The Court of Appeal has upheld the grant of an anti-suit injunction, holding that a “confusion clause” in reinsurance certificates operated as a hierarchy clause giving precedence to the terms of earlier contracts over the later certificates. As a result, the English jurisdiction clause in the earlier contracts prevailed over the New York arbitration clause in the certificates, since the two could not be reconciled while still giving effect to the parties’ contractual bargain.

Refusal of reinsurance indemnity after loss

The case concerned reinsurance agreements entered into between Tyson, a Bermudan captive insurer, and GIC.

GIC signed two agreements on the Market Reform Contract form, which was (and is) standard in the London insurance and reinsurance markets (the MRC Contracts). The MRC Contracts were expressed to be governed by English law and subject to the exclusive jurisdiction of the English courts for “all matters relating to this Insurance”.

Nine days later, GIC agreed two facultative certificates on the Market Uniform Reinsurance Agreement form, a standard form commonly used for property reinsurance in the United States (the MURA Certificates). The MURA Certificates covered the same reinsurance as the MRC Contracts, with the same policy numbers. Critically, they contained a New York arbitration clause and a New York governing law clause.

Each document was a complete and binding contract of reinsurance in its own right. The parties therefore had two separate contracts governing the same risk, but with inconsistent dispute resolution mechanisms: litigation in England under the MRC Contracts, or arbitration in New York under the MURA Certificates.

The MURA Certificates contained a short clause which stated simply: “[MRC Contracts] to take precedence over reinsurance certificate in case of confusion".

Following a fire at an insured poultry plant in Alabama, Tyson accepted coverage for the losses and provided notice of these losses to GIC. GIC refused to indemnify Tyson and subsequently sent Tyson a letter purporting to rescind the relevant reinsurance policies on the basis of alleged understatements of the value of the damaged Alabaman plant.

This led to Tyson making a claim in the English High Court, at which point the question of what the confusion clause meant, and to which dispute resolution process the substantive dispute between the parties should ultimately be referred, came into focus.

The points in dispute

GIC argued that the confusion clause had a narrow scope: it applied only where the MURA Certificates were unclear or internally confusing (for example, if the MURA Certificates provided in one place for a premium due on 1 September and elsewhere for 20 September). Since the New York arbitration clause was perfectly clear on its own terms, the confusion clause was not engaged, and there was no need to consider the MRC Contracts.

Even if the confusion clause did apply, GIC argued that the two dispute resolution clauses could be reconciled to give the English court supervisory jurisdiction over an underlying New York arbitration.

Tyson, on the other hand, argued that the confusion clause operated as a hierarchy clause: wherever the terms of the MRC Contracts and the MURA Certificates differed, the MRC Contracts prevailed. The two dispute resolution clauses could not be reconciled without completely inverting the bargain struck by the parties.

Interpreting the confusion clause

The Court of Appeal agreed with Tyson’s view on the meaning of the confusion clause for several reasons.

First, it held that purely as a matter of language, Tyson’s interpretation was “by far the more natural”. The entire purpose of the confusion clause was to give precedence to one document over another - the phrase “take precedence over” implying that a conflict might arise between the MRC Contracts and the MURA Certificates. The words “in case of confusion” most naturally referred to confusion arising from any such differences, which would be reconciled by giving the MRC Contracts priority.

Second, from a commercial perspective the Court also found GIC’s arguments unattractive. It agreed with Tyson’s submission that most contracting parties deem their own contracts to make sense; and a clause accounting for internally-contradictory provisions would make even less commercial sense when taking into account that the MURA Certificates were based on a widely-used standard form. Indeed, no submission was made that there were in fact any contradictory or confusing provisions within the MURA Certificates themselves.

As regards GIC’s suggestion that the parties had decided to effectively supersede all the provisions of the MRC Contracts in all normal circumstances, but revive these provisions in the necessarily ill-defined circumstances where there were internal inconsistencies in the MURA Certificates, this was described by the Court as “such an unusual and irrational thing to have done that one would expect it to be much more clearly spelt out if it had really been intended”.

The prospect of two different types of standard form contract, developed in different contexts and for different markets - as was the case here - being contradictory in respect of particular details was a far more likely issue for the parties to attempt to resolve in their negotiations.

Of further relevance to the commercial point was the fact that Tyson and GIC had, in the policy year preceding the policies in dispute, agreed that the relevant certificates (again based on the MURA form) would apply “subject to” the terms and conditions of the preceding contracts (again based on the MRC form).

No reconciliation of the competing clauses

As regards the argument that - regardless of one’s interpretation of the confusion clause - the two dispute resolution clauses were reconcilable by giving the English courts a supervisory role over a New York arbitration, the Court was equally sceptical.

The Court did not take issue with GIC’s submissions that an arbitration agreement and an exclusive-jurisdiction clause could sometimes be reconciled, irrespective of whether they are in the same agreement or different documents, and even when the seat of arbitration is in a different jurisdiction to the chosen court.

Nonetheless, the facts of this particular case (including that the dispute resolution provisions were in different documents agreed at different times, and that the confusion clause operated as a hierarchy clause) meant that it could be distinguished from case law cited by GIC. On the facts, there was an inconsistency between the clauses, and this should not be resolved by ascribing to the English courts a solely supervisory role in respect of a New York arbitration. Such a setup, in which the courts of the United States would in any event also retain residual jurisdiction, would essentially invert the apparent intentions of the parties when agreeing that the MRC Contracts would have priority over the MURA Certificates and that “all matters relating to this Insurance” would be under the exclusive jurisdiction of the English courts.

Commentary

This unanimous decision is a useful reminder that where parties enter into overlapping contracts containing different dispute resolution clauses, the drafting of any hierarchy or precedence clause will be critical. Here, a single short sentence in the MURA Certificates was enough to determine that disputes would be resolved in England rather than New York.

The case also highlights the important distinction the courts will draw depending on whether competing dispute resolution clauses appear in the same document or in different documents. Where the clauses are in different documents and a hierarchy clause applies, the court need not and will not strain to reconcile them. Instead, it will take a “cool and objective” approach as to whether an inconsistency does in truth exist, and if so, apply the hierarchy clause.

For parties drafting multiple agreements, the evident conclusion is that careful attention should be paid to which document is intended to prevail in the event of any inconsistency, how that priority is expressed and whether any provisions should be carved out. A confusion or hierarchy clause may have far-reaching (and potentially unintended) consequences for dispute resolution, governing law and other fundamental terms.

Judgment: Tyson v GIC