A notable case has addressed the enforceability of an insurance policy dispute resolution clause that provided the following:
If any difference between the Company and the Insured arises as to determination of the amount of damages or compensation, the matter shall be referred to the decision of the Non-Life Insurance Arbitration Committee.(1)
In this case, the erection all risk (EAR) insurance policy, which had been issued by a Korean insurance company in favour of a Japanese generator supplier, was governed by Bangladeshi law. The Japanese company supplied a generator for a power plant in Bangladesh.
A dispute arose following an accident involving the generator. The Japanese supplier incurred approximately $60 million in repair costs and then sought reimbursement from the insurance company under the EAR policy. The insurance company refused to pay.
The Japanese supplier commenced an ad hoc arbitration. When the insurance company failed to appoint an arbitrator, it asked the Seoul Central District Court to appoint an arbitrator on the insurance company's behalf.
The Korean insurance company objected, arguing that:
- the arbitration agreement was invalid because the "Non-Life Insurance Arbitration Committee" is a non-existent arbitration institution; and
- even if the clause was valid, the Court had no jurisdiction to appoint an arbitrator because Korea had not been designated as the seat of arbitration.
If the Court did not accept these arguments, the insurer asked the Court to appoint an arbitrator from the insurer's list of proposed candidates.
Mystery of Non-Life Insurance Arbitration Committee
This is not the first time that the non-existent Non-Life Insurance Arbitration Committee has appeared in an arbitration clause. There are at least two other cases where Korean insurance companies have issued EAR policies with an identical dispute resolution clause.(2) The clause has somehow worked its way into a standardised form that has been adopted in the market.
An institution with a similar name formerly existed in Japan. In 1965, the Marine and Fire Insurance Association of Japan established the songai-hoken-choutei-iinnkai, which was sometimes translated into English as the "non-life insurance arbitration committee". This is misleading because the songai-hoken-choutei-iinnkai was an organisation for mediation, not arbitration. The organisation was abolished in 2012 with no direct successor.
The Court issued its decision in three stages, with separate orders deciding:
- whether the Court had jurisdiction despite the seat of arbitration having not been specified;
- whether the reference to the Non-Life Insurance Arbitration Committee rendered the clause pathological; and
- who to appoint as the arbitrator.
Whether the Court had jurisdiction despite the seat of arbitration having not been specified
On the jurisdiction question, the Court determined that it had jurisdiction based on article 2 of the Act on Private International Law, which requires that Korea have a "substantial connection" to the dispute.(3) Although the Arbitration Act expressly grants the court power to appoint an arbitrator only for arbitrations seated in Korea, the Court concluded that the provisions of the Arbitration Act authorising the Court to appoint an arbitrator should be applied in this case. The Court compared the arbitration laws of Korea, Japan and Bangladesh and noted that the three acts governing the countries' arbitration laws, respectively, only apply to arbitrations seated in their own jurisdictions. If all of these provisions were strictly applied, none of the courts would be able to appoint an arbitrator. The Court determined that this would be contrary to the purpose of the Korean Arbitration Act(4) and Korean jurisprudence, which recognises the validity of an arbitration clause that does not specify the seat of arbitration or arbitral institution.
Further, although Korea follows the principle that a choice of law clause in a contract also applies to the relevant arbitration agreement – meaning that, in this case, the validity and interpretation of the arbitration agreement would be governed by Bangladeshi law – this does not mean that the Bangladeshi courts would have exclusive jurisdiction to appoint an arbitrator, particularly under circumstances where neither party was located in Bangladesh.
Whether reference to Non-Life Insurance Arbitration Committee rendered clause pathological
The Court determined that there was a sufficient indication in the dispute resolution clause that the parties had agreed to refer their dispute to arbitration. The Court did not make any final determination about the arbitration agreement's enforceability, as this would primarily be decided by the arbitral tribunal, subject to the review by the courts with jurisdiction over the matter, after the seat of arbitration had been decided.
Who to appoint as arbitrator
For the above reasons, the Court appointed an arbitrator. Consistent with the occasional practice of the Korean courts, the Court requested that the Korean Commercial Arbitration Board recommend several suitable candidates. After considering these candidates, as well as the candidates that the Korean insurance company had proposed in the event that the Court decided to appoint an arbitrator, the Court decided to appoint one of the candidates that the insurer had nominated.
After the three-member tribunal was constituted, the respondent objected to their jurisdiction on the ground that the arbitration agreement was pathological, and the respondent asked for a partial award, which the arbitral tribunal agreed to issue. The respondent appealed the partial award on jurisdiction to the Court under article 17(6) of the Arbitration Act, which permits a party to immediately appeal if the arbitral tribunal issues a decision on jurisdiction as a preliminary question.(5) In this proceeding,(6) the Court found that:
- the arbitration agreement was valid;
- the seat of the arbitration was Korea; and
- Bangladeshi law governed the validity and interpretation of the arbitration agreement.
Applying Bangladeshi law, the Court held that although the dispute resolution clause did not include any mandatory wording that disputes "must" or "shall" be referred to arbitration, the fact that disputes "shall be referred to the decision of the Non-Life Insurance Arbitration Committee" (despite this organisation not existing) indicated that recourse to arbitration would be appropriate as the word "arbitration" appeared in the fictional name. In particular, the Court confirmed that interpretation of an insurance policy written in English should depend on the meaning of the English term. Even if the reference to "arbitration" may have been based on an antecedent that implied "mediation", the use of the English word "arbitration" was enough to satisfy the Court that the parties had agreed to refer their dispute to arbitration. The Court considered the effet utile principle, that when considering the objective of an agreement, the court should put more emphasis on the intent to resolve disputes by the arbitration, and less on the institution itself. In this case, although there was no Non-Life Insurance Arbitration Committee, it was still possible to constitute a tribunal and proceed with arbitration. This decision was not subject to appeal, pursuant to article 17(8) of the Arbitration Act.(7)
The judgment is fully consistent with the courts' consistently arbitration-friendly decisions.
For further information on this topic please contact Robert Wachter or Saemee Kim at Lee & Ko by telephone (+82 2 772 4000) or email ([email protected] or [email protected]). The Lee & Ko website can be accessed at www.leeko.com.
(1) Seoul Central District Court, decision 2018BiHap30171, dated 11 June 2019.
(2) Seoul Central District Court, decision 2016BiHap30170, dated 19 July 2017.
(3) Article 2(1) of the Act on Private International Law provides the following:
In case a party or a case in dispute is substantively related to the Republic of Korea, a court shall have the international jurisdiction. In this case, the court shall obey reasonable principles, compatible to the ideology of the allocation of international jurisdiction, in judging the existence of the substantive relations.
(4) Article 21(2) of the Arbitration Act provides that if the parties do not agree on the place of arbitration, "the place of arbitration shall be determined by the arbitral tribunal having regard to all circumstances of the case, including the convenience of the parties".
(5) Article 17(6) of the Arbitration Act provides the following:
If the arbitral tribunal makes a decision on its jurisdiction as a preliminary question . . . the party who objects to the decision may file a petition with a court to examine the jurisdiction of the arbitral tribunal, within thirty days after the party is notified of the decision.
(6) Seoul Central District Court, decision 2020KaGi418, dated 4 September 2020.
(7) Article 17(8) of the Arbitration Act provides the following:
No appeal shall be filed against the review of the authority which is conducted by a court following a request therefor under paragraph (6).