Jun 9, 2016

Michael Erdle - The Role of Arbitrator Disclosure in International Arbitration

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There is a very natural human tendency to claim the game is rigged when one loses.

“The referee was obviously biased against us,” the coach says, explaining the team’s loss.

Donald Trump kept complaining that the Republican Party primary rules were rigged against him, even though he was winning.

So, too, in arbitration, when the losing party seeks to overturn an unfavourable award. This is particularly evident in international arbitration, where there is no right of appeal. Also, in some domestic arbitration cases, where appeals are increasingly limited.

In these situations, lack of jurisdiction or arbitrator bias may be the only way to have an award set aside or block enforcement. But it’s a high-risk strategy that can backfire on the unhappy loser.

This was illustrated in a recent Ontario case, which the presiding judge called “a thinly disguised attempt to avoid the consequences of an adverse decision on the merits,” and awarded significant costs against the applicant “to deter losing parties in international commercial arbitrations from launching baseless ex post facto challenges to an arbitrator’s impartiality.”

The issue in Jacob Securities Inc. v Typhoon Capital B.V., was whether an arbitrator’s failure to disclose a potential conflict of interest involving his former law firm gave rise to justifiable doubts as to his independence or impartiality and a reasonable apprehension of bias.

Thomas Heintzman, an experienced Toronto litigator and retired partner of McCathy Tetreault, was appointed sole arbitrator under the arbitration clause in an Engagement Agreement between Jacob and Typhoon.

Jacob, a Canadian investment bank, had been engaged to raise financing for energy projects promoted by Typhoon, a Dutch company. The dispute related to Jacob’s claim for compensation for financing provided by Northland Power Inc. and Northland Capital Inc. (“Northland”). A Northland executive was a witness in the arbitration.

Mr. Heintzman had confirmed that he was not aware of any conflict relating to the parties or their principals when he was appointed. The parties also confirmed they were not aware of any conflict or grounds to object to the appointment.

But after Mr. Heintzman dismissed Jacob’s claim, Jacob retained new lawyers to challenge the award. Jacob did some research and found that McCarthy’s had acted for Northland and its underwriters on several transactions while Mr. Heintzman was still a partner of the firm.

This was enough to tempt Jacob to ask the court to throw out the award and order a new arbitration.
Everyone agreed that Mr. Heintzman had no actual knowledge of the relationship between McCarthy’s and Northland when he was appointed or at any point during the arbitration, but Jacob argued that he should have done a search with his former firm and disclosed the conflict.

Justice Greame Mew reviewed the current law and international guidelines relating to arbitrator disclosure and decided that it was not reasonable to expect an arbitrator to go to those lengths to discover potential conflicts. It is reasonable to expect a current partner of a law firm to do such a conflict check, but not a former partner, he concluded.

In any event, firms owe a duty to their clients not to disclose confidential information about their clients to third parties, including former partners.
It is worth noting that the information about McCarthy’s representation was public and the parties could have found it out, if they had looked. But no one did, until after the award was issued.

This question of arbitrator disclosure keeps surfacing in international arbitration, because it is an effective way to challenge an award.
Justice Mew referred to the decision of the Paris Court of Appeal in SA Auto Guadeloupe Investissements v Colombus Acquisitions Inc, RG 13/13459 (cour d’appel de Paris, 14 October 2014), in which the court declined to enforce an award because Canadian arbitrator Henri Alvarez did not fully disclose a conflict of interest relating to his law firm, Fasken Martineau. The arbitrator’s declaration stated that although his firm had previously represented a parent company of the claimant, it was no longer doing so. Unknown to the arbitrator, however, the firm had continued to represent the parent company. The court considered this work as an important engagement for the firm and therefore its nondisclosure undermined the arbitrator’s independence and impartiality.
That decision was recently confirmed by the French Cour de Cassation (Civ. 1, 16 December 2015, N°D14-26.279), under the Code of Civil Procedure which requires that:
Before accepting a mandate, an arbitrator shall disclose any circumstance that may affect his or her independence or impartiality. He or she shall also disclose promptly any such circumstance that may arise after accepting the mandate“. (Article 1456)
Although this provision came into effect after the arbitration had commenced, the court found that it simply reflected the existing strict standard of disclosure under French law. In particular, there is a continuous obligation to disclose both personal relationships with participants in the arbitration and factual circumstances involving the arbitrator’s law firm.

Contrast this strict interpretation with the decision of the English High Court in a case involving another Canadian arbitrator, David Haigh. W Limited v. M Sdn Bhd arose from a London Court of International Arbitration proceeding where, shortly after Mr. Haigh’s appointment, the parent company of the claimant in the arbitration acquired a company that was a client of Mr. Haigh’s law firm. He was not aware of the acquisition or the relationship between the two companies.

The court acknowledged that this situation fell squarely within the “Non-Waivable Red List” of the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration, which refers to situations where “the 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, the court found that the Guidelines are not binding under English law and that the proper test was whether the failure to disclose was “such as to reasonably cause a doubt regarding the independence and impartiality of the arbitrator”.

It is interesting that, in finding no such reasonable doubt in this case, the court relied heavily on an affidavit submitted by Mr. Haigh describing his relationship with the firm, and the ongoing conflict checks he conducted which did not disclose the relationship between the firm’s client and the claimant in the arbitration.

The court also criticized the IBA’s “Non-Waivable Red List”, questioning why the parties should not have the discretion to waive a potential conflict if it has been disclosed.

I would add a further comment that the idea of a non-waivable list of prohibited relationships seems particularly draconian when a situation arises – or is discovered and disclosed – after the arbitration has begun. Why should the parties be forced to throw away the time and money they have already spent and start again with another arbitrator?

It is important to remember that in all of these cases there was no direct relationship between the arbitrator and the client of their current or former law firm. And there was no personal knowledge of the relationship or the potential conflict.

Nevertheless, they reinforce the critical importance of full and timely disclosure of any relationship that could be viewed as a conflict, especially in international arbitration.
And, as it becomes more difficult to challenge domestic arbitration awards on the merits, it will be interesting to see whether Canadian courts will follow the strict rules of the French courts or the more pragmatic approach of the English courts.

Justice Mew’s decision in the Jacob Securities case suggests it may be the latter.

Ed’s Note – This article was originally posted by the Canadian Online Legal Magazine via Slaw.ca


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