Developments in Bermuda Arbitration Law
In last year’s edition of Global Arbitration Review we reported Bermuda’s continued development as a sophisticated international arbitration centre, especially for the (re)insurance industry. The past year has seen more and more class 4 (re)insurers writing policies containing Bermuda arbitration clauses and an increase in the number of (re)insurance arbitration disputes, possibly reflecting premium increases. The Bermuda Commercial Court has further demonstrated its desire to support two key areas of arbitration law and practice: parties’ agreement to arbitrate and the arbitrator appointment procedure. As discussed towards the end of this article, the European Court of Justice’s February 2009 decision in The Front Comor has represented a move away from English arbitration in favour of Bermuda arbitration.
Enforcement of agreement to arbitrate
The Bermuda Commercial Court has, in unreported decisions, again shown its preparedness to grant anti-suit injunctions to enforce parties’ contractual agreement to arbitrate. OAO CT Mobile v IPOC International Growth Fund Ltd, LV Finance Group Limited v IPOC International Growth Fund Ltd,1 remains the most significant decision on agreements to arbitrate outside of Bermuda.
In ACE Bermuda Insurance Ltd v Continental Casualty Company2 the Bermuda Court was prepared to grant an anti-suit injunction against a non-party to an arbitration agreement. The plaintiff, ACE, and the defendant, Continental, had both issued excess liability insurance policies to the Minnesota Mining and Manufacturing Company (3M). Continental had commenced proceedings in the District Court for the Fourth Judicial District of the state of Minnesota (the Minnesota proceedings) against, inter alia, its insured 3M, seeking a declaration as to the scope of its liabilities under certain excess liability policies issued to 3M at various times between 31 December 1969 and 1 January 1986. Continental had joined, as defendants to the Minnesota proceedings, more than 60 other insurers (including ACE) on the basis that 3M had purchased potentially applicable insurance policies from them. As Mr Justice Bell explained, the Minnesota proceedings impacted on ACE’s contractual rights:
The policies which Continental issued to 3M pertain to liability in respect of claims arising from exposure to toxic substances caused by 3M products. In the nature of such claims, complex questions arise as to when liability under particular insurance policies was triggered and as to the appropriate allocation between the various policies […] Continental seeks declarations in relation to the issues of triggering and allocation in relation to the various underlying insurance policies issued by the Defendant Insurers, as well as a declaration that Continental’s policies have not been triggered by the exhaustion of the underlying insurance. This […] will necessarily require the Minnesota Court to determine, so far as ACE is concerned, the contractual rights and obligations between ACE and 3M with regard to the terms of their contract and the extent of coverage thereunder.
Bell J upheld an order giving leave to serve notice of the Bermuda proceedings out of the jurisdiction and continued an anti-suit injunction to restrain Continental from pursuing the Minnesota proceedings against ACE. The learned judge accepted ACE’s argument that the Minnesota proceedings were unconscionable since they would decide in a final and binding manner the issues between ACE and 3M, in clear breach of an arbitration clause in the ACE policy which provided for arbitration in Bermuda.
Continental unsuccessfully challenged the jurisdiction of the Bermuda Court to grant an injunction against it on the grounds that it was not a party to the arbitration agreement between ACE and 3M. The relevant jurisdictional rule (RSC order 11, rule 1(d) (iii)) provided that the court could grant leave to serve proceedings out of the jurisdiction on a foreign defendant, where the plaintiff’s claim affected a contract governed by Bermudian law. Continental argued that, to find jurisdiction under that rule, there had to be a contract between the plaintiff and the defendant. Rejecting that argument, Bell J ruled:
[…] the Court has granted anti-suit injunctions to restrain a party from pursuing foreign Court proceedings in breach of an arbitration agreement for many years. In my judgment, the Court has such jurisdiction whether or not the party pursuing the foreign proceedings is itself a party to the arbitration agreement. It is the breach of the arbitration clause calling for arbitration in Bermuda that the Court has jurisdiction to restrain. Continental’s suit in Minnesota is calculated to breach such an arbitration clause, and the Bermuda Court thus exercises jurisdiction.
It remains in doubt whether this reasoning is correct. Where C is not a party to the agreement to arbitrate between A and B, how can C breach an agreement that it is not bound by? There is no further judicial guidance on the point but we remain of the view that the result in ACE v Continental was justified on the basis that Continental’s conduct amounted to an unconscionable (and possibly tortious) interference with ACE’s contractual rights.
In Starr Excess Liability Insurance Company Ltd v General Reinsurance Corp,3 Bell J granted an anti-suit injunction to restrain proceedings in New York, which purportedly were filed in breach of an arbitration agreement that was governed by the procedural law of Bermuda. The facts were as follows: General Re (Gen Re) reinsured Starr Excess (Starr) under a casualty quota share reinsurance contract. That reinsurance contract was stated expressly to be governed by New York law. Clause A of the arbitration clause dealt with the appointment of arbitrators and an umpire and contained a mechanism for appointment of such arbitrators by a justice of the Supreme Court of New York. However, clause B of the arbitration clause stated: ‘the arbitration proceeding shall take place in Hamilton, Bermuda’ and then dealt with a number of procedural matters. There was no express choice of ‘seat’ or procedural law.
A coverage dispute arose and Starr commenced arbitration against Gen Re. There then followed a dispute between them as to the scope of the arbitration clause. Starr argued that the seat of the arbitration was Bermuda with the consequence that Bermudian procedural law applied (the Bermuda International Conciliation and Arbitration Act 1993 which applies the UNCITRAL Model Law). Gen Re, represented by a US firm unversed in Bermuda law, argued that New York procedural law applied and duly commenced litigation in New York to request that the New York court interpret the arbitration clause. Bell J found that the seat of the arbitration was Bermuda, and the arbitration was therefore subject to Bermudian procedural law, not New York law. The judge noted that ‘it is common in international arbitration for the procedural law to be different than the law governing the substantive dispute between the parties’ and went on to say:
[…] given that the parties reached an express agreement that the arbitration proceeding should take place in Bermuda, and there being no express choice of procedural law, the next question is whether [there] are any other pointers to offset the ‘very strong pointer’ that by agreeing to arbitrate in Bermuda the parties have implicitly chosen the law of Bermuda to be the procedural law of the arbitration.
Granting an anti-suit injunction restraining Gen Re’s New York proceedings, and having considered the terms of clause A of the arbitration clause, the judge concluded:
I do not regard the default provision for appointing an arbitrator or umpire as being a matter which should be taken beyond its relatively narrow confines; it is, as Mr. Attride-Stirling submitted, a purely administrative provision, applicable only to the appointment of an arbitrator or umpire. In my view, it cannot justify an inference that it represents some wider choice of procedural law […]
In the circumstances, there is no part of the arbitration agreement that operates to counter the ‘very strong pointer’ that the parties’ agreement on Bermuda as the place of the arbitration implicitly indicates their agreement that the procedural law of Bermuda should apply to the arbitration. I am therefore satisfied by their agreement to arbitrate their dispute in Bermuda the parties did implicitly agree that Bermuda procedural law (and only Bermuda procedural law) should apply to the arbitration, and I so find.
Enforcement of Bermuda form arbitration clauses
Bermudian (re)insurers continue to underwrite policies on the Bermuda form, which was invented in the mid 1980s to respond to the critical lack of liability insurance coverage available to US industrial concerns at that time. Arbitrations arising under the Bermuda form are, according to its arbitration clause, to be held in London (ie, subject to English procedural law) but governed by New York law.
The Bermuda form came before the English Court of Appeal for the first time in December 2007 in the case of C v D.4 In that case, D was the liability insurer of C, a company based in New Jersey. C made a claim on the policy, which was written on the Bermuda form, and D raised various defences to indemnification. The tribunal ruled in favour of C and dismissed D’s defences. Following the hearing C applied to the tribunal to ‘correct’ the award on the ground that the tribunal’s findings constituted a ‘manifest disregard of New York law’ and were therefore reviewable by the US Federal District Court. The tribunal refused to ‘correct’ its award saying that it had no power to do because the parties had expressly agreed to contract out of the right to appeal given by the (English) Arbitration Act 1996, section 69. A dispute therefore arose as to whether: English procedural law applied (ie, the Arbitration Act 1996), which permitted the contracting out of a right to appeal against arbitration awards; or whether, because New York substantive law governed the contract, D had the right to draw upon the New York procedural law and appeal to the New York Court on the ground of ‘manifest disregard of New York law’, which could not be excluded by agreement by the parties.
The Court of Appeal affirmed the judge’s decision to grant a permanent injunction restraining D from appealing to the New York Court. The central issue was not so much the proper law of the arbitration agreement (New York) nor the determination of the procedural law (which was clearly English) but whether or not the parties, by choosing London as the seat of the arbitration, must be taken to have agreed that proceedings on the award should be only those permitted by English law. The Court of Appeal ruled that the parties agreed to exclude an appeal to the English Commercial Court and, in view of that agreement, could not appeal to the New York Court. The whole purpose of the balance achieved by the Bermuda form was that judicial remedies in respect of the award should be only those permitted by English law. The remedies of the New York Court were not available in tandem or parallel and to permit such a dual system would invite a rush by the parties to take advantage of the different and conflicting rules of the two jurisdictions. The choice of arbitration seat must be the choice of forum for remedies seeking to attack the award.
Appointment of arbitrators and lot drawing
In relation to enforcement of parties’ agreement to the arbitrator appointment process the judgment of Montpelier Reinsurance Ltd v Manufacturers Property & Casualty Ltd5 concerned our client, Montpelier Re (a Bermudian (re)insurer), which was reinsured under two reinsurance contracts by Manufacturers Property & Casualty Ltd (MPCL). Those contracts contained identical arbitration clauses providing for resolution of disputes by a three-man Tribunal, subject to Bermudian procedural law. The arbitration clause went on to set out the procedure for selection of the third arbitrator:
The two arbitrators, chosen as above provided, shall within thirty (30) calendar days after the appointment of the second arbitrator choose a third arbitrator. In the event of the failure of the first two arbitrators to agree on a third arbitrator within thirty (30) calendar days thereafter, the arbitrators may, upon mutual agreement, implement the ARIAS-US Umpire Appointment Procedure to select the third arbitrator. Alternatively, each arbitrator will nominate three candidates and notify the other arbitrator of those nominations. The arbitrator receiving such notice will reject two of the candidates so nominated. The third arbitrator will then be chosen from the remaining two candidates by a lot drawing procedure acceptable to the two arbitrators, and the chosen candidate will be appointed.
This wording became controversial when Montpelier’s appointed arbitrator, Bryan Kellett (an English former Lloyd’s underwriter), was unable to agree a third arbitrator with MPCL’s appointed arbitrator, Charles Foss (an American in-house lawyer). Mr Foss had proposed a number of candidates for the role of third arbitrator, all of whom were American and inexperienced in Bermuda arbitrations. Mr Kellett objected and refused to enter into the lot drawing process. Montpelier applied to the Bermuda court to appoint the third arbitrator and resolve the impasse. The question arose as to what jurisdiction the court possessed to make such an appointment. Montpelier argued that the Model Law provided that the court could only order the appointment of a third arbitrator. It could not order the arbitrators to draw lots. Article 5 of the Model Law states: In matters governed by this Law, no Court shall intervene except where so provided by this Law.
With specific reference to the appointment process, article 11(4) of the Model Law states:
Where, under an appointment procedure agreed upon by the parties,
(a) a party fails to act as required under such procedure, or
(b) the parties, or two arbitrators, are unable to reach an agreement expected of them under such procedure […] any party may request the Court or other authority specified in Article 6 to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.
Article 11(5) then provides that there shall be no appeal from a decision made under article 11(4) above.
Kawaley J held that article 11(4)(b) should be interpreted broadly and that the clear purpose of the provision was to empower the court to appoint an arbitrator where either the parties or two party-appointed arbitrators were unable to effect the relevant appointment in accordance with the agreed procedure. The nature of the inability to reach an agreement was either irrelevant or subsidiary to the dominant practical concern that the appointment mechanism provided for by the contract had clearly broken down. The judge therefore appointed Michael Collins QC, an English lawyer experienced in Bermuda arbitrations.
The effect in Bermuda of the European Court of Justice’s ruling in The Front Comor5
Although the Privy Council is Bermuda’s highest court of appeal, English judgments are of persuasive, but not binding, authority in Bermuda. European law has no binding effect in Bermuda, which is not a member of the EU. However, as discussed below, the ECJ’s February 2009 decision in The Front Comor has had a beneficial effect on the facility of Bermuda arbitration.
In that case the charterers of a ship, The Front Comor, crashed into a jetty in Sicily. After paying the owners of the jetty (who were also the charterers) the insurers of the jetty commenced subrogated proceedings against the shipowners in Italy. The shipowners argued that the proceedings were in breach of an arbitration clause in the charterparty by which all disputes would be referred to arbitration in London, subject to English law. The insurers argued that they were not bound by the arbitration agreement or English law. The House of Lords posed the following question to the European Court of Justice: Is it consistent with Regulation No. 44/2001 for a court of a Member State to make an order to restrain a person from commencing or continuing proceedings in another Member State on the ground that such proceedings are in breach of an arbitration agreement?
The ECJ answered ‘no’, reasoning that the Italian proceedings were commenced to determine a preliminary issue on the validity of the arbitration agreement on the insurers. It was for the Italian courts to determine their own jurisdiction to hear the issue. In effect the ECJ found that it was incompatible with Regulation No. 44/2001 for a court of any other country within the EU to decide that the court seised should be restrained from determining its own jurisdiction. The decision therefore rendered useless anti-suit injunctions in England against parties in other EU member states. Indeed, Gloster J later found in National Navigation Co v Endesa Generacion SA (The Wadi Sudr)6 that she had no jurisdiction to grant anti-suit relief in respect of proceedings already initiated in the courts of another EU member state.
Since the ECJ’s decision in The Front Comor was handed down earlier this year, more and more parties have sought a more reliable arbitral seat to protect their bargain and ensure that arbitration clauses are observed and enforced. Bermuda has been a principal beneficiary of that flight to other arbitration systems. Parties consider arbitration clauses to be of fundamental importance and will often not conclude contracts without arbitration clauses, especially if the alternative is US litigation. How much longer Bermuda will benefit remains to be seen. The Ministry of Justice has proposed amendments to Regulation No. 44/2001, which would effectively reverse The Front Comor decision. For the time being Bermuda is enjoying the benefits of the EU’s inefficiencies in this vitally important area.