LOYOLA UNIVERSITY CHICAGO SCHOOL OF LAW REASONED DECISIONS IN ARBITRATOR CHALLENGES MARGARET MOSES

Transcription

1 LOYOLA UNIVERSITY CHICAGO SCHOOL OF LAW LOYOLA UNIVERSITY CHICAGO SCHOOL OF LAW PUBLIC LAW & LEGAL THEORY RESEARCH PAPER NO REASONED DECISIONS IN ARBITRATOR CHALLENGES MARGARET MOSES

2 Margaret L. Moses Professor of Law Loyola University Chicago Reasoned Decisions in Arbitrator Challenges Most arbitral institutions do not provide parties with reasoned decisions regarding the challenge a party makes to an arbitrator based on an alleged lack of independence or impartiality. The outcome of the decision is given without explanation. However, the London Court of International Arbitration ( LCIA ) has recently published digests of reasoned decisions on challenges to arbitrators. 1 In addition, ICSID also publishes a number of reasoned decisions on challenges to arbitrators. This article will focus on the value of these published decisions and what can be learned from them. Published, reasoned decisions on arbitrator challenges can be useful in several ways. First, they can help parties in future cases evaluate whether particular circumstances are likely to result in disqualification of an arbitrator. This can aid parties in making the decision whether to appoint a particular arbitrator, as well as whether to challenge an arbitrator appointed by the other party. Second, reasoned decisions can help arbitrators decide whether to accept or reject appointments. If they decide to accept an appointment, the decisions can provide some guidance as to what information they should disclose. Thus, access to these decisions can provide transparency about how the process works, and how efficacious it is. In considering these decisions and their value, it is important to keep in mind two fundamental tensions that arise with respect to the proper function of challenges to the independence and impartiality of an arbitrator. First, there is a tension about the purpose or usefulness of the challenge: A. On the one hand, the challenge may be a tactic to delay, to destabilize the other side, or to sabotage proceedings. B. On the other hand, it is important that arbitrators be free from taint. It is critical to arbitration that parties have confidence in the fairness of the process, particularly because an award cannot be appealed for mistake of fact or law. For this reason, there must be a means of challenging an arbitrator who may lack independence or impartiality. Thus, the first kind of tension is between the problem of parties using challenges as a tactic to delay, and a concern for parties confidence in the fairness of the process. The second tension involves party autonomy: A. In tribunals with three arbitrators, there is an expectation that parties will have considerable autonomy in selecting at least one co-arbitrator, who will have input in choosing 1 27 Journal of International Arbitration No. 3, Electronic copy available at:

3 the chair. In making their choice, parties want to find an arbitrator who they think will be at least open to decide in their favor. B. However, there is also the expectation that arbitrators will be impartial and independent with respect to all the parties, including the parties that chose them. Therefore, the second kind of tension is between parties having the right to choose an arbitrator who they think may favor them, and their right to expect that each arbitrator will be entirely independent and impartial. The reasoned decisions, therefore, provide some insight into the way decision-makers come to grips with these tensions, and how effective they are at balancing the different concerns of the parties. Published LCIA challenge decisions The LCIA is one of only a very few arbitral institution to write reasoned decisions in arbitrator challenges, and to provide these decisions to the parties. In its journal, ARBITRATION INTERNATIONAL, 2 the LCIA has published digests of all of it decisions between 1996 and 2010, approximately thirty challenges. The digests have been sanitized to remove any identifying language as to parties or arbitrators, and significantly shortened. Challenges are resolved either by the President, or a Vice President of the LCIA Court of Arbitration, or by a Division of three or five members. 3 Most challenges are decided by a Division of three members of the Court. 4 The published decisions include cases under the LCIA Rules, as well as under the UNCITRAL Rules in matters for which the LCIA was the Appointing Authority. 5 The statistics do not reveal the number of cases in which an arbitrator voluntarily stepped down before a challenge went to the LCIA Court. Among the published decisions, however, what stands out is that very few challenges succeeded. There were six decisions where the arbitrator was replaced, and one other where the Chair was invited to step down, and agreed to do so. This produced about a 20% success rate for the challenges. Among the 80% of cases where the challenge was rejected, it was apparent that arbitrators can go wrong in a number of ways without being removed. The decisions revealed a fairly broad tolerance level for certain arbitrator conduct. 2 See id. 3 See LCIA Arbitration Rules, Art. 3.1 (1998). 4 See Thomas W. Walsh and Ruth Teitelbaum, The LCIA Court Decisions on challenges to Arbitrators: An Introduction, 27 Arb. Int l 282, (Vol.3 (2011). 5 See id. at Electronic copy available at:

4 Challenges that Succeeded What kinds of things cause an arbitrator to be disqualified? 6 Three of the LCIA decisions were based on relationships -- facts that go to the independence of the arbitrator. (1) One such relationship was between the arbitrator and the respondents, who were insurance underwriters and underwriting syndicates. 7 In the insurance industry in London, the arbitrator had acted both for and against underwriters involved in the case, and currently was acting on behalf of one underwriter and against another. The Division did not find that repeat appointments were grounds for disqualification, but rather that the arbitrator s current barrister/client relationship with one of the parties who had nominated him sufficed to justify removal. 8 In the other two cases, the relationship was between the arbitrator s law firm and the party. In one, the law firm had been involved with the actual contract at issue in the dispute before the arbitrator, 9 and in the other, the law firm had done work for a company that was associated with one of the parties. 10 As to the disqualifications relating to arbitrator behavior, these tended to be based on the subjective question of impartiality, that is, the real possibility of bias by the arbitrator. In one matter the arbitrator was disqualified for responding intemperately to a challenge that would not have otherwise succeeded. 11 In addressing the grounds of the claimant s challenge, the arbitrator characterized the claimant s submissions as fictitious, false and malevolent, and stated that certain statements were viciously attributed by [claimant s counsel]. 12 Although the Division that was considering the challenge did not think the basic claims alleged by the claimant sufficed to remove the arbitrator, it considered that the self-evident tension and illfeeling that had arisen as a result of the challenge had created justifiable doubts as to the arbitrator s impartiality. 13 The other two decisions in which arbitrators were disqualified concerned ex parte contact between an arbitrator and a party. In one challenge, an arbitrator had given a party advance notice about the content of an award before it was published. 14 In the other challenge, 15 the arbitrator met privately with one party twice, behind closed doors, and the other party was neither invited nor informed. In addition, the arbitrator accused the challenging party of entering his private break-out room and stealing grapes, and then lying about it. The same arbitrator also unilaterally ordered the deletion of certain passages from the transcript, over objection of the respondent s counsel. The Division said the arbitrator failed to act even- 6 Under the LCIA Rules, an arbitrator may be challenged by any party if circumstances exist that give rise to justifiable doubts as to his impartiality or independence. Art. 10(3). 7 See LCIA Ref (2009). 8 See id. 9 See LCIA Ref (2000). 10 See LCIA Ref. UN96/X15 (1996). 11 See LCIA Ref. No (2001). 12 Id. 13 Id. 14 See LCIA Ref (2002). 15 See LCIA Ref. UN3490 (2005) 3 Electronic copy available at:

5 handedly, had given the appearance of bias, and established a real possibility that he had acted or would act with partiality. 16 Finally, in one challenge, the Chair of the Tribunal was invited to stand down from the Tribunal because of close professional relationship between the Chair s law firm and one of the other arbitrators (a barrister), and he agreed to do so. 17 Challenges that did not Succeed Repeat appointments were not viewed as grounds for replacing an arbitrator. 18 Challenges about the way the arbitrator was managing the proceedings were also unsuccessful. 19 These procedural areas were considered within the arbitrator s discretion, and challenges on procedural grounds were generally viewed as vexatious and intended to delay. Examples of additional challenges that did not succeed include the following: 1. the failure of a chair to consult with co-arbitrators was not cause for disqualification; the favorable demeanor of an arbitrator toward the side that appointed him, posing leading and helpful questions to that side, while responding with rudeness to other side, did not suffice for disqualification; comments that suggested an arbitrator had prejudged the issue did not warrant disqualification when viewed in context; 22 and (4) even ex parte communication did not necessarily provide grounds for disqualification. 23 In the ex parte case, the arbitrator had said the hearing was cancelled, but when respondent s counsel travelled to London, the arbitrator met with him and agreed to hold the hearing the following day. The claimant was unable to travel to London from the U.S. in time to attend the hearing. The Division of the LCIA Court found that the arbitrator s talking about the merits ex parte with respondent, and giving claimant in the U.S. less than 24 hours notice of hearing in London was an error in judgment, but not sufficient to remove the arbitrator for bias. 24 It saw no reason to doubt the arbitrator s independence or impartiality. 25 Although these kinds of challenges did not lead to disqualification, they appeared to raise legitimate concerns about the fairness of the process. Published Challenge Decisions in ICSID Cases The 20% success rate in LCIA challenges looks good compared to the rate in ICSID challenges. 26 ICSID challenges rarely succeed. The success rate is more like 3%. Since the 16 See id. 17 See LCIA Ref (2008). 18 See LCIA Refs (2009). 19 See, e.g., LCIA Refs , and (2009); 3431 (2003); and UN0239 (2001). 20 See LCIA Ref (2002). 21 See LCIA Ref (2010). 22 See LCIA Ref (2007). 23 See LCIA Ref (2002). 24 See id. 25 See id., para ICSID only publishes challenge decisions with the consent of all parties. However, each party is free to publish a challenge decision. ICSID decisions tend to be extensively reasoned. In the past the decisions rendered by the Chairman of the Administrative Council gave only the outcome of the decision, but in more recent times, according to Eloise Obadia, senior counsel for ICSID, the ICISD Secretariat decided to give 4

6 early 1980 s through 2011, there have been 42 challenges. In nine of them, the arbitrator resigned voluntarily. 27 Three challenges did not go forward, and only one challenge succeeded. 28 However, another challenge recently succeeded when it was not handled in the normal way because the parties adopted a process that was not consistent with ICSID Convention. 29 Given the paltry success rate, Karel Daele, the author of a recent book on the challenges and disqualification of arbitrators, concluded that the ICSID system of arbitrator challenges simply does not work. 30 There are both procedural and substantive reasons that prevent the ICSID system from working properly. Procedurally, when an ICSID arbitrator is challenged, the decision whether the arbitrator shall be displaced is made by the other two arbitrators. The only time the Chairman of the ICSID Administrative Council makes the decision is if the two arbitrators cannot agree, or if a challenge is made to a sole arbitrator or to two or more arbitrators. 31 The majority of decisions, however, are made by the two other members of the tribunal. The arbitrators reluctance to disqualify a fellow arbitrator may well be a primary reason why ICSID arbitrator challenges do not succeed. The arbitral world is a small world, and arbitrators, who tend to know each other, are not likely to require another arbitrator to step down. Moreover, it is difficult to be the subject challenged, and arbitrators who have been challenged are likely to be quite empathetic when their fellow arbitrators are targeted. At least fourteen ICSID arbitrators have seen the challenge process from both sides, having been both the subject of a challenge, and required to decide the challenge against a fellow member of the tribunal. 32 In addition, the substantive requirement from the ICSID Convention is that arbitrators can be disqualified only on the basis of any fact indicating a manifest lack of the qualities required to serve as an ICSID arbitrator. 33 Those required qualities are set forth in Article 14 of the ICSID Convention. Arbitrators must be persons of high moral character and recognized competence, who may be relied upon to exercise independent judgment. 34 Thus, the other members of a tribunal deciding a challenge must ascertain that their fellow arbitrator had a manifest lack of high moral character, a manifest lack of recognized detailed reasoning in order to be consistent with the evolution of investment arbitration towards greater transparency, and with a view to securing wider confidence in the arbitral process. Challenge Decisions, 23 ICSID Review No. 2 at 377 (2008). 27 Karel Daele, CHALLENGE AND DISQUALIFICATION OF ARBITRATORS IN INTERNATIONAL ARBITRATION, at 205, (2012). 28 See id. 29 See infra, notes and accompanying text. 30 See Karel Daele, Interview, IAReporter, June 8, For criticisms of the ICSID challenge procedures, see Daele, supra note 27, at , Article 58, ICSID Convention. 32 See Daele, supra note 27 at 172, Article 57. ICSID Convention. 34 Article 14 of the ICSID Convention provides as follows: Persons designated to serve on the Panels shall be persons of high moral character and recognized competence in the fields of law, commerce, industry or finance, who may be relied upon to exercise independent judgment. 5

7 competence in the field, or a manifest lack of independent judgment. This presents a very high bar to disqualification. Arguably, this standard is higher than under most commercial arbitration rules, where arbitrators can be disqualified if there is a reasonable or justifiable doubt about their independence or impartiality. 35 Commercial arbitrators have held that the test of independence was a test for appearance of bias, while the test of impartiality was a test for the actual presence of bias. 36 However, when disqualification requires that the arbitrator demonstrate a manifest lack of the required qualities to be an arbitrator, there is no basis for removal if there is only an appearance of bias. To date, no ICSID arbitrator has been removed by a decision of the other two members of the tribunal. 37 In twenty-five decisions submitted to the co-arbitrators, twenty-one were rejected, while four were sent to the Chairman of the Administrative Council because the two arbitrators could not reach agreement. 38 One ICSID case, Perenco v. Ecuador, 39 was handled differently from the normal ICSID challenge procedures. The parties had agreed in advance that any challenges would be determined by the Secretary General of the Permanent Court of Arbitration, who would make the decision in accordance with the International Bar Association Guidelines on Conflicts of Interest in International Arbitration. 40 Thus, the parties essentially opted out of Convention Articles 14, 57 and 58. In Perenco, Ecuador filed a request for disqualification of an arbitrator, Judge Charles Brower, based on comments he had made in the media. The Secretary General concluded that the arbitrator should be disqualified because the remarks had the effect of raising justifiable doubts as to his impartiality. 41 This case raises the question whether parties have the power to adopt a different procedure than that prescribed by Articles 14, 57 and 58 of the ICSID Convention. Some commentators have suggested that these are mandatory provisions, so parties cannot opt out of the requirement as to who makes the decision under Article 58, or what the required standards for disqualification are under Articles 14 and Support for that position is that the phrase except as the parties otherwise agree, is included in a number of provisions in the Convention, 43 but missing from Articles 14, 57 and 58. Thus, these provisions are mandatory law. 44 As Karel Daele noted, in Perenco, ICSID did not acknowledge the challenge decision, and the disqualified arbitrator could have stayed on the Tribunal and compelled Ecuador 35 See, e.g., LCIA Rules. Art. 10(3), supra note See LCIA Ref (2009). 37 See Daele, supra note 27 at 174, See id. 39 PCA Case No. IR-2009/1 (8 December 2009). 40 See id. 41 See id. 42 See, e.g., Sam Luttrell, ICSID Arbitrator Disqualified for Comments in Media, available at ( it is... likely that it was not open to the parties to agreement for the PCA to determine [the challenge] and as such the validity of the agreement to refer challenges to the PCA is, therefore, open to question under international law ); Karel Daele, supra note 27, at 179, See, e.g., Articles 43, 44, 46, 47, and 61 of the ICSID Convention. 44 Because the ICSID treaty is a multilateral treaty, provisions cannot be excluded by bilateral agreement of parties, and certainly not by a party to the treaty and a national of another party. See Luttrell, supra, note 42. 6

8 to re-file a challenge in accordance with ICSID s challenge mechanism. 45 It is doubtful the arbitrator could have been removed under the standards of those articles. Conclusion The LCIA reasoned decisions make a strong contribution to the transparency needed to promote confidence in the arbitral process. It is hoped that other arbitral institutions will follow suit. Parties should know the reasons why their challenges to an arbitrator have succeeded or failed. This knowledge can be useful to parties in determining their future actions both with regard to selecting arbitrators and deciding whether to challenge an arbitrator. It can also be useful to arbitrators in knowing when they should refuse to accept an appointment, what kinds of information they should disclose, and what kind of conduct is expected from them while serving as an arbitrator. The usefulness of the ICSID decisions is somewhat more problematic. The cynical view would be that the extremely low success rate of the ICSID challenges sends a clear message that challenges cannot succeed, so why bother. There are two possible responses to that position. First, although only one ICSID challenge out of forty-two has succeeded under the ICSID challenge procedures, nine arbitrators voluntarily resigned. 46 Such voluntary action should provide some comfort to parties that there is genuine concern in the arbitration community that the process be fair and be perceived as fair. In addition, the publication of challenge decisions creates public awareness of the kinds of arbitrator conduct or relationships that parties believe indicate a lack of impartiality or independence. Because the ICSID decisions are published in complete, non-sanitized versions, this transparency may encourage proper conduct by arbitrators who do not want their reputations for fairmindedness to suffer under the glare of public scrutiny. As a result, arbitrators may be less likely to accept appointments when they might be challenged, and more likely to step down voluntarily if they are challenged on a ground that raises reasonable issues about independence or impartiality. A second response would be to consider if there are ways that the process could be changed to make it more feasible to remove arbitrators in whom the parties do not have confidence. It is unlikely that the ISCID Convention itself could be modified because all of the contracting parties would have to agree. 47 However, suggestions have been made that the ICSID Rules be modified, because that would not require unanimity. Rather a majority of two-thirds of the votes of members of the Administrative Council can amend the Rules. 48 One rule could be that before any challenge is decided, the co-arbitrators or the Chairman of the Administrative Council will seek a recommendation of an outside person, such as the Secretary of the PCA, or another body specially created to deal with arbitrator challenges. 49 Another possibility 45 Daele, supra note 26, at 179, See id., at 204, The requirement of unanimity is found in Article 66 of the ICSID Convention, which states that an amendment enters into force 30 days after all Contracting States have ratified, accepted or approved the amendment. 48 See Article 6(1), ICSID Convention. 49 See Daele, supra note 27 at ,

9 would be to encourage a practice whereby the co-arbitrators agree to disagree, thereby sending the challenge to the Chairman of the Administrative Council for decision. 50 Making the ICSID system more responsive to the perception of conflict by outside stakeholders is a goal worth pursuing. Arbitrator challenges are of paramount importance to maintaining the integrity of the arbitral process. For the system to work, parties need to believe in the fair-mindedness and independence of the tribunal. Much can be learned from the reasoned decisions on arbitrator disqualification. Although it may be difficult to achieve an appropriate decisional balance between frivolous and meritorious challenges, the struggle to do so benefits from being transparent to all participants. The published decisions, particularly the ICSID decisions, make it appear unlikely that an equilibrium has yet been properly established. For arbitration to survive and prosper and maintain the confidence of its users, more institutions should publish reasoned decisions about challenges. More light shining on these issues can make clearer what reforms may be needed, and can perhaps inspire participants in the arbitration community to implement them. 50 See Lars Markert, Challenging Arbitrators in Investment Arbitration: The Challenging Search For Relevant Standards and Ethical Guidelines, 3(2) Contemp Asia Arb. J. (2010). 8