In the recent decision of Equitas Insurance Limited v Municipal Mutual Insurance Limited [2019] EWCA Civ 718 (available here), the Court of Appeal allowed an appeal on a point of law under section 69 of the Arbitration Act 1996 (the “Act“) against an award rendered by Flaux LJ as judge-arbitrator.

The award concerned a dispute between an insurer, Municipal Mutual Insurance (“MMI“), and its reinsurer, Equitas Insurance (“Equitas“), about how employer’s liability (“EL“) mesothelioma insurance claims should be handled at a reinsurance level. The Court of Appeal held that although employers may “spike” their EL claims 100% into a single policy year as against their insurer, an insurer may not “spike” its own claims 100% into a single policy year as against its reinsurer. A detailed analysis of the case can be found here.

Given the relatively low number of cases which obtain permission to appeal under section 69 of the Act (let alone succeed), it is instructive to revisit the earlier decision of the Court of Appeal in which permission to appeal was granted.

Background

Mesothelioma is a fatal lung disease caused by asbestos. English law recognises a special rule of causation in mesothelioma claims (known as the “Fairchild enclave”) which permits a claimant employee to recover in full from a single employer who had exposed them to asbestos, even if the employee had been exposed over a period of time spanning multiple employers. The reason is that exposure to a single strand of asbestos can cause mesothelioma, and it may be impossible to prove on the balance of probabilities which employer’s exposure caused the disease.

English law also allows an employer to “spike” its insurance claims 100% into a single policy year, so that an EL insurer who provided cover for only part of the period of exposure to asbestos is required to bear the whole of the employer’s liability. The insurer can then seek contribution from other insurers who provided cover for other years.

The courts had not previously considered, however, whether an insurer may “spike” its claims against a reinsurer.

In the present case, MMI provided EL policies to numerous public authorities between 1950 and 1981. MMI reinsured its liabilities under these policies with Lloyd’s syndicates, whose liabilities have since been transferred to Equitas. MMI’s employer insureds have faced a large number of mesothelioma claims from their employees, and MMI paid the claims without attempting to apportion the claims to individual policies or periods.

A dispute then arose between MMI and Equitas about how MMI was to present its claim under its policies of reinsurance, and whether it was permitted to “spike” its claim.

Judge-arbitrator

The dispute was heard before Flaux LJ sitting as a judge-arbitrator. This practice, which is relatively rare, is permitted under section 93 of the Act. That provision provides that a High Court judge may, if in all the circumstances he or she thinks fit, accept an appointment as a sole arbitrator or umpire. The appointment must also be approved by the Lord Chief Justice.

Notwithstanding that the appointment of judge-arbitrators remains rare, the practice has recently been encouraged by the court on the basis that it contributes to the maintenance of judges’ expertise and experience of the arbitral process. It has also been suggested that the increased availability of judge-arbitrators would encourage the use of arbitration clauses in relation to a wider range of disputes, including competition law and intellectual property.

Arbitral award

Flaux LJ resolved the dispute in MMI’s favour, finding that MMI was entitled to present its entire claim to any one year’s reinsurance contract. He acknowledged, however, that there would need to be equitable contribution and recoupment to iron out unfairness and anomalies.

Permission to appeal on point of law

Equitas sought permission to appeal Flaux LJ’s award on a point of law under section 69 of the Act. The questions raised by Equitas were:

  • Whether an EL insurer is obliged to present its claim on a pro-rata, time on risk basis (i.e. as opposed to “spiking” its claim).
  • If the EL insurer is not so obliged and may “spike” its claim, how the rights of recoupment and contribution acquired by the reinsurer are to be calculated.

Under section 69(3) of the Act, permission to appeal shall only be granted where the court is satisfied that:

  • The determination of the question will substantially affect the rights of one or more of the parties.
  • The question is one which the tribunal was asked to determine.
  • On the basis of the findings of fact in the award:
  • the decision of the tribunal on the question is obviously wrong, or
  • the question is one of general public importance and the decision of the tribunal is at least open to serious doubt.
  • Despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question.

The application for permission to appeal was heard by Gloster LJ and Sir Jack Beatson in the Court of Appeal in December 2017 (judgment available here).

The court considered each element of the test outlined above, finding:

  • The determination of the questions would substantially affect the rights of the parties.
  • The questions were essentially the same issues that the judge-arbitrator had been asked to determine.
  • The questions were of general public importance, particularly for the insurance and reinsurance industry which expects to face further mesothelioma claims in the future.
  • The decision of the judge-arbitrator was open to serious doubt. There were strong arguments against the conclusions reached by the judge-arbitrator on the issues of “spiking” and contribution.
  • It was just and proper for the court to determine the questions, notwithstanding the importance of finality in arbitration. The parties had chosen not to exclude appeals under section 69 of the Act, and the issues raised in the appeal were important for the insurance and reinsurance industry.

Accordingly, permission to appeal was granted.

Outcome of appeal on point of law

As noted earlier, and discussed in detail here, the Court of Appeal found that MMI was not entitled to “spike” its claim. The reason was that there was an implied good faith requirement which required that the claim be presented by reference to each year’s contribution to the risk, rather than against a single year.

Comment

The case serves as a rare example of the court both granting permission to appeal and allowing an appeal under section 69 of the Act. As we reported last year (see here), only a relatively small number of cases obtain permission to appeal, and then only a fraction of those cases succeed on appeal.

A significant factor in this case was the importance of the issues in dispute to the insurance and reinsurance industry. This allowed the case to proceed through the “general public importance” gateway, which only required that the decision be open to “serious doubt”. Had the case not been one of general public importance, MMI would have needed to show that the decision was “obviously wrong” – a much more difficult test to satisfy.

It remains to be seen whether this decision will have an impact on challenges to commercial arbitral awards more generally, or whether its impact will be limited by its particular fact pattern. It seems likely that section 69 appeals will remain a relatively unpromising mode of challenge for the majority of commercial arbitrations, particularly in circumstances where most institutional rules exclude appeals under section 69 and few commercial disputes are likely to raise questions of general public importance.

For more information, please contact Nick Peacock, Partner, Aaron McDonald, Senior Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803
Aaron McDonald
Aaron McDonald
Senior Associate
+44 20 7466 2980