In Tonicstar Limited v Allianz Insurance Plc and Sirius International Insurance Corporation [2017] EWHC 2753 (Comm), the English High Court granted a party’s application to remove the other party’s appointed arbitrator on the ground that he lacked the qualifications required by the parties’ contract. The decision stands as a reminder that parties should thoroughly consider whether to include arbitrator selection criteria in their arbitration agreement and that, if such criteria are included, they must be carefully worded. Unless sufficient attention is paid to such a clause at the drafting stage, the arbitrator selection criteria may have undesirable consequences when a dispute does arise.

Background

In Tonicstar, the underlying dispute involved the Respondents’ reinsurance of risks underwritten by the Claimant with respect to the liabilities of the Port of New York. In May 2011, the Port of New York agreed to a US $47.5 million settlement of its liabilities arising out of the World Trade Centre attacks on September 11, 2001. That settlement gave rise to the Claimant’s claim against the Respondents.

In April 2017, the Claimant commenced arbitration under the parties’ reinsurance contract, which incorporated the “Joint Excess Loss Committee, Excess Loss Clauses” drafted in 1997 under the instructions of The Institute of London Underwriters. Among the incorporated provisions was an arbitration clause providing for each party to appoint an arbitrator. Under the arbitration clause, the Respondents were to appoint their arbitrator within 30 days of receiving notice of the Claimant’s arbitrator appointment, failing which the Claimant could ask the Chairman of the Lloyd’s Underwriters’ Association and the Chairman of the International Underwriting Association of London to appoint an arbitrator on the Respondents’ behalf. The arbitration clause also contained an arbitrator qualification requirement stating that “[u]nless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance”.

The Respondents timely appointed Alistair Schaff QC, an English barrister with long experience practicing insurance and reinsurance law, as their arbitrator. Following that appointment, the Claimant applied to the English High Court for Mr. Schaff’s removal from the tribunal on the ground that he was not qualified to act as arbitrator. Under section 24 of the Arbitration Act 1996 (the “Act”), a court may remove an arbitrator, inter alia, if “he does not possess the qualifications required by the arbitration agreement”. The Claimant accepted that Mr. Schaff had at least ten years’ experience of insurance or reinsurance law but submitted to the High Court that he did not meet the requirements of the arbitration agreement because he did not have experience in the business of insurance and reinsurance itself.

The English High Court’s Decision

With some reluctance, the High Court judge accepted the Claimant’s submission. He did so primarily on the basis that another High Court decision had considered the construction of the same arbitrator qualification language in a case in 2000 and determined that a barrister with “considerable experience as a lawyer in insurance and reinsurance disputes” did not satisfy the requirement of “not less than ten years’ experience of insurance or reinsurance” within the meaning of the relevant provision from the Excess Loss Clauses. In the prior case, the judge had considered it determinative of the parties’ intent to have a “trade arbitration” that the arbitration clause had been drafted by a trade body and that it provided for trade industry figures to make the appointment of an arbitrator in case of party default. He thus had concluded that the parties intended for the arbitrator to be a person in the business of insurance and reinsurance (i.e., someone in the trade), and not for example a lawyer or accountant with experience in insurance and reinsurance law or accountancy.

In Tonicstar, the judge considered that there would need to be a “very powerful reason” for the court not to follow the prior decision. He expressed some sympathy with the Respondents’ argument that “[t]he ordinary and natural meaning of ‘experience of insurance and reinsurance’ included experience acquired not only from working within the insurance and reinsurance industry but also from working with or on behalf of that industry” and that the Claimant’s reading imposed an additional limitation on the clause that was not obvious from its language. Nonetheless, the judge was not persuaded that the prior decision was “obviously wrong”, and he took note that the relevant language had not been changed when the Joint Excess Loss Committee updated its Excess Loss Clauses after the prior judgment was issued, that the prior judgment appeared to be fairly well known in the reinsurance industry, and that the decision had stood unchallenged for 17 years. He therefore did not find “sufficiently powerful reasons” to depart from it.

Having concluded that Mr. Schaff did not meet the arbitrator qualification requirement because he was not in the insurance and reinsurance business, the judge had to consider two further points in Tonicstar. First, he rejected the Respondents’ argument that the competence of the tribunal to rule on its own jurisdiction under section 30 of the Act deprived the court of power to remove an arbitrator without the tribunal first ruling on the point. The power to rule on jurisdictional questions is different from the power to remove an arbitrator. Section 24(2) of the Act provides that “[i]f there is an arbitral or other institution or person vested by the parties with power to remove an arbitrator, the court shall not exercise its power of removal unless satisfied that the applicant has first exhausted any available recourse to that institution or person”. In Tonicstar, the two party-appointed arbitrators had no such power. Second, the court chose to apply the appointment procedures from the parties’ arbitration agreement to the re-appointment, thus giving the Respondents 30 days from the court’s decision to appoint a new arbitrator. The court acknowledged that this approach, which had been followed in a prior case as well, involved “some degree of manipulation of the contractual wording” but was “consistent with the parties’ agreement and the principle of party autonomy”.

Conclusions

The Tonicstar decision is being appealed, but regardless whether the judgment survives appellate scrutiny, it serves as a lesson in the pitfalls of arbitrator qualification requirements and the need for such specification to be drafted with great care. At the outset, the choice whether to include such a clause in the arbitration agreement at all is an important one. Such clauses limit the parties’ flexibility when selecting an arbitrator and may make it more difficult for an appropriate arbitrator to be chosen. For example, while it may seem reasonable at the outset of preparing a reinsurance contract to assume that reinsurance business expertise will be necessary for an arbitrator, it may be that the dispute that actually arises is a question of pure contractual interpretation for which an arbitrator with legal expertise would be best suited. In Tonicstar, Mr. Schaff may have been better suited to serve as arbitrator precisely because of his legal expertise.

If parties do choose to include particular selection criteria in their arbitration agreement, it is essential to consider carefully which criteria are important enough to be included and to define them clearly. Overbroad or imprecise descriptions of the criteria may lead to unnecessary time and expense being wasted in disputing the meaning of the clause and, even worse, having a party-appointed arbitrator removed by the court, as happened in Tonicstar. In many cases, the parties to an arbitration agreement that incorporates model clauses, such as the Excess Loss Clauses, may need to alter the language of the criteria in model clauses to suit their situation. Likewise, too narrowly circumscribed arbitrator criteria may make it difficult to identify a candidate in the relevant industry who not only satisfies all criteria but also has no conflicts and is available to serve as arbitrator.

Interestingly, addressing the need for more precise drafting, the Joint Excess Loss Committee has issued updated Excess Loss Clauses that go into effect on January 1, 2018 and resolve the question posed by Tonicstar. The relevant provision now reads: "The Arbitrators shall be persons (including those who have retired) with not less than 10 years’ experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry".