Shail Patel of 4 New Square discuss the CA decision in Tonicstar v Allianz. The Court overturned the decision of Teare J at first instance and Morrison J in X Company v Y Company (17 July 2000) as to the meaning of a common form of JELC insurance arbitration agreement.

BACKGROUND

A dispute arose with respect to reinsurance coverage following the attacks on the World Trade Centre in 2001. The reinsurance was on Joint Excess of Loss Committee (“JELC”) terms, clause 15 of which provided:

“Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance”

In submitting the dispute to arbitration, the Appellant sought to appoint Alistair Schaff QC as their arbitrator. The Respondent challenged the appointment on the basis that the arbitration provision in the JELC terms did not allow appointment of an insurance QC (or other lawyers) with more than ten years’ experience of insurance or reinsurance disputes.

FIRST INSTANCE

At first instance Teare J followed the earlier decision of Morrison J in X Company v Y Company with undisguised reluctance. In the earlier case, Morrison J had decided that the JELC arbitration clause envisaged a “trade arbitration” and therefore limited the pool for appointments to members of the insurance trade, as opposed to professional advisers such as lawyers. Teare J considered he was bound by that decision: see my blog post here for further analysis.

COURT OF APPEAL

The CA analysed the reasons deployed by Morrison J in support of the narrower conclusion and dismissed each one in turn:

  • The fact that the clause was drafted by a “trade body” did not mean that only members of the trade could be appointed;
  • The fact that the default power of appointment fell to the Chairman of the Lloyd’s Underwriters’ Association was similarly neutral; there was no reason the Chairman would not know or would not be able to appoint an insurance lawyer;
  • The fact that clause 15.6 gives the tribunal the discretion not to apply the strict rules of evidence was not significant; more important was the English law clause which did require the arbitrator to apply (and therefore presumed knowledge of) English law.

Against that backdrop Morrison J had not referred to the clear and unambiguous wording of the arbitration clause, which was not confined to “trade arbitrators”. Thus the CA overruled X Company v Y Company, holding that a lawyer could qualify for appointment.

In the Court of Appeal, the Respondent ran a new argument; that there was a difference between experience of insurance, and experience of insurance law, in the same way as there was a difference between experience of sports and of sports law. In the leading judgment of the Court, Leggatt LJ rejected that argument: insurance “itself” was inextricably bound up with the law giving rise to the rights and liabilities under an insurance contract. The analogy was ingenious, but inapt.

SETTLED MEANING

Leggatt LJ went on to address the question of whether Teare J should have considered himself bound by Morison J’s decision on the grounds that the clause had a “settled meaning”, the decision in X Company having stood, unchallenged, for 17 years. He noted that Courts may adhere to an interpretation of a standard form agreement adopted in a previous decision even if, deciding the question for the first time, they would have taken a different view. That was generally for two reasons. First the earlier decision may form part of the relevant background against which parties have contracted. Second, there was value in certainty in commercial law, and if practitioners did not want the prevailing meaning they could always alter the words.

On the facts however X Company v Y Company was handed down only seven months prior to the arbitration agreement being entered, and was unreported. There was no evidential basis to conclude it formed part of the relevant factual background for the instant parties. Even if the contract had been made recently, however, context must not be used to impose on a text a meaning which it could not reasonably bear.

Nor, in Leggatt LJ’s view, did the desirability of promoting certainty provide a good reason to uphold Morrison J’s decision: to the contrary, consistency is enhanced where contractual language is given its ordinary meaning. As the arbitration clause was clear, a commercial party should not have to scour textbooks but should be able to rely on its natural meaning.

Finally the Court considered it difficult to envisage that there would be any detriment to parties who had previously resolved disputes on the JELC terms. This was not therefore a case where overruling a longstanding decision would cause injustice to such persons.

COMMENT

This is an unsurprising decision on the facts; arguably more so given the primacy that is now (again) given to the contractual words in carefully drafted agreements, per Arnold v Britton [2015] UKSC 36. The earlier, narrower approach adopted by Morison J was needlessly restrictive and was prone to create complexity and risk in the appointment of the panel.

The decision is likely to be of interest as to the approach to precedent where the language of well known insurance clauses is in issue, setting out clear boundaries of where commercial certainty must give way to an obviously correct interpretation of the words used.