Author: Ian Smith
A recent case in the Commercial Court, which has coincided with our experience of an arbitrator resigning due to a potential conflict, has brought attention to the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration.
The IBA Guidelines are frequently used in the international arbitration arena to consider impartiality and independence. With reference to seven General Standards in Part I of the IBA Guidelines, Part II sets out non-exhaustive lists of ‘traffic light’ colour coded situations that on occurrence may raise questions about an arbitrator’s impartiality and independence.
The Red, Orange and Green Lists
The Red List
The Red List consists of a Non-Waivable Red List and a Waivable Red List, covering situations in which justifiable doubts exist as to the arbitrator’s impartiality and independence. The applicable test is whether ‘an objective conflict of interest exists from the point of view of a reasonable third person having knowledge of the relevant facts and circumstances’.
An example of a Non-Waivable Red List situation is where the arbitrator has ‘a significant financial or personal interest in one of the parties, or the outcome of the case’. In a situation falling under this category, the arbitrator should not accept his appointment or, if the arbitration has already commenced, should refuse to continue to act.
The Waivable Red List covers circumstances that are serious but less severe, for example where ‘a close family member of the arbitrator has a significant financial interest in the outcome of the dispute’. In such waivable circumstances the arbitrator may continue to act, but only if and when the parties expressly state their willingness for the arbitrator to do so.
The Orange List
The Orange List covers situations that may give rise to doubts as to the arbitrator’s impartiality and independence, such as where the arbitrator ‘has, within the past three years, served as counsel against one of the parties, or an affiliate of one of the parties, in an unrelated matter’.
In these circumstances the arbitrator has a duty of disclosure. Disclosure does not imply the existence of a conflict; rather it allows the parties to consider whether they have any objective, justifiable doubts as to the arbitrator’s impartiality. The parties are deemed to have accepted the arbitrator’s appointment unless they make an objection within 30 days of the disclosure.
The Green List
The Green List covers situations where there is no apparent or actual conflict of interest on an objective view, for example where the arbitrator has ‘previously expressed a legal opinion (such as in a law review or public lecture) concerning an issue that also arises in the arbitration (but this opinion is not focused on the case’. In such a circumstance the arbitrator is not under a duty to disclose.
The IBA Guidelines are not binding but are of assistance in considering whether an arbitrator may not be independent. However, there are weaknesses with the IBA Guidelines: for instance, certain circumstances could spread into a number of the categories.
W Ltd v M SDN BHD  EWHC 422 (Comm)
The case of W Ltd v M SDN BHD in the English Commercial Court dealt with an alleged conflict of interest as the arbitrator was a partner in a law firm that regularly advised an affiliate of the defendant and consequently received significant fees (though the arbitrator himself had not done any work for the affiliate company). The challenge was for apparent bias. Under the IBA Guidelines, the arbitrator should have disclosed these circumstances – they fall into the Non-Waivable Red List as a circumstance where 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 question of bias was dismissed by the court. Neither the arbitrator nor his firm advise or advised the party to the arbitration or its parent company and there was no indication that the arbitrator carried out any work for the affiliated company. Mr Justice Knowles stated that ‘considering the facts the fair minded and informed observer would not…conclude that there was a real possibility that the tribunal was biased, or lacked independence or impartiality’.
Mr Justice Knowles went on to explore the weaknesses in how the IBA Guidelines were applied to the case. In his view, rather than focusing on the specific facts of the situation to make an informed judgement as to impartiality and independence, the use of the IBA Guidelines in this case had led to an assumption based on a strict reading of the IBA Guidelines ‘without reference to the question whether the particular facts could realistically have an effect on impartiality or independence (including where the facts were not known to the arbitrator)’. An inconsistency was revealed: the Non-Waivable Red List is qualified by the phrase ‘depending on the facts of a given case’, suggesting that each situation should be read with the issues of each case in mind, whereas the General Standards in Part I (which are overriding in controlling the outcome of a disclosure) state that in any of the Non-Waivable Red List situations justifiable doubts necessarily exist as to impartiality or independence (emphasis added) and therefore the individual facts of a given case are not relevant.
‘Traffic signals in New York are just rough guidelines’ – David Letterman
A guide to the types of situation that might lead to a question of an arbitrator’s independence and how serious certain scenarios may be can be invaluable, but no guidelines can be exhaustive or detail the specific facts of each case. In W Ltd v M SDN BHD Mr Justice Knowles detailed situations in the Waivable Red List that ‘seem potentially more serious that the circumstances of the present case’, such as when the ‘arbitrator has given legal advice…on the dispute to a party’ or when a ‘close family member of the arbitrator has a significant financial interest in the outcome of the dispute’, than those dealt with in the Non-Waivable Red List.
In an arbitration we have been dealing with, an arbitrator was unable to accept an appointment due to a potential conflict because of the arbitrator’s past professional relationship with the claimant’s counsel. The respondent was asked to confirm it had no objection, but did not do so because it was not engaging in the arbitration process at all. Whilst the respondent did not object at the point the issue was raised, the arbitrator was rightly concerned that this could become an issue during the enforcement of any award the tribunal might make: the respondent could seek to use the fact of the business relationship and the fact it was raised to cast doubt on the legality of the award. These facts and situations are not envisaged by the IBA Guidelines, and under the circumstances the arbitrator resigned even though there was no conflict as listed in the IBA Guidelines.
If a conflict of interest arises before an appointment or during the course of an arbitration, the IBA Guidelines are of great assistance in assessing the situation, but the specific facts of each case should always be kept in mind, especially if an award is being challenged on the basis of apparent bias.
‘Amber, Green and Red Surprise’ are lyrics from John Martyn’s song ‘Traffic Light Lady’.
Ian Smith, Associate, Fladgate LLP (firstname.lastname@example.org)
Laura Priestley, Paralegal, Fladgate LLP (email@example.com)