The Honorable Engagement Clause (But I Thought I Had a Legal Contract!)

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) website 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 case law 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.

The author recognizes the research assistance of 2006 summer clerk Catherine Archibald.