Out-Law Guide 9 min. read
25 Aug 2011, 4:52 pm
One of the features distinguishing arbitration from litigation is the fact that the parties are free to choose their own tribunal. That tribunal will preside over the proceedings and will ultimately produce an award which is final and binding on the parties. Although there are many factors for the parties to consider when selecting arbitrators, it is generally accepted that they should be independent and impartial. A lack of independence may form the basis of a challenge and disqualification of a party's arbitrator, and so must be guarded against from the outset.
Appointing the tribunal
The general rule in international arbitration is for there to be:
This is reflected in the ICC, LCIA and UNCITRAL Arbitration Rules.
At the time of drafting their arbitration agreement the parties will need to decide whether they require one or three arbitrators to decide any dispute arising out of the contract or whether they will remain silent on the issue. The option to remain silent will, to a large degree, depend on whether the arbitration clause incorporates a set of institutional rules which provide a default position.
The appropriateness of a sole arbitrator or panel will often turn on the nature, value and complexity of the specific dispute between the parties and so prescribing the number of arbitrators may well not be suitable. The following factors should be borne in mind when deciding the number of tribunal members:
In the event that the parties wish to specify that a sole arbitrator will determine any disputes arising out of their contract, the parties can determine the identity of the arbitrator by specifying the name of that arbitrator. The perceived advantage to having an individual specified in the arbitration clause is that there is certainty at the outset as to who will determine and disputes arising out of the contract, however as the parties cannot foresee the range of disputes that might arise they cannot be sure that that individual will ultimately be appropriate. This risk perhaps outweighs the advantage of certainty, so specifying the mechanism for appointment rather than the individual to be appointed may be more appropriate.
While none of the arbitration rules require an arbitrator to have formal legal training or experience, in practice the institutions generally favour the appointment of lawyers. This is because the arbitration process commonly requires the resolution of important legal issues such as jurisdiction and contract interpretation.
In the event there is specialist technical knowledge or industry expertise which the lawyer-arbitrator does not possess and which is required, then this can be resolved by the appointment of an expert witness. That said, it is often useful to appoint an arbitrator with industry-specific knowledge on the basis that the appointed arbitrator has a good grasp of the custom, terminology and standard forms of contract which are used in that specific industry.
It is a fundamental principle in international commercial arbitration that an arbitrator must be and remain impartial and independent at all times. This requirement is reflected in most national laws, international conventions and arbitration rules.
The term 'independence' is not defined in any of the rules. In fact, it is difficult to define the qualities of independence or impartiality required of arbitrators. It is however possible to distinguish independence and impartiality on the basis that independence is generally perceived to be a situation of fact or law which is capable of objective verification whereas impartiality is more a mental state, which is necessarily subjective.
It is often thought that it is easier to establish a lack of independence than to provide proof of impartiality. While the bias of arbitrators will rarely be revealed by their conduct, links with one of the parties will be easier to demonstrate by reference to outside sources.
The issue of whether there should be a universal definition of 'independence' has been considered by the International Chamber of Commerce (ICC). The ICC decided not to provide specific guidelines to prospective arbitrators for fear that they would become too rigid. However Stephen Bond, a former Secretary General of the Court, has described the absence of a "close, substantial, recent and proven relationship" between a party and a prospective arbitrator as the essential feature of independence. How close is 'close', how substantial is 'substantial' and how recent is 'recent' are all matters of potential disagreement which will inevitably depend on the circumstances of a particular case.
It should be noted that this is not the case in trade arbitrations where it is accepted that the parties and the arbitrators will all be professionals in the same field. In such cases, it is felt that the existence of such business relationships need not bring into doubt the independence of an arbitrator.
In an ideal world the nationality of a sole, or the presiding, arbitrator should be irrelevant. It is the qualifications, experience and integrity of the arbitrator which are the factors which should account. However it is generally the practice in international commercial arbitration to appoint a sole, or presiding, arbitrator of a different nationality from that of the parties to the dispute. This ensures that an arbitrator can be seen to be 'neutral'.
If a prospective arbitrator, on being approached with a potential appointment, discloses all the facts which could conceivably be considered grounds for disqualification then, assuming no objection is made, any subsequent challenge during or after the proceedings should be unsuccessful. Furthermore, the right to an independent and impartial arbitrator will be deemed to have been waived in respect of challenges founded on facts contained in the disclosure.
It should be noted, however, that the requirement of disclosure is a continuing duty throughout the arbitration. If new circumstances arise that might give rise to any doubts as to an arbitrator's independence or impartiality, he should disclose those circumstances immediately to the parties and to his fellow arbitrators if relevant.
The duty of disclosure is set out clearly in the various arbitration rules.
The concept of 'bias' or 'partiality' concerns the bias of an arbitrator, either in favour of one of the parties or in relation to the issues in dispute. Central to this concept is the premise that the arbitrator is not acting fairly in that he is predisposed towards one of the parties and prejudiced against the other. Accordingly, 'partiality' is an abstract concept which primarily involves a state of mind.
For the purposes of this guide we will focus on how the ICC Rules deal with bias, drawing comparisons with the other rules where appropriate. The provision that the tribunal act "fairly and impartially" was introduced into the ICC Rules in the 1998 version, although the principle that it expresses relates to basic concepts of 'due process' and 'natural justice' which have always been inherent in ICC arbitration.
It is difficult to imagine parties agreeing to arbitrate if they had no faith in the fairness and impartiality of the process. However the language of the provision was carefully and deliberately chosen and contrasts with other provisions.
Fairly: unlike similar provisions in the UNCITRAL Rules, the ICC provides that parties are to be treated '"fairly" rather than "with equality". This is because, in some cases, treating the parties in precisely the same manner may lead to unfair results.
Reasonable opportunity to present case: the ICC Rules also differ from some others in providing that each party shall have a 'reasonable' as opposed to a 'full' opportunity to present its case. What is a 'full' opportunity may be the subject of debate and may not necessarily be the same as what is seen as either 'reasonable' or 'necessary'.
In the context of 'impartiality', the ICC intends that the arbitral tribunal will have the discretion to decide when it has heard enough and whether it would be unreasonable to permit a continued exchange of submissions or evidence that may no longer be of any use to the arbitrators. It is therefore not open to a party to allege a lack of impartiality under the ICC Rules simply because an arbitrator has not given it a 'full' opportunity to present its case.
Consequences of impartiality: in the event that an arbitrator's partiality can be demonstrated, it remains open to a party to seek the arbitrator's removal by means of the challenge procedure provided for in the various sets of rules.
Practical examples of arbitrator bias
Direct interest in the subject matter of the arbitration: where an arbitrator has a direct interest in the outcome of the arbitration and fails to disclose it, he will be disqualified on the challenge of an interested party. Where an award has been granted before that interest was discovered, it may be set aside.
This practice is entirely consistent with the requirement than an arbitrator must be impartial and the fact that his impartiality will be cast in doubt where he has an interest in the outcome. The concept goes further in that, even when the challenging party admits that it has no suspicion that the arbitrator is biased or partial, the challenge should nevertheless succeed.
Because this remedy is so drastic it will be limited to cases of direct interest in one of the parties to the arbitration or the subject matter of the dispute, bearing in mind the standards of independence required by the jurisdictions which will ultimately execute or affirm the award.
Continuing financial or professional relationship with a party: probably the greatest impediment to impartiality. It is rare that a party nominates one of its employees as an arbitrator. The issue arises more frequently with respect to employment by a related company or individual. In such cases, common sense rather than a formal rule will usually be applied and the court will determine whether the relationship could affect the impartiality of the arbitrator.
Lawyer arbitrators are sometimes successfully challenged on the grounds that the regular counsel for one of the parties may not serve as an arbitrator in the absence of an agreement to the contrary. Difficult issues arise where a lawyer who is a partner in a large law firm is nominated - even though he or she may be of recognised ability and independent of both the nominating and opposing parties, the lawyer will in most circumstances not be allowed to serve as arbitrator if one of the other members of that law firm has advised the nominating party. In this situation there would be no doubt that the arbitrator is professionally independent of the party, but there remains a theoretical financial conflict of interest in that the law firm for which the partner works has a financial relationship with the party and an adverse arbitral decision might trouble that relationship.
Prior financial or professional relationship with a party: if the relationship with the party is in the past, the analysis will be different to in circumstances where that relationship is continuing. However, financial or personal interests will not necessarily be absent and a person who has had previous business with a party may hope to resume such relations in the future. A long prior employment with a party may have given rise to such a close relationship it will make impartiality difficult. Further risk may exist if, in these circumstances, an arbitrator became aware of facts relating to the party or the conduct of its business which are not part of the evidence presented before the tribunal, but may influence his opinion on the dispute.
The general position, however, is that past relationships do not generally create strong grounds for challenge. The court will not automatically assume that a nominee should be disqualified because of occasional business relationships in the past with the nominating party.
Previously expressed opinion: if the arbitrator has previously given his opinion on the matter in dispute, it may be that he will no longer be able to address the issues with an open mind. Absent aggravating factors it is unlikely that a court would sustain a challenge in these circumstances as a party should be free to choose an arbitrator of a compatible 'culture' – whether legal or technical. However the court would probably wish to avoid appointing a chairman who had publicly taken extreme and detailed views on issues central to the arbitration.
Due process violations: this can occur where, during the course of the proceedings, a party becomes convinced that an arbitrator is displaying a lack of impartiality towards it by failing to allow it equal procedural treatment or other due process rights. The exact content of due process rights is rarely defined but it is generally assumed to be as broad as the procedural rights guaranteed under the European Convention on Human Rights. Challenges can relate, for example, to refusal to receive evidence, refusal to hold the hearing or order an expert investigation or granting insufficient or unequal time to file a pleading.
Challenges are often made on the basis of the arbitrator's procedural conduct of hearings. However, very few will succeed because the taking of procedural decisions is precisely within the discretionary powers of most tribunals. It is only in a flagrant case of due process violation causing real prejudice to a party that a challenge based on due process grounds can succeed.