Articles. Away from the Manger: Disqualification of Arbitrators. Melanie Willems The Arbiter Winter 2013

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1 Away from the Manger: Disqualification of Arbitrators Melanie Willems The Arbiter Winter 2013 Challenges to arbitrators have become more common in the field of investment treaty arbitrations. Parties seeking to unseat the arbitrator nominated by the other side almost seems par for the course these days. This has delayed some substantive proceedings significantly. The chairman of ICSID s Administrative Council s recent disqualification of an arbitrator has therefore caught my eye. In Blue Bank International & Trust (Barbados) Ltd v Venezuela (ICSID Case No. ARB/12/20) ( Blue Bank ), ICSID disqualified an arbitrator because he was a partner in an international firm, and some of his partners, based in other offices of the same firm s global network, acted as counsel against Venezuela, for another investor in a separate ICSID arbitration. Whilst it is common for ICSID arbitrators to be challenged, it is rare for them to be disqualified. Some commentators have described the decision as ground-breaking, as ICSID is said to have applied a less onerous test for establishing the basis on which the arbitrator was disqualified. The decision is also of interest for practical reasons. It deals with a situation that parties may encounter more frequently than overt bias or favouritism by an arbitrator. A number of arbitrators practise from within international firms with offices or affiliations in numerous jurisdictions. This article looks at the principles governing disqualification of arbitrators under the ICSID Convention in comparison to the position under English law, and considers the basis on which the Chairman in Blue Bank disqualified a well-known practitioner who himself had felt that his independence was not in question. Independence and impartiality - two sides of the same coin? The basic premise is that arbitrators should be independent and impartial. If they are not, or if circumstances give rise to justifiable concerns in this regard, arbitrators should step down. If they do not step down, they may be challenged by the parties, and disqualified by the competent supervisory body - be that a national court or an arbitral institution. These principles are fundamental and, unsurprisingly, enshrined everywhere one cares to look. Both the LCIA and ICC Rules of Arbitration provide for arbitrators to be impartial and independent (see Article 5.2 of the LCIA Rules, and Article 11(1) of the ICC Rules 2012). There has been academic debate about whether independence and partiality are really the same thing. The ICSID Convention requires all arbitrators to be persons of high moral character and recognised competence, who may be relied on to exercise independent judgment (Article 14(1)). Looking just at the English version of the ICSID Convention, impartiality makes no appearance. However, the Spanish (and equally authentic) version of the treaty refers to imparcialidad de juicio (impartiality of judgment). Decisions in a number of ICSID decisions on challenges, including Blue Bank, have stated that arbitrators must be both independent and impartial, since all official versions of the ICSID Convention must be taken into account. ICSID jurisprudence regards these two requirements as serving the same purpose. In Urbaser S.A. and Others v Argentine Republic (ICSID Case No. ARB/07/26), the tribunal stated that: 43. The requirements of independence and impartiality serve the purpose of protecting the parties against arbitrators being influenced by factors other than those related to the merits of the case. Nonetheless, there is a fine distinction. In Suez and others v Argentine Republic (ICSID Case Nos. ARB/03/19 and ARB/03/17) ( Suez ) (Decision of 12 May 2008), the tribunal noted that independence was concerned with the absence of any connection:

2 28. The concepts of independence and impartiality, though related, are often seen as distinct, although the precise nature of the distinction is not always easy to grasp. Generally speaking, independence relates to the lack of relations with a party that might influence an arbitrator s decision. Impartiality, on the other hand, concerns the absence of a bias or pre-disposition towards one of the parties. The distinction between independence and impartiality in English law seems more pronounced. The English Arbitration Act 1996 implicitly assumes that arbitrators must be impartial, and allows for their removal if they are not. Under Section 24(1)(a) of the Arbitration Act 1996, an arbitrator may be removed by the court if circumstances exist that give rise to justifiable doubts as to his impartiality. There is no reference to independence in the statute. In this, English law deliberately took a different approach from the UNCITRAL Model Law, a UN-sponsored model arbitration law that has been adopted by many States worldwide as the basis for their national legislation. The report of the Departmental Advisory Committee ( DAC ) on the bill that later became the 1996 Act explains the underlying rationale: 101. It seems to us that lack of independence, unless it gives rise to justifiable doubts about the impartiality of the arbitrator, is of no significance. The latter is, of course, the first of our grounds for removal. If lack of independence were to be included, then this could only be justified if it covered cases where the lack of independence did not give rise to justifiable doubts about impartiality, for otherwise there would be no point including lack of independence as a separate ground. Under English law, the assumption is that the greater (lack of impartiality) includes, or is ultimately the result of, the lesser (lack of independence), as the Court of Appeal commented in AT&T Corporation & Anor v Saudi Cable Company [2000] EWCA Civ 14 ( AT&T ). In the DAC report when discussing independence, the DAC cited the example of a barrister from a particular set of chambers appearing as counsel before another barrister from the same set of chambers sitting as arbitrator. It was the DAC s firm view that, under English law, this would not warrant disqualification of the arbitrator, and there would be no lack of independence that could give rise to doubts about the arbitrator s impartiality. To those not familiar with the workings of the English bar (where individual barristers from the same chambers do not share in the profits of chambers, and where they may appear on opposing sides in the same case), that may feel somewhat counter-intuitive. Nonetheless, English law has stuck to the position that this situation does not create a conflict of interests, or violates either impartiality and independence: see for example Laker Airways Inc v FLS Aerospace Ltd [1999] 2 Lloyd s Rep 45, where a challenge on the ground that arbitrator and counsel were members of the same chambers failed under Section 24(1). As regards the situation where counsel and arbitrators are or were part of the same firm or chambers, there are two contrasting ICSID decisions. In Hrvatska Elektroprivreda dd v Republic of Slovenia (ICSID Case No. ARB/05/24) ( Hrvatska ), in a challenge decided in 2008, the tribunal did exclude counsel who was a barrister from the same chambers as a member of the tribunal, and who had been appointed late in the proceedings with little notice given to the other side. In 2010, in The Rompetrol Group NV v Romania (ICSID Case No. ARB/06/3) ( Rompetrol ), counsel for one of the parties was challenged since he had previously been a partner in the chairman s current firm. That challenge was rejected. The tribunal distinguished Hrvatska as a case where the tribunal had imposed an ad hoc sanction for the failure to make proper disclosure of the late appointment of the barrister in question, rather than a holding of more general scope. In Rompetrol, the ICSID tribunal applied the test established under English law (in the decision of the House of Lords in Porter v Magill [2002] 2 WLR 37), that no fair minded and informed observer would have considered that there was a real possibility of the tribunal being biased. The tribunal in that case plainly did not think that a past professional connection between arbitrator and counsel would call into question the tribunal s independence. When does a connection between an arbitrator and a party affect the arbitrator s independence? That brings us to the question of what kind of connections between an arbitrator and a party might give rise to justifiable concerns, or lead to disqualification.

3 The ICSID Convention allows a challenge to any member of a tribunal on account of any fact indicating a manifest lack of the relevant qualities - so the ability to exercise independent and impartial judgment (Article 57). That was traditionally considered to be a high threshold, and required cogent evidence by the party mounting a challenge. ICSID tribunals have expressed the precise legal test that is applied under Article 57 in differing terms - for instance the Rompetrol arbitrators drew on English law. The Suez arbitration provides a good illustration of how the test is applied where a connection between an arbitrator and a party is alleged. Argentina challenged an arbitrator on the basis that she was a non-executive director of UBS. Argentina argued that the arbitrator could not be impartial and independent, since UBS held 2 per cent of the shares in Suez (she was also challenged on the basis of the same connection with Vivendi, an investor making a closely related claim against Argentina). UBS also issued recommendations to investors with regard to the water and utilities sector, and so (it was argued) could influence potential investors or shareholders in Suez. Finally, the arbitrator s remuneration for her non-executive directorship consisted of shares in UBS and so she was (indirectly) a shareholder in Suez. All that, Argentina said, meant that the arbitrator manifestly lacked the necessary qualities. The tribunal found that none of these matters satisfied the test under Article 57, reminding the parties that establishing a manifest lack of impartiality or independence was no easy task. Objective evidence was needed, and not just a subjective belief. The tribunal felt that, in order to succeed, Argentina would have had to: 29 prove such facts that would lead an informed reasonable person to conclude that Professor Kaufmann-Kohler clearly or obviously lacks the quality of being able to exercise independent judgment and impartiality It is important to emphasize that the language of Article 57 places a heavy burden of proof on the Respondent to establish facts that make it obvious and highly probable, not just possible, that Professor Kaufmann-Kohler is a person who may not be relied upon to exercise independent and impartial judgment. The Suez tribunal was clear that the existence of a connection between the arbitrator and a party was not of itself sufficient to show a manifest lack of impartiality or independence. Four criteria were identified that would assist with determining whether any connection between an arbitrator and a party would bring Article 57 into play: Proximity: how close was the connection between the arbitrator and the party? Intensity: how intense and frequent were the interactions between them? Dependent: to what extent does the arbitrator depend on the party for benefits? Materiality: are any benefits that the arbitrator obtains out of the connection significant, and are they likely to influence the arbitrator s judgment? On the facts, the Suez tribunal found that UBS s shareholding in Suez was insignificant when looked at in relative terms (and the same conclusion was reached for the link with Vivendi). The outcome of the arbitration was thought to be incapable of having any real effect on the share price of Suez, and so would not impact on UBS s profitability. The arbitrator had disclosed the UBS directorship to the parties, but had not known about UBS s connection with Suez. Looking at the approach taken by English law to a similar situation, in AT&T the Court of Appeal rejected a challenge to an arbitrator who was a non-executive director of, and shareholder in, a competitor to one of the parties. The directorship had not been disclosed by the arbitrator, something that the Court of Appeal found had been an innocent mistake. Lord Woolf defined independence as follows: Independence connotes an absence of connection with either of the parties in the sense of an absence of any interest in, or of any present or prospective business or other connection with, one of the parties which might lead the arbitrator to favour the party concerned.

4 The Court of Appeal noted that if the arbitrator was not independent, that might warrant an inference of bias or predisposition in favour of the party with whom the arbitrator had a connection. Of course, the absence of independence may not be the only circumstances that could give rise to allegations of bias. Lord Woolf then considered whether, objectively, a reasonable observer would have thought that there was any real danger that the arbitrator was predisposed against AT&T because of his position. He concluded that this was not the case, for a number of reasons: The arbitrator was an experienced practitioner, who was accustomed to and could be relied on to disregard irrelevant considerations, though this had to be judged objectively. Any benefit the arbitrator might himself derive by a competitor to the company of which he was a non-executive director losing the arbitration would be minimal. No reasonable person would see a real danger that the arbitrator would be influenced by the prospect of getting that benefit. The non-executive role was a minimal part of the arbitrator s professional life: indeed, he offered to resign from the position when he was challenged. Both ICSID tribunals - prior to Blue Bank - and the English Courts have therefore considered the effect that a connection would be perceived to have, by an informed and reasonable observer. They asked whether the connection would be material in that context. The test was said to be objective in both cases, although that does not seem to be strictly adhered to: in both cases, decisions make reference to the (subjective) state of mind of the arbitrator ( he or she did not know of the extent of a connection, he or she was prepared to give up the position in question when challenged ). What if the connection between arbitrator and party arises in the provision of legal services? Turning to circumstances such as those before the Chairman of ICSID s Administrative Council in Blue Bank, we should at this stage mention a well-known set of guidelines on conflicts of interest. In both international commercial arbitrations and investment treaty disputes, the International Bar Association s Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines ) are frequently cited. They were prepared as a statement of commonly accepted principles, by a working group consisting of arbitration practitioners from both civil and common law backgrounds. The IBA Guidelines are not binding - unless parties agree to be bound by them or the tribunal so orders - but they are often referred to and discussed in challenges to arbitrators. The IBA Guidelines set out general standards and classify a number of particular issues and situations that may be seen to give rise to a conflict based on a traffic light system. The IBA Guidelines were cited in a case before the English High Court that concerned a challenge to a QC who sat as sole arbitrator in a case where the claimant was represented by a firm of solicitors who were, at the time, instructing the QC as counsel in a piece of High Court litigation (not involving the claimant in the arbitration) (A and others v B and another [2011] EWHC 2345 (Comm) ( A v B ). The litigation in question had been settled and was subject to a stay when the arbitration commenced. During the arbitration, the arrangements contemplated in the settlement failed to materialise. The litigation came back to life, and was listed for trial. The arbitrator was instructed by the solicitors to the claimant in the arbitration to advise their client (an unrelated third party) in respect of the litigation, and he duly provided advice. The claimant then won the arbitration. The respondent promptly challenged the arbitrator before the LCIA Court, and when that failed, applied to the High court under Section 24 of the Arbitration Act The respondent relied on the IBA Guidelines, which deals with the relationship between the arbitrator and a party, or counsel for a party. As part of the so-called Waivable Red List, the IBA Guidelines include: 2.3 Arbitrator s relationship with the parties or counsel The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.

5 The IBA Rules envisage that both parties must give their informed consent to a matter that falls into this category. The respondent also relied on unconscious bias on the part of the arbitrator. It was argued that, having been instructed by the solicitors for the claimants, the arbitrator would not want to disappoint them, and foster the business relationship between them in the hope of future instructions on other matters. There were other aspects of unconscious bias which, in the respondent s case, were said to be of concern: the arbitrator would, in effect, be in contact with the solicitors for one of the parties in the arbitration without that party s knowledge, and the arbitrator might be swayed by his own view or confidence in the abilities of the firm of solicitors, having first-hand knowledge of working with the firm as part of the team advising on the litigation. The High Court dismissed the challenge and rejected the notion of unconscious bias. When commenting on the applicable test under English law, Flaux J again confirmed the more robust approach that will apply under the Arbitration Act 1996, stating that: the test is an objective one and not dependent upon the characteristics of the parties, for example their nationality, so that it is nothing to the point that the claimant companies are registered in foreign jurisdictions or that the individuals who control or manage them are foreign nationals who might, for example, regard as odd the way in which a member of the English Bar can be instructed in one case by a firm of solicitors whilst acting as arbitrator in another case where the same firm of solicitors was acting for one of the parties. The issue is whether the impartial objective observer, irrespective of nationality, would conclude from those facts that there was a real possibility that the arbitrator was biased. Flaux J found that the informed observer, who was familiar with how the legal profession in England functioned, would not have been concerned. The arbitrator had only been instructed twice by the claimant s law firm. The judge did note that where an arbitrator received more than half of his or her instructions as counsel from a particular firm of solicitors, the situation might be different. The Court was also not prepared to read anything into the arbitrator s failure to disclose his role in the litigation. The reason for not disclosing it might equally have been that the arbitrator felt it was insignificant. Finally, the High Court found that the provisions of the IBA Guidelines that had been relied on by the respondent were beside the point, since the arbitrator was not representing the law firm: he was representing the lay client, together with the law firm. The reference to counsel was not intended to capture the role played by an English barrister. The decision in Blue Bank In Blue Bank, the claimant appointed Mr Jose Maria Alonso, a Spanish national, on 8 October Shortly thereafter, Mr Alonso accepted the appointment and provided his statement of independence. He disclosed that: He had been a partner in Baker & McKenzie Madrid S.L.P. since March 2012 (he was also a member of the firm s international arbitration steering committee). Baker & McKenzie Madrid belonged to the Swiss Verein, Baker & McKenzie International - together with a number of other partnerships in various jurisdictions in which Banker & McKenzie operates. All entities that are members of the Swiss Verein were independent. Mr Alonso s remuneration depended mainly on the turnover of each particular firm. Baker & McKenzie New York and Baker & McKenzie Caracas acted for Longreef against Venezuela (the respondent) in another ICSID case. Venezuela then challenged Mr Alonso, on the basis of an adverse relationship between it and Baker & McKenzie. The IBA Guidelines comment on the activities of the arbitrator s law firm with respect to one of the parties. They propose that a relationship between the firm and a party should not automatically give rise to a conflict, or require disclosure by the arbitrator, but should be reasonably considered on a case by case basis. The explanatory note on this standard advocates flexibility. The IBA Working Party refers to the need to balance the interests of parties in appointing an arbitrator of their choice (even though his or her law firm may have some connection with another party), with preserving confidence in the

6 impartiality and the independence of international arbitration. The IBA s Working Party would consider the particular work done by the law firm, the timing and the extent of it in each case, rather than laying down any hard and fast rules. The IBA Guidelines classify the particular situation in Blue Bank as being part of the Orange List, as a matter that might give rise to justifiable doubts as to the arbitrator s impartiality or independence. Example 3.4 in the Orange List states: 3.4 Relationship between arbitrator and party and others involved in the arbitration The arbitrator s law firm is currently acting adverse to one of the parties or an affiliate of one of the parties. Both parties in the Blue Bank challenge had made reference to the IBA Guidelines, though it is not clear from the decision what their submissions had been. The Chairman acknowledged that the IBA Guidelines could be a useful reference point, but did not specifically cite or refer to them further. He noted that Article 57 of the ICSID Convention would be satisfied if the appearance of dependence or bias were established (such that there was no need to prove actual bias). The standard for establishing this was objective, based on how a third party might reasonably evaluate the evidence. The lack of independence or impartiality had to be evident or obvious, because of the reference to manifest in Article 57. The decision to disqualify Mr Alonso was confined to two paragraphs: 67. The sharing of a corporate name, the existence of an international arbitration steering committee at a global level, and Mr. Alonso s statement that his remuneration depends primarily but not exclusively on the results achieved by the Madrid firm imply a degree of connection or overall coordination between the different firms comprising Baker & McKenzie International. 68. In addition, given the similarity of issues likely to be discussed in Longreef v. Venezuela and the present case and the fact that both cases are ongoing, it is highly probable that Mr. Alonso would be in a position to decide issues that are relevant in Longreef v. Venezuela if he remained an arbitrator in this case. Based on that, the Chairman concluded that an evident or obvious appearance of a lack of impartiality had been established. In Blue Bank, two of the arbitrators had been challenged (so the majority of the tribunal). The second arbitrator subsequently volunteered to resign, while Mr Alonso did not. Where the majority of the tribunal is challenged, the Chairman of the Administrative Council takes the decision on whether to disqualify the arbitrators, pursuant to Article 58 of the ICSID Convention. If only one arbitrator is challenged, it is the other two members of the tribunal who decide (provided they can agree). Commentators have suggested that ICSID arbitrators who decide challenges to one of their colleagues may be inclined to apply a more stringent test than that in Blue Bank. Looking at how the applicable principles were described by the Chairman in the decision, there is nothing that invites particular comment. Instead, the most striking feature of the decision is the Chairman s conclusion that the adverse relationship between Baker & McKenzie and Venezuela obviously showed a lack of impartiality. The decision in Blue Bank does not consider any of the factors identified by the tribunal in Suez, nor does it seek to explain why the relationship might be seen to have a material effect on the arbitrator s ability to exercise independent judgment. An English court would have asked whether the connection was such as to give rise to a real possibility of the arbitrator being biased, and would have at least given some weight to the arbitrator s ability to put irrelevant facts out of his mind when deciding the case before him. Did the lack of independence on the part of the arbitrator (being a partner in Baker & McKenzie) mean that he could not be impartial? It is suggested that an English court could well have reached the opposite conclusion to that in Blue Bank. The decision of the Chairman in Blue Bank leaves the reader to draw inferences as to the specific concerns underlying the obvious appearance of bias that was found to exist. The fear might be that Mr Alonso, in furtherance of the reputation of Baker & McKenzie in the field of investment treaty disputes, would decide issues in his arbitration so that the claimant in Longreef v Venezuela could then rely on them, and score a victory against Venezuela. Baker & McKenzie, and Mr Alonso,

7 would then gain financially by other investor claimants instructing the firm in future ICSID claims, perhaps even against Venezuela, on the basis of the firm having added a victory to its track record. That is the same as presuming unethical conduct at best, or collusion or fraud at worst. But such an assumption underlies all conflicts of interests that preclude lawyers from acting. A professional might always pleads his or her own integrity, saying that they would never do anything improper, and so should not be conflicted. Being an arbitrator requires absolute impartiality. The parties need to trust their arbitrators, particularly those members of the tribunal that have been appointed by the other side. Where there is an adverse relationship between the arbitrator s law firm and a party, that trust is affected. A party should not have to wonder about the prospect of something untoward happening behind the scenes - unlikely as it might be. The approach in Blue Bank is echoed by French law. In Société Tecnimont SpA v J&P Avax SA, (Paris Court of Appeal, 12 February 2009), RG 07/22164, the Paris office of the chairman of the tribunal s international law firm had an ongoing relationship with a group of companies to which one party to the arbitration belonged. The Paris Court of Appeal found that this created reasonable doubts as to the chairman s independence. In light of such decisions, arbitrators may need to take stock and consider declining or giving up appointments where their law firm is involved with one of the parties. Independence and impartiality are, alas, not just for Christmas. Other articles from this issue of The Arbiter: Following Yonder Star Energy Don t be a Scrooge about Paying Up Challenging Enforcement Orders in Support of Arbitral Awards Click here to contact Melanie Willems. Click here to download the full issue. A past performance or prior result is no guarantee of a similar future result in another case or matter. Andrews Kurth Kenyon LLP is responsible for the content of this website. Andrews Kurth, the Andrews Kurth logo, Straight Talk is Good Business and Intelligent Energy are registered service marks of Andrews Kurth Kenyon LLP. Andrews Kurth Kenyon and the Andrews Kurth Kenyon logo are service marks of Andrews Kurth Kenyon LLP. Andrews Kurth Kenyon LLP is a Texas limited liability partnership. Andrews Kurth Kenyon (UK) LLP is authorized and regulated by the Solicitors Regulation Authority of England and Wales (SRA Registration No ). Andrews Kurth Kenyon DMCC is registered and licensed as a Free Zone company under the rules and regulations of DMCCA. Attorney Advertising.