postimage

    05:02 PM Siraj Shaik Aziz (Research Associate, Asian Business & Rule of Law Initiative, Singapore Management University)

    Event Note: Herbert Smith Freehills - SMU Asian Arbitration Lecture 2016

        

    Introduction

    On 24 November 2016, the Honourable Chief Justice Sundaresh Menon (“Menon CJ“) delivered the annual Herbert Smith Freehills - SMU Asian Arbitration Lecture, jointly organised by Herbert Smith Freehills and the Centre for Cross-border Commercial Law in Asia at the Singapore Management University. The lecture was provocatively titled “Adjudicator, Advocate, Or Something In Between?: Coming To Terms With The Role Of The Party-Appointed Arbitrator”, and was followed by a commentary by Herbert Smith Freehills managing partner for Southeast Asia , Mr. Alastair Henderson.

    Menon CJ first brought the moral hazards posed by party appointed arbitrators into sharp focus when he  highlighted allegations in the Croatia-Slovenia arbitration of collusion between Slovenia’s appointed  arbitrator and Slovenian government representatives, which led Croatia to claim that Slovenia had engaged in one or more material breaches of the Arbitration Agreement, and argued that “the impartiality and integrity of the arbitral proceedings had been irrevocably damaged, giving rise to a manifest violation” of Croatia’s rights.

    He surveyed the background and evolution of the party appointed arbitrator, which began, in the Hellenistic period, as a facilitation process characterised by its informality and emphasis on fairness over legality. By the period of the Alabama Claims Arbitration, party appointment was an expression of respect of equality for two sovereigns and a trust-building exercise between disputants from diverse cultures. The party appointed arbitrator was the preserve of elites who took on this role out of necessity rather than commerce. Arbitration today, Menon CJ noted, is markedly different from its historical roots, as can be seen in a string of arbitral decisions regarding purported impropriety on the part of the party-appointed arbitrator, i.e. the Alaskan Boundaries arbitration of 1907, the Buraimi Oasis arbitration of the 1950s, cases before the Iran-US Claims Tribunal in the 1980s, and the Loewen v US NAFTA arbitration in 2004.

    Strain on the institution of the party appointed arbitrator

    Menon CJ observed that the confluence of three modern trends have placed pressures on the institution.

    First, he noted the growing number and diversity of arbitration practitioners in the past two decades owing to the increased reliance on international arbitration spurred by the unprecedented reach of awards granted by the New York Convention, the proliferation of arbitral institutions and the liberalisation of foreign counsel participation in international arbitrations. Where past arbitrators were an elite in-group who shared common values, such common ground has become elusive as today’s arbitrators from different legal traditions had varied conceptions of ethically acceptable conduct.  He cited differing views between Germany and America on the extent to which arbitrators should engage in ex parte communication with the appointing party, and a 2013 study that was published in the Journal of International Arbitration wherein 36 per cent of American lawyers expressed the view that pre-appointment interviews are always appropriate, compared with only 4 per cent of Swedish lawyers who shared the same opinion.

    Second, the rise of a new breed of arbitrators who regard appointment as an entrepreneurial venture results in a perverse financial incentive on the part of these arbitrators to rule in favour of the appointing party, or the investor in the case of investment arbitration, to generate demand for one’s services as an arbitrator in future disputes.

    Finally, the notion that the duties of impartiality and independence apply to all arbitrators regardless of how they have been appointed is now the modern consensus. This represents a shift from the greater leeway accorded to party appointed arbitrators in the past. An instance of this shift can be observed in the American Arbitration Association Code of Ethics, which in its 1977 iteration referred to party-appointed arbitrators as “non-neutrals” and said they “may be pre-disposed towards the party that appointed them” but in the 2004 revision indicated they should be impartial.

    Menon CJ observed that these trends raise serious concerns as to whether “the expectations of the modern consensus and the reality of party appointed arbitrators create an anachronism”. 

    Justifications for retention of the party-appointed arbitrator

    Menon CJ then shared his thoughts on some rationalisations for the continued existence of the party-appointed arbitrator. He disagreed with the view that the party appointed arbitrator plays a special role in appreciating the culture and procedural expectations of the appointing party and thus bolsters that party’s confidence in the arbitral process. Menon CJ steadfastly rejected this for a few reasons. First, the duty of impartiality applies with equal or even greater force to the party appointee. Further, the mode of appointment is, and indeed should be, a separate matter from the arbitrator’s sensitivity to the parties’ culture; such sensitivity being the onus of all arbitrators. Moreover, it is overly cynical, in Menon CJ’s opinion, for a disputing party to assume that only one out of three arbitrators (i.e. it’s nominee) can be trusted to best appreciate its concerns and arguments. The party appointee should not serve as that party’s advocate on the tribunal, and seek to unduly steer the outcome.

    Menon CJ was also sceptical of the argument that a self-correcting mechanism is presently in place within the system to keep overzealous party appointed arbitrators in line either through the unreceptiveness of the other arbitrators or impact on the reputation of the party appointee. This is because the nub of the problem rested with subtle forms of arbitrator misconduct through “capillaries of influence” such as the innocuous reticence during private deliberations, hints along corridors and questions calculated to derail a line of inquiry.

    He also addressed the notion that unilateral appointment of an arbitrator is a non-abrogable right since time immemorial; arguing that the vintage of this practice in arbitration does not ipso facto justify its continued existence. He instead considers unilateral appointments as a contingent rather than necessary facet of arbitration that is more accurately characterised as an expression of party autonomy.

    Notwithstanding his discomfort with these justifications, he conceded that the abolition of the institution of the party-appointed arbitrator is unlikely given it is a visceral part of arbitration that parties still seek to benefit from. He then turned to examining practices that would best accommodate this reality whilst preserving confidence in international arbitration by managing the risk of arbitrator misadventure.

    Pre-/Post-appointment Communications and Other Guidelines on Acceptable Conduct

    To this end, Menon CJ first directed his attention to the conduct of pre-appointment arbitrator interviews. He recommended the publication of guidelines on the appointment process; in particular who conducts the interview and the manner it is conducted and recorded. He suggested in particular that, as a matter of prudence, pre-appointment interviews should be kept short; between one to two hours. He juxtaposed this to an extreme instance at the International Chamber of Commerce (“ICC“) Court which refused to confirm an arbitrator who had spent between 50 and 60 hours with the nominating party before appointment. Further, all pre-appointment interviews should be recorded and transcripts made available to the other side expeditiously.

    Menon CJ also advocated a bright line rule against all post-appointment unilateral communications. Acknowledging the creation of exceptions in some arbitral rules, he considered the creation of any exception to be a dangerous precedent as all such communication would in their nature have strategic ramifications and as such should not be unilateral.

    Further, he encouraged the promulgation of guidelines on acceptable conduct, such as the revised IBA guidelines on Conflict of interest which laid out a system of disclosure tiered by a gradation of ‘flags’, adding that such guidelines should be used in an illustrative rather than a prescriptive manner.

    Outsourced CIArb Disciplinary Process

    Beyond measures designed to prevent ethical breaches, Menon CJ also revealed that “an outsourced disciplinary adjudication process in respect of complaints against arbitrators” offered by the Chartered Institute of Arbitrators (“CIArb”) to arbitral institutions is in the pipeline. It is proposed that it would be a three-tiered system, where the arbitral institution would investigate the complaint first; referring it to CIArb only if it were found to be justified.  CIArb could then either take no further action or administer disciplinary proceedings by arbitrators selected from a list. An arbitrator found guilty of misconduct could be removed from the arbitral institution’s panel of arbitrators or expelled from CIArb. The findings would be published and other institutions notified as a general rule. He hoped that such a disciplinary panel could in time, perhaps, create a body of jurisprudence that will provide clarity on arbitrator conduct regardless of jurisdiction.  

    Menon CJ cited a few reasons for CIArb being the choice institution for this disciplinary adjudication process. It is a neutral institution that does administer any arbitration; precluding it from being placed in the difficult position of disciplining its own flock. Also, comprising a diverse array of arbitrators, CIArb would have the requisite knowledge of and sensitivity towards the entire spectrum of arbitral practice. Moreover, CIArb has international credibility and is well-regarded for setting best practices.

    Menon CJ concluded that this endeavour to create clarity on expected arbitrator conduct is geared not only towards fostering sustained confidence in global arbitration, but also towards training new entrants upon whom the future of global arbitration would rest. 

    Address by Mr. Alastair Henderson

    Mr. Alastair Henderson subsequently delivered a speech in which he broadly concurred with Menon CJ’s observations on the moral hazard posed by party appointed arbitrators, the weakness of some conceptual justifications for the institution and its continued existence owing to what he observed as the inculcation in parties of an “inchoate sense of acceptance that flows from involvement in the process”, and the fact that it promotes confidence amongst parties who are unfamiliar with international arbitration. 

    In relation to best practices going forward, he was of the same mind as Menon CJ on the recording and disclosure of pre-appointment interviews yet cautiously supportive of the outsourced CIArb disciplinary process. He observed that there has yet to be a global consensus on acceptable arbitrator conduct, citing as example the permissibility in certain emerging economies of appointing former government servants into arbitration panels presiding over matters involving government bodies. He also wondered whether a disciplinary process could become but another route for parties to challenge arbitrators, noting that even the threat of referral to such a process could be used as a bullying tactic. As such, he suggested that such an abuse of process must be discouraged, if not punished.

    Commentary

    i.              Duty of Impartiality of the Party-Appointed Arbitrator

    As connoted by the choice of punctuation in the Lecture’s title, the role of the party appointed arbitrator is not a settled. While some, like Menon CJ, have argued, as essential to preserving credibility in international arbitration, that the guarantees of independence and impartiality must apply to all arbitrators, irrespective of who appointed them, other "pragmatists" consider it illusory to expect a party-appointed arbitrator to satisfy the same standard of independence and impartiality as the president of a tribunal or a sole arbitrator and prefer to overtly embrace that reality. Professor Hans Smit opined that if party-appointed arbitrators are not banned, “their role as advocates for the party that appointed them is fully disclosed and accepted”. More recently, Professor Catherine Rogers has suggested that party-appointed arbitrators can perform the function of acting as a devil’s advocate who challenges, within the tribunal, the positions that are harmful to the appointing party’s position. It is on such basis that an expectation of a lesser degree of impartiality on the part of the party-appointed arbitrator has been justified in some quarters.

    The uniform standard of impartiality advocated by Menon CJ had greater resonance with this author. First, a lesser degree of impartiality strikes this author as an impossibility; akin to someone being a little pregnant. It is unclear how such a state of impartiality is to realistically be given content. For instance, would there be a difference in what constitutes unacceptable links of an arbitrator?  Further, where would the line between ‘less impartiality’ and ‘partiality’ be?  Creating additional layers of ambiguity to a duty that is already fraught with uncertainty would not only dilute it but potentially allow arbitrator misconduct to thrive in the margins. In any event, such differentiation is of no assistance in building confidence in the adjudicative function of international arbitrators. A uniform standard of impartiality is in fact the more realistic solution to safeguarding the confidence and thus legitimacy of arbitrators.

    ii.           Need for a global disciplinary process

    While there is little disagreement on the imperative for ethical self-regulation of arbitrators amongst the international arbitration committee, the need for a global disciplinary process today is less clear. The experience of the Swiss Arbitration Association (“ASA”) and its proposal for a Global Arbitration Ethics Council to discipline counsel misconduct through sanction is instructive.  The ASA Working Group on Counsel Ethics opined that it was not the time for a global body for two reasons. First, empirical studies involving bar associations across US and Europe reflected a paucity of complaints. Secondly, counsel misconduct could be addressed by a greater willingness amongst arbitrators to exercise the powers they already have under laws and institutional rules and for arbitral institutions to "discuss whether they wish to adopt internal disciplinary procedures [...] since this could address the concern expressed by some that the arbitral community must be seen as auto-regulating seriously”, citing CIArb as a body that did just that.

    It is submitted that these reasons apply with equal force to the proposal for a global CIArb disciplinary process its necessity remains an open question. Some arbitrations have demonstrated the ability of co-arbitrators to self-regulate an arbitrator challenge in a principled and coherent manner. A recent case in point would be the ICSID ruling by two unchallenged members of the tribunal, Hi-Taek Shin (chair) and Zachary Douglas (Venezuela’s nominee) in Fabrica De Vidrios Los Andres C.A., et al. v. Bolivarian Republic of Venezuela. Applying a test based on the views of a reasonable third party observer, they found that there was no deliberate misrepresentation with an erroneous Linkedin page on the part of the challenged arbitrator Yves Fortier especially given the ease of which the information could be publicly verified. This test was applied in a consistent manner with an earlier challenge. Further, the co-arbitrators held that it was legitimate for Venezuela to seek clarification upon discovering the LinkedIn page but not to pursue a challenge having received Fortier’s response. One wonders whether another layer of disciplinary proceedings could have unnecessarily upended a credible arbitral decision and create uncertainty.

    It is humbly suggested that CiArb’s internal disciplinary regime could serve as a model for adoption by other national arbitral institutions. The Global Arbitration Review reported a recent case in point wherein CIArb expelled from its membership a Ukrainian arbitration specialist who had made false representations regarding the engagement of experts on Kazakh tax law for an ICSID case, following a hearing with full due process. Apart from the sanctioning of misconduct, arbitral institutions could also issue accreditations like CIArb does with ethical standards built-in. Harmonization with CIArb internal standards on a national level would create the necessary consensus alluded to by Mr. Alastair Henderson for the creation of a global regime in the future should the empirical evidence support a need for it.

    iii.         Going forward: Ethics in Arbitration

    This year’s Lecture is reflective of the changing zeitgeist with regard to ethical self-regulation in international arbitration. A peripheral consideration in past decades, it is now considered a live issue that goes to the heart of the legitimacy of the international arbitration system. The ensuing process of formalising such regulation for clarity should be welcomed by the international arbitration community as an opportunity to reassess and reaffirm the foundations of its legitimacy. As evident in this commentary, this process will entail building a series of consensus from problem diagnosis to assessment and enforcement tools employed to tackle the ethical challenges.

    It is to be expected that objections to arbitrator appointments and applications to remove arbitrators will persist for the foreseeable future leaving plenty of scope for the various actors to map out the contours of what does or does not give rise to a perception of bias. Arbitrators will need to be more attuned to any set of circumstances that might be construed as indicative of conflict, and proactively avoid conduct that might give a reasonable observer reason to doubt that their impartiality or independence in cases over which they preside.

    * This blog entry may be cited as Siraj Shaik Aziz, “Event Note: Herbert Smith Freehills - SMU Asian Arbitration Lecture 2016” (7 January 2017) (http://www.singaporelawblog.sg/blog/article/174)

    ** A PDF version of this entry may be downloaded here

     

     

Comment Section