The Honorable Engagement Clause (But I Thought I Had a Legal Contract!)
March 2007
Traditional reinsurance contracts with arbitration
clauses typically provide that the arbitrators shall interpret the reinsurance
contract as an "honorable engagement" and not merely as a legal obligation.
This part of the reinsurance contract is often called the "honorable engagement
clause."
by Larry
P. Schiffer*
LeBoeuf, Lamb, Greene
& MacRae LLP
As one might imagine, this phraseology results in varying interpretations
and myriad arbitration results. When asked to consider a signed reinsurance
contract as something other than a legal obligation, reinsurance arbitrators
are empowered with broad discretion to resolve disputes between the contracting
parties based on the arbitrators' experience in the insurance and reinsurance
industries and not as if they were judges in a court. The discretion given to
reinsurance arbitrators means that strict contract construction may or may not
take place during a reinsurance arbitration.
Parties to a reinsurance contract need to understand in advance that having
an honorable engagement provision likely will not result in a reinsurance dispute
being resolved the same way a court would resolve that same dispute. As always,
attention to contract drafting and a full understanding of the ramifications
of reinsurance contract provisions is essential to avoid being confused and
disappointed if a dispute arises in the future.
What's an Honorable Engagement Anyway?
When a reinsurance contract refers to itself as an honorable engagement or
a gentlemen's agreement, either in a stand-alone provision or within the terms
of the arbitration clause, the parties are, in essence, merely reiterating the
traditional reinsurance concept of utmost good faith. The honorable engagement
is simply the reinsurance contract itself that the parties have entered into
with the highest integrity and in utmost good faith. This concept harkens back
to the days where reinsurance contracts were secured by a handshake—a day that
has long since passed. Because of this good faith relationship, parties expect
to resolve any disputes in a businesslike manner consistent with the custom
and practice of the reinsurance industry.
In recognition of the traditional duty of utmost good faith, an honorable
engagement clause instructs the arbitrators that the parties wish to resolve
their disputes based on fairness and custom and practice of the reinsurance
industry. An honorable engagement clause means that the arbitrators are not
to resolve disputes solely based on the strict rules of law and contract interpretation.
It frees the arbitrators from following the strict rules of law and allows for
a more commercial and pragmatic approach to dispute resolution.
Honorable Engagement Clauses
There are myriad examples of honorable engagement provisions with a wide
variety of permutations. The Brokers & Reinsurance Markets Association (BRMA)
Web site has contract wording examples of different arbitration clauses with
honorable engagement-type language. For example, BRMA 6-B states:
- 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 provides as follows:
- 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.
How Flexible May Arbitrators Be?
Honorable engagement language relieves reinsurance arbitrators from following
the strict rules of law and allows them to use their expertise and experience
in reaching a result that is consistent with the reinsurance contract and with
the custom and practice of the reinsurance industry. This flexibility and broad
discretion may manifest itself in many ways.
Where the language of a reinsurance contract is ambiguous, reinsurance arbitrators
are free to interpret the contract in a reasonable, business-like manner. For
example, where the arbitration clause requires the parties to "submit" their
case to the panel within 30 days, an arbitration panel may reasonably interpret
this ambiguous provision as requiring the parties to merely introduce their
facts and arguments to the arbitration panel within 30 days instead of the parties'
full submission of the case to the panel within 30 days.
And other procedural flexibility also derives from an honorable engagement
clause. Strict rules of evidence and procedure need not be followed and arbitrators
have traditionally exercised wide discretion in allowing parties to present
evidence and arguments that might not have seen the light of day in a courtroom.
While this level of flexibility sometimes avoids the difficulties of the technical
admission of evidence, it often widens the scope of what is allowed and gives
fits to counsel—both in-house and outside—unfamiliar with reinsurance arbitration.
Arbitrators exercising this broad discretion will tell you that they are just
allowing the evidence "for what it is worth." With high quality experienced
reinsurance arbitrators, that often means that they are being generous in allowing
the submission of that evidence, but it is unlikely that the evidence allowed
"for what it is worth" will be considered to be worth anything at all during
the panel's deliberations.
Substantive caselaw affecting reinsurance issues may also get little attention
in the face of an honorable engagement clause. Because the clause relieves the
arbitrators from interpreting the reinsurance contract solely as a legal obligation,
what the courts have said about the interpretation of a particular clause may
not be quite the same interpretation given by experienced reinsurance practitioners.
This, of course, drives lawyers crazy, as court precedent, although regularly
cited in briefs to the arbitration panel, is often given very little weight
in resolving disputes about contract interpretation.
There are a number of examples of well-known court decisions in certain substantive
areas that are routinely ignored by many reinsurance arbitrators. In fact, in
some cases, disputes about the same clause and the same contract wording between
the same parties have resulted in completely different outcomes depending on
whether the dispute was in court or before a panel of reinsurance arbitrators.
Arbitrators Do Have Boundaries
Although freed from following strict rules of law and contract interpretation,
reinsurance arbitrators are still bound to resolve the dispute based on the
reinsurance contract before them. The honorable engagement clause is not an
invitation to the arbitrators to ignore express provisions of the parties' contract.
It is well settled in the courts that the clear provisions of the contract may
not be ignored or altered by an arbitrator. Arbitrators may not ignore contract
provisions or base their decisions on thoughts, feelings, policy, or law that
come from outside of the contract unless the arbitration agreement allows the
arbitrators to do so.
While an honorable engagement clause gives reinsurance arbitrators the flexibility
to bring to bear their expertise and commercial experience in interpreting the
reinsurance agreement before them, express contract provisions cannot be avoided
or modified based on industry knowledge or custom and practice. Essentially,
neither parties nor reinsurance arbitrators may pick and choose contract provisions
that they seek to uphold.
For example, if the arbitration clause states that each side will pay the
costs of their own arbitrators and will share the cost of the third arbitrator,
the arbitration panel cannot award one party recovery of its cost of its arbitrator
and its share of the third arbitrator's fees. Arbitrators are not empowered
to disregard express contractual provisions under the guise of the honorable
engagement clause or because the arbitration clause relieves the arbitrators
of all judicial formalities and may abstain from following the strict rules
of law. As one California court has put it:
- Although the arbitrators [are] not bound to follow legal procedures
strictly, they are not, because of such freedom, released from the obligation
to be guided by the basic agreement of the litigants.
Garamendi v. California Comp. Ins., 2005 Cal.
App. Unpub. LEXIS 11799 (Cal. App. Unpub. Opinions 2005).
Thus, an arbitration panel may not fashion a remedy that is not rationally
related to the contract or select a remedy that is not authorized by law.
Conclusion
While many existing and certainly older reinsurance contracts continue the
tradition of the honorable engagement clause, more recently, reinsureds and
reinsurers have been moving away from incorporating honorable engagement language
in their reinsurance contracts. Perhaps it is because the day of contracting
by handshake in utmost good faith is now a faded memory. Or perhaps it is because
our litigious society requires more legalistic determinations of reinsurance
disputes even in arbitration. If it is a business-like resolution to a reinsurance
dispute you seek, then giving the arbitrators the flexibility to resolve the
dispute without construing the reinsurance agreement strictly as a legal obligation
makes sense. If, however, you want your reinsurance agreement interpreted purely
as a legal document, then draft your arbitration clause accordingly.
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