The Honorable Engagement Clause and Flexibility In Arbitration Award Relief
Those of you steeped in reinsurance know about the honorable engagement clause. It’s a provision found in the arbitration clause of some (mostly older) reinsurance contracts that gives guidance to the arbitration panel on how they should construe the disputed reinsurance contract. I use the term “guidance” loosely here because a typical honorable engagement clause is more about what the arbitrators don’t have to do rather than what they must do. For example, the honorable engagement clause generally provides that the arbitrators should consider the reinsurance contract “as an honorable engagement rather than merely a legal obligation.” The clause then often goes on to say that the arbitrators are “relieved of all judicial formalities and may abstain from following the strict rules of law.” What does all of that mean?
There are very few court cases that address the honorable engagement clause. And there is little commentary discussing this clause. But the First Circuit has, for the very first time, addressed the operation and effect of an honorable engagement clause in a reinsurance contract.
In First State Ins. Co. v. Nat’l Cas. Co., No. 14-1644, 2015 U.S. App. LEXIS 4614 (1st Cir. Mar. 20, 2015), the circuit court was asked to reverse the district court and vacate an arbitration award in a reinsurance dispute. The award, which interpreted the manner in which claim payments should be made under a series of reinsurance contracts, included a provision that allowed the reinsurer to make certain reinsurance payments. Those payments, however, were subject to an appropriate reservation of rights in cases where it has specific facts that create a reasonable question about coverage under the reinsurance agreements. The arbitration clauses in the reinsurance agreements (there were 8 according to the court) contained honorable engagement provisions like the one quoted above. The reinsurer sought to vacate the award claiming that the reservation of rights provision of the award did not draw its essence from the underlying reinsurance agreements and therefore exceeded the arbitrators’ powers.
The district court rejected this argument and confirmed the award. The First Circuit affirmed. In affirming, the circuit court was direct and to the point. An honorable engagement provision, said the court, “empowers arbitrators to grant forms of relief, such as equitable remedies, not explicitly mentioned in the underlying agreement.” This the court saw as a huge advantage because the prospects for a successful arbitration “are measurably enhanced if the arbitrators have flexibility to custom-tailor remedies to fit particular circumstances.” The honorable engagement provision, said the court, ensures that flexibility. The court went on to hold that the honorable engagement provisions in the arbitration clauses of the underlying reinsurance agreements authorized the arbitrators to grant equitable remedies and that the reservation of rights procedure was such a remedy.
Notably, in the opening paragraph of the opinion, the court stated the well-known proposition that the scope of judicial review of an arbitration award is narrow, but that an honorable engagement clause encumbers judicial review “by yet a further level of circumscription.” The how and why is answered later in the opinion as discussed above when describing the ability of the arbitrators to be flexible and award equitable relief not expressly stated in the underlying contracts.