What is an 'Honorable Undertaking'

An honorable undertaking is a treaty clause commonly associated with reinsurance contracts encouraging an open dialogue between two parties in a disputed contract.

Breaking Down 'Honorable Undertaking'

An honorable undertaking clause provides that arbitrators interpret a disputed reinsurance contract as an honorable exchange and not solely as a strict legal document. Reinsurance contracts typically contain many rules pertaining to how each party agrees to meet its requirements. When disagreements arise it is up to the courts to interpret what the intentions of each party were at the contract’s inception. The inclusion of an honorable undertaking clause in the original contract can help narrow the focus of any subsequent legal disagreements.

Honorable undertaking clauses essentially formalize a sort of gentlemen’s agreement between parties, indicating that all parties should act with integrity and goodwill when dealing with each other. For example, there are often times when inadvertent errors are discovered later in the original agreement, errors that can be easily repaired to mutual satisfaction. Examples of these can range from typos that actually change the meaning of a particular clause to other minor editing issues best fixed for the sake of clarity.

When a disagreement does arise, the inclusion of an honorable undertaking clause helps guide the arbitrators working toward a resolution. For example, the clause may instruct that common practices found in the industry be given due weight when evaluating options. Contracts containing honorable undertaking clauses make subsequent legal interpretation clearer.

Here is an example of a boilerplate Honorable Undertaking clause: "This agreement is considered by the parties hereto as an honorable undertaking, the purpose of which is not to be defeated by a strict or narrow interpretation of the language thereof."  

Pros and Cons of Honorable Undertakings

An Honorable Undertaking clause confers varying degrees of interpretation and discretion on the part of arbitrators in departing from the strict language of the original disputed contract. While this carries certain advantages to both parties at the time of writing the contract, in practice it opens up the original agreement to interpretation from the arbitrator that could be colored in ways not originally desired or foreseen by either party. As a result, one needs to give careful attention to whether one wants to risk opening up an original contract to this subsequent and possibly more subjective reading.

As a result of the above concern, the usage and acceptance of these clauses may be dictated by the most recent experiences of either party in a disputed contract containing an Honorable Undertaking clause. If the recent experiences have been without controversy, their usage is much more likely to be accepted by both parties in future agreements.

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