The parties to the dispute agreed that a single document constituted both (1) a contract of insurance relating to cargo to be used in the construction of a Kenyan power plant, and (2) a contract of reinsurance for 95% of the direct risk. The document did not clearly identify which terms belonged to the insurance or reinsurance contracts, and which belonged to both.
The original policy document contained a law & jurisdiction clause that stated only the word “Kenya”. The policy was amended by endorsement nearly two months after inception, prompted by the insureds’ financers receiving advice that English governing law was preferable throughout. The endorsement changed the law and jurisdiction clause so as to identify English law, the jurisdiction of the Kenyan Court, and London arbitration.
The dispute concerned whether the full endorsement applied to both the insurance and the reinsurance contracts, such that all parties were bound to refer disputes to London arbitration, or whether it applied to the reinsurance only.
In deciding whether there was a binding agreement to arbitrate, the court sought to identify what the reasonable person would have understood the parties to have meant by the endorsement, having all the background knowledge that would reasonably have been available to the parties at the time they entered into it (ICS v West Bromwich Building Society and Rainy Sky v Kookmin Bank).
The court found that the governing law element of the endorsement applied to both the insurance and reinsurance contracts. Adopting this starting point, and in the absence of any express provision, the court held that the reasonable person would be reluctant to see the arbitration element of the endorsement apply only to the reinsurance. Notably, the court inferred that the unusual approach of incorporating separate insurance and reinsurance contracts into one document indicated a desire to ensure that the contracts would, insofar as possible, be identical.
The court also confirmed two principles of construction applicable when dealing with contractual inconsistencies:
• Where the language of the parties can be construed in two different ways, the court should generally adopt the interpretation that will make more commercial sense (Rainy Sky v Kookmin Bank). The court found that identical arbitration clauses would enable disputes under the linked contracts to be decided by the same tribunal, and could not see any good reason for the parties to seek disputes to be decided under different regimes. Negating any suggestion that the location of the one Kenyan insured should play a role, it also placed weight on the fact that not all of the insureds were based in Kenya, and that, being a marine policy, disputes were likely to require investigation in other parts of the world.
• Where two provisions are on the face of it inconsistent, then the court should do its best to reconcile those provisions, going to the margins of what can conscientiously and fairly be done but no further (Pagnan Spa v Tradax Ocean Transportation). The court rejected the suggestion that preventing the insured from commencing proceedings in Kenya would be crossing this line; it was important to avoid a construction that would have a potentially damaging impact for insurers.
The lessons to be learned
The case is a new example of an old market problem; failure to secure clarity in policy wordings will increase the likelihood of disputes. It acts as a reminder to include express language to make clear where insurance and reinsurance contracts are intended to be back-to-back, and also provides a particular warning to those using a single document for both a direct and reinsurance policy. Ambiguities fuel disagreement, and in that form of documentation ambiguities are inevitable.
To the extent that an insurer/reinsurer’s position may be prejudiced by alternative dispute forums, the case reaffirms the importance of properly incorporated law and jurisdiction and dispute resolution clauses. Notwithstanding the London market drive to Contract Certainty, it is clear that these disputes continue to arise.
British American Insurance (Kenya) Ltd V (1) Matelec Sal (2) Thika Power Ltd  EWHC 3278 (Comm)
ICS v West Bromwich Building Society  UKHL 28
Rainy Sky v Kookmin Bank  UKSC 50
Pagnan Spa v Tradax Ocean Transportation  2 Lloyd’s Rep 342