US Service of Suit clause v English Arbitration clause - Who wins?
Ace Capital Ltd v CMS Energy Corporation [2008]
The US Service of Suit clause is a common feature of insurance contracts between London and Bermuda market insurers and their US assureds. The clause is a regulatory requirement of many US States, its purpose being to render out-of-State (surplus lines) insurers amenable to the local jurisdiction in the same way as locally licensed insurers.
Policies issued in the Lloyd's market will usually satisfy the requirement by means of the standard Service of Suit clause (NMA 1998), as most recently prescribed by the Lloyd's Market LMP Slip Bulletin of 8 October 2004. The clause provides that, at the request of the assured, the insurer "will submit to the jurisdiction of a court of competent jurisdiction within the United States", and it further specifies that service of process on the insurers may be made via the New York law firm, Mendes & Mount. The clause says nothing about governing law.
In practice, most policies will also contain a separate Law and Jurisdiction or arbitration provision, specifying that disputes are to be resolved by reference to the law and jurisdiction of a court perhaps outside the United States, or by arbitration.
So how do you reconcile the choice of jurisdiction (or arbitration) with the US Service of Suit clause?
To begin with, the answer depends on where the question is being put. Courts in the US have taken divergent approaches, as between different States and, indeed, between different Federal Circuits. In some cases, most notably Thiokol Corp v Lloyd's (1997), a case before the US District Court for the District of Utah, the Service of Suit clause was treated as a waiver of the insurer's right to insist upon (in that case) arbitration, so that in effect the Service of Suit provision trumped the arbitration clause. The bulk of US authority, however, takes the opposite view, namely that the arbitration agreement is a mutually binding mechanism for dispute resolution, and that Service of Suit is merely designed to ensure local jurisdiction over the insurer for, amongst other things, enforcement of any arbitration award.
The matter recently came before the English Commercial Court in Ace Capital Ltd v CMS Energy Corporation, a case in which judgment was handed down on 30 July 2008. The policy contained the standard Service of Suit clause (NMA 1998). However, Lloyd's underwriters sought an anti-suit injunction from the English court, restraining the assured from pursuing court proceedings against them in Michigan, because the policy also contained an agreement referring disputes to LCIA arbitration in London. In a helpful Judgment, the English court considered the position under various different scenarios:
Service of Suit clause v English law and (non-exclusive) jurisdiction clause
The court noted the decision in Catlin v Adams Land & Cattle [2007], where the Service of Suit clause sat alongside a Law and Jurisdiction clause providing merely for "UK law and jurisdiction". It was held that this amounted to a non-exclusive choice of English law and jurisdiction. As such, it was not a breach of the Service of Suit for insurers to commence English court proceedings, but neither was it a breach of the Law and Jurisdiction clause for the assured to issue in Nebraska. Both were valid proceedings, which left the English court to decide as a matter of forum conveniens which was the appropriate place to determine the matter. It held that this was Nebraska, given the express right of election conferred on the assured in the Service of Suit clause.
The position would likely have been different, however, if the choice of English law and jurisdiction were mandatory (or "exclusive"), because there it could be said that the pursuit of the US proceedings amounted to a breach of the clause.
Mandatory arbitration clause v English law and (exclusive) jurisdiction clause
Another common scenario is the juxtaposition of an arbitration clause with a Law and Jurisdiction clause, the latter conferring jurisdiction on the courts of one State or another. The English court has resolved this tension by giving primacy to the arbitration clause, while treating the Law and Jurisdiction clause as simply identifying the law and court under which the arbitration will be supervised (the "curial law") (Paul Smith v International Holdings Inc [1991]; Shell v Coral Oil [1999]).
Service of Suit clause v Mandatory Arbitration clause
This was the situation that existed in the present case, so the court found. Applying the authorities, the Judge concluded that the US Service of Suit clause did not emasculate the English arbitration clause, and that by commencing or pursuing proceedings on the claim in Michigan the assured was therefore in breach of an agreement to submit all such disputes to LCIA arbitration. This did not leave the Service of Suit clause without effect: The clause still allowed the assured to found jurisdiction in any US court in order to compel arbitration, to declare the validity of an award, to enforce an award or to confirm the US court jurisdiction on the merits in the event that the parties agreed to dispense with arbitration. Absent that agreement, however, the parties were bound to refer the substantive dispute on the claim to arbitration and accordingly the English court granted an injunction restraining the pursuit of the Michigan proceedings.
For more information about our Insurance services, please click on the links of interest:
Insurance Services
Topical Issues
Our International Insurance Team