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Reinsurance Nuts & Bolts: Honorable Engagement Clauses

May 18th, 2009 Arbitrability, Authority of Arbitrators, Nuts & Bolts, Nuts & Bolts: Reinsurance, Reinsurance Arbitration 1 Comment » By Philip J. Loree Jr.

Introduction

In today’s Nuts & Bolts post we take a brief look at honorable engagement clauses, which are sometimes referred to as “honorable undertaking” clauses.  Honorable engagement clauses are, for practical purposes, a species of choice of law clause.   Generally, they confer upon arbitration panels a degree of freedom to depart from the strict rules of law and evidence, and to interpret the contract as an honorable engagement rather than literally according to its terms.  They are premised on the now arguably outmoded historical concept that a reinsurance contract is more than a contract, but an honorable undertaking, a deal that  is closed when the parties shake hands over a cocktail (or three), and one by which the parties are honor-bound to abide.  They also recognize that reinsurance is an arcane business with its own peculiar set of customs, practices and norms, and that, if the parties so agree, arbitrators should be reasonably free to apply these norms in deciding a case, even if a court faced with the same facts would or could not. 

Honorable engagement clauses are more common in older reinsurance contracts than in those written today.  But many reinsurance disputes arise out of long-tail asbestos or environmental claims arising out of decades-old contracts, a great many of which contain these clauses.  And the clauses can have some significant implications in those disputes.

Some Examples of Honorable Engagement Clauses

Honorable engagement clauses are typically found within the arbitration clause itself, but occasionally appear in a separate clause.  Some contracts contain both honorable engagement clauses and ordinary choice-of-law clauses, which designate a particular jurisdiction’s law as governing.    

Honorable engagement clauses come in various types and may be interpreted in various ways.  We shall focus on examples found in the Brokers and Reinsurance Market Association (“BRMA”) arbitration clause wordings, which are available, along with other BRMA standard clauses, here

BRMA arbitration clauses 6C, 6E and 6I contain the following honorable engagement clauses, which one might term “classic.”  Each confers upon the arbitration panel a good deal of latitude in interpreting the contract and departing from otherwise applicable law: 

 

BRMA 6 C

The arbitrators shall interpret this Contract as an honorable engagement and not as merely a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law.

BRMA 6 E

All arbitrators shall interpret this Contract as an honorable engagement rather than as merely a legal obligation.  They are relieved of all judicial formalities and may abstain from following the strict rules of law. They shall make their award with a view to effecting the general purpose of this Contract in a reasonable manner rather than in accordance with a literal interpretation of the language.

 BRMA 6 I

The arbiters and the umpire are relieved from all judicial formalities and may abstain from the strict rules of law, interpreting this Contract as an honorable undertaking rather than as a merely legal obligation. 

 

 When honorable engagement clauses are contained in contracts that also contain choice-of-law clauses, interpretive tension may result.  The honorable engagement portion of the arbitration clause says that the arbitrators do not have to apply the “strict” rules of law, but the choice of law provision says that a particular body of law nevertheless applies: 

BRMA 6 J

The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law.  .  .  . 

Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office.

Certain honorable engagement clauses relieve the interpretive tension by saying that the choice-of-law provision supplies the governing law only to the extent that the arbitrators look to the law for guidance:

 BRMA 6 L

The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in  (City, State),  but the venue may be changed when deemed by the panel to be in the best interest of the arbitration proceeding. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of __________.  .  .  .  The panel shall interpret this Contract as an honorable engagement rather than as merely a legal obligation and shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible following the termination of the hearings. 

Closely related to honorable engagement clauses are clauses that might more accurately be referred to as “custom and usage” or “custom and practice” clauses.  These clauses may relieve the arbitrators from following strict judicial formalities and rules of evidence and procedure, but do not necessarily authorize them to refrain from following applicable law.   They do, however, command the arbitrators to make their decision with regard to applicable custom, practice and usage, and in that sense they are not unlike honorable engagement clauses.  Sometimes they, too, appear in contracts containing choice-of-law clauses.  Here are some examples: 

BRMA 6 P

The Board shall make a decision and award with regard to the terms expressed in this Agreement, the original intentions of the parties to the extent reasonably ascertainable and the custom and usage of the property and casualty insurance and reinsurance business, which decision and award shall be in writing and shall state the factual and legal basis for the decision and award.  .  .  .  

 BRMA 6 R

The Panel shall be relieved from applying the strict rules of evidence and/or procedure and shall make its decision based on the custom and practice of the insurance and reinsurance business with a view toward effecting this Contract in a reasonable manner. 

 BRMA 6 A

The arbitrators shall not be obliged to follow judicial formalities or the rules of evidence except to the extent required by governing law, that is, the state law of the situs of the arbitration as herein agreed; they shall make their decisions according to the practice of the reinsurance business. 

BRMA 6 B

The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business.  The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. 

 BRMA 6 F

The Arbitrators or Umpire as the case may be shall determine any reference in accordance with current reinsurance market practice pertaining during the period of this Contract.  .  .  .

The Court of Arbitration shall take place in New York and the law applicable to both the aforesaid Contract and this arbitration clause shall be the law of New York State.

Here is an example of a custom and usage clause with a choice of law clause that could be interpreted as authorizing the arbitrators to depart from otherwise applicable substantive law (as opposed to simply evidence and procedural law):    

BRMA 6 O

The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in  (City,  State) , but the venue may be changed when deemed by the panel to be in the best interest of the arbitration proceeding. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of _________.  .  .  .

 The panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible following the termination of the hearings.   .  .  . 

Some Key Points to Remember

There are at least three important points to keep in mind about honorable engagment and custom and usage clauses, and this list is not intended to be exhaustive.  First, while the clauses may confer varying degrees of discretion upon arbitrators to depart from the strict rules of law and to eschew strict interpretation of the contract language, they are not limitless in scope.  While the limits of the authority they confer will depend upon the wording of the clause and that of the rest of the contract — and those limits may, indeed, be blurry — the arbitrators’ decision must have a colorable basis in the contract and the applicable law.  In considering whether the award has a colorable basis, however, some interesting questions may arise concerning whether the interpretation of the honorable engagement clause itself is a question of arbitrability, which ordinarily a court must decide, or a question for the arbitrators, which the court must review deferentially like any other arbitrator determination.      

Second, honorable engagement clauses may have important implications on how each side presents its case to the arbitrators.  They can provide affirmative support for arguments that may lack support in the contract or applicable law, but which are based on equity and fairness, or on what the advocating party believes the arbitrators will consider the applicable customs, practices, and norms of the reinsurance industry.  By the same token, the party opposing such an argument must be prepared to deal with the implications of the honorable engagement clause, and to argue that its position is supported not only by the elusive concept of “honorable engagement,” but also by the terms of the contract and applicable law.  To the extent that one party may sense that the other has the better side of the “honorable engagement” debate, that party may be able to assert legitimately that the clause cannot be interpreted to permit the result advanced by the other party, and to reserve its rights to challenge an award based on that interpretation. 

Third, these clauses can have important implications for Federal Arbitration Act satellite litigation.  For example, if an award is challenged on the ground that the arbitrators exceeded their authority by manifestly disregarding the law or by rendering a decision that did not draw its essence from the reinsurance contract, the honorable engagement clause may provide the party defending the award with a powerful argument for rejecting the challenge.  While the other party may argue that the clause is not broad enough to justify the award, it will have to demonstrate that the interpretation of the scope of the honorable engagement clause raises a question of arbitrability that must be determined by the court.  Otherwise, if there is even a colorable basis for the arbitrators’ interpretation of the clause itself, the reviewing court will have no choice but to accept it, even if it would have interpreted the clause differently.  And even if the court interprets the clause de novo, it may find it broad enough to authorize the award.

         

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One Response to “Reinsurance Nuts & Bolts: Honorable Engagement Clauses”

  1. […] honorable engagement clause in the contract.  (See our discussion of honorable engagement clauses, here.)   Never assume that the outcome of a reinsurance case in arbitration is going to mirror one a […]