Arbitration clause – Time limit — Extension of time – Insurance policy containing arbitration clause requiring disputes between parties to be referred within nine months — Dispute not being referred within time limit – Defendant insurer repudiating contact — Insured entering into liquidation — Insured’s rights under policy vesting in third party claimants — Whether right of action arising before insured’s liability established — Whether claimants entitled to extension of time – Whether defendant entitled to summary judgment — Application dismissed
The first claimant leased premises from the second claimant at which L had carried out refurbishment works. The High Court found that L was responsible for a fire at the property and upheld two claims for damages by the claimants.
L had insured its risk with the defendant insurer, which denied liability on the ground that L had breached certain policy conditions; it therefore took no part in the actions against L. An arbitration clause in the policy provided that any dispute in respect of a claim was to be referred to arbitration within nine months of it arising, failing which the claim would be deemed to have been abandoned. However, L failed to make a reference to arbitration within nine months of becoming aware of the repudiation. The judgments had not been satisfied when L went into liquidation.
Following the liquidation, L’s rights under the policy became vested in the claimants, which brought claims against the defendant under the Third Parties (Rights Against Insurers) Act 1930. A preliminary issue arose, inter alia, as to whether a dispute under the policy could have arisen before L’s liability to the claimants had been established.
The claimants argued that an insured under such a liability policy had no right of action against its insurer unless and until its liability to a third party had been established by litigation, arbitration or agreement. Accordingly, no dispute could arise within the meaning of the arbitration clause until then. If that were correct, the nine-month time bar did not apply and the claimants were entitled to pursue their claims against the defendant. If the claimants were wrong, they sought an extension of time to refer the dispute to arbitration under section 12 of the Arbitration Act 1996.
The defendant applied for summary judgment.
Held: The application was dismissed.
The arbitration clause had been incorporated into the policy. The wording of the condition was clear and prescribed a mandatory mode of dispute resolution, with a time limit within which it could be exercised, failing which a claim in respect of that dispute could not be recovered. It was intended to provide an exclusive remedy.
The clause had to be considered in two parts. The first sentence constituted an arbitration clause and the second comprised a time bar. The word “shall” in the first sentence indicated that arbitration was a mandatory mode of dispute resolution. Had it been intended to be an optional remedy for either party, as an alternative to litigation, the clause would have said so. Further, the presence of the time bar, and the deemed abandonment of the claim should an arbitration not be brought in time, was a clear contraindication of either party being entitled to start court proceedings rather than arbitration.
The arbitration clause was unusual, in that it provided for arbitration in respect of disputes concerning liability and the amount of the indemnity and because it provided a nine month time limit for referring disputes to arbitration. However, it could not be regarded as unduly onerous merely because it was unusual and possibly inconvenient. Nine months was a reasonable time for exploring the merits of a dispute and, should the dispute not be resolved, to request the appointment of an arbitrator. Once a dispute had arisen, a reasonable insured would consider the relevant conditions of its policy, including provisions relating to dispute resolution.
Until the liability of the insured had been established and the amount of that liability ascertained, the insured could not sue the insurer for a particular sum of money by way of indemnity. However, that did not prevent the insured from seeking declaratory relief where it alleged that the insurer was in breach of contract. As a matter of ordinary language, once L had notified the defendant of a claim under the policy in respect of a potential liability to a third party and the defendant had notified L that it was refusing indemnity, a dispute would have arisen between them regarding the defendant’s liability to indemnify L within the meaning of the arbitration clause. Since no such dispute had been referred to arbitration, the claimants were not entitled to pursue a claim against the defendant for an indemnity in respect of L’s liability for the fire: Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363.
Furthermore, the court could not grant or refuse an extension of time under section 12 of the 1996 Act. Whatever the defendant’s conduct in respect of the claim, it could not be said that that conduct had caused or contributed to L’s failure to refer the dispute to arbitration within the requisite time limit. The court no longer had a general discretion to extend time simply because it considered that it would be fair and reasonable to do so. It could do so only if one or other requirement of section 12(3) were satisfied, and neither condition was satisfied in the instant case.
Since the court was not in a position to grant or refuse an extension of time under section 12, it could not determine whether the claimants were entitled to the relief claimed. Until that point had been decided, it was impossible to conclude that the claims were bound to fail. Accordingly, the defendant’s application for summary judgment had to be dismissed.
Neil Moody QC (instructed by Kennedys) appeared for the first claimant; Benjamin Elkington (instructed by Greenwoods Solicitors) appeared for the second claimant; Nicholas Davidson QC (instructed by Weightmans LLP) appeared for the defendant.
Eileen O’Grady, barrister