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Bermuda guide covers 2008 20/3/08 15:46 Page 8

2 The Review • The Bermuda Legal Guide • 2008

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CONTENTS

4 EditorialBy GGrreegg DDoobbiiee, editor of The Review

5 Introduction By RRoodd AAttttrriiddee--SSttiirrlliinngg, Managing Partner of Attride-Stirling & Woloniecki

CHAPTER1

6 Recent Regulatory DevelopmentsHow Bermuda’s facilitative but responsible regulation isbeing fine-tuned to fit with the island’s role as are/insurance hub.

CHAPTER 2

9 Bermuda CaptivesThe lowdown on why Bermuda continues to be a topchoice for companies setting up captives.

CHAPTER 3

12 Enforcing agreements to arbitrateHow Bermuda’s courts are continuing to follow astrongly pro-arbitration policy.

CHAPTER 4

16 E-Discovery in international arbitrationsA look at whether technical innovations are a help or ahindrance when it comes to resolving internationalarbitrations.

CHAPTER 5

20 Insolvency and US recognitionHow recent cases in the US Bankruptcy Court couldhave an impact on Bermudian re/insurers.

23 CONTACTS

The Review is published 10 times a year by InformaInsurance, Informa House, 30-32 Mortimer Street,London W1W 7RE, UK. Distributed by MSC Mailers, Inc, 420 South Ave,Middlesex, NJ 08846. Periodical Postage Paid atMiddlesex, NJ 08846 POSTMASTER: Send US addresscorrections to Pronto Mailers Association, 444 LincolnBlvd, Middlesex NJ 08846.

Informa also publishes Health Insurance, World Insurance Report and Insurance Day.

Editor: Greg DobieEmail: [email protected] Reporter: Ruth LytheEmail: [email protected] Editor: Nicki SitarasEmail: [email protected] Manager: Paul Clifton [email protected] account manager: Dean [email protected] Director: Andrea [email protected]: MPG Impressions

Subscription enquiries: Customer Services Department,Informa UK Ltd, Sheepen Place, Colchester. CO3 3LP. Tel: +44 (0)20 7017 5532 Fax: +44 (0)20 7017 4781Annual subscription to The Review: UK £368; Europe !534; US/rest of world : $662

Neither the publisher nor the sponsor accept any responsibility for any inaccuracies, errors or omis-sions contained in this publication. Interested partiesshould rely on their own enquiries.

© 2008 Informa UK Ltd. All rights reserved; nopart of this publication may be reproduced, storedin a retrieval system, or transmitted in any form orby any means, electrical, mechanical, photocopy-ing, recording or otherwise without the prior writ-ten permission of the publisher.

The Bermuda Legal Guide

The Review • The Bermuda Legal Guide • 2008 3


EDITORIAL

One of the major reasons why Bermuda has been so successful is because it hasalways possessed a regulatory regime which its companies, and those from otherre/insurance domiciles, think makes perfect business sense.

Facilitative yet responsible regulation has long been the approach favoured by theregulator on this 21 square mile rock in the middle of the Atlantic Ocean.

The success and international prominence of the Bermuda industry has attracted theattention of a plethora of international standard-setters over the years. Bermudianregulators and supervisors play critical roles in a number of these bodies and there is adesire for the Bermuda Monetary Authority (BMA) to be seen to be leading the way inthe emergence of global regulatory standards and supervision.

And so it should. At a time when there is an increasing industry focus on this area it iswell worth noting that Bermuda had ‘risk-based principles’ long before the Basel andSolvency II initiatives currently beingimplemented in Europe.

But the BMA refuses to rest on its laurels.More recent moves have seen it take thesupervision of insurance away fromgovernment – it is now firmly under itsindependent wing – and beef up its staff. Thisyear, there is a new director of insurance,Shanna Lespere, and insurance companies aresubject now to tighter scrutiny, including on-site spot checks and 12 month reviews for newcompanies.

Other recent regulatory refinements arediscussed in greater detail in the opening chapter of this year’s The Bermuda Legal Guide2008. The guide also explores a number of other issues including why Bermuda continuesto be the top location for captives; why Bermuda’s courts are continuing to follow astrongly pro-arbitration policy; whether technology is a help or hindrance when it comesto resolving international arbitrations; and how recent cases in the US Bankruptcy Courtcould impact Bermudian re/insurers.

I would like to thank Attride-Stirling & Woloniecki for their contribution to the fifthBermuda legal guide. It provides a fascinating insight into the major legal issues theisland’s re/insurance community will have to deal with, both now and in the future.

Greg DobieEditorThe Review – Worldwide Reinsurance

Bermuda’s position

The growth of theBermuda market and itsregulatory development is a success story


INTRODUCTION

Bermuda is a small island in the middle of the Atlantic. Although there are only 21square miles of land, there are over 1,500 insurance companies. But what are theydoing? Surely there can’t be more than 16 houses to insure in an island that small?

The answer is that they now do everything. The Bermuda market has progressed from beingexclusively a captive insurance company market, to branching off into excessproperty/catastrophe business, to now providing all forms of insurance and reinsurance tothe world’s markets.

The Hamilton skyline has metamorphosized beyond recognition. New large insurancecompanies can now be found throughout the city, which has extended to accommodate thegrowth. And suggestions that there is ‘no more room at the barn’ is an expression of wishfulthinking by Bermuda’s competitors. Certainly it is true that Bermuda is an expensive placeto do business, but all serious commercial centres are expensive. However one thing that hasbecome clear following the latest waves of capital to Bermuda’s shores is that the Bermudamarket is able to absorb surprising quantities of capital and business.

And the legal infrastructure is keeping pace. Along with the expansion in the insuranceindustry there has been an expansion in theprofessional service providers who service thatindustry. A law firm such as ours, which issometimes characterised as a boutiquereinsurance practice, would have beenunthinkable some years ago. And ASW is notthe only firm to expand in the growingmarket. The accountancy firms have grown,and insurance and reinsurance consultancies abound, providing every manner ofprofessional services to the industry. The new commercial court has proven to be a massivesuccess. Reinsurance arbitrations have also increased, with many locally based insurancecompanies re-domesticating their arbitration clauses to provide for arbitration in Bermuda,sometimes under Bermuda law, sometimes under New York law.

The catalyst for each burst of new capital to come to Bermuda has frequently been somelarge catastrophe. From hurricanes Hugo and Andrew to September 11th and Katrina,Bermuda has always been the place where speed to market, together with a now tried andtested legal infrastructure come together. Bermuda has been at the centre of many stormsand where others have seen problems, Bermuda has seen solutions. Insurance capital willcontinue to come to Bermuda, not because of perceived tax advantages, but becauseBermuda has truly built a better mousetrap and this fact has been recognised by the world’scapital markets.

Rod S. Attride-StirlingSenior PartnerAttride-Stirling & Woloniecki

Bermuda is able toabsorb surprisingquantities of capital andbusiness

Storming ahead


RECENT REGULATORY DEVELOPMENTSCHAPTER 1

Leader of thepack

The golden threadinterweaving thefabric of the

Bermuda insurance andreinsurance industry is itsregulatory model. This ischaracterised by afacilitative but responsibleapproach towardsregulation and continuesto evolve.

The growth of theBermuda market and itsaccompanying regulatorydevelopments certainlymerit close inspection.Recent highlights includethe important changesintroduced by theInsurance AmendmentAct, 2006, as well as theproposed new risk-basedcapital model (RBC) forthe Class 4 companies.

A MARKET LEADERRating agency AM Best’s 2005 reportprovides some significant information regarding

Bermuda’s insurance andreinsurance marketposition. According tothis report, Bermuda held15 of the top 35 reinsurersin the world, ahead ofEurope, which had 11.

Also, according to AMBest’s August 2006 ReportP/C and Life, Bermuda isranked as one of the topfive insurance domicilesbehind US and Germany,having one of the largestproperty cat reinsurancemarkets and supplying40% of the US market.

Additionally inProfiling the BermudaCaptive Market, publishedin the Bermuda CaptiveConference editionSeptember 2007, DrMarcelo Ramella,assistant director ofresearch at regulator, theBermuda MonetaryAuthority (BMA),provided a detailedanalysis of Bermuda’s

Bermuda’s evolution from captive insurance jurisdiction to thriving re/insurance market has been accompanied by a host ofregulatory developments. Neil Horner and Natasha Scotland

chart the most important recent refinements in this area.

RECENT REGULATORY DEVELOPMENTS CHAPTER 1


global position in the captiveinsurance market. Accordingto Dr Ramella’s report,Bermuda maintained its statusas world market leader withUS$19.4bn in gross writtenpremium for 2005, which wasthree times as much as its closestcompetitor, the Cayman Islandswhich itself wrote US$6.7bn inthe same period.

Captive insurers remain thebread and butter of the Bermudainsurance market but Bermudahas also become the jurisdictionof choice for the highlycapitalised property catastropheClass 4 reinsurers. It is criticalthat Bermuda continues todevelop its regulatory modelappropriately and responsibly toensure it is in line with bestglobal practice. And Bermuda isindeed doing just that.

IN CONTROLAn important changeintroduced by the AmendmentAct is the concept of a‘controller’ and the requirementthat any person planning tobecome a controller of aninsurance company must givenotice to the Bermuda MonetaryAuthority.

The definition of a controllerincludes a managing director orchief executive of an entityregistered under the Act. The‘shareholder controller’requirement under theAmendment Act is particularlynoteworthy as no person canbecome a shareholder directly orindirectly of 10%, 20%, 33% or50% of the voting shares of an

insurance company unless priornotification has been given tothe BMA.

The BMA must then informthe company that it has noobjection or 45 days must lapsesince the notification was given.

If the insurer is a publiccompany, written notificationmust be provided to the BMAwithin 45 days of the personbecoming a shareholdercontroller. Alternatively, if theinsurer is a private company, theprospective shareholdercontroller must notify the BMAof his intention to become ashareholder controller. Thepotential shareholder must notbecome a controller unless hehas been notified within 45 daysfrom the date of service that theBMA has no objection or theBMA has not served a notice ofobjection within the 45 dayperiod.

The BMA may serve a noticeof objection on a potentialshareholder of the privatecompany and must be satisfiedthat the person concerned is afit and proper person to becomea controller of the description inquestion of the insurer. It mustalso be satisfied that theinterests of clients or potentialclients of the insurer would notbe threatened by that personbecoming a controller and thathaving regard to that person’slikely influence on the insurer asa controller the minimumcriteria would continue to befulfilled in the case of theinsurer or if any of those criteriais not fulfilled, that the person is

likely to undertake adequateremedial action.

The Amendment Act alsoestablishes an appeals processwhich can be invoked if, forexample, any party isdissatisfied with a BMAobjection to a person becominga controller.

These amendments furtherserve to strengthen theinsurance regulatory frameworkin Bermuda and are to bewelcomed. They have beenaccompanied by significantreform to Bermuda’s underlyingcompany law framework.

STREAMLINED PROCESSThe BMA has recently issued anotice on the separation of theincorporation process forinsurance companies.Previously, in order toincorporate an insurancecompany, documents had to besimultaneously submittedrelating to the licensing of theentity under the Act, as well ascompany incorporationdocuments under theCompanies Act 1981. The BMAhas now streamlined the processand can review applications forthe incorporation of thecompany separately fromapplications for registration ofinsurance companies. It isimportant to note, however,that approval of a company forincorporation is not anindication that an applicationfor the registration of thecompany as an insurer will alsobe approved. As theincorporation and licensing !!

processes are actually dealt withby two separate divisions withinthe BMA, this two-stageincorporations procedure ismore practical and offers greaterflexibility.

RISK-BASED MODELBermuda has always had a risk-based approach towards theregulation of its insurers andreinsurers. This is demonstratedby the ‘class-based’ approachwhich divides Bermuda insurersand reinsurers into four classes.These range from a Class 1captive insurer through to aClass 4 property catastrophereinsurer such as Ace or XL.

The current capitalrequirements for Class 4insurance and reinsurancecompanies call for themaintenance of minimumsolvency margins. This meansmaintaining a minimumsolvency margin requirementgreater than $100m; 50% of netpremium written, with a partialdeduction for credit forreinsurance; or 15% of lossreserves.

In July, 2007 the BMA issueda consultation paper on internalmodels. It was in this that it setout its proposals on the use ofcompany-specific internalmodels to assist in determininga company’s regulatory capitalrequirement. In thisconsultation paper, the BMAindicates its intention tointroduce the Risk-BasedCapital (RBC) Model indetermining an insurer’sregulatory capital requirement

and its belief that an insurer’srisk profile should determineits capital adequacy. The BMAproposes that where the insurerbelieves that its own internalmodel better reflects theinherent risk of its business,it can apply for approval of its internal model tobe considered in thedetermination of its regulatorycapital requirement.

The RBC Model furtherrefines the insurance andreinsurance regulatoryframework in Bermuda as itlooks to the particular riskprofile of individual companiesin making an assessment of itscapital requirements. Theinsurer’s risk profile includesthe quality of its management,corporate governance, theinherent risk of its business andhow it mitigates those risks. It isimportant to stress however thatBermuda has always had a risk-based approach towardsinsurance regulation.

This capital adequacyassessment tool, alongside theon-site programme for Class 4insurance companies, which

was introduced in 2005, servesto highlight Bermuda’scontinued efforts in relation tothe supervision of insurancecompanies. The on-siteprogramme includes on-sitemeetings with the seniormanagement and related staff ateach company. At thesemeetings, the insurer’s strategicinitiatives, alongside anydevelopments within theorganisation and factors that areaffecting or concernmanagement are a few of theitems which would be discussed.These meetings continue to bean effective tool in the BMA’sregulatory arsenal.

IN STRONG SHAPEBermuda has created a businessenvironment that nurtures andsustains free enterprise,supported by informed andappropriate regulation andnecessary infrastructure.Through continuedenhancement of its regulatoryinfrastructure, Bermuda is ableto maintain appropriatesupervisory controls over theinsurance and reinsurancesectors. It appears thatBermuda is well equipped todeal with future developmentsin international standards inthe insurance and reinsuranceindustries. The continuedrefinement of the regulatoryframework of Bermuda willsupport the next phase ofgrowth and will allow the islandto preserve its appeal as acredible and leading insuranceand reinsurance jurisdiction. ®


RECENT REGULATORY DEVELOPMENTSCHAPTER 1

Despite a thriving property cat re/insurance market, Bermuda still has not lost any of its allure for captives. Natasha Scotland and Neil Horner give

the lowdown on this bedrock of the island’s insurance industry


Acaptive insurance company,in its purest form, is aninsurance company

established as a subsidiary of a non-insurance entity to insure the risks ofits parent entity and or its affiliates.Bermuda has been and continues tobe the world’s leading captive andrent-a-captive domicile since thecaptive concept was first introducedto the island in the 1960s.

ADVANTAGES OF CAPTIVESA captive can assist in avoidingcommercial insurers’ administrativeoverheads allowing its parent toretain income that would otherwisehave been lost in expenditure to athird party insurance provider. Secondly, common market practicewith commercial insuranceproviders is to have premiums basedon a general industry-wide standard

CAPTIVES CHAPTER 2

!!

Ideal conditions

as opposed to an individualcompany’s own risk. With acaptive, premiums are fixedbased upon the specific riskexperience of the captive’sparent and affiliates as opposedto the industry.

As a captive is incorporated todeal specifically with the risks ofits parent and affiliates, it cancater more precisely to thespecific insurance needs of itsparent. This allows for a greaterdegree of flexibility and controlover risk management, asprogrammes can be specificallydesigned to deal with acompany’s operations.

Participation in a captiveprovides insulation against thevagaries of the commercialinsurance market and canprovide breadth of coverage thatis either unavailable or availableonly at excessive prices fromcommercial insurers.

Finally, captives can access thereinsurance market andpurchase reinsurance, wholesale,which is something that cannotbe obtained from primaryinsurers.

WHY BERMUDA?Bermuda continues to be theworld’s leading captive domicile.In Profiling the Bermuda CaptiveMarket, Dr Marcelo Ramella,assistant director of research atthe Bermuda MonetaryAuthority (BMA) provided adetailed analysis of Bermuda’sglobal position in the captiveinsurance market. This showsthat Bermuda’s captive marketexperienced a 28% growth

between 2003 and 2005, withClasses 1 and 2 showing thesteepest growth, with 57% and 47% growth respectively.North American businesspredominates in Bermuda, with74% of all Bermuda captive riskcoming from the US in 2005.Global insurance risks provide14%, Europe 7% and otherareas, 5%.

A key advantage ofestablishing a captive inBermuda is the access suchincorporation provides to thehighly developed Bermudareinsurance market. Bermudaprovides a ‘one-stop shop’, ascaptives have both excellentreinsurance and retrocessionalsupport. Bermuda’s leadingposition in the captive market isfurther enhanced by itsfacilitative but responsibleregulation.

The introduction of modern

public segregated accountslegislation with the SegregatedAccounts Companies Act 2000has provided sophisticated celltechnology for those smallercaptives that cannot afford toestablish a stand-aloneinsurance company.

Bermuda also has a highlydeveloped infrastructure ofinsurance experts and serviceproviders including lawyers,accountants and managers,which altogether serve tomaintain the jurisdiction’sstrong market position.

THE BERMUDA APPROACHBermuda has always had a 'risk-based' approach towards theregulation of its insurers andreinsurers. Its regulatorsrecognise that a one-size-fits-allapproach is not sensible andthat insurers will need to adaptdifferent corporate governanceneeds depending on the nature,complexity and risk profile of itsparticular organisation.

Bermuda insurancelegislation accordinglydistinguishes between four‘classes’ of insurer andreinsurer. These range from aClass 1 pure captive to a Class 4property catastrophe reinsurer.Single-owner captives areestablished as Class 1 captives,while multi-owner captives maybe established as Class 2captives. A Class 2 licensedinsurer may also write up to20% third party risk unrelatedto the owners of the insurancecompany or any affiliates ofthose owners, or insure risks

CAPTIVESCHAPTER 2


CAPTIVES

which arise out of the businessor operations of its owners ortheir affiliates. A Class 3 licenceenables the coverage mainly ofthird party risks and is a generalcatch-all category covering thoseinsurers and reinsurers nototherwise within Class 1, 2 or 4.

Class 4 are the highlycapitalised commercial insurerswhose coverage must includeexcess liability business and/orproperty catastrophereinsurance business.

In accordance with the risk-based approach, Bermudaadopts a graduated scale ofregulation. Class 1 captives aresubject to the lowest level ofregulation and Class 4commercial insurers to thehighest.

A further important facet ofthe Bermuda landscape is that aBermuda insurer must have aBermuda-based ‘principalrepresentative’, who has certainstatutory responsibilities to theBMA to ensure that the insurercontinues at all times to meet itssolvency margin and otherresponsibilities under theInsurance Act.

THE APPLICATION PROCESSThe application to form aBermuda captive is made onprescribed forms to the BMAInsurance Division. The so-called pre-incorporation formsets out amongst other things;the capitalisation of theproposed insurer, the categoryof insurance business the insurerproposes to write, the proposedclass the insurer will have, the

estimated financials, levels ofrisk retention and details of anyproposed reinsurance. It alsosets out the insurer’s principalrepresentative, insurancemanager, approved auditor and,loss reserve specialist. Howeverthis is not required for Class 1companies. In addition, theapplication must contain abusiness plan explaining thebusiness case for the Bermudacaptive. Projected pro-formafinancials should also beincluded, ideally for a five-yearperiod. It is also helpful ifactuarial analysis can beincluded substantiating theproposed premium levels,adequacy of reserves, andgenerally the pro formafinancials.

Applications to form a newinsurer are heard at the weeklyFriday meeting of theAssessment and LicensingCommittee (ALC). The ALC ismade up completely ofemployees from BMA.Members of the TechnicalAdvisory Group (TAG),consisting of experiencedinsurance professionals,actuaries and accountants, maybe invited to meetings of theALC, which will generallyhappen in the case of Class 2, 3and 4 applications.

The ALC/TAG may at itsweekly Friday meeting,recommend to the BMA toapprove the applicationunconditionally or subject toconditions which may be set outin the licence. It may also deferthe application pending

clarification of certain matters,or reject the application if itconsiders the business casesimply cannot be substantiated.Once BMA approval has beenobtained, it is then possible toorganise the captive and applyfor the insurance licence. Thecaptive must be fully capitalisedbefore the licence application ismade. The application will bemade by the attorneyssubmitting the so-called Form1B which effectively mirrors thepre-incorporation formtogether with payment of theappropriate licensing fee whichis on a graduated basisdepending on the proposedclass of the insurer. The licencewill generally have the date ofthe application as the effectivedate of registration, and as ofthe registration, the Bermudacaptive will be licensed toconduct insurance business ofthe type depending on itsclassification.

A CAPTIVE AUDIENCEThe captive remains thebedrock of the Bermudainsurance industry, alongsideBermuda’s highly developedand capitalised propertycatastrophe reinsuranceindustry. Bermuda values its captiveinsurance clients highly andcontinues to provide anefficient, credible andfacilitative infrastructure for thegrowth of the captive industryand the maintenance of its pre-eminent role as the world’sleading captive domicile. ®

CHAPTER 2


ENFORCING AGREEMENTS TO ARBITRATECHAPTER 3


Bermuda is striving to ensure that the island and its law remain top choices for resolving contract disputes. Jan Woloniecki and Susie Wakefield

describe recent cases enforcing agreements to arbitrate before the island’s courts

An emphasis on agreement

ENFORCING AGREEMENTS TO ARBITRATE

The trend of Bermuda’scourts activelypromoting a strong pro-

arbitration policy is one thathas continued into 2008.

The Bermuda CommercialCourt remains ready, willingand able to grant injunctionsto enforce the parties’contractual agreement toarbitrate whether in Bermuda,or outside of Bermuda.

Indeed, in Ace BermudaInsurance Ltd v. ContinentalCasualty Company, [2007] BdaLR 38, the Commercial Courtwas prepared to grant an anti-suit injunction against a non-party to an arbitrationagreement.

The plaintiff, Ace and thedefendant, Continental, hadboth issued excess liabilityinsurance policies to theMinnesota Mining andManufacturing Company(3M). Continental hadcommenced proceedings inthe District Court for theFourth Judicial District of theState of Minnesota against itsinsured, 3M, seeking adeclaration as to the scope ofits liabilities under certainexcess liability policies issuedto 3M at various timesbetween December 31, 1969and January 1, 1986.Continental had joined, asdefendants to the Minnesotaproceedings, more than 60other insurers, including Ace,on the basis that 3M hadpurchased potentiallyapplicable insurance policiesfrom them.

As Mr Justice Bell explained,the Minnesota proceedingsimpacted on Ace’s contractualrights, (see box above).

UNCONSCIONABLEThe judge upheld an ordergiving leave to serve notice ofthe Bermuda proceedings outof the jurisdiction, which hadoriginally been granted exparte by the Chief Justice ofBermuda and continued ananti-suit injunction to restrainContinental from pursuing theMinnesota proceedingsagainst Ace in the MinnesotaCourts. He accepted Ace’sargument that the Minnesotaproceedings wereunconscionable since theywould decide in a final andbinding manner the issuesbetween Ace and 3M, inbreach of an arbitration clausein the Ace policy whichprovided for arbitration of any

disputes under that policy inBermuda.

CHALLENGING TIMESContinental, unsuccessfully,challenged the jurisdiction ofthe Bermuda Court to grant aninjunction against it, on thegrounds that it was not a partyto the arbitration agreementbetween Ace and 3M. Therelevant jurisdictional rule, RSCOrder 11, rule 1(d) (iii)provided that the Court couldgrant leave to serve proceedingsout of the jurisdiction on aforeign defendant, where theplaintiff’s claim ‘affected’ acontract governed byBermudian law. Continentalargued that, in order to findjurisdiction under that rule,there had to be a contract or acontractual nexus between theplaintiff and the defendant.Justice Bell rejected theargument (see box on page 14).

CHAPTER 3


JUSTICE BELL’S FINDINGS: ACE V. CONTINENTAL

“The policies which Continental issued to 3M pertain to liability inrespect of claims arising from exposure to toxic substances caused by3M products. In the nature of such claims, complex questions arise asto when liability under particular insurance policies was triggered andas to the appropriate allocation between the various policies …Continental seeks declarations in relation to the issues of triggeringand allocation in relation to the various underlying insurance policiesissued by the Defendant Insurers, as well as a declaration thatContinental’s policies have not been triggered by the exhaustion ofthe underlying insurance. This … will necessarily require theMinnesota court to determine, so far as Ace is concerned, thecontractual rights and obligations between Ace and 3M with regard to the terms of their contract and the extent of coverage thereunder.”

!!

COURTING CONTROVERSY?It is open to question whetherthis reasoning is correct. WhereC is not a party to the agreementto arbitrate between A and B,how can it breach an agreementby which it is not bound?Nonetheless, we believe theresult in Ace v. Continental maybe justified on the basis thatContinental’s conduct plainlyamounted to an unconscionable,and possibly tortious,interference with Ace’scontractual rights.

In Starr Excess LiabilityInsurance Company Ltd v.General Reinsurance Cor [2007]Bda LR 34, Mr Justice Bellgranted an anti-suit injunctionrestraining proceedingscommenced in New York,purporting to compelarbitration under the US FederalArbitration Act (FAA).

He found the New Yorkproceedings to be in breach ofthe arbitration agreement thatwas governed by the procedurallaw of Bermuda. Thereinsurance contract between

Starr and Gen Re was expresslygoverned by New York law.

BERMUDA BOUNDClause A of the arbitrationclause dealt with theappointment of arbitrators, andcontained a mechanism forappointment by the SupremeCourt of New York. Clause Bstated: “The arbitrationproceeding shall take place inHamilton, Bermuda.”

Justice Bell found that the seatof the arbitration was Bermuda,and the arbitration wastherefore subject to Bermudianprocedural law (the BermudaInternational Conciliation andArbitration Act 1993 and theUnited Nations Commission onInternational Trade Law(UNCITRAL) Model Law) andnot New York law. He notedthat, “it is common ininternational arbitration for theprocedural law to be differentthan the law governing thesubstantive dispute between theparties”.

He concluded that the parties

had reached an “expressagreement that the arbitrationproceeding should take placein Bermuda.” And becausethere was no express choice ofprocedural law, the nextquestion was whether therewas anything to offset the“very strong pointer” that, byagreeing to arbitrate inBermuda, the parties hadimplicitly chosen the law ofBermuda to be the procedurallaw.

Having considered theterms of Clause A of thearbitration clause, Justice Bellconcluded that the defaultprovision for appointing anarbitrator or umpire could notjustify the inference that itrepresents some wider choiceof procedural law.

He found that the partieshad implicitly agreed, in theirdecision to arbitrate theirdispute in Bermuda, thatBermuda procedural lawshould apply to thearbitration.

A DIFFERENT WAYStarr v. Gen Re was a blatantattempt by one party to‘hijack’ a Bermudianarbitration and turn it into anAmerican one.

Gen Re’s US attorneys hadmade it clear that they wantedto engage in ex partecommunications with ‘their’arbitrator, which is commonpractice in the US, but ananathema in Bermuda.

Party-appointed arbitratorsin Bermudian arbitrations

ENFORCING AGREEMENTS TO ARBITRATECHAPTER 3


JUSTICE BELL’S FINDINGS: ACE V. CONTINENTAL

“… the Court has granted anti-suit injunctions to restrain a party frompursuing foreign court proceedings in breach of an arbitrationagreement for many years. In my judgment, the Court has suchjurisdiction whether or not the party pursuing the foreign proceedingsis itself a party to the arbitration agreement. It is the breach of thearbitration clause calling for arbitration in Bermuda that the Court hasjurisdiction to restrain. Continental’s suit in Minnesota is calculated tobreach such an arbitration clause, and the Bermuda Court thusexercises jurisdiction.”

ENFORCING AGREEMENTS TO ARBITRATE

may not be partisan oradvocates and no ex partecommunications regarding theissues in dispute or the merits ofthe case are allowed between aparty and its arbitrator at anytime. This is just one of severalfundamental differencesbetween Bermudian and USarbitral procedure. Otherdifferences include the form ofthe ‘pleadings’ or ‘positionstatements’. A Bermudianpleading is usually detailed inform while a US positionstatement will likely be relativelybrief and will be followed by thesubmission of a pre-hearingbrief after the close of discovery.Discovery too is quite differentunder the two regimes. Thegeneral practice in Bermudianarbitration is to limit the scopeof document disclosure to thosedocuments that are strictlyrelevant to the issues in dispute.Also, unlike the standard USprocedure, depositions are notused in Bermuda. Rather,witness statements areexchanged and the first timethat a party has an opportunityto cross-examine the otherside’s witnesses is during thehearing itself. In addition, aBermudian arbitral award shallbe reasoned, unless the partiesagree otherwise, whereas in theUS, a reasoned award willusually only be handed down ifit is specifically requested oragreed.

Finally, costs will usually beawarded to the winning party ina Bermudian arbitration,whereas in the US the parties

will bear their own costs.Accordingly, an agreement toarbitrate in Bermuda has moreimplications than a trip to theisland for the final hearing andthe Bermuda Court is willingto take steps to ensure that theparties act in accordance withtheir agreement to arbitrateand follow Bermudianarbitration procedure, asappropriate.

LONDON CALLINGMany arbitrations on the so-called ‘Bermuda form’ are heldin London, under Englishprocedural law but apply thelaw of New York as thegoverning law of the contract.In a recent decision of theEnglish Court of Appeal (C v.D [2007] EWCA Civ 1282), apermanent injunction wasgranted. This restrained thelosing party, the insurer in aBermuda form arbitration heldin London, from seeking tochallenge the award under theUS Federal Arbitration Act(FAA) on the grounds of‘manifest disregard’ of NewYork law.

The Court of Appeal heldthat, in agreeing to arbitrate inLondon, it was the legitimateexpectation of the parties thatany challenge to the awardwould take place in the EnglishCourts under the UKArbitration Act 1996. Webelieve that a Bermuda Courtwould take a similar view if anattempt was made to challengea Bermudian arbitral award inthe US courts. ®

CHAPTER 3


The Court ofAppeal held that,in agreeing toarbitrate inLondon, it was thelegitimateexpectation of theparties that anychallenge to theaward would likelytake place in theEnglish Courts. A Bermuda Courtwould likely take asimilar view if anattempt was madeto challenge aBermudian arbitralaward in the UScourts

E-DISCOVERY IN INTERNATIONAL ARBITRATIONSCHAPTER 4


While computers and email have undoubtedly made the world a smaller place, Peter Dunlop asks whether technological innovations are a help

or hindrance to international arbitrations

An electronic odyssey

E-DISCOVERY IN INTERNATIONAL ARBITRATIONS

One of the principaladvantages of using thearbitral model for

resolution of internationaldisputes is avoiding theburdensome cost and delay oflitigation-style discovery.

But does today’s technologyand everyday use of email,threaten the relative ease andlower cost of the arbitraldiscovery process? Or mightinternational arbitrations in factbenefit from technological datainnovations?

BERMUDA LAWIn Bermudian litigation, eachparty is obliged by Order 24 ofthe Rules of the Supreme Court1985 to mutually disclose alldocuments relevant to their ownor their opponent’s case whichare or have been in theirpossession, custody or power.

Lawyers will conduct thecostly and painstaking process oflisting these documents for theirrespective clients, whilstremoving irrelevant and legallyprivileged documents. Aninspection of the other side’sdocuments will follow.

In cases where insurers orreinsurers are seeking to avoid apolicy the process may alsoinclude several applications fordiscovery of particulardocuments, often as a fishingexpedition for evidence tosubstantiate that avoidanceclaim.

CAUSE FORCONSTERNATION?For Bermudian international

arbitrations, The BermudaInternational Conciliation andArbitration Act 1993 hasimplemented the UnitedNations Commission onInternational Trade Law(UNCITRAL) Model Law in itsentirety.

Article 19 of the Model Lawgives the arbitral tribunal a widediscretion on the scope ofdiscovery appropriate in anycase.

But how internationaltribunals exercise thatdiscretion and how lawyers,often along with their clientsfrom different culturalbackgrounds, seek to influencethat exercise is a regular sourceof consternation. Tribunals maybe constituted of a mix offormer civil and common lawlawyers. Even lawyers fromculturally similar professionalbackgrounds, for example, NewYork and London can reachvastly different conclusions onwhat level of discovery isappropriate in international

arbitrations.To meet these concerns there

has been an increasingreference, by tribunals andlawyers alike, to theInternational Bar Association(IBA) rules on the Taking ofEvidence in InternationalCommercial Arbitration.Article 3 of these rules providesfor a narrow approach wherebyeach party exchanges andsubmits to the tribunal alldocuments on which that partyrelies. A party may then submita ‘Request to Produce’, whichwill contain a description of thedocument sought or a detaileddescription of a ‘narrow andspecific category’ and why it isrelevant to the dispute. Partiesmay object to disclosure ofdocuments on such grounds asirrelevance, legal privilege,unreasonable burden andcommercial confidentiality,after which the tribunal willconsider the requests andobjections and issue a ruling.

Although preferable tolitigation-style discovery, thisprocess is not impervious toabuse. Parties still argue overthe meaning of “narrow andspecific category of documents”and make inappropriately wideor numerous discoveryrequests. In a recent arbitrationwhere we acted for a Bermudiancaptive insurer, the argumentover the breadth of the captive’sdiscovery rumbled on for oversix months, through fourultimately failed attempts byreinsurers to obtain 14 millionpages of documents instead

CHAPTER 4


In a recentarbitration, theargument over thebreadth of thecaptive’s discoveryrumbled on for oversix months

!!

of the one million disclosed.When the reinsurers began tofinally consider those millionpages the case rapidly settled.

DIGI-DANGER‘E-discovery’ is merely a term todescribe disclosure of electronicdata. Electronic data is equallydiscoverable in principle to hardcopy documents. As well asemails, e-letters, spreadsheetsand presentations, electronicdata comes in a variety of formsand can be stored on CDs,DVDs, desktop hard drives,backup storage media, flashdrives, personal laptops,personal organisers and evenoffice or home voicemail. All ofthese are frequently the subjectof discovery requests today.

There are several problemswith electronic data. First, withvirtually everyone using emailnowadays, even Lloyd’s brokersand insurers, it follows that thereare now many more datacustodians. Parties may findthey have to disclose emails anddocuments originating not onlyfrom the main protagonists in adispute but also the moretangential players. This haspotentially enormous costsconsequences in the discoveryprocess.

Secondly, duplication is anunfortunate consequence. Inmost commercial enterprisesemails have replaced telephonecalls to a significant extent. Onany email a multitude ofindividuals may be copied in.The result can be a hugeduplication of the same email,

which when consolidated withother duplicated emails resultsin a formidable edifice ofdocumentary evidence. This isenough to demoralise theparties and considerably delaythe dispute resolution process.

Thirdly, e-documents live onin various forms even after theyare deleted. While hard copydocuments might be shreddedor lost in an archive warehouse,deleted electronic data can oftenbe resurrected from back uptapes. However, backup data isnot easily searched as it is savedon a time interval basis insteadof a subject matter basis. Thisdoes not stop requesting partiesdemanding ‘all deleted files’.

Fourth is metadata. This isdata about data, usually storedinvisibly within an e-document.Metadata might relate todocument templates andsettings but may also indicatewhen that document wascreated and who amended it,

when. This may enable atribunal to draw a negativeinference from thatamendment. Considerabledebate has sprung up overwhether e-documents should bedisclosed in their nativeapplication or in a copiedformat, such as a PDF or TIFFdocument.

Finally, waiver of privilegeddocuments is a vital concern toparties. In view of the vastnumbers of e-documentsdisclosed today, the risk ofinadvertent waiver of privilegein a document iscommensurately higher.

DISCOVERING SOLUTIONSTo meet the problemstechnology has brought to thediscovery process, theinternational arbitrationcommunity has available to itThe Sedona Principles: BestPractices Recommendationsand Principles for AddressingElectronic DocumentProduction. These principles,which have already led toPractice Direction 31 of theCivil Procedure Rules (CPR) inEngland and an amended Rule26 of the US Federal Rules ofCivil Procedure (FRCP),propose three main bedrockconcepts.

Sedona Principle 1 demandsthat organisations properlypreserve electronic data that canbe relevant to a dispute. SedonaPrinciple 2 requires a balancingexercise to weigh up theimportance of the documentversus the difficulty in finding

E-DISCOVERY IN INTERNATIONAL ARBITRATIONSCHAPTER 4


E-DISCOVERY IN INTERNATIONAL ARBITRATIONS

and producing it. SedonaPrinciple 3 expects earlycooperation between parties.

Although a balancing exerciseis already in place at Article 9.2 ofthe IBA Rules there is no specificprovision for e-discovery and inthis respect the CPR and FRCPare more advanced. However,tribunals’ broad discretionenables them to consider andapply the Sedona Principles, aswell as arrive at practicalsolutions to the five mainproblems set out (see box, right).

HELP OR HINDRANCE?Technology has precipitatedvastly more discoverabledocuments in internationalarbitrations but it has also offeredinnovative tools, such as wordsearches and ‘de-duping’, to limitdiscovery to only the mostrelevant documents. On balance,technology and e-discoverygenerally represent time andcosts savings.

The Sedona Principles offer apractical and proportionateframework. It is not expected thathumans will review each andevery document in their own ortheir opponent’s discoverywithout the assistance of thesetechnological tools. TheBermuda InternationalConciliation and Arbitration Act1993 and the Model Law permittribunals to exercise their broaddiscretion by considering theSedona Principles. It remains tobe seen if the Bermuda legislaturewill follow the English and US’slead by formally implementingthose principles. ®

CHAPTER 4


FIVE E-DISCOVERY ISSUESCustodians – In many cases tribunals will order that only a limitedcast of characters’ data will be searched. Requesting parties areasked to give a compelling reason why those individuals are relevantto the issues in dispute and tribunals will guillotine the production ofdocuments of only peripheral individuals. To limit further thenumber of documents, tribunals might ask the parties for an agreedlist of word search terms designed to locate documents of keyrelevance. Sedona Principle 11 accepts that electronic searches andsampling may replace a human review of each document.

‘De-duping’ – Technology offers an antidote to the exponentialincrease of duplicated e-documents through so-called de-duping,which can be tailored to a wide variety of parameters. Many ITconsultancies now offer de-duping applications. Although initialinfrastructure costs of archiving and classifying e-documents can behigh, running subsequent de-duping searches will be quick andeconomical.

Deleted documents and spoliation – Despite the practical searchdifficulties involved, tribunals may order that deleted documents aresearched. Sedona Principle 8 suggests that a responding partyalways searches its active data. Sedona Principle 9 proposes thatrequesting parties demonstrate the special need and relevance ofdeleted files. In cases of spoliation, where data has beenpermanently deleted or significantly altered with no back up copy, atribunal may draw a negative inference if is found that spoliation ofthe evidence was intentional or reckless.

Metadata – Tribunals might consider applications for production ofdocuments in their native format to be a step too far. SedonaPrinciple 12 recommends that data production should be made in itsnative format. Unless copy data is scanned through optical characterrecognition, enabling a requesting party to perform word searches, itwill be difficult to resist an application for native form documents.

Waiver of privilege – Tribunals will frequently endorse so-calledclaw-back agreements, whereby the parties firstly agree thatinadvertent disclosure of privileged documents will not be taken as awaiver of all privileged documents either on the same subject orgenerally and the privileged documents will be returned. To ensurethe validity of claw-back agreements they should be shown totribunals at the outset of the discovery process. These agreementswill not prevent inadvertent disclosure but they will avoid the harmfuland costly debate over waiver that follows.

INSOLVENCYCHAPTER 5


The United States is a major market forthe majority of the reinsurancecompanies registered in Bermuda and

many will have assets and/or creditors in theUS. Therefore, whenever any of them enterinto liquidation proceedings, or reorganisationproceedings by way of schemes ofarrangement, the insolvency officeholder orscheme administrators will probably as an earlystep, apply to the US Bankruptcy Court forrecognition of the proceedings, pursuant to

Chapter 15 of the US Bankruptcy Code andassistance such as the moratorium onproceedings against the company in the US.The recent decisions of the US BankruptcyCourt (N.Y. Southern District) in the cases ofBear Sterns (chapter 15 Cases & Nos. 07-12383) and Basis [Yield Alpha Fund (chapter 15Case No. 07-12762)] on recognition ofinsolvency proceedings of various CaymanIslands hedge funds have been followed withinterest in Bermuda.

With the sub-prime mess looming, Larry Mussenden and Kehinde George consider recent cases in the US Bankruptcy Court on recognition of

foreign insolvency proceedings

Recognition woes

INSOLVENCY

US RECOGNITIONChapter 15 implements theUnited Nations Commission onInternational Trade Law(UNCITRAL), Model Law onCross Border Insolvency in theUSA. The type of assistance thatwill be provided by theBankruptcy Court underChapter 15 depends on whetherthe foreign proceedings arerecognised as either a foreignmain proceeding or a foreignnon-main proceeding. A foreignmain proceeding means aproceeding pending in thecountry where the debtor has itsCentre of Main Interests(COMI). In this case the foreignrepresentative will be entitled toobtain a stay on all dealings withthe company’s property and amoratorium on all proceedingsagainst the company. A foreignnon-main proceeding means aforeign proceeding other than aforeign main proceeding,pending in a country where thedebtor has an establishment, inwhich case the stay will be at thecourt’s discretion. Obviously, itis desirable to obtain recognitionas a main proceeding.

In the Bear Sterns case, theissue was whether liquidationproceedings in the CaymanIslands in respect of companiesincorporated there were main ornon-main proceedings. Thecourt found that the proceedingswere neither main, nor non-main and did not grantrecognition. In the Basis case,the court required the jointprovisional liquidators of thecompany to provide a

substantial amount of evidenceon a number of issues in excessof what one would normallyexpect. The court also refused togrant recognition of theCayman Islands proceedings asmain proceedings on asummary basis.

EXEMPTED COMPANIESIn the Bear Sterns case, JudgeLifland first found that theCayman Islands proceedingswere not main proceedings asthe Cayman Islands was not theCOMI of the companies. Heheld that the presumption thatthe place of the registered officeis the COMI was rebutted by theevidence that the ‘funds’ onlycohesive connection to theCayman Islands was that theyare registered there. They hadno employees or managers inthe Cayman Islands and he gaveno weight to the fact that thefunds had two directors residentthere; the investment managerand fund administrators and allliquid assets were in the US. Indetermining whether or not theBear Sterns funds had anestablishment in the CaymanIslands sufficient for theCayman Islands proceedings tobe recognised as non-mainproceedings, Judge Liflandstated that the “bar is ratherhigh”. This was especially inview of the Cayman Islands’statutory prohibition againstexempted companies engagingin business in the CaymanIslands “except in furtheranceof their business carried onoutside of the Cayman Islands”.

Similarly, in the Basis case, –one reason why the courtrefused to grant recognition ofthe Cayman Islandsproceedings as mainproceedings on a summarybasis was that the company wasan exempted company requiredto carry on its business outsideCayman. Judge Gerber foundthat the company’s exemptedstatus was sufficient to raise thequestion of whether thecompany could have its COMIin the Cayman Islands. TheBankruptcy Court appears tohave assumed in Bear Sterns andBasis that because an exemptedcompany is not permitted to dobusiness in the Cayman Islands,it cannot have its COMI or anestablishment there.

BERMUDA IMPLICATIONS?Bermuda also has the concept ofexempted companies, which bylaw are not permitted to carryon business in Bermuda exceptwith persons outside Bermudaor with other exemptedcompanies for the furtheranceof their business outsideBermuda and reinsurance ofcompanies incorporated inBermuda. Presumably, theBankruptcy Court would applythe same assumption toBermudian exemptedcompanies. Therefore, theimplications of these decisionsfor Bermudian exemptedre/insurance companies andother companies in theinternational business sector aresimilar to the implications forthese Cayman Islands

CHAPTER 5


!!

companies. Some of Bermuda’s exempted

re/insurance companies have asubstantial presence in Bermudawith large staffs and officebuildings. But there are manywhich do not. Every Bermudiancompany is required to have aregistered office in Bermuda atwhich its registers of membersand directors and officers,minute books and certainrecords of account are to be kept.If it does not have any residentdirectors, it must have a secretarywho is resident in Bermuda and aresident representative. Inaddition, re/insurancecompanies are required tomaintain a principal office inBermuda, which would be theirbusiness office as opposed to theregistered office. Re/insurancecompanies that do not managethemselves may be managed by aBermuda based insurancemanager, in which case they mayuse the office of the insurancemanager as their principal office.

They must appoint aprincipal representative inBermuda who is required tokeep the affairs of the companyunder constant review and hascertain reporting obligations tothe regulator. It remains to beseen whether the minimumpresence of a company inBermuda allowed underBermudian law would besufficient, on currentinterpretation, to justifyrecognition of insolvency orreorganisation proceedings ofthat company as foreign mainproceedings. Or if not whether

it would be sufficient toconstitute an establishment forthe purpose of recognition asnon-main proceedings.

LACK OF RECOGNITIONJudge Lifland suggested that allwas not lost if the foreignproceedings were notrecognised as main or non-main proceedings underchapter 15. As an alternative,pursuant to section 303 ofchapter 3 of the BankruptcyCode, the foreignrepresentative can commenceproceedings under chapter 7 orchapter 11; or pursuant tosection 1509(f) of chapter 15,bring proceedings in the UScourts to collect or recover anyclaim which is the property ofthe company. Section 1509(f)clearly states that suchproceedings can becommenced regardless ofwhether the foreignrepresentative has obtainedrecognition. However, itshould be noted that section1511 of chapter 15 providesthat “upon recognition”, aforeign representative maycommence an involuntary caseunder section 303. Therefore, itappears that a foreignrepresentative has no right tocommence a chapter 7 orchapter 11 case unless theforeign proceedings arerecognised.

Subject to that, thealternative options may not beparticularly attractive to theBermudian representative,whose principal goal in coming

to the US is to obtain protectionfor the company and its assetsagainst proceedings in the US,with the aim of requiringcreditors to make their claims inthe company’s jurisdiction ofregistration. While chapter 11proceedings may be appropriateproceedings for a cross borderinsolvency, they may not be anattractive option for theBermudian officeholder if thereis no reasonable prospect of areorganisation. Also chapter 11proceedings are morecumbersome than a Bermudianliquidation or scheme ofarrangement and much morecostly. Most importantly fromthe Bermudian prospective,chapter 7 and chapter 11proceedings may not beavailable to foreign insurancecompanies, although a holdingcompany of an insurer can usechapter 11 to reorganise thegroup. For example, seeTrenwick America Corporation,et al. Chapter 11 Case No. 03-12635 (MFW).

DAY OF JUDGMENTThe outcome of the appeal ofthe Bear Sterns decision iseagerly anticipated. It will be tothe benefit of Bermudiancompanies if the appeal isupheld and companies with theextent of establishment in theCayman Islands which the BearSterns funds had are at leastentitled to recognition of theirinsolvency and reorganisationproceedings as non-mainproceedings, if not mainproceedings recognition. ®

INSOLVENCYCHAPTER 5


CONTACTS


ATTRIDE-STIRLING & WOLONIECKICrawford House, 50 Cedar Avenue, Hamilton HM 11, Bermuda

OR

P.O. Box HM 2879, Hamilton HM LX, Bermuda

Tel: (001) 441 295 6500, Fax: 441 295 6566E-mail: [email protected], Web: www.aswlaw.com

ROD S. ATTRIDE-STIRLING, J.PSenior [email protected] Tel: 441 296 8314

KEHINDE A.L. GEORGEHead of [email protected] Tel: 441 296 8316

JAN W. WOLONIECKIHead of [email protected] Tel: 441 296 8315

BALA NADARAJAHHead of [email protected] Tel: 441 295 8104

MARC [email protected] Tel: 441 295 1295

PETER [email protected] Tel: 441 295 5788

NEIL [email protected] Tel: 441 295 8146

ALEX [email protected] Tel: 441 294 0135

VICTOR LYON, [email protected] Tel: 441 294 0134

MINA [email protected] Tel: 441 296 0356

LARRY [email protected] Tel: 441 296 8317

NATASHA [email protected] Tel: 441 294 0136

EVERARD BARCLAY [email protected] Tel: 441 295 1652

SHADE [email protected] Tel: 441 295 9159

NATHANIEL A. [email protected] Tel: 441 296 6650

SUSIE [email protected] Tel: 441 294 0134

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