Jan Woloniecki from ASW Law highlights the importance of ensuring that your arbitration clause is fit for purpose
Does the arbitration clause in the contract of special purpose vehicles differ from arbitration clauses in a re/insurance contract?
Arbitration clauses are standard throughout the (re)insurance market and contracts written by SPVs are no exception. The extent to which a particular arbitration clause may be tailor-made to fit a particular contract will very much depend upon the nature of the transaction. For example, a side-car arrangement is unlikely to feature an arbitration clause which is different from one to be found in a typical Quota Share Treaty. An ILW contract – including a market index as a loss trigger – may have special features; for example, a mechanism providing for expert determination of the industry loss in the event that, for some reason, the market index is unavailable or inapplicable.
While the Cat Bond arena has been relatively arbitration free, how important is it that parties to the transaction give it sufficient attention?
It is very important for parties to think carefully about the kind of arbitration clause in the contract, and whether it is fit for purpose. All too often clauses are plucked from another wording and inserted into a (re)insurance contract without sufficient consideration of its suitability for the particular kind of transaction and the nature of potential disputes. It is therefore sensible to have any arbitration provision reviewed by a lawyer with expertise in the field.
“The most efficiently run arbitrations are those in which the parties can agree on an experienced sole arbitrator who has the confidence of both sides’ counsel”
As the Cat Bond market grows and we see more transactions involving increasingly risky lower layers, can we expect to see more arbitration cases?
(Re)insurance disputes seldom, if ever, arise out of profitable transactions. Cat Bonds are subscribed to in the expectation of making a profit for investors. Investment managers are under pressure to produce higher rates of return, which may result in their being prepared to take greater risks than investors had in mind. If there are losses, then disputes are likely to follow. One may foresee disputes not only between (re)insurers, but between investors and investment managers over loss-making contracts. Reading the small print in the prospectus and paying attention to the form of the arbitration clause should be a priority for investors in Cat Bonds and other insurance derivative products.
What steps should be taken in advance to ensure that in a case of arbitration things run as smoothly as possible?
There is nothing more important in arbitration than the selection of the tribunal. The most efficiently run arbitrations are those in which the parties can agree on an experienced sole arbitrator who has the confidence of both sides’ counsel. If that is not possible, then time and due care must be taken with both the selection of one’s own appointed arbitrator and over the process of selecting a chairman. It is normal practice for the appointment of a chairman to be the subject of discussion between the party-appointed arbitrators and counsel for the parties. One should be prepared, if necessary, to oppose vigorously the appointment of a manifestly unsuitable chairman and be prepared to go to court (or use whatever third party appointing mechanism is in place under the clause) to decide on a chairman. The use of experienced counsel is therefore vitally important to ensure the right arbitrators are selected.
Once a sensible tribunal has been selected, and provided the other side’s counsel are experienced and reputable professionals, it should be possible to run a case smoothly and agree upon a workable timetable that brings the case to a final hearing within 12 months (at the most 18 months) from the date on which the tribunal is appointed. It should also be possible to make discovery a relative painless process, limited in scope, and to agree on a suitable procedure which works for the dispute in question.
Kane would like to thank Jan Woloniecki, Head of Litigation at ASW Law Limited, Bermuda, for contributing to this issue of ILS Insights. E firstname.lastname@example.org