English Court Holds Arbitration Clause Trumps Service of Suit Clause in Policy
Insurance Law Update
In ACE Capital Ltd v. CMS Energy Corporation,  EWHC 1843 (Comm), the English High Court held that where a policy contains both an arbitration clause and a U.S. service of suit clause, the arbitration clause takes precedence.
The court held the dispute could be determined only by arbitration. Stating that an arbitration clause should be read widely and interpreted liberally, the court ruled that a coexisting service of suit clause does not relieve a party of its contractual obligation to arbitrate disputes. Notwithstanding its restrictive reading of the service of suit clause, the court observed that a party could still apply to a U.S. court to have the arbitral nature of the dispute declared, compel arbitration, declare the validity of an award, enforce an award, or confirm the jurisdiction of the U.S. courts in the event the parties agree to dispense with arbitration.
CMS obtained political risk coverage through certain underwriters at Lloyds, London. In a subsequent coverage dispute, the central issue was whether a service of suit clause entitled CMS to sue its insurers in the United States, notwithstanding the coexistence of a London arbitration clause. CMS averred that the service of suit clause gave it the option of suing underwriters in the United States or arbitrating in London.
The court also found that rational business people would seek to have all disputes arising from a transaction determined by a single tribunal. Therefore, if a party to an insurance contract wants to have the issue of contract validity decided by one tribunal and issues regarding contract interpretation decided by another tribunal, it must expressly say so.