REUTERS | Ahmad Masood

A roundabout route to arbitration

Since the Arbitration Act 1996 came into force, the courts have upheld arbitration clauses agreed between the parties in precedence to litigation commenced by one of them. If a contract contains an arbitration clause, then parallel proceedings will be stayed on either party’s application, even if the dispute is of a flimsy nature.

However, the court must first be persuaded that there is a genuine arbitration clause and this issue arose in Turville Heath v Chartis Insurance, decided by Edwards-Stuart J in the TCC earlier this month.

Turville Heath v Chartis

The clause in Chartis’ general conditions of insurance does not seem to be a common one in insurance policies. I suspect that after this case, it may become even less common. It said that in the event of a dispute over the amount of loss:

“…either party may make a written demand that each selects an independent appraiser… The independent appraiser will select an arbitrator within fifteen (15) days… The independent appraisers will then appraise the loss and submit any differences to the arbitrator. A decision in writing agreed to by the two appraisers or either appraiser and the arbitrator will be binding.”

In short, the court decided that although the parties had headed this clause “arbitration”, what they had agreed was not genuinely an arbitration procedure, so the court had no power to stay the action under section 9 of the Arbitration Act 1996. However, it did find another way of upholding the parties’ preferred method of dispute resolution (of which more later).

Problems with the clause

The problem was that the clause appeared to confuse the roles of advocate and arbitrator. The process started by each side selecting an independent appraiser to assess a loss. Those appraisers would try to resolve the parties’ differences and, if they were unable to do so, they would submit their differences to an arbitrator selected by the parties or a nominating body. A decision binding on the parties could be reached either by both appraisers together or by one appraiser and the arbitrator.

Was this an arbitration clause at all?

The Arbitration Act 1996 defines the object of arbitration as being to “obtain a fair resolution of disputes by an impartial tribunal”. By section 33, the tribunal must act fairly and impartially as between the parties.

The reality of the procedure chosen by the parties in Turville was that the arbitrator could not make an impartial decision alone. He had to reach agreement with one of the parties’ appraisers, so that the eventual decision would be the result of negotiation with that appraiser. The appraisers themselves could not become arbitrators as they had already acted as advocates for the party instructing them. Therefore, the court decided that this procedure did not qualify as “arbitration” under the Act.

Court’s inherent jurisdiction

However, the courts will, where possible, endeavour to uphold the parties’ chosen dispute resolution process and here there was another route available. Under section 49 of the Senior Courts Act 1991, the court may stay proceedings under its inherent jurisdiction. In Turville, it was prepared to do so on the basis that the parties had already spent substantial sums on the “independent appraiser” process; these sums would be wasted if the process was not allowed to continue. Therefore a stay was granted on the basis that, if necessary, a nominating body could name an arbitrator to enable the procedure to continue.

Med-arb, pendulum arbitration and expert witnesses

The process chosen by the parties has some parallels with med-arb, whereby a mediator becomes an arbitrator if the mediation does not succeed. However, the procedure in Turville did not provide for the appraisers to be genuinely independent mediators, instead they effectively adopted the instructions of the party paying them.

Another route by which the parties might have achieved their aim more effectively would be pendulum or baseball arbitration, where an arbitrator must choose between either party’s position and cannot in any sense “split the difference”. The parties could also have empowered the appraisers to act as expert witnesses before an independent arbitrator.

Finally, as the parties’ procedure is not an arbitration under the Arbitration Act 1996, there may be some doubt as to the effective enforcement of the arbitrator’s decision, once the procedure is concluded. However, it seems to me that the successful party could seek to enforce that decision through the court as a matter of contract in a similar way to experts’ and adjudicators’ decisions.

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