23 April 2004
Key Points:
Challenges (tactical or genuine) to arbitrators are increasing, but the standards for deciding on impartiality and independence are unclear. Parties should consider adopting the IBA Guidelines to avoid or prevent unwarranted challenges.
Allegations against arbitrators of bias and lack of independence and the ensuing challenge of arbitrators are becoming more commonplace in international arbitration. This can be frustrating and may be one reason some parties opt for the courts instead of arbitration. However, such choices can come at a high price. Litigating in foreign courts and – if successful – enforcing your rights in a foreign jurisdiction are often difficult and time consuming.
In most common arbitration schemes both parties are entitled to appoint an arbitrator (not their arbitrator). Nevertheless, this in itself may create a degree of suspicion in relation to the impartiality of that party-appointed arbitrator. Although most arbitration laws and rules explicitly require an arbitrator to be impartial and independent, the understanding of those terms is often too vague or too disputed to be of practical assistance.
Arbitrators themselves are often unsure as to what information they need to disclose to the parties (eg. whether an arbitrator is a shareholder in one of the parties, or is a close friend of one of the party’s counsel). Uniform international regulations do not exist and courts in each country apply different standards. Further, the growing interconnectedness of international business, overlapping corporate relationships and the size of large international law firms have all contributed to the uncertainty about which facts and circumstances an arbitrator should disclose and whether they are sufficiently serious to warrant an arbitrator declining an appointment or stepping down.
The result is no real consensus or agreed international standard. Unsurprisingly this has led to an increase in challenges; whether for tactical reasons or because parties and arbitrators were genuinely unsure whether a challenge was appropriate.
In early 2002 the International Bar Association (‘IBA’) Committee D formed a working group to review the issues relating to conflict of interest. The working group presented the second draft of the IBA Guidelines on Impartiality, Independence and Disclosure in International Commercial Arbitration at the IBA conference in San Francisco in September 2003. International arbitration experts from 14 different countries were appointed to review the different national approaches and to consider practical solutions to overcome the existing lack of clarity and uniformity (Doug Jones, the head of the Clayton Utz International Arbitration Group, being a member of the working group). A final draft has recently been prepared by the group and the guidelines are expected to be published by the IBA within the next few weeks.
The aim of the IBA guidelines is to promote greater consistency and uniformity in the determination of impermissible bias, and reduce delays caused by unwarranted challenges. The guidelines are not the first attempt to harmonize these standards. In 1987, the IBA published the Rules of Ethics for International Arbitrators. However, these rules only deal briefly with principles relating to disclosure, and because the IBA Rules of Ethics for International Arbitrators cover a wider subject area they will remain in force as well.
The new guidelines consist of three parts: the General Standards (Part I); the Explanatory Notes (Part II); and Practical Application Lists (Part III). Although the application lists are a useful practical tool to determine whether a certain situation generates a conflict of interest or not, they do not purport to be comprehensive. If a certain situation is not listed in the application list, the general standards have to be taken into account in order to determine whether a conflict of interest is likely to exist or not.
The general standards
The general standards are based upon the research of statutes and case law from many jurisdictions and have attempted to balance the various interests of parties, representatives, arbitrators, and arbitration institutions; all of whom have a responsibility to ensure the integrity, reputation and efficiency of international arbitration. The guidelines expressly mention that arbitrators have to meet the general standards – which are impartiality and independence – at any time during the proceedings.
Whenever a situation arises during the proceedings which could cause a conflict of interest, the arbitrator has to disclose those circumstances and may have to withdraw. According to the general standards, a conflict of interest exists if there are facts or circumstances that, from a reasonable third person’s view and having knowledge of all relevant facts, give rise to justifiable doubts as to the arbitrator’s impartiality and independence. Further, doubts are considered to be “justifiable” if a reasonable and informed third party would reach the conclusion that there was a likelihood that the arbitrator may be influenced by factors other than the merits of the case. This rather legalistic and formal definition of the general standard underlines the usefulness of a practical application list to determine a potential conflict of interest.
A debate arose within the working group about the politically correct naming of the friendly practical application lists. It was finally decided to call them red, orange and green lists (rather than a black, grey and white!). The different coloured lists indicate the different levels of conflict of interest and disclosure requirements.
The practical application list – true colours
The green list encompasses situations where no appearance of a conflict of interest exists. The arbitrator does not need to disclose such circumstances, nor does he or she need to withdraw or refuse to accept the appointment. As an example, no conflict is likely to exist where the arbitrator’s law firm has previously acted against one of the parties, or an affiliate of one of the parties, in a case not related to the current dispute.
The orange list on the other hand covers those situations which in the eyes of the parties “may” give rise to “justifiable doubts as to the arbitrator’s independence and impartiality”. In those cases the arbitrator has a duty to disclose such circumstances to the parties. Parties then have the opportunity to object against that person acting as an arbitrator. However, if no timely objection is made (within 15 days after the disclosure) the parties are deemed to have accepted the arbitrator. A later objection, for example in an attempt to challenge the arbitrator, on the basis of those circumstances which have been disclosed, is not possible.
Finally, the red list contains those situations which give rise to justifiable doubts as to impartiality and independence. The red list is separated into a “non-waivable red list” and a “waivable red list”. The purpose of this distinction is to allow for the highest degree of party autonomy possible, while upholding the overriding principle that no one should be his or her own judge. Therefore the non-waivable red list encompasses situations where this overriding principle would be violated if the person acts as an arbitrator.
For example where there is some form of significant connection between a party and the arbitrator (eg. through legal representation of a company) or where an arbitrator has a significant financial interest in the outcome of the case, he or she would not be allowed to accept the appointment or would have to resign. As a consequence, parties will not be able to waive such conflict situations. On the other hand, situations covered by the waivable red list can be waived by the parties, despite the existence of justifiable doubts as to the arbitrator’s independence or impartiality. This option is a salute to the principle of party autonomy, giving the parties the choice to decide if they would like to have that person act as their arbitrator, notwithstanding the possibility of a conflict of interest. However, parties have to be fully informed about the circumstances and must waive their objections expressly in writing.
The practical application lists provide assistance in the determination of a conflict of interest and, together with the explanatory notes in part II of the guidelines, they make the general standards easier to understand and to apply. However, the question is: who will benefit from the new guidelines? It is clear that the guidelines are primarily addressed to the arbitrator, who has to decide whether to accept an appointment or not, and what circumstances he or she has to disclose to the parties. In this respect it is more a code of conduct for arbitrators. On the other hand the guidelines will support a general standard which will help reduce unnecessary challenges and withdrawals of arbitrators, and thus reduce the occurrence of delay tactics. Furthermore parties are provided with a much better understanding of who they should choose as an arbitrator and what sort of information they should disclose to assist the arbitrator in determining whether a conflict of interest exists. Therefore, when a dispute arises, parties would be wise to read the IBA guidelines before they appoint or nominate an arbitrator. It could save time and money!
