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Home and Overseas Ins Co v Mentor Ins Co (UK), [1989] 1 Lloyd’s Rep 473

Principles of construction of contract.

Facts

Mentor Insurance entered in a number of reinsurance contracts with Home and Overseas Insurance under a standard form of contract with Clause (18), stipulating that disputes arising between the Parties were to be referred to arbitration. Clause (18) further provided that arbitrators were to “interpret this reinsurance as an honourable engagement”, and their award shall effect “the general purpose of this reinsurance in a reasonable manner, rather than in accordance with a literal interpretation of the language. When Mentor when into liquidation, Home and Overseas Insurance applied for a summary judgement for a recovery sums pursuant to the terms of the contract.

Issue

The question arose as to the effect of the words “honourable engagement” in the arbitration clause on the construction of the contractual terms as a point of law, and whether the parties should be, accordingly, permitted to a summary judgement by the court.

Held

The Court held that the effect of the “honourable engagement” provision within the arbitration clause is to permit arbitrators to, as in previous authorities, apply the principle that arbitrators should construe the terms of commercial contracts with view to achieving the commercial purpose of the transaction. Thus, the principle of construction allows the arbitrator to depart from the literal and ordinary meaning of the words in view of the commercial context and purpose of the contractual agreement, as well as in light of the stipulated purpose of the contract in its preamble. This applies particularly to ambiguous terms. However, this principle of contract construction does not permit arbitrators to depart from the law itself. The Court held that the requested summary judgment would require interpretations as to the proper construction of ambiguous contractual terms, which ought to be, instead, referred to arbitration to be determined according to the arbitration clause.

Word Count: 300


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