Bermuda: Reinsurance Arbitration in Bermuda

1. The Bermuda International Conciliation and Arbitration Act 1993 (the "Act")

The way in which arbitration is commenced is usually governed by reference to the reinsurance contract under which a dispute has arisen. However, service of a demand for arbitration and a notice of the appointment of the claimant’s arbitrator is the most common method in which to commence reinsurance arbitrations. In most cases the reinsurance contract will make specific reference as to which country’s law should apply and in which place the arbitration will be held (however see Conflict of Law below at 8). If for example the reinsurance contract said that any dispute should be settled by way of Bermuda arbitration law, reference should be made to the Act. Although Bermuda also has the Arbitration Act 1986, which primarily govern domestic arbitrations the Act is most commonly referred to in international contracts of reinsurance.

A typical reinsurance agreement will provide for arbitration by a panel of three arbitrators. If the reinsurance agreement is silent as to the appointment of the Tribunal and the parties cannot reach agreement on how to constitute the Tribunal, the Act will apply (provided Bermuda law governs) and the Tribunal would be appointed as follows:

1. (i) Each party appoints its own arbitrator;
2. (ii) The two appointed arbitrators choose the third member of the Tribunal.

If the two appointed arbitrators cannot agree the identity of the third arbitrator within 30 days, the third arbitrator can be appointed by an agreed appointing body or, if there is no appointing body, by the Supreme Court of Bermuda. The third arbitrator usually then acts as chairman of the arbitral tribunal.

In most reinsurance agreements, arbitration clauses often specify that the arbitrators be active or retired insurance industry persons. The arbitration clause recommended by ARIAS (UK) (which is becoming a very common clause) expands the class of potential arbitrators and suggests the inclusion of lawyers and other professional advisors with a practice in the insurance industry. In complex arbitrations with difficult legal issues, the ideal panel comprises two industry executives appointed by the parties with a senior lawyer with extensive reinsurance experience as the third arbitrator (usually a QC).

The arbitrators, including the party-appointed arbitrators, must be "independent and impartial". However, often parties to arbitration mistakenly believe that their appointee is their advocate or will be biased in their favour. Although this is common practice in the United States, nothing could be further from the truth in Bermuda arbitrations. Simply put, the appointed arbitrators are supposed to be neutral.

Prior to appointment private communication between the parties and a potential arbitrator should be limited to determining that there are no conflicts of interest, confirming the candidates’ qualifications and the potential arbitrator’s willingness to act. In particular there must be no canvassing of the potential arbitrator to determine if he/she would be sympathetic to the appointer. Further there must be no private communication between the parties and the arbitrators once the Tribunal has been constituted.

Under the Act, the appointment of an arbitrator can be challenged on two grounds:

1. (1) The arbitrator does not possess the qualifications agreed by the parties;
2. (2) There are justifiable doubts as to the arbitrator’s impartiality or independence.

The Act provides that absent agreement between the parties on the challenge procedure the challenging party must, within 15 days of either becoming aware of the constitution of the Tribunal or becoming aware of any circumstance as referred to above, send a written statement of the reasons for the challenge to the Tribunal. Interestingly, the Tribunal will hear any such challenge - even if the Tribunal consists of a sole arbitrator. In other words the arbitrator who is subject to challenge will essentially decide his/her own fate. If the challenge is rejected, there is a right of appeal to the Supreme Court of Bermuda - but no further right of appeal. During the pendancy of any appeal, the arbitration can continue with the challenged arbitrator in place.

Article 16 (1) of the Act provides that a Tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. Any application for lack of jurisdiction of the Tribunal must be made not later than the submission of defence. The Tribunal then may either determine the matter as a preliminary issue or as part of its substantive award.

There is only one appeal on this subject to the Supreme Court of Bermuda. As with an appeal as to the suitability of an arbitrator, during the pendancy of the appeal, the arbitration can continue. Although such points do not often arise in reinsurance disputes since reinsurance contracts are normally very clear that arbitration applies, it is worth noting that a decision by the Tribunal that the contract is null and void shall not invalidate the arbitration clause.

An arbitration clause can set out procedural rules or it can adopt the rules of an established arbitration institution such as ICC, AAA, ARIAS or the LCIA. In reinsurance contracts, the arbitration procedures tend to be drafted on an ad hoc basis often using Lloyd’s Standard Wording as a template with various additions. It is common practice in ad hoc reinsurance arbitrations for an organisational hearing to be held early in the proceedings and for the Tribunal to rule and give directions on procedural issues that cannot be agreed between the parties.

If Bermuda law applies and the parties have not reached agreement on the procedures to follow, the conduct of Bermuda arbitrations under the Act is governed by Articles 18 to 27. According to Article 19 the Tribunal may in the absence of agreement by the parties, ‘conduct the arbitration in such manner as it considers appropriate’.

Conflict of laws issues can arise in reinsurance arbitrations particularly where the contract fails to specify a governing law. As above, the procedural law, or curial law, of all international commercial arbitrations held in Bermuda is governed by the Act unless the parties agree to the contrary. If the parties specify a governing law in their reinsurance contracts, the Tribunal will follow that choice. However, the parties are free to choose a governing law, which need not have any territorial connection with either parties’ residence, place of performance of the contract or the seat of arbitration. The Act does, however, prevent a party from attempting to ‘rewrite’ the parties’ express choice of law agreement by relying upon the conflict of law rules of the jurisdiction chosen by the parties. Only where the parties do not agree on the substantive law governing the dispute will the Tribunal apply the law determined by the conflict of law rules which it considers applicable.

The Act allows for recourse to the Court to set aside an award under the following limited circumstances if the party making the application furnishes proof that

1. (i) A party to the arbitration agreement was incapacitated or the agreement was not valid under the law which was applied;
2. (ii) It was not aware or given proper notice of the proceedings or was unable to present its case;
3. (iii) The award deals with a dispute not contemplated or does not fall within the Tribunal’s remit;
4. (iv) The Tribunal was not composed in accordance with the agreement between the parties;
5. (v) The application is made within 3 months of receipt of the award.

Further, if the Court finds the subject matter of the dispute is not capable of being dealt with in arbitration or the award is in conflict with public policy it may be set aside.

It is unusual for arbitration awards to be subject to appeal, since the grounds of appeal are very limited and thus most avenues for appeal are moot having been dealt with at an earlier stage in the proceedings. Furthermore, since one of the main benefits of arbitration is its confidential nature, parties are often reluctant to pursue an appeal.

In conclusion, arbitration clauses are a common phenomena in reinsurance contracts and it is not unusual to have the seat of arbitration differ from the law to be followed in the arbitration. For example the seat of arbitration may be Bermuda but the arbitration conducted under the auspices of New York arbitration law. However the Act has been successful since its introduction. The fact that there is limited right to appeal and arbitrators are supposed to be non-partisan should be "appealing" to Bermudian reinsurers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.