Conflict of interest – apparent bias of arbitrators
As Lyndon Smith explains, there have been two noteworthy judgments by the Commercial Court this year on the subject of apparent bias of arbitrators. These decisions potentially have a wider application because, whilst they give guidance as to how the English courts will treat conflicts of interest of an arbitrator, the principles discussed, as a third case in the TCC has already demonstrated, apply equally to the appointment of adjudicators.
Both cases considered the apparent bias of a sole arbitrator based on an alleged conflict of interest.
In Cofely Ltd v Bingham & Knowles Ltd,1 the claimant’s application was for the removal of the arbitrator during the course of the arbitration under section 24 (power of the court to remove an arbitrator) of the Arbitration Act 1996.
W Ltd v M SDN BHD2 followed soon afterwards in which the claimant challenged two awards by alleging serious irregularity under section 68(2) (challenging the award: serious irregularity) of the Arbitration Act 1996. In this case, the claimant also relied on the new IBA Guidelines to support its position.
In September 2016, the Cofely case was referred to in an adjudication enforcement case, Beumer Group UK Ltd v Vinci Construction UK Ltd.3
Despite all the discussion and developments surrounding these cases, both cases ultimately reconfirmed the well established common law position as to the basic test for establishing bias as set out in Porter v Magill.4 That is, whether:
“a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.”
Cofely Ltd v Bingham & Knowles Ltd
Background
Cofely Ltd (a major construction company) applied to have the arbitrator removed under section 24 of the Arbitration Act 1996 alleging apparent bias. The dispute related to the alleged breach of an agreement by Cofely to pay a success fee to Knowles (claims consultants) of £3.5m.
Knowles had been appointed by Cofely to advise upon and then progress its claims for an extension of time and associated additional costs relating to Cofely’s contract with Stratford City Developments Ltd and the Olympic Delivery Authority to design, build, maintain and operate district energy services to the Olympic Park and Westfield Shopping Centre in Stratford, London.
Section 24(1)(a) of the Arbitration Act enables a party to apply to the Court to remove an arbitrator on the grounds that circumstances exist that give rise to justifiable doubts as to his impartiality.
Cofely’s concerns surrounded Knowles’ request for the appointment of this particular Arbitrator. On his acceptance of nomination form, he had failed to disclose any prior involvement with Knowles and subsequent to the commencement of the arbitration and following the first award, the judgment of Eurocom Ltd v Siemens Plc5 was handed down in the Technology & Construction Court.
The Eurocom case concerned a summary judgment application made by Eurocom against Siemens in respect of an adjudication decision made by this arbitrator. The application failed on the grounds that Siemens had real prospects of successfully defending the claim on the basis that the adjudicator had no jurisdiction because of a fraudulent misrepresentation allegedly made by one of Knowles’ employees when applying for the appointment of the adjudicator on Eurocom’s behalf. It turned out that the adjudicator appointed (who was also the arbitrator in the Cofely arbitration) had regularly been appointed by Knowles.
This was clearly of great interest to Cofely as they wrote to the arbitrator requesting information on his previous dealings with Knowles in light of the Eurocom judgment. The arbitrator did not answer Cofely’s questions in detail but called a hearing at which he ruled that there was no conflict or apparent bias. It was after this hearing that Cofely decided to make its section 24 of the Arbitration Act 1996 application.
Cofely also relied upon Rule 3 of the CIArb Code of Professional and Ethical Conduct for Members (October 2000) which states that:
“Both before and throughout the dispute resolution process, a member shall disclose all interests, relationships and matters likely to affect the member’s independence or impartiality or which might reasonably be perceived as likely to do so.”
Cofely contended that the disclosure obligation should be followed where there is any doubt as to the relevance of the information and the manner in which an arbitrator discharges this obligation can be relevant to the issue of apparent bias. In this case, no disclosure had been made at the outset of the arbitration, although as the case progressed, it was the attitude of the arbitrator which took on a bigger focus.
The Decision
In coming to his decision, Mr Justice Hamblen concluded that five of the grounds relied upon by Cofely gave rise to a real possibility of apparent bias. These were:
(i) The facts of the Eurocom case, i.e. the adjudicator in that case (i.e. Cofely’s arbitrator in their arbitration) was clearly someone that Knowles was keen to see appointed, and they sought to influence appointments by trying to exclude many other potential adjudicators from acting;
(ii) The arbitrator’s evasive and defensive responses to Cofely’s questioning about the nature and extent of the professional relationship between himself and Knowles;
(iii) The arbitrator’s defensive approach in providing the requested information. His calling of a hearing, which had not been requested, to consider Cofely’s questions, the way the hearing was then conducted and the way the “ruling” was handed down purporting to deal with the apparent bias;
(iv) The information that eventually became available of the professional relationship between the arbitrator and Knowles showed that over the past three years he had acted as adjudicator or arbitrator 25 times (out of a total of 137) on cases involving Knowles as either a party or the representative of a party. This represented 18% of his appointments and 25% of his income. It was also found that he had held in favour of Knowles, or the party with which Knowles was involved, on 18 of the 25 occasions (i.e. 72%); and
(v) The arbitrator was aggressive and unapologetic in his witness statement. Rather than stay neutral, he saw fit to make positive statements in opposition to Cofely’s application. This could not but leave the impression that on any view, he had taken sides in the application.
For these reasons, Mr Justice Hamblen found that Cofely had established the requisite grounds for the removal of the arbitrator under section 24(1)(a) of the Arbitration Act.
The case for apparent bias had been made out.
It is worth noting that the Cofely case was then cited in the adjudication enforcement case of Beumer Group UK Ltd v Vinci Construction UK Ltd – judgment was handed down on 13 September 2016.
Here, Beumer had been successful in an adjudication against Vinci and had applied for summary judgment. However, Vinci opposed enforcement relying on breaches of natural justice. The facts were that on the same day that Beumer commenced an adjudication against Vinci, it had also commenced a second adjudication, before the same adjudicator, against its sub-subcontractor. Beumer also went on to take differing positions on the same issues in the two different adjudications.
This was not disclosed by either Beumer or the adjudicator and it was only some time later that Vinci found out about the second adjudication.
Mr Justice Fraser in the Technology and Construction Court commented that:
“Adjudication is not the Wild West of dispute resolution”
The Judge then went on to say that he took:
“a very dim view of the propriety of behaviour where Party A says in one set of adjudication proceedings with Party B “the works were complete on 16 December 2015” and, in relation to the very same works (or at least a sub-set of the works) on the very same project states in another set of adjudication proceedings with Party C “the works are not yet complete, you are liable to pay liquidated damages”. They are wholly inconsistent.”
The Judge then held that the adjudicator’s failure to disclose his involvement in a simultaneous adjudication involving Beumer was a material breach of the rules of natural justice and, therefore, he did not enforce the adjudicator’s decision. He referred to Cofely and Mr Justice Hamblen’s reference to the CIArb Code of Professional and Ethical Conduct for Members and the requirement to disclose all interests, relationships and matters likely to affect the member’s independence or impartiality.
Mr Justice Fraser stated that:
“Adjudicators are not arbitrators, but in my judgment are governed broadly by the same principles so far as disclosure is concerned.”
W Ltd v M SDN BHD
Background
Following an arbitration between M SDN BHD and W Ltd, relating to a project in Iraq, W Ltd applied to have two awards set aside pursuant to s.68 of the Arbitration Act 1996 on the grounds of apparent bias on the part of the arbitrator. W Ltd’s application was based on an alleged conflict of interest.
The sole arbitrator had been appointed in May 2012. He was a partner in a medium-sized Canadian law firm although had worked almost exclusively as an international arbitrator for a number of years with virtually no involvement in the running of the firm. For instance, he had not attended partnership meetings for the previous six or so years.
At the time of his appointment, a company (“Q”) was a client of the firm. M SDN BHD was a subsidiary of another company (“P”) and, following an announcement in June 2012, P acquired Q, meaning that Q (as with M SDN BHD) became a subsidiary of P. This resulted in Q and M SDN BHD becoming affiliates. Following the acquisition, the law firm continued to provide substantial legal services to Q.
The arbitrator carried out conflict checks at the time of his appointment and made various disclosures to the parties but the conflict checks did not identify that Q was a client of the law firm.
It was not until the arbitrator handed down his final award on costs that the potential conflict was actually raised by W Ltd in correspondence with the arbitrator. The arbitrator then responded promptly stating that he had no knowledge of his firm’s work for Q, and further confirming that had he known, he would have disclosed the potential conflict to the parties.
The parties were agreed that the common law test for apparent bias was that set out in the Porter v Magill case: i.e. whether “a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased”.
W Ltd argued that, given the facts of the case, the fair minded and informed observer would conclude that there was a real possibility that the tribunal was biased or lacked independence or impartiality.
W Ltd also relied on the fact that the position with the arbitrator’s law firm acting for Q meant that this conflict was caught by paragraph 1.4 of the Non-Waivable Red List of the IBA Guidelines which states:
“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.”
The Decision
In considering whether there was apparent bias, Mr Justice Knowles concluded that a fair minded and informed observer would not conclude that there was any real possibility of bias and dismissed the application accordingly. He was of the view that the arbitrator, although a partner, operated effectively as a sole practitioner, using the firm for secretarial and administrative assistance.
The arbitrator had made other disclosures where, after checking, he had knowledge of his firm’s involvement with the parties. Given this commitment to transparency, the Judge was of the view that the arbitrator would have made a disclosure in this case had he been alerted to the situation. This would be relevant in the mind of the fair minded and informed observer. It also showed that the arbitrator could not have been biased by reason of the firm’s work for the client. In fact, that work was not in his mind at all; had it been he would have disclosed it.
Mr Justice Knowles went on to comment that the 2014 IBA Guidelines make a distinguished contribution in the field of international arbitration:
“Their objective, to assist in assessing impartiality and independence, is to be commended.”
However, the Judge went on to say that in this case, the Guidelines had perhaps led to some uncertainty which was at the forefront of W Ltd’s case. With regard to W Ltd’s reliance on the IBA Guidelines, the Judge acknowledged that the conflict fell within the description given in paragraph 1.4 but this did not result in him altering his decision as he identified two weaknesses in the guidelines.
First, it was only in 2014 that paragraph 1.4 of the IBA Guidelines was amended to include scenarios where advice was provided to an affiliate without the arbitrator’s involvement or knowledge. The Judge found it hard to understand why this situation should now warrant inclusion in the Non-Waivable Red List.
Secondly, including such a situation in the Non-Waivable Red List meant that there was no consideration of whether the particular facts could realistically have any effect on impartiality or independence (including where the facts were not known to the arbitrator).
W Ltd sought permission to appeal but this was refused on the basis that the proper forum for the determination of the wording of the IBA Guidelines was the International Bar Association and not the Court of Appeal.
Conclusions
Whilst all cases must be Judged on their specific facts, the judgments here all serve to confirm the English law position of the fair observer test when deciding on claims of apparent bias.
The lesson for arbitrators is to be transparent and honest in the conflict process. If in doubt, disclose. Common sense should prevail. In Cofely, the arbitrator’s failure to acknowledge the relevance of his relation with Knowles and his refusal to disclose information about that relationship led the Court to conclude a lack of impartiality. This was in contrast to the arbitrator in W Ltd v M SDN BHD who was willing to disclose possible conflicts of interest.
With regard to the IBA Guidelines, paragraph six makes it clear that the guidelines are not legal provisions and do not override any applicable national law or arbitral rules chosen by the parties. W Ltd v M SDN BHD confirms the position that the English Courts will not be bound by the IBA Guidelines.
Even given this judgment, the international arbitration community will, no doubt, continue to use the IBA Guidelines but the point has now been made that a strict approach to the guidelines when determining conflict is not necessarily the right approach to be taken in every case.