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Court of Appeal Precludes Escape from the 1996 Arbitration Act for Unsuccessful Parties (Legal Week)

By Andrew T. Berry and Cynthia S. Betz of McCarter & English

October 23, 2008

Legal Week

An insurer’s recent attempt to escape from an unfavorable arbitration award resulted in the Court of Appeal confirming that an award rendered under the 1996 Arbitration Act can only be challenged under that Act — even where the parties agreed to apply the substantive law of another jurisdiction.

The Bermuda Form Insurance Policy, with its exclusive arbitration clause, is widely used by US and European Fortune 500 companies to insure high-level risk exposure. The Form’s unique provisions call for dispute resolution pursuant to the 1996 Act, but with substantive legal issues decided as a matter of New York law. Yet, until the Court of Appeal affirmed a High Court decision prohibiting an insurer from challenging a Bermuda Form London arbitration award in the US courts, it was unclear which law would apply in the event of a judicial challenge to an award rendered under these policy terms. That question, now resolved by C v D [2007], leaves an unsuccessful party to a Bermuda Form arbitration award with only the bare minimum 1996 Act remedies to challenge the unfavorable award. Resort to the New York Convention or the arbitral laws of another jurisdiction will not be allowed; thus both insurers and insureds should recognise that when they resort to the supposed expeditious, streamlined and confidential proceedings afforded by the 1996 Act, they face the risk of limited remedies in the event the award does not go their way.

In C v D, the US-based insured (C), a Fortune 100 company, initiated an arbitration under the terms of its Bermuda Form policy after sustaining large product liabilities losses. The arbitration proceeded under the 1996 Act, with application of substantive New York law, and a partial final award was rendered in the insured’s favor. Shortly thereafter, the US-based insurer (D) indicated that it would seek review of the award in the US under the Federal Arbitration Act (FAA). C, therefore, sought and was granted injunctive relief from the High Court. The Court concluded that the parties had agreed to London as the site of the arbitration, accepted that the 1996 Act was the lex arbitri, and had impliedly agreed to abide by the award. Therefore, it said, the Bermuda Form insurance clause required any challenges to the award to be made under the 1996 Act.

In affirming the High Court’s decision, the Court of Appeal noted that “[t]he whole purpose of the balance achieved by the Bermuda Form… is that judicial remedies with respect of the award should be those permitted by English law and only those so permitted”. Rejecting D’s argument that in addition to the English judicial remedies those available under New York law should also be allowed, the Court stated that to allow both remedies “would be a recipe for litigation and (what is worse) confusion which cannot have been intended by the parties”. Therefore, the only way to respect and enforce the parties’ legitimate expectations under the policy form was to preclude proceedings in the US to challenge the award.

insurers and insureds should recognise that when they resort to the supposed streamlined and confidential proceedings afforded by the 1996 act, they face the risk of limited remedies in the event the award does not go their way

D’s desire to challenge the award in the US was undoubtedly motivated by the opportunity to test the award against an amorphous “manifest disregard of the law” standard for setting the order aside. US Courts have employed this judicially articulated standard to vacate arbitration awards — albeit in a small number of cases — for over 50 years. Although still a high threshold, with substantial deference to the arbitrators’ judgment, this standard provides a challenging party with an opening to design an argument not otherwise available under the FAA’s — or, indeed, the 1996 Act’s — articulated grounds.

Subsequently, in March, the US Supreme Court decided Hall Street Associates v Mattel [2008], which may appear to undercut the significance C v D. In Hall Street, the Supreme Court held that grounds for annulment of the order not specifically articulated in the FAA, even if made by agreement, were invalid. The Court left open, however, whether the well-established “manifest disregard of the law” standard was a judicial interpretation of the FAA’s articulated grounds or an additional, and therefore improperly created, basis for setting the order aside. If the latter, this relatively relaxed basis for annulment would have met an immediate death, thus undercutting the significance of C v D’s mandate. But, old habits die hard, and in practice, US courts following Hall Street have nonetheless continued to apply the ‘manifest disregard’ standard, although now carefully articulated as a judicial interpretation.

In any event, parties (regardless of their legal domicile) to a Bermuda form insurance contract, with its requirement for London arbitration under the 1996 Act, cannot seek relief other than in England. However, nothing in the Form precludes parties from resolving disputes consensually — for example, through mediation under the auspices of an organisation such as the International Institute for Conflict Prevention and Resolution.

Andrew T. Berry is a partner and Cynthia S. Betz an associate of US firm McCarter & English.

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