Expansion of the duty of disclosure in international arbitration
December 2018 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
December 2018 Issue
International arbitration has always sought to reconcile the competing goals of efficiency and due process in light of the expectations of parties to a dispute. In order to achieve this balance, institutional rules recognise the contractual freedom of parties, grant arbitrators extensive discretion as to procedure, and limit opportunities for judicial intervention.
As a result of the institutional rules, arbitration has been mostly successful in its reconciliation of efficiency and due process. In recent years, however, the appropriate ‘balance’ of the two has been the subject of widespread judicial and academic debate. In England, this debate was reignited in April 2018 with the Court of Appeal’s decision in Halliburton Company v Chubb Bermuda Insurance Ltd.
In Halliburton, the Court of Appeal rejected Halliburton’s appeal of the High Court’s decision not to remove an arbitrator appointed by Chubb on the basis that he had also been appointed by Chubb in two other related, overlapping arbitrations.
In its reasons, the Court of Appeal expanded the duty of disclosure required under England’s Arbitration Act, 1996. The court held that an arbitrator had a duty to disclose circumstances when the circumstances would or might, in the eyes of a fair-minded observer informed of all the facts, give rise to a real possibility that the arbitrator was biased. On the facts of this case, the court held that the arbitrator had a duty to disclose his later appointments.
The court went on to hold, however, that the test for removal of an arbitrator required that there be apparent bias, in that the circumstances would, in the eyes of a fair-minded observer informed of all the facts, give rise to a real possibility that the arbitrator was biased. The court held that this test was not met on the basis that the overlap was minor, non-disclosure was not proof of apparent bias and the arbitrator did not display poor conduct.
The decision in Halliburton is problematic for several reasons. By expanding the duty of disclosure, it obliges arbitrators to disclose matters which may give rise to a risk of bias, even where that risk is insufficient to merit removal of an arbitrator. At the same time, this broader duty gives parties a false expectation that in England, arbitration requires disclosure and heightened due process in line with the 2014 International Bar Association (IBA) ‘Guidelines on Conflicts of Interest in International Arbitration’. Parties have continually brought applications alleging apparent bias on the basis of a breach of the IBA guidelines, despite consistent judicial consideration of the IBA guidelines as non-authoritative guide. In the wake of Halliburton, there may be an increase in the number of applications on this basis as arbitrators have no clear guidance as to when to disclose information and parties to an arbitration have no clear guidance as to when disclosed circumstances merit removal of an arbitrator.
Another problem is that the decision in Halliburton, insofar as it emphasises the importance of due process in international arbitration, heightens concerns about the expansion of disclosure in areas such as document production. One reason parties choose arbitration is to avoid the extensive document production associated with litigation in common law courts. However, increasing demands for extensive production, particularly from US parties to an arbitration, and growing acceptance of electronic document production especially, raises concerns that extensive document disclosure could become a norm in international arbitration.
For example, in Mofet Etzion Ltd v General Dynamics Land Systems (2008), over 150,000 pages of document production were ordered by International Centre for Dispute Resolution (ICDR) arbitrators sitting in New York. Further, it was reportedly ordered that in an arbitration seated in Switzerland, the arbitrators issued an order for 18,000 pages of document disclosure to one of the parties. The decision in Halliburton gives rise to worries that arbitrators will give effect to parties’ expectations of due process by granting excessive requests for document disclosure.
The practical concern is that as a result of Halliburton, parties to an arbitration will be more likely to challenge arbitrator appointments, submit applications for arbitrator removal or for the annulment of awards on the basis of apparent bias, apply for further document production or challenge awards on the basis that documents were not disclosed. Whether these applications are brought out of a misunderstanding of the requirements of due process or simply as a strategic tactic, the practical result is the same: an increase in the time and cost of arbitration.
The threat of such applications also raises a justifiable concern that arbitrators, wishing to respect party expectations, will feel obliged to provide disclosure as required under English law. Tribunals may want to avoid party applications to a court which invites scrutiny of their decisions. All of this may influence arbitrators to prioritise due process over efficiency. This could include by arbitral disclosure of circumstances where the arbitrator does not believe their impartiality is affected, or simply by allowing increased document production in order to appease parties.
In the current climate with respect to duties of disclosure and the appropriate balance between due process and efficiency, one can imagine the following scenario all too easily. Say an arbitrator has been appointed by the same party in two overlapping, related arbitrations. In the first arbitration, the arbitral tribunal prioritises efficiency and grants limited document production. In the second, the arbitral tribunal, mindful of party expectations of due process, grants extensive document production and admits documents which were inadmissible in the first arbitration. The arbitrator does not deem these ‘inadmissible documents’ relevant to the first arbitration, but in the interests of avoiding the appearance of bias discloses these circumstances to the relevant parties. Given this apparent admission of inside knowledge, the non-appointing party in the first arbitration becomes concerned about bias and applies for removal of the arbitrator. The application is, as per the test in Halliburton, unsuccessful. Practically speaking, the adherence to due process by ordering extensive document production in the second arbitration was costly and time consuming. It also triggered the arbitrator’s duty to disclose in the first arbitration. The fact that this was a ‘disclosable circumstance’ triggered concerns of apparent bias in the non-appointing party, whose application was costly, time consuming and – given the lack of evidence of apparent bias – doomed to fail under English law.
This example highlights the challenge of imposing on arbitrators an ongoing duty to disclose circumstances which are insufficient grounds to remove an arbitrator. It is practically impossible for parties to an arbitration to gather evidence sufficient to prove ‘apparent bias’. Time and money is wasted on fruitless or strategic applications, confidential information risks becoming public and arbitrator discretion to tailor the arbitration to the needs of parties is hampered. One possible result of Halliburton is that the current arbitral landscape in England is confusing, unpredictable, and likely to prove inefficient and unsatisfactory to parties, arbitrators and courts.
However, one suggests reason will prevail and a literal application of Halliburton will not be strictly applied. What this means for those facing an arbitration under English law is to be mindful of the decision in Halliburton and the increased sense that party-approved arbitrators will be subject to more scrutiny and possible application for recusal than in the past. All, of course, adds further expense to the arbitration proceedings.
Timothy St. John Ellam, QC is a partner and co-chair of the international arbitration practice group, and Nicole Fitz-Simon is an articling student, at McCarthy Tétrault LLP. Mr Ellam can be contacted on +1 (403) 260 3533 or by email: email@example.com. Ms Fitz-Simon can be contacted on +1 (403) 260 3510 or by email: firstname.lastname@example.org.
© Financier Worldwide
Timothy St. John Ellam, QC and Nicole Fitz-Simon
McCarthy Tétrault LLP