Service of suit v arbitration: which jurisdiction prevails?

Dispute resolution provisions in insurance policies can often contain a service of suit clause providing for disputes to be dealt with in different jurisdictions before specific courts, yet they may also contain clauses purporting to refer disputes to arbitration. A recent decision of the Commercial Court has considered how to reconcile these provisions when the parties place conflicting reliance upon them.

In Ace Captial Ltd v CMS Energy Corp 2008 WL 2976535 underwriters avoided a claim on the policy by the insured (a Michigan based company). The insured commenced proceedings against underwriters for payment of the claim in Michigan. Underwriters instigated arbitration proceedings in London and asked the Court to grant a permanent anti-suit injunction to restrain the Insured from continuing with the US proceedings.

The policy contained the following dispute resolution provisions:

1. a service of suit clause enabling the insured to submit to the jurisdiction of the US courts in the event of the failure of underwriters to pay under the policy; and
2. a mandatory arbitration clause providing for all disputes to be submitted to arbitration at the London Court of International Arbitration (LCIA).

The Court found in favour of underwriters and granted a permanent anti-suit injunction preventing the insured from pursuing the Michigan proceedings. It concluded that the service of suit clause did not exclude the operation of the arbitration clause. On this basis, the arbitration proceedings could proceed in London.

Reasoning of courts

Service of suit clauses are often inserted into insurance policies for US regulatory purposes. The function of the clause is to ensure that surplus lines insurers (i.e. those not licensed in the US or in a particular state) can still usually be sued in the US courts. In the UK, there is an established body of case law that requires parties to abide by agreement to arbitrate.

Under English law, where an agreement contains provisions that provide for conflicting outcomes the Courts will not uphold the part that would defeat the parties’ intentions. A court will not reject a clause unless it is manifestly inconsistent with the rest of the document.

The Court had regard to the following findings and matters when deciding to grant the permanent injunction in favour of underwriters:

1. Having regard to the body of US case law that was put before it, it noted the majority of US authorities treat arbitration and service of suit clauses on the basis that they are not inconsistent with each other. Generally, service of suit clauses are construed so that the insurer is subject to personal jurisdiction in any state for purposes such as the enforcement of awards. The Court noted that the purpose of service of suit clauses is not to prevent or restrict the arbitration of insurance and reinsurance claims.

2. The effect of US case law is that service of suit clauses have generally been interpreted to ensure the insurer is subject to personal jurisdiction in any state for purposes such as the enforcement of any award.

3. There is a strong legal policy in the US and UK in favour of arbitration. This has recently been reinforced by the case of Premium Nafta V Fili (for more information on this decision click here). This meant that any provision in a policy that might have an effect on an arbitration clause should be construed narrowly. In this case, this provided a strong impetus for the Court:

(i) not to read the service of suit clause as removing the sort of disputed claim most likely to arise under the policy (i.e. recovery of a claim for payment); and

(ii) to confine the clause so that disputes agreed to be determined by arbitration could not be determined in any court in the US.

The Court acknowledged that the service of suit clause still had meaningful scope. The insured could still go to a US court to enforce any arbitration award or to confirm the jurisdiction of the courts in the event that the parties agreed to dispense with arbitration.

4. The Court held that the service of suit clause did not operate as a waiver of the defence available to underwriters in any action in the US court. Taking the policy as a whole, and construing it, it was the parties' agreement that the dispute should be arbitrated. The Court concluded that any action under the policy is subject to mandatory arbitration.

Conclusion

This decision simply further illustrates and reinforces the general tendency of the English Courts to uphold arbitration clauses in insurance and reinsurance policies.