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20 August 2020

Apparent Bias in Arbitrations: the importance of disclosure for Arbitrators.

The right to a fair trial and / or the right to have your claims heard and carried out in accordance with the rules of natural justice, is a fundamental tenet of litigation throughout the world.

Two of the principles that sit behind these tenets include:

  • There should not be any bias and / or apparent bias from the individuals deciding the outcome of the case
  • There should not be a conflict of interest between those advocating your case with those parties they are advocating against

Four years ago, there was a spate of decisions in the English Courts which considered these principles in the context of UK Adjudications and Arbitrations.

Those cases confirmed that the test under English law, was as set out in Porter v Magill, of whether:

“a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.”

More recently, the English Courts have had to consider the position of potential conflicts of interests of experts, when it granted an injunction preventing a party from appointing an expert in an ICC arbitration on the basis that there was a potential conflict.

Now, a recent decision by the International Centre for Investment Disputes resolution (ICSID) Annulment Committee has looked at the roles and relationships between experts, arbitrators and advocates and the potential for conflicts of interest that can arise.

Background

Eiser Infrastructure Limited and Energia Solar Luxembourg (Eiser) brought claims against Spain alleging regulatory reforms it had implemented fell foul of the Energy Charter Treaty, the energy industry international investment agreement.  Eiser claimed €256M in damages.

In May 2017, the three-panel arbitral tribunal decided unanimously in favour of Eiser and ordered Spain to pay €128M in damages.

Shortly after the award, Spain requested an annulment of the decision on the basis that Eiser’s appointed tribunal member (Dr Stanimir Alexandrov) had failed to disclose a 15-year working relationship with Eiser’s appointed expert (Mr Carlos Lapuerta).  Mr Lapuerta worked for the firm the Brattle Group.  Due to his failure to disclose this relationship, Spain alleged that Mr Alexandrov had violated his obligation of independence and impartiality.

During the annulment proceedings, the panel noted that:

  • Dr Alexandov had been appointed as arbitrator in four cases in which the Brattle Group had been instructed as the experts by the party that appointed him as arbitrator.
  • In two of those cases, Mr Lapuerta was the appointed expert and three of those cases proceeded at the same time as the arbitration involving Spain.
  • In a further eight cases, Dr Alexandrov had been appointed counsel where the client had engaged the Brattle Group as expert.
  • In three of those cases, Mr Lapuerta was the testifying expert.

In analysing the issues, the committee asked itself the following questions:

  1. Whether the right to the independence and impartiality of an arbitrator is a fundamental rule of procedure
  2. Whether there had been a departure from a fundamental rule of procedure
  3. Whether the lack of impartiality or independence on the part of Dr. Alexandrov may have had a material effect on the Award and thus amounts to a serious departure from a fundamental rule of procedure

Unsurprisingly, the Committee decided question 1 in the affirmative.  It went further and stated that:

“the arbitrator has a duty not only to be impartial and independent but also to be perceived as such by an independent and objective third party observer. This duty includes the duty to disclose any circumstance that might cause his reliability for independent judgment to be reasonably questioned by a party.”

This statement is similar to the test set out above in Porter v Magill.

 “a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.”

On question 2, the Committee decided that Dr Alexandrov’s decision or failure to disclose the “relationship” with Mr Lapuerta deprived Spain the opportunity to challenge him about that “relationship” and deprived Spain the benefit of an independent and impartial tribunal.

They concluded that based on an objective assessment of the facts, it was apparent that Dr Alexandrov lacked impartiality.

On question 3, the Committee concluded that despite there being a three person panel, they considered that there was the opportunity and at least expectation that Dr Alexandrov would have held discussions with the other panel members and had the opportunity to influence the decision process during the course of their deliberations.

On that basis, the Committee decided that Dr Alexandrov’s views could have had a material bearing on the opinions of the panel and that the Committee could not exclude that possibility.

Having considered these issues, the Committee concluded that the undisclosed “relationship” could have had a material effect on the award and the non-disclosure was sufficiently serious to warrant an annulment of the award.

Analysis

Due to the very nature of the professions of counsel and experts, it is inevitable that relationships will be formed and counsel and experts may find themselves acting for the same client on multiple matters. 

Where those individuals also act as arbitrators, or adjudicators there is the prospect that they could well find themselves in a similar situation to which Dr Alexandrov and Mr Lapuerta found themselves.   This is particularly the case where disputes arise in very discreet areas and there is a limited number of professionals operating in those areas.

Although nothing untoward was alleged, it was the fact that there was non-disclosure of the relationship that Committee considered raised the prospect that there could be apparent bias and could jeopardise the enforceability of any award made by the arbitral panel / adjudicator.

This of course had serious implications for Eiser.  It had a €128M award annulled and it was ordered to pay the costs of the annulment proceedings and Spain’s legal costs totalling just over USD$4M.

Whilst all cases must be judged on their particular circumstances, decisions as to whether there has been bias or apparent bias will be decided on what a fair observer would consider. 

Experts, arbitrators and counsel need to consider very carefully before accepting an instruction whether there is a potential conflict of interest and / or the “relationships” they have with the professional advisers involved in the arbitration and whether that could give rise to a potential conflict of interest.

It seems that given the significant risk that non-disclosure of such “relationships” could lead to findings of apparent bias and the annulment of decisions, arbitrators, experts and counsel should err on the side of caution and disclose such “relationships”.  It is not inevitable that there will be a finding of a conflict of interest and full and frank disclosure of these relationships, allow the parties an opportunity to investigate and question such matters and make informed decisions on the potential risks.


This article was written by Michael O'Connor, please contact him at Michael.O'Connor@crsblaw.com for more information. 

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