Case Study

Ar­bi­tra­tion Clause: A Dys­func­tional Agree­ment

Insurance - - CONTENTS - Text LF Ong LL.B (Hons) (Lon­don); CLP; ACII, AMII, MCI Arb; MMI Arb | Char­tered In­sur­ance Prac­ti­tioner, Ar­bi­tra­tor & Me­di­a­tor

IN­TRO­DUC­TION

The Ar­bi­tra­tion Clause as found in the main line po­lices is de­fec­tive and con­se­quently, un­en­force­able.

The prob­lem sur­faced since the com­mence­ment of the Ar­bi­tra­tion Act, 2005 (“AA 2005”) (ACT 646) re­plac­ing the re­pealed Ar­bi­tra­tion Act, 1952 (“AA 1952”) (ACT 93).

The prob­lem lies in the us­age of the word “Um­pire”.

For some rea­sons as yet un­known, there had been no con­tenders to the prob­lem.

The in­tent and pur­port of this ar­ti­cle is to high­light the prob­lem which is a mat­ter of le­gal­ity and tech­ni­cal­ity.

AR­BI­TRA­TION CLAUSE

The Ar­bi­tra­tion Clause is one of the Con­di­tions in the pol­icy. In ac­tual fact, it is “a con­di­tion prece­dent to any right of ac­tion or suit”.

In prac­tice, the Ar­bi­tra­tion Clause is an Ar­bi­tra­tion Agree­ment by virtue of Sec­tion 9 of the AA 2005.

The Ar­bi­tra­tion Clause reads as fol­lows:-

“If any dif­fer­ence arises as to the amount of any loss or dam­age such dif­fer­ence shall in­de­pen­dently of all other ques­tions be re­ferred to the de­ci­sion of an Ar­bi­tra­tor, to be ap­pointed in writ­ing by the par­ties in dif­fer­ence, or, if they can­not agree upon a sin­gle Ar­bi­tra­tor, to the de­ci­sion of two dis­in­ter­ested per­sons as Ar­bi­tra­tors, of whom one shall be ap­pointed in writ­ing by each of the par­ties within 2 cal­en­dar months af­ter hav­ing been re­quired so to do in writ­ing by the other party. In case ei­ther party shall refuse or fail to ap­point an Ar­bi­tra­tor within 2 cal­en­dar months af­ter re­ceipt of no­tice in writ­ing re­quir­ing an ap­point­ment, the other party shall be at lib­erty to ap­point a sole Ar­bi­tra­tor; and in case of dis­agree­ment be­tween the Ar­bi­tra­tors, the dif­fer­ence shall be

re­ferred to the de­ci­sion of an Um­pire who shall have been ap­pointed by them in writ­ing be­fore en­ter­ing on the ref­er­ence, and who shall sit with the Ar­bi­tra­tors and pre­side at their meet­ings. The death of any party shall not re­voke or ef­fect the au­thor­ity or pow­ers of the Ar­bi­tra­tor, Ar­bi­tra­tors or Um­pire re­spec­tively; and in the event of the death of an Ar­bi­tra­tor or Um­pire, an­other shall in each case be ap­pointed in his stead by the party or Ar­bi­tra­tors (as the case may be) by whom the Ar­bi­tra­tor or Um­pire so dy­ing was ap­pointed. The costs of the ref­er­ence and of the award shall be in the dis­cre­tion of the Ar­bi­tra­tor, Ar­bi­tra­tors or Um­pire mak­ing the award. And it is hereby ex­pressly stip­u­lated and de­clared that is shall be a con­di­tion prece­dent to any right of ac­tion or suit upon this pol­icy that the award by such Ar­bi­tra­tor, Ar­bi­tra­tors or Um­pire of the amount of the loss or dam­age if dis­puted shall be first ob­tained”.

In sum­mary, the Um­pire is ap­pointed by the two Ar­bi­tra­tors and the for­mer is man­dated to deal with the dif­fer­ence aris­ing from dis­agree­ment be­tween the Ar­bi­tra­tors and to pre­side at their meet­ings.

There is some doubt whether an Um­pire pre­sid­ing an ar­bi­tral tri­bunal is legally con­sti­tuted as this is the province of the pre­sid­ing ar­bi­tra­tor or chair­man of the ar­bi­tral tri­bunal.

AR­BI­TRA­TION ACT 1952

Sec­tion 2 : In­ter­pre­ta­tion pro­vides:-

“ar­bi­tra­tion agree­ment means a writ­ten agree­ment to sub­mit present or fu­ture dif­fer­ences to ar­bi­tra­tion, whether an ar­bi­tra­tor is named therein or not”.

We are con­cerned with the word “Um­pire”.

The word “Um­pire” un­der S ec­tion 10 is pari ma­te­ria to Sec­tion 8 of the English Ar­bi­tra­tion Act 1950.

Ref­er­ence to the word “Um­pire” in the AA 1952 can be found at:-

1 Sec­tion 3 : Au­thor­ity of ar­bi­tra­tors and um­pire to be ir­rev­o­ca­ble.

2 Sec­tion 10 : Um­pires.

3 Sec­tion 11 : Agree­ment for ref­er­ence to three ar­bi­tra­tors.

4 Sec­tion 12 : Power of High Court in cer­tain cases to ap­point an ar­bi­tra­tor or um­pire.

5 Sec­tion 13 : Con­duct of pro­ceed­ings, wit­nesses, etc.

6 Sec­tion 14: Time for mak­ing award.

7 Sec­tion 15 : In­terim awards.

8 Sec­tion 16 : Spe­cific per­for­mance.

9 Sec­tion 17 : Awards to be fi­nal.

10 Sec­tion 18 : Power to cor­rect slips.

11 Sec­tion 19 : Costs.

12 Sec­tion 20 : Tax­a­tion of ar­bi­tra­tor’s or um­pire’s fees.

13 Sec­tion 22 : State­ment of case.

14 Sec­tion 23 : Power to re­mit award.

15 Sec­tion 24 : Re­moval of ar­bi­tra­tor and set­ting aside of award.

16 Sec­tion 26 : Power of High Court where ar­bi­tra­tor is re­moved or au­thor­ity of ar­bi­tra­tor is re­voked.

In the light of the per­ti­nent Sec­tions above, it is crys­tal clear that the Ar­bi­tra­tion Clause vis-a vis Um­pire had been specif­i­cally des­ig­nated along the line of the AA 1952.

No use­ful pur­poses will be served to ex­trap­o­late on each and ev­ery Sec­tion of the AA 1952 men­tioned above.

In a nut­shell, it can be seen that un­der the AA 1952, the Um­pire had an em­i­nently vi­tal and sig­nif­i­cant role on many as­pects of the ar­bi­tral pro­ceed­ings.

AR­BI­TRA­TION ACT 2005

Sec­tion 51 of the AA 2005 ex­pressly re­pealed the AA 1952.

It can be safely con­strued that, among oth­ers, the word “Um­pire” to­gether with this des­ig­nated statu­tory role had been re­pealed un­der Sec­tion 51.

Sec­tion 2 : In­ter­pre­ta­tion - pro­vides, in­ter alia, the fol­low­ings :-

“pre­sid­ing ar­bi­tra­tor” means the ar­bi­tra­tor des­ig­nated in the ar­bi­tra­tion agree­ment as the pre­sid­ing ar­bi­tra­tor or chair­man of the ar­bi­tral tri­bunal, a sin­gle ar­bi­tra­tor or the third ar­bi­tra­tor ap­pointed un­der Sec­tion 13 (3)” (of the AA 2005).

It would be of ur­gent ne­ces­sity for the rel­e­vant au­thor­i­ties to re­view the Ar­bi­tra­tion Clause.

““ar­bi­tral tri­bunal” means a sole ar­bi­tra­tor or a panel of ar­bi­tra­tors”.

Un­der Chap­ter 2 of the AA 2005, Sec­tion 9 pro­vides the “Def­i­ni­tion and form of Ar­bi­tra­tion Agree­ment”.

It may come as a cu­ri­ous sur­prise that the AA 2005 is de­void of the word “Um­pire”, thus, giv­ing no le­gal cog­ni­sance to this word which forms a sub­stan­tial ba­sis of the Ar­bi­tra­tion Clause.

The Ar­bi­tra­tion Clause of the pol­icy has no pro­vi­sion for the word “pre­sid­ing ar­bi­tra­tor or chair­man of the ar­bi­tral tri­bunal or the third ar­bi­tra­tor” to be ap­pointed as the pre­sid­ing ar­bi­tra­tor.

There is some doubt whether an Um­pire pre­sid­ing an ar­bi­tral tri­bunal is legally con­sti­tuted as this is the province of the pre­sid­ing ar­bi­tra­tor or chair­man of the ar­bi­tral tri­bunal.

The Ar­bi­tra­tion Clause lim­its the two ar­bi­tra­tors to ap­point an Um­pire and not a third ar­bi­tra­tor or the pre­sid­ing ar­bi­tra­tor. Here, there is a dis­tinc­tion be­tween the role of a third ar­bi­tra­tor or pre­sid­ing ar­bi­tra­tor and that of the Um­pire.

Con­se­quently, it would be out­side the scope of the Ar­bi­tra­tion Clause for the two ar­bi­tra­tors to ap­point a third ar­bi­tra­tor or pre­sid­ing ar­bi­tra­tor.

In or­der for the Ar­bi­tra­tion Clause to be legally ef­fec­tive, the des­ig­na­tion of the third ar­bi­tra­tor or pre­sid­ing ar­bi­tra­tor has to be ex­pressly stip­u­lated therein and also to aver that the pre­sid­ing ar­bi­tra­tor shall act as the chair­man of the ar­bi­tral tri­bunal in com­pli­ance with Sec­tion 13 (3) of the AA 2005.

Sec­tion 13 (3) of AA 2005 added that “the two ap­pointed ar­bi­tra­tors shall ap­point the third ar­bi­tra­tor as the pre­sid­ing ar­bi­tra­tor”.

The word “pre­sid­ing ar­bi­tra­tor” is a crea­ture born out of the AA 2005 (Sec­tion 2 (1). Equally, the word “Um­pire” was an off­spring of the AA

1952 and suf­fered a demise when it was re­pealed un­der Sec­tion 51 of the AA 2005.

CON­CLU­SION

The AA 2005 has some­what ren­dered the Ar­bi­tra­tion Clause to be de­fec­tive, save for the ap­point­ment of a sole ar­bi­tra­tor.

The ap­point­ment of an Um­pire or a pre­sid­ing ar­bi­tra­tor would be re­garded as in­valid as there is no lo­cus standi for such a po­si­tion in the ar­bi­tral tri­bunal. On this premise, there is noth­ing to re­frain a loser from sub­mit­ting an ap­pli­ca­tion for set­ting aside of an ar­bi­tral Award on point of law in pur­suant to the rel­e­vant Sec­tion (s) of the AA 2005.

No doubt, an ap­pli­ca­tion can be made to the High Court for a Declara­tory Or­der as to the proper con­struc­tion and in­ten­tion of the Ar­bi­tra­tion Clause but this is deem to be a fu­tile ex­er­cise as the High Court would in­vari­ably re­fer to the AA 2005 for guid­ance to reach its de­ci­sion.

It would be of ur­gent ne­ces­sity for the rel­e­vant au­thor­i­ties to re­view the Ar­bi­tra­tion Clause in line with the cur­rent AA 2005, and to rat­ify this amended Clause ef­fec­tive from the date of in­cep­tion of the AA 2005.

A WORD OF AP­PRE­CI­A­TION

Grate­ful thanks and ap­pre­ci­a­tion are ac­corded to the Honourable Tan Sri Dato’ V.C. George (re­tired Judge, Court of Ap­peal) for his in­valu­able ad­vice and learned views.

LF Ong is a Char­tered In­sur­ance Prac­ti­tioner and was the Chief Ex­ec­u­tive Of­fi­cer/Prin­ci­pal Con­sul­tant of the Line Fo­cus Group of Com­pa­nies. He is an As­so­ciate of the Char­tered In­sur­ance In­sti­tute and the Malaysian In­sur­ance In­sti­tute and a Mem­ber of the Char­tered In­sti­tute of Ar­bi­tra­tors and Malaysian In­sti­tute of Ar­bi­tra­tors.

LF Ong is a prac­tis­ing Ar­bi­tra­tor and Me­di­a­tor. He has some 43 years of ex­pe­ri­ence in in­sur­ance claims.

He was the for­mer Chair­man of the As­so­ci­a­tion of Malaysian Loss Ad­justers and the Char­tered In­sti­tute of Ar­bi­tra­tors, Malaysia branch, and a Di­rec­tor of the Malaysian In­sur­ance In­sti­tute. He can be con­tacted at line­foc@ya­hoo.co.uk.

The Ar­bi­tra­tion Clause lim­its the two ar­bi­tra­tors to ap­point an Um­pire and not a third ar­bi­tra­tor or the pre­sid­ing ar­bi­tra­tor.

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