A clause providing for loss to be assessed under an insurance policy by way of a so-called “arbitration” procedure was held to be non-compliant with the Arbitration Act 1996 and therefore not a genuine arbitration clause. The clause provided that each side should select an independent appraiser who would then submit their differences to the “arbitrator”. A decision in writing agreed to by both appraisers or by either appraiser and the “arbitrator” would be binding on the parties. The Court said that this provision was not a genuine arbitration clause since the arbitrator would have to agree with one of the appraisers rather than make his own independent decision. However in the exercise of its discretion the Court ordered that the “arbitration” process should be progressed (rather than litigation should be continued) as the parties had already spent substantial sums on the “arbitration”.
Whilst arbitration is based on party autonomy and parties may choose their procedure for the process, they must be careful to ensure that the relevant clause does qualify as an arbitration clause under the 1996 Act. The parties might have achieved their overall aim by slightly different means eg by designating a sole arbitrator or providing for a streamlined process where the independent appraisers act as experts before an arbitrator whose powers to decide are unfettered by the need to agree with one or other of them.
This was an application by insurers to stay under either section 9 of the Arbitration Act 1996 or the inherent jurisdiction of the Court under section 49 of the Senior Courts Act 1991 proceedings bought by the insured. The claim arose out of a fire at the insured’s property and although liability was admitted, there was a substantial dispute between the parties as to both the building costs and professional fees. The sum in issue was over £1 million.
The policy contained a clause headed “arbitration”. This provided that in the event of a dispute as to the amount of loss, either party could make a written demand that each select an independent appraiser. The appraisers would then select an “arbitrator” or he would be appointed by a nominating body. The independent appraisers would then appraise the loss and submit any differences to the arbitrator. A decision in writing agreed by the two appraisers or either appraiser and the “arbitrator” would be binding on the parties.
There had been substantial correspondence between the parties as to the extent of the loss but this had not succeeded in resolving the dispute. The parties had already appointed independent appraisers who had carried out substantial work in appraising the loss. However the insured was dissatisfied with progress and commenced Court proceedings.
The Court first considered what the dispute was about. The insured had raised several discrete issues of liability including declarations about the meaning of the policy and refusal to indemnify by the insurer. However the Court decided that these were all merely aspects of the dispute about the amount of the loss and therefore fell within the terms of the “arbitration” clause.
However, it was necessary to decide whether this clause was a true arbitration clause within the meaning of the 1996 Act. The Court held that it was not. The proper interpretation of the process was that the arbitrator had to reach agreement with one of the two appraisers in order for his decision to be binding. However section 1 of the 1996 Act provided that the object of arbitration was to obtain the fair resolution of disputes by an impartial tribunal. It was implicit that the arbitrator alone made the decision and not the arbitrator in conjunction with someone else. By contrast an arbitrator may be entitled to seek advice from Experts or legal advisers but the decision remains his own. The process prescribed by the policy was likely to lead to a course of negotiation between the appraisers and the arbitrator and any decision reached as a result would not be that of the arbitrator alone. The appraisers could not themselves become arbitrators as they had already acted as advocates for the party instructing them. Any decision of the “arbitrator” with which neither independent appraiser agreed would be of no effect and litigation would ensue. Therefore the application for a stay under section 9 of the 1996 Act failed.
The Court was prepared to grant a stay of the proceedings under its inherent jurisdiction. It noted that the insured had freely participated in the process when it was first invoked and a substantial amount of work had been done by each of the independent appraisers, whose combined fees totalled some £100,000. The appraisers should not be very far from identifying their differences and there should be prospects of the “arbitrator” and at least one of the appraisers reaching agreement, albeit after negotiation. A nominating body could appoint the “arbitrator” albeit that, strictly speaking, his role was at most similar to that of an arbitrator. The Court determined that its discretion should be exercised in favour of granting a stay rather than, as it put it, “pulling the plug” at the present stage in the “arbitration”.
The decision indicates that, where appropriate, the Court will have regard to the course of action which is likely to produce a speedier and more economic solution and, in this case, this approach militated strongly in favour of allowing the parties to continue with the course of action they had already embarked on.
The process chosen by the parties has some parallels with the “med-arb” procedure, whereby a mediator becomes an arbitrator if the mediation does not succeed. However, by contrast with a mediator, appraisers are paid by their instructing parties to promote their case and are not truly independent of them
The issue of enforcement of a procedure of this type may be problematical but probably the successful party would seek to enforce through the courts any decision reached on the basis that the parties had agreed to abide by such decision as a matter of contract, as is done for experts’ decisions.