Commercial Arbitration and Conflicts of Interest
In a recent judgment, the English Commercial Court rejected a challenge to two arbitral awards on the basis of conflict of interest, even though the challenge was clearly supported by the internationally respected IBA Guidelines on Conflicts of Interest.
In the world of international arbitration, a general consensus exists that arbitrators must be impartial and independent of the parties. To that end, arbitrators shall – inter alia – avoid conflicts of interest. However, there is a lack of uniformity in the applicable norms concerning conflict of interest. In order to promote greater consistency and to avoid unnecessary challenges by arbitrators, the International Bar Association (IBA) published (revised) Guidelines on Conflicts of Interest in October 2014. These guidelines aim to assist not only parties and arbitrators, but also arbitration institutions and national courts in dealing with questions of conflict of interest.
To that end, the IBA Guidelines provide for seven General Standards in relation to the behaviour of arbitrators, explanations to these standards and four Application Lists. Most interesting is the so-called Non-Waivable Red (Application) List, in which specific situations have been detailed which the international arbitration community considers to be (cases of) conflict of interest.
Although the IBA Guidelines do not override any applicable national law, they have gained ‘wide acceptance’ within the international arbitration community. Besides, several national courts in countries such as Austria, Germany, Sweden, Switzerland and the United States consult the IBA Guidelines when considering challenges to arbitrators. A judgment of the Commercial Court in England, dated 2 March 2016, illustrates a conflict of norms between the IBA Guidelines and national (English) law. Which approach does the Commercial Court prefer?
Commercial Court favours English law approach over IBA Guidelines
The facts that gave rise to the underlying judgment are as follows. Two corporations – one incorporated in the British Virgin Islands (the Claimant), the other incorporated in Malaysia (the Defendant) – contracted in relation to a project in Iraq. Unfortunately, a dispute arose and an arbitral procedure at the London Court of International Arbitration (LCIA) was commenced by the Defendant in April 2012. The LCIA appointed Mr David Haigh QC, a Canadian lawyer, as sole arbitrator. Mr Haigh made two arbitral awards in October 2014 and March 2015.
After these two awards had been made, it turned out that the Canadian law firm of Mr Haigh had provided ‘substantial’ legal services to a client company that has the same corporate parent as the Defendant. Besides, the law firm of Mr Haigh has earned ‘substantial’ financial income from advising this affiliate.
Although Mr Haigh stated that he was not aware of this situation and would have made disclosure if he had known, the Claimant challenged the arbitral awards on the grounds of ‘serious irregularity’ before the English (Commercial) Court. This challenge ground has been laid down in section 68(2) of the English Arbitration Act 1996. More specifically, the Claimant alleged ‘apparent bias’ based on alleged conflict of interest, i.e. the law firm’s involvement with the Defendant. In order to support his position, the Claimant relied on ‘[t]he fact that the conflict of interest in this case fell squarely within paragraph 1.4 of the Non-Waivable Red List within the 2014 IBA Guidelines’.
Indeed, paragraph 1.4 applies to situations where ‘[t]he arbitrator or his or her firm regularly advises the party, or an affiliate of the party, and the arbitrator or his or her firm derives significant financial income therefrom’. However, ‘without hesitation’, Mr Justice Knowles concluded that the Claimant’s challenges to the awards had to fail. In order to reach this conclusion, Mr Justice Knowles relied on the English test for ‘apparent bias’, i.e. whether ‘a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased’. Considering the facts of the underlying proceedings, there was no suggestion that the arbitrator had done any work for the client company. Furthermore, Mr Haigh operated as a sole practitioner, using the firm for secretarial and administrative assistance for his work as arbitrator, and he would have made disclosure if he had been alerted to the law firm’s involvement with any of the parties. Therefore, according to Mr Justice Knowles, a fair minded and informed observer would not conclude that there was a real possibility that the tribunal was biased. As a consequence, the challenge had to be rejected.
With regard to the Claimant’s reliance on the IBA Guidelines’ Non-Waivable Red List, Mr Justice Knowles underlined that these guidelines were not binding on the English Court. Nevertheless, as the present arbitration was international, and parties often choose English Law in an international context, Mr Justice Knowles ‘prefer[red]’ to consider the IBA Guidelines and explain why he did not, ‘with respect’, think that they could be correct.
Mr Justice Knowles’ main argument was that the current situation should not have been included in the Non-Waivable Red List as the situation was ‘classically appropriate[s] for a case-specific judgment’. In this regard, he argued that there were ‘weaknesses’ in the IBA Guidelines as they led parties to focus more on assumptions derived from facts than on the specific facts of a case (as the English test for apparent bias does). Therefore, Mr Justice Knowles favoured the English law approach over the IBA Guidelines. In addition, Mr Justice Knowles refused permission to appeal as he considered this issue ‘one for the IBA to resolve and not a matter for the Court of Appeal’.
Although Mr Justice Knowles recognised the ‘distinguished contribution’ of the IBA Guidelines 2014 in the field of international arbitration, it is interesting to see how he called into question the scope of (paragraph 1.4 of) the Non-Waivable Red List. It may perhaps not be surprising that the English Court will not consider itself bound by (the IBA) Guidelines. Nevertheless, this judgment might be a wake-up call for the arbitration community: notwithstanding guidance from the IBA Guidelines, the English law approach will be decisive in conflict of interest issues before English courts.