The Technology and Construction Court has rejected arguments that a clause under an insurance policy referring disputes to an Alternative Dispute Resolution (“ADR”) procedure operated as an arbitration clause.  On the facts of the case the ADR was allowed to continue as it was the fairest outcome in the circumstances. 

Background

The property in question was once owned by Henry Ford II, and is at the centre of this insurance dispute after its pool house was destroyed by fire on 3 July 2009.

Liability was not disputed by Chartis, the defendant, who wrote the policy.  The claimant was Henry Ford’s widow’s company, Turville Heath Inc, which was the insured.  However, an issue arose as Turville Heath considered it necessary to demolish the pool house in its entirety in order to rebuild it.  Chartis contended that part of the substructure could be reused and so this was not required.  The parties clashed over what dispute resolution procedure should be used to resolve this dispute.

The arguments

The hearing concerned an application for a stay either (1) to arbitrate under section 9 of the Arbitration Act 1996, which would apply if there were a valid agreement to arbitrate, or (2) a stay to follow the agreed dispute resolution process contemplated under the policy, which would be granted pursuant to the inherent jurisdiction of the court.

The question of whether the clause that appeared in the policy was a true arbitration clause hinged on the role of the arbitrator described therein.   Under the Arbitration Act, an arbitration clause must allow for a binding decision by the independent arbitrator.  In this case the decision-making process included input by two independent appraisers appointed by the parties with an independent “arbitrator” intervening if agreement could not be reached.  The drafting of the clause only provided for a decision to be binding if one appraiser and the arbitrator agreed upon it.  This left open the possibility of the arbitrator arriving at a decision on which neither appraiser agreed.  In these circumstances the decision would be non-binding.  Mr Justice Edwards-Stuart held that the result was that the process envisaged by the clause would not necessarily result in a binding decision, with the result that the clause could not be effective under the Arbitration Act.

Instead the judge decided to grant a stay of proceedings to resolve the dispute in the manner agreed under the policy.  The insured submitted that the procedure under the clause had become inoperable and therefore incapable of being performed.  However, Edwards-Stuart J held that the process had merely become more protracted than previously envisaged under the clause, but that he “saw no reason why the process should not be allowed to continue”.

Comment

This case highlights that where a purported arbitration clause cannot necessarily bring about a decision that is binding on the parties, this is a strong indicator that it will not constitute an agreement to arbitrate under the Arbitration Act 1996.  It also shows the courts’ ability to grant a stay for ADR where it is the fairest outcome based on the facts.  Both insurer and insured should be reminded of the courts’ wide jurisdiction to intervene throughout the dispute resolution process.

Further reading: Turville Heath Inc v Chartis Insurance UK Ltd [2012] EWHC 3019 (TCC) http://www.bailii.org/ew/cases/EWHC/TCC/2012/3019.html.