Developments in Bermuda: Arbitration, Commercial Court & Choice of Law
London and Bermuda Newsletter
a) BDA Confidential
The Bermuda Supreme Court has confirmed that arbitrations governed by Bermuda's international arbitration statute are subject to an implied duty of confidentiality.
In ABC Insurance Company v. XYZ Insurance Company (2 February 2006), a reinsurer ("the Reinsurer") was engaged in an arbitration with its reinsured ("Reinsured A") in which the Reinsurer was seeking a declaration that it had validly rescinded two excess of loss treaties with Reinsured A. The Reinsurer had failed in an earlier arbitration to rescind its contracts with a separate reinsured, Reinsured B. Reinsured A wished to refer in the arbitration to materials generated in the earlier arbitration with Reinsured B in an effort to demonstrate that the Reinsurer was precluded from rescinding the treaties as regards Reinsured A. It was asserted that the issue had previously been determined in the earlier arbitration and that this had resulted in an "issue estoppel" that bound the Reinsurer as against both Reinsured A and Reinsured B. The Reinsurer denied that there could be an issue estoppel in these circumstances and contended that the earlier arbitration materials were confidential. The Reinsurer sought an injunction to restrain Reinsured A from disclosing them to the arbitration panel.
The Bermuda International Conciliation and Arbitration Act 1993 adopts the UNCITRAL Model Law and arbitrations under the Act differ materially from the English arbitration régime. Reinsured A thus asserted that it was inappropriate to look to English authorities to determine the existence and scope of a duty of confidentiality. The Bermuda Supreme Court disagreed and noted that the Bermuda Court of Appeal had previously followed English precedent in European Re v. AEGIS (30 March 2001) where it was held that arbitrations under the 1993 Act were subject to an implied obligation of confidentiality.
The Bermuda Court also accepted that, just as in England, the implied duty of confidentiality under Bermuda law is subject to certain exceptions, such as to demonstrate an issue estoppel. However, the court regarded Reinsured A's assertion of an issue estoppel as unsustainable as the treaties in question were "composite" and not "joint" reinsurance contracts. On this basis, it was not possible for a decision in a separate arbitration (to which Reinsured A was not a party) to be used to found an issue estoppel. The Bermuda Court thus rejected Reinsured A's assertion that it fell within an exception to the implied duty of confidentiality.
b) A Commercial Court
Effective 1 January 2006, Bermuda's civil procedure rules underwent a radical amendment that included incorporating a number of reforms previously adopted in England in 1998. A Commercial Division of the Bermuda Supreme Court has also been established to hear disputes involving insurance and reinsurance as well as other commercial matters.
There have been several procedural changes which represent a significant departure from the prior practice in Bermuda's civil courts.These include the adoption of an "overriding objective" to deal with cases justly. This should reduce the prevalence of "technical" procedural points being taken and encourage a more commercial and pragmatic approach to procedural issues in line with that which has been introduced successfully in England. Another significant change is the introduction of written witness statements to replace the prior practice of oral evidence-in-chief at trial. This presented a risk of "litigation by ambush" as often a litigating party would have little or no idea of the substance of its opponent's witness evidence prior to the trial (there is no procedure for deposition discovery in Bermuda). Bermuda has also adopted new costs rules that allow for costs penalties in the event that reasonable settlement offers are not accepted and it is thought likely that the changes will result in a higher percentage costs recovery for successful litigants. These reforms should encourage settlement at an earlier stage in the litigation process.
c) Bermuda Choice of Law Clauses
Bermuda-based (re)insureds and (re)insurers often wish to avoid the application of US law and jurisdiction. This is best achieved by incorporating express choice of law and exclusive jurisdiction clauses citing the applicable law and preferred jurisdiction (usually Bermuda or England). A recent decision demonstrates that care must be taken to ensure that a choice of law clause is sufficiently wide.
In Ghose v CNA Reinsurance Company et al (case no. 108121/04, 26 January 2006) a New York State Court considered a choice of law clause in an insurance policy providing that "this Policy shall be interpreted under, governed by and construed in accordance with the laws of the jurisdiction of [Bermuda]". In Ghose, the defendant directors and officers liability insurers had given notice to rescind a D&O policy. The insurers asserted that there were significant differences between the law relating to rescission as applied in New York and Bermuda and argued for the application of Bermuda law.
The court acknowledged that the choice of law clause was sufficient to bind the parties in respect of "contractual" causes of action. However, the court did not consider it to be wide enough to encompass "non-contractual" causes of action or defences, such as a claim of fraudulent inducement which, if proven, would entitle an insurer to rescind. The court therefore proceeded to address the substantive issues by reference to New York rather than Bermuda law.
If the insurers in the Ghose case had wished for the choice of law clause to encompass "non-contractual" as well as "contractual" causes of action then the prospects of achieving this would have been significantly enhanced by adding language to confirm that the clause extended to controversies "arising out of or relating to" the Policy.