Transnational Dispute Management transnational-dispute-management.com

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1 Transnational Dispute Management transnational-dispute-management.com ISSN : Issue : Vol. 5, issue 4 Published : July 2008 This article is part of the special issue on Arbitrator Bias edited by: Don't Bite the Hand that Feeds You: Arbitrator Bias Based on Payment Information by K.S. Gans About TDM Sophie Nappert 3 Verulam Buildings Editor-in-Chief Thomas W. Wälde twwalde@aol.com Professor & Jean-Monnet Chair CEPMLP/Dundee Essex Court Chambers, London Terms & Conditions Registered TDM users are authorised to download and print one copy of the articles in the TDM Website for personal, non-commercial use provided all printouts clearly include the name of the author and of TDM. The work so downloaded must not be m odified. Copies downloaded must not be further circulated. Each individual wishing to download a copy must first register with the website. All other use including copying, distribution, retransmission or modification of the information or materials contained herein without the express written consent of TDM is strictly prohibited. Should the user contravene these conditions TDM reserve the right to send a bill for the unauthorised use to the person or persons engaging in such unauthorised use. The bill will charge to the unauthorised user a sum which takes into account the copyright fee and administrative costs of identifying and pursuing the unauthorised user. For more information about the Terms & Conditions visit com Copyright TDM 2008 TDM Cover v1.5 TDM (Transnational Dispute Management): Focusing on recent developments in the area of Investment arbitration and Dispute Management, regulation, treaties, judicial and arbitral cases, voluntary guidelines, tax and contracting. Visit for full Terms & Conditions and subscription rates. Open to all to read and to contribute Our aim is for TDM to become the hub of a global professional and academic network. Therefore we invite all those with an interest in Investment arbitration and Dispute Management to contribute. We are looking mainly for short comments on recent developments of broad interest. We would like where possible for such comments to be backed-up by provision of in-depth notes and articles (which we will be published in our 'knowledge bank') and primary legal and regulatory materials. Please contact Editor-in-Chief Thomas Wälde at twwalde@aol.com if you would like to participate in this global network: we are ready to publish relevant and quality contributions with name, photo, and brief biographical description - but we will also accept anonymous ones where there is a good reason. We do not expect contributors to produce long academic articles (though we publish a select number of academic studies either as an advance version or an TDM-focused republication), but rather concise comments from the author's professional workshop. TDM is linked to OGEMID, the principal internet information & discussion forum in the area of oil, gas, energy, mining, infrastructure and investment disputes moderated by Thomas Wälde.

2 Don t Bite the Hand that Feeds You: Arbitrator Bias Based on Payment Information by Kiera S. Gans I. Introduction Parties arbitrating claims in New York may be surprised to learn of an infrequently used, although possibly fertile ground, to disrupt an arbitration on the grounds of arbitrator bias. Various New York courts have held that a tribunal s mere knowledge that one party has not paid its share of the arbitrators fees may provide grounds to stay the arbitration or to vacate or challenge confirmation of the arbitration award on grounds of bias. This case law may prove especially significant to unwitting parties, who as discussed below, seek to take advantage of institutional rules which permit them to provide a substitute payment for the non-paying parties or who seek to avail themselves of arbitral rules which permit them to seek relief from the arbitrators when the other party refuses to pay its share of advance fees. II. Relevant Case Law In Grendi v. LNL Construction Management Corp, the court disqualified the arbitrators, finding that the petitioner had been placed in an unfair position when the AAA informed the arbitrators, three-days into the arbitration, that the respondent had declined to pay the its portion of the arbitrator s fee as well as the AAA administrative fees. 1 In that case, the court held that the claimant was placed in a position in which it would feel compelled to accede to the AAA s request to pay the respondent s share of the arbitrator s fee for fear of adverse consequences because the arbitrator understood if that if the respondent did not pay, he would not be paid. 2 Likewise, in Coty, Inc. v. Anchor Constr., Inc., the court determined that the award should be set aside because the award had been procured by arbitrator misconduct. 3 The court found that the arbitrators had only heard the side that had paid them and thus had violated the respondent s right to due process, including its right to be heard and present a relevant and material defense. 4 Notably, the court explicitly referred to the AAA s rules and found that the tribunal s response Kiera Gans is an associate at DLA Piper US LLP in New York. The author thanks Ellyn Pearlstein and David Wenger for their assistance in writing this article. 1 See 175 A.D. 2d 775 (1st Dep t 1991) See id. at 776. See Coty, Inc. v. Anchor Constr., Inc., 2003 WL (Sup. Ct., N.Y. Co. Jan. 8, 2003), aff d, 7 A.D.3d 438 (1st Dep t 2004). See id. at *3 & *5. 1

3 had not been in accordance with the AAA rules, which did not provide for the expulsion of a party from participating in the arbitration due to a failure to pay the requisite fees. 5 Because a tribunal has a direct financial interest in getting paid, its mere knowledge of one party s non-payment may be sufficient to put the tribunal s partiality into question. For example, in Coty, Inc., the court vacated the arbitral award, in light of the appearance of impropriety created by the involvement of the arbitrators in the parties dispute over prepayment of arbitration fees... 6 In Grendi, the court determined that it did not even need to reach the issue of actual bias. 7 Similarly, in Arbitration between I. Jerry Fischer and Queens Telephone Secretary, Inc., the court found that discussions among the arbitrator and the parties regarding fees during the arbitration may require the vacatur of an arbitral award. 8 Even though bias was not proven, the court found that the arbitrator s concern about his fees clearly infects the impartiality of the proceeding. 9 However, in another New York case, the court held that a mere allegation of bias was not sufficient to stay an arbitration. 10 Rather, the court held that there is no per se rule regarding what constitutes misconduct or an impairment of the proceeding and that each case needs to be determined on a case by case basis. 11 III. Arbitral Institution Rules Concerning Fees Most arbitral institutions have created procedures whereby it will suspend or dismiss proceedings should the party fail to pay the advance on costs. The rules, however, also permit the paying party to cover the non-paying party s share of fees in order to have its case proceed. For example, under Article 41 of the UNCITRAL rules, if the whole payment is not made by one of the parties (after the tribunal provides notice of the party s failure to pay), the tribunal may order the suspension or termination of the proceedings. 12 The same is true of the ICDR and LCIA rules. Under both sets of rules, if the arbitrator s fees and costs are not paid by one party, the tribunal may order the suspension or termination of the proceedings. 13 The LCIA and ICDR rules differ from the UNCITRAL because they expressly contemplate that the LCIA Court or the administrator not the tribunal itself- may direct the 5 6 See id. at * 10. The court further noted that violation of arbitration rules will not alone be sufficient to vacate an award. See Coty, at * 9. 7 A.D.3d 438, 439 (1st Dep t 2004). 7 Grendi, supra at See 106 A.D.2d 314, 316 (1st Dep t 1984). See, e.g., Montague Pipeline Tech Corp., v. Grace-Lansing & Grace Indus, Inc., 238 A.D.2d 510 (2d Dep t 1997). See, e.g., id. See UNCITRAL Arbitration Rules, Article 41. See ICDR International Rules of Arbitration, Article 33(3); LCIA Arbitration Rules, Article

4 other party or parties to effect a substitute payment to allow the arbitration to proceed (subject to any award on costs). 14 Like the UNCITRAL rules, the LCIA and ICDR also provide that if such payment is not ultimately and timely made, the tribunal can and should suspend the proceedings, but leave the possibility that the administrative body might shield the tribunal from any precise knowledge of the circumstances that lead to that decision, including which party failed to pay, until for example submissions on costs (assuming the issue of costs is determined separately from the merits). The ICC rules are more ambiguous on this point. Article 30 of the ICC rules provide that when a request for an advance on costs has not been complied with, the Secretary General may direct the Arbitral Tribunal to suspend its work after consultation with the Arbitral Tribunal. 15 Further, a party may apply to the ICC Court to object to a suspension on this ground. 16 Unlike other institutions rules, the JAMS arbitration rules go substantially further in providing a remedy or sanction to the paying party. Under Article 31(b) of the JAMS Comprehensive Arbitration Rules, the Arbitrator may preclude a Party that has failed to deposit its pro-rata or agreed-upon share of the fees and expenses from offering evidence of any affirmative claim at the Hearing. 17 Under these rules, the arbitrator is informed about a party s failure to pay its fees, but is allowed to continue the arbitration and prevent the non-paying party from presenting any affirmative claim at the hearing. Accordingly, these rules not only expressly contemplate that a tribunal could learn that one party has not made a payment, but also expressly provide the compliant or paying party with an affirmative right to petition the tribunal for specific relief for non-payment. Almost universally, the leading arbitral institutions have rules which by way of their express provisions might result in situations which come afoul of the New York court s pronouncements in both Grendi and Coty, Inc. Concerns of arbitrator bias which derive from the arbitrator s knowledge of fee arrangement are perhaps most likely when the arbitration lacks an administrative body to serve as a buffer between the arbitrator(s) and the parties. In this situation, it is inevitable that the arbitrator(s) will have direct knowledge that only one party has paid the arbitrator s fees. Nevertheless, there routinely will be a risk that a tribunal will be able to discern that a party has not paid it share of fees. The above situation creates a policy quandary. A party may be able to withhold fees as a tactical maneuver by (i) foisting the economic burden of proceeding onto the other party and (ii) fashioning grounds to stay or vacate the proceedings with its own misconduct. Furthermore, if taken literally, it is possible that a paying party may be precluded from taking advantage of agreed upon protections in the governing arbitral rules. Put another way, it is absurd that a non See e.g., ICC Rules of Arbitration, Article 30(4) JAMS Comprehensive Arbitration Rules, Rule 31 3

5 paying party will have grounds to complain when the other party or arbitral institution seeks a sanction afforded in the rules that the parties agreed would govern their dispute. 18 IV. Conclusion At least in New York, when a tribunal becomes aware of a party s failure to pay its fees, the paying party may face significant hurdles in the form of an injunctive action during the arbitration and a challenge on grounds of bias after the award is issued. 19 Therefore, parties which seek to have an arbitration proceed beyond a motion to stay and ensure that an eventual award is enforceable, are encouraged to avoid informing the arbitrators about the non-payment, and work with the arbitration institute to shield the arbitrators from this knowledge. The greater the separation between fee payment and the arbitrators decision, the more likely that a motion to stay an arbitration will not be granted, and an arbitration award will be enforced. About the author Kiera S. Gans DLA Piper LLP kiera.gans@dlapiper.com Kiera Gans is an associate at DLA Piper US LLP in New York. Ms. Gans has represented clients in both ad hoc arbitrations and arbitrations under the ICC, SIAC, UNCITRAL, AAA and ICSID rules, and she has particular experience arbitrating investment treaty claims. Before joining DLA Piper, Ms. Gans worked for Shearman & Sterling in New York and had a public interest law fellowship in Argentina. She serves as Vice Chair of the Young Lawyers Interest Network for the American Bar Association, International Law Section. 18 See Coty, Inc., * 4 (when parties to a contract expressly opt to settle disputes by arbitration rather than resort to the courts, they cannot be heard to complain later, in court, that the procedures of the forum were not fully in accord with the prevailing law. ). 19 The author has not observed parallel type holdings in other states within the U.S., but the reasoning theoretically could apply within other jurisdictions. 4