision must be at least "obviously wrong", or "open to serious doubt" and raising a point of general importance) provided permission to appeal is obtained from the English Courts, whilst in the US effectively any legal challenge is confined to setting aside awards because of serious irregularity/bias regarding the panel and the process.

It is not the purpose of this article to question what mode of procedure is better, but the propensity for a different substantive determination of rights, on similar facts and applying similar legal principles, does exist. Hurricane Katrina is expected to have a far greater impact on the London reinsurance market than all four hurricanes of 2004 combined, and while all members of the market will wish to play their crucial part in the reconstruction efforts following Katrina, they ought to be aware of realistic explanations of how the disputes might be determined and how that may differ depending whether heard in England or in the US.

Window shopping is often considered a pleasant experience; it costs nothing, and you benefit from having had a thorough look through the options available before settling on your final decision. A rash purchase, on the other hand, could impact on the family purse for years and years.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 10/10/2005.