In a January 20, 1998 decision of first impression in Missouri, the state Court of Appeals, Western District, affirmed a lower court ruling denying a Reinsurer's motion to compel arbitration because of the presence of a service-of-suit clause. Transit Casualty Company in Receivership is seeking nearly $1,000,000 under its reinsurance agreements with Certain Underwriters at Lloyd's of London, together with statutory punitive damages for wrongful refusal to pay amounts due under the agreements. Transit additionally claims that the Reinsurers have breached a contractual duty of good faith and are guilty of "vexatious delay" in making payments to Transit. Transit commenced suit in state court, and the Reinsurers moved to dismiss on the ground that the dispute was subject to arbitration.
The Reinsurers argued on appeal that the service-of-suit clause in the reinsurance agreements did not signify an intent to waive their rights under the general arbitration clause. Rather, it was merely an enforcement mechanism to confirm an arbitration award. Transit, in turn, responded that the service-of-suit clause was specific to the issue of "failure to pay" and afforded it greater rights under the agreements. The precise contractual language at issue is: Article XVII - Service of Suit Clause
In the event of the failure of the reinsurer to pay an amount claimed to be due hereunder, the reinsurer will, at the request of the reinsured, submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction and all matters arising hereunder shall be determined in accord with the law and practice of such court.
In any such suit instituted against the reinsurer under this agreement the Reinsurer will abide by the final decision of such court or any reviewing court.
Article XXII - Arbitration Clause
All disputes or differences arising out of this agreement shall be submitted to the decision of two Arbitrators . . . and in the event of the Arbitrators [sic] failure to agree, to the Arbitrators [sic] failure to agree, to thedecision of the Umpire to be chosen by the Arbitrators.
The Court analyzed the language of the reinsurance agreements utilizing certain standard rules of construction in order "to ascertain the intention of the parties as expressed in the whole of the contract." Finding a patent ambiguity between these two clauses with respect to claims of "failure to pay," the Court noted that a specific provision within a reinsurance agreement will prevail over a more general provision and that the Court was bound to harmonize the language to give meaning to all of the contractual terms rather than leave some of the terms without function or sense. Accordingly, the Reinsurers' interpretation of the service-of-suit clause would render the language "amounts claimed to be due" [by Transit] meaningless and change the contract to read "amounts awarded at an arbitration panel" [to either party]. That is, Transit's unilateral rights under the service-of-suit clause would be swallowed up by the broader arbitration clause.
The Court further noted that the agreements were drafted by the Reinsurers and that all ambiguities should be read against them since the Reinsurers could have expressly made the service-of-suit clause to be merely an enforcement mechanism for arbitration awards through simple language modifications. Finally, by construing the service-of-suit clause to allow litigation of "failure to pay" claims, the Court harmonized two seemingly conflicting provisions since arbitration is not barred for such claims but remains a viable option under the reinsurance agreements if Transit elects to invoke it.