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Conflicts of Interest in International Commercial Arbitration

Overview

Conflicts of interest can arise when an arbitrator has a connection to one of the parties or has otherwise conducted himself or herself in a manner that may give rise to justifiable doubt as to their impartiality. International commercial arbitration is largely a private process but the adage that justice must not only be done but be seen to be done holds true just as much as in litigation. Without this essential principle arbitration would stop being an effective means of commercial dispute resolution as users would lose faith in the process.

In this Practice Note we explore the general principles applicable to conflicts of interest in international commercial arbitration, and how such conflicts are assessed and resolved.

Definitions

Practical Guidance

General principles

International commercial arbitration is not a single uniform system, it arises from the operation of national arbitration systems and the ability to enforce awards in different countries (mainly as a result of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958[8 p.8]). A variety of different rules simultaneously apply to an arbitration, chief among them is the law of the seat (or legal place) where the arbitration is occurring and any institutional rules that the parties have agreed should be applied.

National laws

It is not possible in this Practice Note to survey all national arbitration laws to determine what they say about conflicts of interest, but most will contain language to the effect that an arbitrator must be impartial and independent. For example:

  • New York – under the Federal Arbitration Act a party may challenge an arbitration award on the ground that there was ‘evident partiality or corruption in the arbitrators’ (9 U.S.C. §10(a)(2)).
  • London – under the English Arbitration Act 1996[9 p.8] a party may challenge an arbitrator in the courts if circumstances give rise to justifiable doubts as to his or her impartiality (section 24(1)(a)).
  • UAE (onshore) – under Federal Law No. 6/2018 On Arbitration an arbitrator can be removed ‘if there are circumstances that are likely to give rise to serious doubts regarding his impartiality or independence’ (article 14 of Federal Law No. 6/2018).
  • Singapore – under the International Arbitration Act 1994[10 p.8] an arbitrator can be challenged if ‘there are circumstances giving rise to justifiable doubts as to the arbitrator’s impartiality or independence’ (section 14).

The above shows that the way national laws express the principle varies. The English Arbitration Act 1996 refers to an arbitrator’s impartiality, but unlike Singapore and UAE (onshore), it does not require that an arbitrator be independent of the parties. In a recent consultation paper reviewing the 1996 Act, the UK Law Commission commented that impartiality is the idea that arbitrators are neutral as between the arbitrating parties, and independence is the idea that arbitrators have no connection to them. It considered whether independence should be added, but provisionally concluded that there should be no new express duty of independence as it was not practical in many areas of arbitration for an arbitrator to have absolutely no connections to the parties, what matters is that they are impartial. Most laws however include a duty to be independent, and so do most institutional rules.

Institutional rules

Parties do not have to use an institution to help manage the arbitration process, but it is almost always recommended given the significant benefits using an institution brings. Most institutional arbitral rules address conflicts of interest, for example:

  • ICDR – article 14(1) states arbitrators ‘shall be impartial and independent’.
  • LCIA – article 5 states ‘all arbitrators shall be and remain at all times impartial and independent of the parties’.
  • DIAC – article 14(1) states an arbitrator ‘shall be and remain impartial and independent of the parties’.
  • SIAC – article 13(1) states an arbitrator ‘shall be and remain at all times independent and impartial’.

Soft law and other rules

Whilst the law of the seat and the institutional rules are the primary sources for rules concerning conflicts of interests, there may be other rules to consider. For example, an arbitrator may be a professional (such as a lawyer) with professional rules to avoid conflicts of interest and anything that may bring the profession into disrepute.

There is also ‘soft law’, being guidance and rules generated by industry bodies which are not mandatory, but which parties either choose to follow or which are taken to reflect best practice and so may be consulted when determining whether there is a conflict of interest. The main soft law in this area is the International Bar Association’s ‘Guidelines on Conflicts of Interest in International Arbitration’, first issued in 2004. The IBA Guidelines divide possible conflicts into three traffic light categories:

  • Red list items, being situations where there is clearly a conflict. This is divided further into ‘Red Non-waivable’ situations which result in automatic disqualification of the arbitrator, and ‘Red Waivable’ situations which require notification of the parties and their express consent to be given (i.e., a specific waiver provided) for the arbitrator to act.
  • Orange list items, being situations which ‘in the eyes of the parties give[s] rise to doubts as to the arbitrator’s impartiality and independence’. These require notification of the parties and an invitation to the parties to make an informed decision whether to request that the arbitrator be disqualified on the basis that there is an objective, justifiable doubt as to an arbitrator’s impartiality and/or independence.
  • Green list items, being situations ‘where no appearance of, and no actual, conflict exists from an objective point of view’. No obligation to disclose arises or a limit to disclosure applies based on reasonableness.

The IBA Guidelines are helpful and often relied upon by arbitrators and parties alike and have been referred to in arbitral and court decisions. In Sierra Fishing Company v Farran (2015 EWHC 140 (Comm), 2015 All ER (D) 04 Feb), for example, the English Court relied heavily on the IBA Guidelines when it held there were grounds to conclude a real possibility of bias given the fact that the arbitrator had previously acted as a legal advisor to one of the parties, and had taken the challenge personally.

However, there has equally been some criticism of the IBA Guidelines and in particular, of the non-waivable red list items. W Ltd v M Sdn Bhd (2017 1 All ER (Comm) 981) concerned an arbitrator who worked for a law firm which regularly acted for a client who shared a corporate parent with one of the parties to the arbitration. As per the IBA Guidelines, this scenario would have fallen squarely under the Non-Waivable Red List but the English Court held it instead to be a case requiring case-specific judgment to be applied, thus rejecting the IBA Guidelines’ categorisation. Whilst this case did not decide the matter of the usefulness or otherwise of the IBA Guidelines in general, it does illustrate the fact that care must be taken when applying them to the specific facts of the matter, and that they remain non-binding guidelines.

Types of conflicts

Conflicts of interest can arise in many different forms, but perhaps the three most common are where:

  • there is a connection with a party;
  • a connection to one of the parties’ legal representatives; and
  • where there is an issue in the arbitration that the arbitrator has already expressed a view on.

Each of these instances are discussed in further detail below.

Connection with a party

A connection with one of the parties can arise where, for example, the arbitrator has previously substantively advised one of them in a professional capacity or has a financial interest in one of them. The IBA Guidelines Red List details these as ‘nonwaivable’, being so serious that (in the IBA’s view) it cannot be waived by the parties. An example was the case of Sierra Fishing Company v Farran referred to above. Another example is Suez v Argentina (No 2) (Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal v. Argentine Republic (ICSID Case No. ARB/03/19)), where the tribunal had to consider whether an arbitrator was disqualified because she was a director of Swiss bank UBS, which was a shareholder in two of the claimants. Given that UBS's involvement in the relevant parties was small and passive, and that her role at UBS was supervisory with no involvement in the bank's investment decision-making practices, the tribunal held that the arbitrator’s independence and impartiality were not impugned.

Connection with legal representatives

A common source of conflict is where an arbitrator has a connection with one of the lawyers in the case. The IBA Guidelines Red List (article 2.3.3) expressly provides a potential conflict situation where ‘the arbitrator is a lawyer in the same law firm as the counsel to one of the parties’ (in which case it is waivable), and article 3.3.2 of the Orange List includes the case where ‘the arbitrator and… the counsel for one of the parties are members of the same barristers' chambers’. The Orange List also includes the scenario where there are repeated appointments of the same arbitrator by the same firm. In Cofely Ltd v. Anthony Bingham and Knowles [2016] EWHC 240 (Comm), eighteen percent of the arbitrator’s appointments and twenty-five percent of his income as an arbitrator over three years derived from cases involving the opponent’s solicitors. The English High Court held that this was sufficient to require disclosure under the Orange List, and that there was apparent bias which meant the arbitrator had to be removed.

A recent notable (albeit unusual) example was the Paris Court of Appeal decision in Douala International Terminal (DIT) v. Port Autonome de Douala (ICC Case No. 24211/DDA) to set aside an award because the arbitrator had written a eulogy about one of the parties’ lawyers. In the eulogy he said that he had regular meetings with the lawyer, would consult him before making any important decision, and that he admired and loved him. The Court held this gave rise to doubt about the independence and impartiality of the arbitrator.

An area of controversy has been whether barristers, who operate independently but group together in sets of chambers, give rise to conflicts when two from the same chambers are involved in an arbitration. Traditionally, it has been acceptable for counsel and one of the arbitrators to be at the same set of chambers, but this has come under strain as chambers increasingly market themselves in the same manner as firms of solicitors.

In Hrvatska Elektroprivreda dd v Republic of Slovenia (ICSID Case No. ARB/05/24), the respondent wished to instruct a barrister at the same chambers as one of the arbitrators. When requested, the respondent refused to disclose information about a potential conflict. The tribunal decided that it was more important that the integrity of the arbitral process be maintained than that the party exercise its right to freely choose its legal counsel, and accordingly barred the barrister from appearing. The tribunal placed particular reliance on the facts surrounding the conflict and, in particular, the lateness and unwillingness of the respondent to disclose the scope of counsel’s involvement in the matter.

Issue conflict

Issue conflict arises where an arbitrator has previously expressed a view on a particular legal problem that also arises in the arbitration, such that it may be argued that the arbitrator is no longer impartial or open-minded on the issue. This is traditionally hard to prove and doesn’t arise as often as the other conflicts referred to above. The IBA Guidelines state that expressing a prior opinion on a legal issue falls under the Green List and so no potential conflict arises at all.

In CC/Devs v India, an arbitrator had pronounced a view on a key legal issue in the case, having served on three previous tribunals that had considered the issue and then written a chapter in a textbook defending his view. It was held that this could give rise to doubts to an objective observer as to the arbitrator’s ability to approach the question with an open mind. In Telekom Malaysia Berhad v Republic of Ghana (PCA Case No. 2003-03), the arbitrator was concurrently acting as counsel in another case. It was successfully argued that the arbitrator would be predisposed towards investors by virtue of his concurrent role and therefore he had to resign.

Assessing and resolving conflicts

Disclosing a conflict

Such is the importance of fairness, impartiality and independence, that a positive confirmation at the very outset of a matter by an arbitrator that they are not conflicted is required under many national arbitration laws and by many international arbitral bodies in their institutional rules (for example by providing a certificate or statement of impartiality and no conflict). This exercise often extends to cover not only the parties to the dispute directly, but also connected parties such as third-party funders, legal representatives and experts. The ICC provides a standard acceptance form which includes information regarding impartiality and independence (Statement Expedited Rules[11 p.8]).

The requirement to make disclosure of conflicts is not however universal. The English Arbitration Act 1996 permits removal of an arbitrator where circumstances give rise to ‘justifiable doubts as to his impartiality’ but does not contain any express affirmative duty of disclosure. In contrast, in Federal Law No. 6/2018 it sets out at article 10(4) of Federal Law No. 6/2018 that, ‘any person who is notified of his possible appointment as an arbitrator, shall declare, in writing, all circumstances that are likely to give rise to doubts as to his impartiality or independence, and he, as from the date of his appointment and throughout the arbitration proceedings, shall, without delay, notify the parties and other arbitrators of any such circumstances that may arise and which may give rise to doubts as to his impartiality or independence, unless they have already been informed of such circumstance’. The UAE position rather follows the UNCITRAL Model Law[12 p.8] continuing duty to disclose ‘any circumstances likely to give rise to justifiable doubts as to [the arbitrator’s] impartiality or independence,’ but is silent on the specific level of disclosure required.

Even if the applicable law or rules does not impose such a duty to disclose, parties will want to push arbitrators to make a declaration as to their impartiality as soon as possible to flush out any issues and allow them to be resolved with minimal disruption and delay to the arbitral process.

Arbitral rules can differ in how to identify possible conflicts. The HKIAC Rules call for an objective test regarding presence of ‘justifiable doubts’ as to independence and impartiality (rule 11.4 HKIAC Rules). The IBA Guidelines and ICC Rules call for a subjective analysis by the parties. More complicated still is the ICC’s differentiation between the ‘objective concept’ of independence and the ‘subjective concept’ of impartiality. In every instance, the test is fact-based and disclosure follows if required under the relevant rules. Arbitrators are advised to consult the relevant arbitral rules, guidelines and domestic laws, ensure all of the relevant party information has been received, cast the net wide when running conflicts checks and to resolve any doubt as to disclosure in favour of disclosing.

Arbitrators should also take care to understand as fully as possible the relevant corporate structure of the parties to the dispute so that any conflict check is complete. In carrying out this assessment, an arbitrator may look to the IBA Guidelines to understand the General Standards (Part 1 IBA Guidelines) as well as guidance on their practical application and specifically which situations do and do not constitute conflicts of interest and should be disclosed (Part 2 IBA Guidelines) using the IBA Guidelines’ traffic-light system.

Challenging an arbitrator

Challenging an arbitrator is not a decision to be taken lightly. It will cause some delay and incur costs, and there is the risk that the challenge will fail and the arbitrator will harbor resentment towards the party that made the challenge. But if a challenge needs to be made then it should be made unequivocally and without delay.

It should also be acknowledged that parties seeking to delay an arbitration may well consider challenging an arbitrator on spurious grounds, although the risk of being subject to an adverse cost order should offer some protection against such cynical ploys.

If the parties have not agreed to use an arbitral institution to manage the arbitral process, then a party that wishes to challenge the appointment of an arbitrator will need to make an application to the courts of the seat. This can be costly and time-consuming and is one reason why parties are usually best advised to use an arbitral institution because any such challenge (or other issue with the arbitral process) can be addressed to, and resolved by, the institution quickly without court involvement.

The exact mechanics of bringing a challenge are dependent on the specific arbitral rules being used, but typically a challenge is made by writing to the institution with reference to specific grounds for the challenge and attaching supporting evidence. This challenge once brought generally suspends the arbitral proceedings pending resolution of the challenge, which may take 4 to 8 weeks. Usually the arbitrator under challenge, the parties, and any co-arbitrators are permitted to respond. If the challenge fails, the arbitrator remains in office and the arbitration resumes. If the challenge is successful, the arbitrator is replaced.

Assessing the challenge

Whilst most laws and rules require arbitrators to be impartial, they do not detail how to assess a potential conflict. Nonetheless, the wording of the applicable law and rules will set the threshold and will need to be considered carefully. For example, the specific requirement regarding the doubt as to the arbitrator’s impartiality can vary between the LCIA’s ‘justifiable doubts’ (LCIA Rules) to ICSID’s very stringent standard of ‘manifest lack’ (ICSID Rules) of the qualities required of arbitrators as observed by an objective third party with the relevant knowledge.

Those tasked with deciding on the issue will usually look for guidance in ‘soft law’ (primarily the IBA Guidelines on conflicts) and any available case law, but the nature of the issue is such that it will usually be heavily dependent on the unique circumstances of each case.

The IBA Guidelines neatly summarise the overarching test for a conflict of interest as whether ‘facts or circumstances exist, which, from the point of view of a reasonable third person, would give rise to justifiable doubts as to the arbitrator's impartiality or independence’ (IBA Guidelines General Standard 2(b)) and those doubts are described as being ‘justifiable’ if ‘a reasonable third person, having knowledge of the relevant facts and circumstances, would reach the conclusion that there is a likelihood that the arbitrator may be influenced by factors other than the merits of the case’.

Regarding national laws, in England for example the test for bias is found in the case of Porter v Magill (2002 AC 357), being whether ‘a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased’.

If the institution is tasked with making the decision and rejects the challenge, then it may be possible for the party that made it to make an application directly to the courts of the seat, although in such situations often the arbitration will continue. It can also happen that even though the challenge is rejected by the institution the arbitrator nonetheless voluntarily resigns, not wishing the issue to be raised again on enforcement which could see the award set aside.

The particular impact of a successful challenge to an arbitrator’s appointment will depend on the stage of proceedings at which that challenge was brought and determined. A successful challenge during the appointment stage should disqualify the appointment of that arbitrator. During the arbitral proceedings, an arbitrator's failure to disclose a conflict of interest is grounds for the removal of the arbitrator, and this may cause the proceedings to have to be repeated or at least delayed whilst a new arbitrator gets up to speed. If the award has already been issued, then any discovered failure to disclose a conflict of interest can be grounds for the annulment of the arbitral award.

Key points

Conflicts of interest are a fact of life that will continue to occur, they just need to be properly identified and managed. Although as detailed above, the exact test to be applied can vary between different laws and arbitral rules, the key points are that arbitrators should confirm their impartiality and identify any possible conflict as soon as they can, using the IBA Guidelines for guidance. After that any challenge should be made promptly to minimise the delay to the arbitral process as far as possible.

Related Content

Legislation

  • Federal Law No. 6/2018 On Arbitration

International Legislation and Regulations

International Case Law

  • Sierra Fishing Company v Farran (2015 EWHC 140 (Comm), 2015 All ER (D) 04 Feb)
  • W Ltd v M Sdn Bhd (2017 1 All ER (Comm) 981)
  • Suez v Argentina (No 2) (Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal v. Argentine Republic (ICSID Case No. ARB/03/19)
  • Cofely Ltd v. Anthony Bingham and Knowles [2016] EWHC 240 (Comm)
  • Douala International Terminal (DIT) v. Port Autonome de Douala (ICC Case No. 24211/DDA)
  • Hrvatska Elektroprivreda dd v Republic of Slovenia (ICSID Case No. ARB/05/24)
  • CC/Devs v India
  • Telekom Malaysia Berhad v Republic of Ghana (PCA Case No. 2003-03)
  • Porter v Magill (2002 AC 357)

Notes

  1. ^ [p.2] [p.5] https://www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918
  2. ^ [p.2] https://www.icdr.org/about_icdr
  3. ^ [p.2] https://icsid.worldbank.org/
  4. ^ [p.2] https://www.hkiac.org/
  5. ^ [p.2] https://www.lcia.org/
  6. ^ [p.2] https://www.diac.com/en/home/
  7. ^ [p.2] https://siac.org.sg/
  8. ^ [p.2] [p.5] https://www.newyorkconvention.org/
  9. ^ [p.2] [p.5] https://www.legislation.gov.uk/ukpga/1996/23/contents
  10. ^ [p.2] [p.5] https://sso.agc.gov.sg/act/iaa1994
  11. ^ [p.4] https://iccwbo.org/wp-content/uploads/sites/3/2016/06/ICC-Arbitrator-Statement-Acceptance-Availability-Impartiality-and-Independence-Arbitration-Rules-ENGLISH.pdf
  12. ^ [p.4] [p.5] https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-09955_e_ebook.pdf


This article was first published by LexisNexis

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