IBA Guidelines on Conflicts of Interest under Fire

Hong Kong as a super-connector in the “One-Belt-One-Road” initiative has all along adopted a pro-arbitration approach to resolve disputes. Parties of different social, cultural and economic backgrounds understandably have different norms, perceptions and values judgment as to what amount to real or perceived conflict of interest. This essay explains how the IBA Guidelines usefully provide uniformity on disclosure obligations for arbitrators so as to remove justifiable doubts on their impartiality and independence. It then addresses inadequacies in the Guidelines that call for caution on the part of the arbitration users.

Introduction

International arbitration has been increasingly used in the commercial world to resolve disputes. Parties to arbitration invariably count on the impartiality and independence of arbitrators. The United Nations Commission on International Trade Law (“UNCITRAL”) Model Law, adopted in Hong Kong, provides vide Art. 12(2) that “an arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence ...”.  A relevant question is what should be the scope of the disclosure obligations by an arbitrator.

IBA Guidelines

The International Bar Association (“IBA”) Guidelines on conflicts of interest in international arbitration was revised in October 2014 in light of experiences since its launch in 2004. The updated Guidelines serve to promote clarity, certainty and uniformity. They help avoid ill-founded challenges to arbitrators.

The 2014 IBA Guidelines comprises two parts. The first part details seven General Standards while the second part sets out a Practical Application of the General Standards and a list of situations which may occur. The situations are categorised into Red, Orange and Green lists after the colours of a traffic light.

Red, Orange, Green

The Red List details specific situations that, depending on the facts of a given case, give rise to justifiable doubts as to the arbitrator’s impartiality and independence. It comprises a Non-Waivable Red List and a Waivable Red List.

The Non-Waivable Red List addresses severe situations where the conflict flies in the face of the overriding principle that no person shall be his own judge. Such situation is non-waivable and the arbitrator cannot act. An example is that an arbitrator has a significant financial or personal interest in one of the parties or the outcome of the case.

The Waivable Red List covers serious but not severe situations whereby the parties being aware of such conflict can choose to agree to the waiver. An example is that the arbitrator’s law firm has a significant commercial relationship with an affiliate of one of the parties.

The Orange List sets out specific situations that, depending on the facts of a given case, may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence. The arbitrator has a duty to disclose such situations. For example, the arbitrator has, within the past three years, been appointed as arbitrator on two or more occasions by one of the parties.

Finally, the Green List includes specific situations where no appearance and no actual conflict of interest exists from an objective point of view and thus the arbitrator has no duty to disclose. An example is where an arbitrator has previously given a talk in public touching on an issue that arises in the arbitration.

The IBA Guidelines have been commonly used by arbitration institutions and parties to deal with the ethical standard expected of arbitrators. They have also provided a user-friendly guidance to facilitate consistency in handling challenges to arbitrators.

Line of Fault

However, the recent English court decision in W Ltd v M SDN BHD [2016] EWHC 422 (Comm) exposed a line of fault in the 2014 IBA Guidelines. The court found it difficult to understand why the arbitrator, who had not been involved in giving advice to an affiliate of the Defendant, should automatically be barred from acting under the Non-Waivable Red List.

In that case, the arbitrator was a partner of a law firm. While neither the arbitrator nor his firm provided any legal services to the Defendant, his firm earned a substantial income from legal services provided to Company Q, an affiliate of the Defendant.  However, the arbitrator never, himself, provided any legal services to Company Q. The arbitrator indicated that he would have made a disclosure had he been alerted to the situation. But he was not, as he essentially operated as a sole practitioner using the firm for secretarial and administrative assistance for his work as an arbitrator.

The Claimant challenged the arbitral awards by relying on para. 1.4 of the Non-Waivable Red List under the IBA Guidelines which reads: “[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.”

The Claimant alleged that since the arbitrator’s firm regularly provided legal services to the Defendant’s affiliate (Company Q) and derived substantial financial income from that advice, there were justiciable doubts as to the arbitrator’s independence and impartiality. Given that the conflict falls under the ‘Non-Waivable’ Red List, it is not a conflict of interest that can be waived by agreement of the parties.  Thus, the Claimant argued, he was apparently biased.

The English court applied the Porter v Magill test for apparent bias: whether a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased. On the facts, a case of apparent bias was not made out.

The court also examined the 2014 IBA Guidelines and thought they could not be correct.

Analysis of Guidelines

General Standard (2)(d) provides that “justifiable doubts necessarily exist as to the arbitrator’s impartiality or independence in any of the situations described in the Non-Waivable Red List.” 

The use of the words “necessarily exist” means that such situations do not allow for case-specific judgment. This view is echoed by the Explanation to General Standard 2(d) which states that “… because no one is allowed to be his or her own judge … the parties, therefore, cannot waive the conflict of interest arising in such a situation.”

General Standard (6)(a) however provides that “… the relationship of the arbitrator with the law firm should be considered in each individual case” and “the fact that the activities of the arbitrator’s firm involve one of the parties shall not necessarily constitute a source of such conflict … similarly, if one of the parties is a member of a group with which the arbitrator’s firm has a relationship, such fact should be considered in each individual case, but shall not necessarily constitute by itself a source of a conflict of interest…”.

The Explanation to General Standard (6) (a) adds that in the case of a group of companies, “because individual corporate structure arrangements vary widely, a catch-all rule is not appropriate. Instead, the particular circumstances of an affiliation with another entity within the same group of companies, and the relationship of that entity with the arbitrator’s law firm, should be considered in each individual case.” 

A line of fault was thus exposed in light of the internal inconsistency between General Standard (2)(d) and General Standard 6(a) in the IBA Guidelines.

Viewed in the round, the assumption that justifiable doubts “necessarily exist” in certain situations pursuant to General Standard (2)(d) contradicts the approach of examining the given facts of each individual case under General Standard 6(a). It is noteworthy that para. 2 of Part II of the IBA Guidelines expressly qualifies the Non-Waivable Red List of specific situations that “give rise to Justifiable doubts as to the arbitrator’s impartiality and independence” with the phrase “depending on the facts of a given case”.

The court also criticized that the IBA Guidelines do not allow the parties an option to waive the conflict in situations like the present case. There are situations in the Waivable Red List, which can sound more serious than the circumstances of the present case, such as where the arbitrator has given legal advice on the dispute to a party or an affiliate of one of the parties, or, where a close family member of the arbitrator has a significant financial interest in the outcome of the dispute.

In the circumstances, the court held that though the situation fell within the Non-Waivable Red List, it was not a sufficient basis to set aside the arbitral award made by the arbitrator.

Lessons to Learn

An important lesson for arbitration practitioners is that the IBA Guidelines are merely a guide in a conflict of interest situation. They are a reference tool rather than a straitjacket for arbitration practitioners.

The lack of case-specific judgement in conflict situations currently listed in the Non-Waivable Red List calls for an overhaul in order to regain clarity and to maintain relevancy.

A mechanical application of the Red-Orange-Green traffic light system in the IBA Guidelines without reference to the particular circumstances of the case will attract court criticism and disapproval.

The better view is that one should exercise specific judgment on a case-by-case basis to decide if there could be apparent or real conflict in situations listed under the “Non-Waivable” Red List. This is in line with the approach adopted in the Waivable Red List, and thus cannot be said to undermine the purpose of the IBA Guidelines in promoting certainty and reducing challenges to arbitrators.

There is a growing trend for arbitral institutions like ICC to depart from the disclosure obligations in accordance with the Red-Orange-Green traffic light lines of the 2014 IBA Guidelines. Thus, in its 2016 Note to the 2012 Edition of the ICC Rules of Arbitration, the updated Note requires prospective and appointed arbitrators to pay particular regard to conflicts arising from their business relationship (including their firm’s business relationship) with one of the parties or one of its affiliates. It also reminds arbitrators of their ongoing duty of disclosure.

Conclusion

One should be cautious in challenging or defending the appointment of an arbitrator as each case turns on its own specific facts. While a tactical challenge to arbitrators may still be made, it should be noted that arbitrators can in turn argue that they should not be automatically conflicted purely on the basis of prescriptions listed under the Non-Waivable Red List.

Jurisdictions: 

Fellow, Hong Kong Institute of Arbitrators