Wednesday, 8 July 2015

English court removes party-appointed arbitrator due to doubts as to his impartiality

July 8, 2015. 

In Sierra Fishing Company and other v Hasan Said Farran and others [2015] EWHC 140 (Comm), the English court took the unusual step to remove an arbitrator as there were justifiable doubts as to his impartiality. The Court considered his relationship with one of the parties, his involvement in drafting one of the agreements in dispute and his conduct once the challenge against him had been made. It found that each of the three grounds were sufficient to raise justifiable doubts as to his impartiality. The case demonstrates that in exceptional circumstances the English court will step in to remove an arbitrator in order to ensure the arbitral process is fair.


Background:

Sierra Fishing Company, a company incorporated in Sierra Leone involved in the supply of seafood, and its managing director (the “Claimants“), entered into a loan with a Lebanese bank and an Iraqi individual. Upon the Claimants’ failure to repay the loan, the chairman of the Lebanese bank (Mr Farrad) and the Iraqi individual (Mr Assan, and together with Mr Farrad the “Defendants“) initiated proceedings under the arbitration clause contained in a loan agreement:

“The three parties agreed that in case any dispute arises in the execution of this agreement they will refer to arbitration in SIERRA LEON (sic) or LONDON (UK) as decided by Mr Farrad and/or Mr Assan.”

The Defendants appointed Mr Ali Zbeeb as an arbitrator (the “Arbitrator“) and in the ensuing year, the parties attempted to settle their disagreement by way of a series of agreements to repay the loan through a share transfer in the company. The parties also agreed to stay the arbitration proceedings during these negotiations. When the Defendants attempted to revive the arbitration, the Claimants failed to engage in the arbitration process and claimed that the Arbitrator had no jurisdiction and, in any case, was biased due to his close connection with the Defendants. The Arbitrator dismissed the Claimants’ protests and moved towards issuing his award.

The Claimants brought an application for the removal of the Arbitrator under section 24(1)(a) of the Arbitration Act 1996 (the “Act“) on the grounds that circumstances exist that give rise to justifiable doubts as to his impartiality. The Defendants disputed the existence of such circumstances and, in the alternative, argued that the Claimants lost the right to raise this objection under section 73 of the Act by taking part in the arbitration.



The First Issue: Justifiable Doubts as to the Arbitrator’s Impartiality

Section 24(1)(a) of the Arbitration Act 1996 states (where relevant) that:

 “(1) A party to arbitral proceedings may (upon notice to the other parties, to the arbitrator concerned and to any other arbitrator) apply to the court to remove an arbitrator on any of the following grounds – (a) that circumstances exist that give rise to justifiable doubts as to his impartiality…”.

The Court confirmed the test for such apparent bias was whether the fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased (Porter v Magill [2002] UKHL 67). It emphasised that the test only required a “real possibility” of bias, not actual proof of bias on the part of the arbitrator.

In applying the test, the Court held in favour of the Claimants for three reasons:

The Arbitrator’s legal and business connections with the Defendants: It was undisputed that the Arbitrator had previously advised the bank where the Defendant was chairman, and that the Arbitrator’s father and co-partner in his law firm continued to act as legal counsel to both the Defendant personally and the said bank. The Court referred to the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”), according to which (at least some of) these circumstances fell under the “Non-Waivable Red List”. As such, the Court concluded that a fair minded observer would take the view that the Arbitrator would be predisposed to favour the Defendants in the dispute, in order to foster and maintain business relationships with himself, his firm and his father, to the financial benefit of all three. Further, the Arbitrator argued that it was not his duty to carry out due diligence into potential conflicts on behalf of the Claimants. According to the Court, this statement contradicts Principle 3 of the IBA Guidelines, which imposes a duty on the arbitrator to make voluntary disclosure to the parties of connections which he knew and which might justify doubts to his impartiality. This served to reinforce the fair minded observer’s doubt as to the Arbitrator’s impartiality.
The Arbitrator’s involvement in the drafting of parties’ settlement agreements: Instead of relying on the initial loan agreement to support a claim for monies repayable, the Defendants were relying on one of the subsequent agreements signed after the arbitration was initiated to claim shares in the Claimants’ company. It was undisputed that the Arbitrator had assisted the Defendants in drafting this agreement. The Court held that as the Arbitrator had given advice to the Defendants, there was a real possibility in the mind of a fair minded observer that the Arbitrator would wish to find in their favour.
The Arbitrator’s conduct in rejecting the Claimants’ challenge to his impartiality: The Arbitrator had refused to postpone rendering the award until after the Court had resolved the challenge of his impartiality, even upon the request of both parties. Further, the Arbitrator’s tone and the content of his communications with the parties as well as the Court after challenges to his jurisdiction and impartiality had been made justified doubts as to his impartiality. Specifically, the Arbitrator advanced detailed arguments in support of the Defendants’ position, which they had not made themselves. He also disparaged and questioned the Claimants’ good faith in bringing their challenge. The Court found that the Arbitrator’s conduct showed that he had become personally embroiled in the dispute and that, as a result, his ability to be objective was doubtful.
In summary, the Court found that each of the three reasons on its own was sufficient to give rise to justifiable doubts about the Arbitrator’s impartiality.



The Second Issue: Did the Claimants Lose their Right to Object?

Section 73(1) of the Act states that:

 “(1) If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection: 

 (a) that the tribunal lacks substantive jurisdiction;

(b) that the proceedings have been improperly conducted;

(c) that there has been a failure to comply with the arbitration agreement or with any provision of this Part; or

(d) that there has been any other irregularity affecting the tribunal or the proceedings,

he may not raise that objection letter, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection.”

The Court found that the Claimants had not lost the right to object as they had not taken part in the arbitration proceedings without raising objections at the relevant time.

As to the applicable test, the Court confirmed that a party does not take part in an arbitration unless and until it invokes the jurisdiction of the tribunal, whether regarding the merits of the dispute or to determine its own jurisdiction (Broda Agro Trading v Toepfer [2011] 1 Lloyds Rep 243). However, after taking part, a party may continue to take part through silence or inactivity (Rusal v Gill & Duffus [2000] 1 Lloyd’s Rep 14).

The Court held that none of the Claimants’ actions amounted to taking part. The Claimants’ actions included:

  1. Their silence and inactivity towards the Defendants’ initiation or revival of arbitration proceedings.
  2. Their request or agreement to adjourn a procedural hearing in circumstances where they had not agreed to the arbitration.
  3. Their indication to appoint an arbitrator, which also does not constitute invoking the tribunal’s jurisdiction, and their subsequent failure to appoint one.

The Court held that the Claimants’ had not participated in the arbitration and consequently maintained their right to object, and removed the Arbitrator as there were justifiable doubts as to his impartiality.

Source: http://globalarbitrationnews.com

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