The Ontario Court of Appeal has declared that the proper effect to be given to international insurance agreements containing both an arbitration provision and an "action against insurer" clause is for the Ontario action to be stayed and referred to arbitration.

Rise of the dispute

In Trade Finance Solutions Inc. v. Equinox Global Limited 2018 ONCA 12, the dispute concerned an Ontario company that retained insurance from Equinox Global Limited, an insurer in England. The contract of insurance was issued by Equinox and Lloyd's Underwriters and contained an arbitration provision stipulating that disputes were to be settled in arbitration in England. The policy also contained an action against insurer clause providing that the underwriters were to be designated or named as "Lloyd's Underwriters" in any action to enforce their obligations.

The insured made several claims for loss under the policy upon which the insurers identified a number of concerns. The insured viewed the response as an attempt to frustrate the claims process and commenced an action against the insurers in Ontario for losses under the policy. The insurers brought a motion to stay.

At trial, the motion judge refused to stay the insured's action, finding that the arbitration and action against insurer clauses provided for alternative, optional methods of dispute resolution. While the insurers argued that the action against insurer provision was a mere service of suit clause, the trial court held that the words indicated a wider purpose. The motion judge also believed that the UNCITRAL Model Law on International Commercial Arbitration adopted by Ontario did not apply because its application was limited to situations where parties agreed to arbitration as the sole method of dispute resolution. The motion judge found that the parties at hand had agreed to "Canadianize" the contract by allowing domestic actions against the insurer under the action against insurer provision.

At the Ontario Court of Appeal, the insurers submitted that the motion judge did not correctly apply the principles of contractual interpretation so as to give meaning to the policy's terms as a whole. They also argued that the motion judge had failed to apply the correct legal test for a stay under the International Commercial Arbitration Act (ICAA) and the Model Law. The appeal was allowed.

Arbitration v. Action Against Insurer Provisions

The court of appeal held that the motion judge was wrong to widen the scope of the action against insurer clause, effectively turning it into an alternative dispute resolution provision. It found that the clause simply defined the circumstances under which an insurer will accept service of a suit if it is out the jurisdiction or constitutes a syndicate of many individual insurers. When the words "action" and "defendant" appear in such a clause, they do not necessarily refer to a civil action or to a defendant in a civil action. They should be read as referring to any proceeding, including arbitration, in which a claim is made against underwriters, with "defendant" describing the underwriter's role in the proceeding.

The clause also said nothing about where or how claims to enforce obligations under the agreement are to be determined. Both arbitration and action against insurer clauses can have meaningful effect without nullifying or modifying the other. The plain wording of the provision should not have been widened into an alternative dispute resolution process as other civil actions available to insureds can include actions to determine jurisdiction or compel arbitration, actions to enforce arbitral awards, or appeals of arbitral awards. However, the court did note that these clauses can take many forms where broader examples are akin to choice of law and jurisdiction clauses and narrower versions like the one at hand simply define the circumstances under which an insurer will accept service of a suit.

ICAA and the Model Law

The motion judge was also in error when finding that arbitration must be the “sole method” of dispute resolution agreed to between parties to attract the operation of the Model Law. While the court noted that the policy did provide for mandatory arbitration as the sole method of resolving disputes, it found that clarifying the law surrounding the ICAA and Model Law would be helpful given the statutes' importance to international commercial agreements.

The Model Law defines "arbitration agreement" as "an agreement by the parties to submit to arbitration all or certain disputes which have arisen…" Implicit in this definition, the court held, is the notion that certain disputes under the contract may be resolvable by methods other than arbitration, like civil action or meditation. The Model Law may apply to an arbitration agreement even if the right of arbitration is merely optional: if the parties agree that arbitration is an optional method of dispute resolution, and one of the parties chooses to commence arbitration, there is no reason why it should not apply to stay any duplicative court actions in Ontario.

A trend of giving force to arbitration agreements in international commercial disputes

The appeal court reinforced the trend of giving force to arbitration agreements in international commercial disputes. Even with the presence of an action against insurer clause, insurers can feel confident in the effect of an arbitration provision and knowing that the ICAA and Model Law will be applicable even if arbitration is not the sole method of dispute resolution agreed to between the parties.