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To consider the nature and ambit of a dispute resolution clause only after a dispute has arisen or a tribunal has given an award or judgment finding is perverse. It is often the case however that contracting parties fail to give proper consideration to such clauses when entering into contracts (including contracts for re/insurance) and voting on schemes of arrangement. Depending upon the terms, a dispute resolution clause may result in a wholly different scenario than envisaged, with curtailed rights of appeal.
Just as it is important to be clear about which law governs a contract, and also the jurisdiction in which any dispute may have to be decided, it is imperative that parties understand whether the dispute resolution clause is binding finally or whether it may be the subject of appeal or judicial intervention/review. There are clear differences as to whether contracting parties will be bound by a dispute resolution clause and it is important therefore that parties appreciate the consequences of adopting a particular resolution process. And there are many processes - litigation, arbitration, administrative tribunals, expert determination, private judging and mediation. As such, the draftsman of the contract (and ultimately the parties) should consider the wider implications of each form of dispute resolution, particularly if it limits who may be joined to proceedings or it gives rise to limited rights of appeal. The usual example given is that a broker will not be bound to join an arbitration between the contracting parties to a re/insurance contract since the broker itself is not party to the contract. Although some might argue that a broker facilitating say a slip contract and acting as agent of the principal makes the broker a party, this is not the case in law. Adopting a restrictive clause may be what the parties intend to ensure finality in a dispute.
Two recent cases Shell Egypt West Manzala GMBH & Ors v Dana Gas Egypt Ltd ("the Shell case") and The Oriental Insurance Co Ltd v Reliance National Asia Re Pte Ltd ("the OIC case") have highlighted the need for parties to ensure clarity in dispute resolution clauses and to understand the effect of some clauses, in terms of their finality or the right to have a decision reviewed.
The first instance decision in the Shell case serves to underline the point about the parties’ intentions to achieve finality. This case addressed the question of whether there was any right of appeal from an arbitration award in circumstances in which the arbitration agreement stated an award was to be "final, binding and conclusive". The Court had to consider the effect of those words on the Court’s jurisdiction in relation to sections 58(2) and 69 of the Arbitration Act 1996 ("the Act"), the latter enabling the appeal of an arbitral award on a point of law.
The subject matter of the dispute was an agreement relating to the exploration of oil that included a mandatory arbitration clause. One of the parties elected to exercise a contractual right it had, in certain circumstances, to terminate the contract and it sought damages for a repudiatory breach of the agreement. The damages related to an alleged breach of a clause requiring a notification of change of control, which in turn gave rise to certain pre-emption rights. Additionally, there were alleged breaches of conditions in the contract. The arbitral tribunal hearing the dispute between the parties made an award that there had been a repudiatory breach, but that the breach had not been accepted. The tribunal concluded that the termination had been for commercial reasons.
The issue for the court was whether the dispute settlement clause could be read as excluding the jurisdiction of the court to entertain an appeal of the arbitral award. The respondent argued that the court did not have jurisdiction to hear the appellant’s appeal on the basis that there were unequivocal terms excluding the jurisdiction of the court. The appellant contended that the words in the contract did not exclude the right to challenge an award which was, it argued, preserved under s 58(2) of the Act. The respondent also placed weight on the word "conclusive". The Court went on to consider whether it is ever possible in the English jurisdiction to have a form of words that would achieve that aim.
Dame Gloster J decided that the phrase "final, conclusive and binding" could not mean that rights of appeal on a question of law had been excluded. She considered that clear words would have to be used. The intention was that the clause should refer to the state of the award and that there had been a final decision, rather than the fact that a party could not appeal it. As regards the word "conclusive", that did not amount to an exclusion of appeal rights.
Schemes and the OIC case
The binding nature and finality of decisions has arisen also in respect of schemes of arrangement, particularly in respect of decisions by scheme adjudicators. Scheme documents usually contain a clause dealing with the relevant scheme company’s valuation of each scheme creditor’s claim and that any dispute with regard to that will be referred to an independent scheme adjudicator, often being an actuary who is independent of the scheme company and its advisers. In essence therefore there may be a dispute between a scheme creditor and the scheme company, which has to be resolved. Often a clause is inserted into the scheme document stating that the independent adjudicator’s decision is final and cannot be appealed to the Courts or be submitted for arbitration.
The question that often arises however is – does the scheme creditor have any avenue to pursue an appeal in circumstances where it considers that the adjudicator’s assessment of the claim value is erroneous. As the decision in the OIC case makes clear the answer depends upon the remit of the adjudicator and an analysis of the adjudicator’s role. The case, which came before the Singaporean Court, arose out of the scheme of arrangement and entailed an application by a scheme creditor seeking to set aside the determination of the scheme adjudicator, in circumstances where the scheme creditor alleged negligence by the adjudicator in reaching a decision.
The facts in OIC
The background was Reliance Asia’s ceasing to write new business and entering into run-off in April 2001, followed by a scheme of arrangement with the objective of concluding the run-off and accelerating the return to the company’s creditors. The scheme, as is usual, required the estimation of present and future claims (including the contingent claims) of the scheme creditors with a view to the agreed claims being paid in full. The scheme was approved and OIC, a major reinsurance creditor of the company, voted in favour of the scheme at the sanction hearing on the basis that it would be able to seek full indemnity from Reliance Asia in respect of a claim that was the subject of on-going proceedings. It was accepted that, but for OIC’s support, the scheme would not have been passed because the requisite majority vote would not have been obtained. OIC filed a proof of debt for US$24m plus interest of US$1.95m per annum until payment to enable the scheme administrator to ascertain the claim. The scheme administrator however determined the claim to be worth US$1.96m. OIC’s claim was a percentage of the reinsurance claim to which it would be entitled in respect of its underlying insured’s loss that itself was subject of on-going proceedings. OIC contended that was a contingent liability and previously it had been notified as an outstanding claim for which it had been established by the Court that a proof of debt could be submitted under the scheme. OIC asked for the matter to be referred to adjudication that necessitated submissions and an oral hearing. The adjudicator decided that the claim was US$3.8m for the overall claim (the principal sum as well as interest).
The question arose whether the decision could be challenged. OIC argued that the independent adjudicator’s decision was an expert determination rather than adjudication and that his powers were derived solely from the terms of the contract and that the adjudicator had to act with due care and diligence. OIC argued that the independent adjudicator however was able to take account of argument.
This led to the Court’s review of the different modes of dispute resolution and a determination in relation to the words:
9.3 Subject to any agreement between the Company and the particular Scheme Creditor in relation to a Disputed Claim, the Independent Adjudicator shall be responsible for the adjudication and determination of Disputed Claims and shall have the powers, rights, duties and functions conferred upon him by the Scheme for such purposes.
9.4 In exercising his powers and rights and in carrying out his duties and functions under the Scheme, the Independent Adjudicator shall act in good faith with due care and diligence in the interests of the Scheme Creditors as a whole and shall exercise his powers and rights under the Scheme to ensure that the Scheme is operated in accordance with its terms.
9.5 No Scheme Creditor shall be entitled to challenge the validity of any act done or permitted to be done in good faith and with due care and diligence pursuant to the provisions of the scheme or in the exercise or performance of any power, right, duty or function conferred upon him under the scheme and the Independent Adjudicator shall not be liable for any loss unless any such loss is attributable to his own negligence, wilful default, wilful breach of duty or trust, fraud or dishonesty.
The Court dismissed an argument that these words did not prohibit a challenge to the independent adjudicator’s determination based on a lack of due care and diligence. The adjudicator was as his title indicated - performing in an adjudicating role - requiring him to take account of arguments, consider the burden of proof, and assess the credibility of the position taken by each of the parties. The Judge found that this was a situation where expert determination had been chosen, noting the flexibility of the language in the scheme document to enable the application of the adjudicator’s expertise, with the ability to use different valuation methodologies and his experience as well as expertise to reach his own independent conclusions and decisions. Those conclusions and decisions however have to be in the confines of the terms of reference and instructions.
In the Judge’s opinion, the term independent adjudicator need not mean that he was not an expert determiner. In his view the term “adjudication” meant the process by which he was confined to act on the evidence led by the parties, as shown by the requirement for the parties to make written submissions, with expert evidence, and then oral submissions. In light of the fact that the independent adjudicator was to make a non-speaking determination i.e. without reasons, making it impossible to examine his reasons, the Judge considered that the parties had contractually agreed to accept the determination with the intention of restricting the Court’s supervisory jurisdiction. The judge considered that the following factors led to the conclusion that the adjudicator was an expert rather than arbitral determination: the wide extent of personal and subjective discretion; the injection of personal expertise; a lack of being confined by procedure; it is a technical and specialist matter; and the scheme wording stated that the independent adjudicator’s determination be final.
This however entitled challenge on two main grounds being first, the independent adjudicator materially departing from instructions, or second, where there is a manifest error in his determination that justly requires judicial intervention, including fraud or partiality. In that regard the Court found authority in the English case of Veba Oil Supply & Trading Gmbh v Petrotrade Inc that any departure would be material unless it can be characterised as trivial or de minimis, in the sense of being obvious that it could make no possible difference to either party. If there was a material departure then the determination must be set aside. The Court found that although there was a material departure because of valuation of the claim from the wrong date, it remitted the case to the independent adjudicator for re-determination for a "manifest error" in performing certain calculations and also a lack of care and due diligence in doing so. It is of note that the independent adjudicator had provided detailed reasons for his decision, although not obliged to do so, and that enabled the Court to go behind the finding to conclude that there had been a manifest error.
The Court also found that the process of expert determination under the scheme document carried the caveat (in paragraph 9.4 above) that the independent adjudicator "shall act in good faith and with due care and diligence in the interests of the Scheme Creditors as a whole". That widened the ability of the Court to review the independent adjudicator’s decision but did not detract from the fact that the independent adjudicator was an expert. It did mean however that if the independent adjudicator failed to act with due care and diligence, and an error resulted, the Scheme creditor was entitled to challenge the validity of that part of the determination in the same way a creditor may challenge the validity of an act done or permitted to be done in bad faith. That modified the form of expert determination, not limiting it to material departure from instructions or manifest errors and bad faith, bias, collusion, fraud, breach of trust, and dishonesty, but also to include negligent error which leads to a party suffering a loss.
These cases serve to highlight that parties should give careful consideration to the terms in re/insurance contracts and scheme of arrangements about the reviewability of decisions, and the type of determination they desire before they are bound by those terms. A lack of diligence may result in an unintended curtailment of rights.
Tim Goodger
Source: Elborne Mitchell
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