English court removes arbitrator based on justifiable doubts as to his impartiality

In its recent judgment in Sierra Fishing Company and others v Hasan Said Farran and others [2015] EWHC 140 (Comm), the English Court granted an application to remove an arbitrator under s24 of the Arbitration Act 1996 (the "Act"), which provides that a party may "apply to the court to remove an arbitrator on [the grounds that] circumstances exist that give rise to justifiable doubts as to his impartiality".

The Court, applying the relevant test as articulated by the House of Lords in Porter v Magill [2002] and referring to the IBA Guidelines on Conflicts of Interest in International Arbitration (the "IBA Guidelines"), had no difficulty in finding that "the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased". The Court's decision provides helpful confirmation that it is the arbitrator's duty to make voluntary disclosure to the parties of circumstances known to him which might give rise to justifiable doubts as to his impartiality, regardless of whatever steps may be available to the parties to discover their existence.   The judgment also provides helpful guidance on the steps which a party may take without losing their right to object to an irregularity affecting the tribunal or proceedings under s73 of the Act.

For further information on the revised 2014 IBA Guidelines, published on 28 November 2014, see our blog post here.)

Factual background

The applicants (together, "C") applied for the removal of the third respondent (the "Arbitrator") as arbitrator. The first respondent ("Farran") was chairman of Finance Bank SAL ("Finance Bank"). He and the second respondent (together, "D") had entered into a loan agreement with C (the "Loan Agreement") which contained an arbitration clause. When C failed to make repayments, D commenced ad hoc arbitration proceedings under the Loan Agreement, appointed the Arbitrator as their arbitrator, and requested that C appoint an arbitrator.

C and D subsequently made a series of agreements for repayment of the loan and suspension of the arbitration, including an agreement (the "Execution Agreement") providing for a transfer of shares in the first applicant company to D in satisfaction of the debt. When the agreements were not performed, D recommenced the arbitration with the Arbitrator as sole arbitrator, on the basis of C's failure to appoint an arbitrator.

The Arbitrator rejected C's challenge to his impartiality, accepted jurisdiction, and proceeded with the arbitration. C applied to the English Court to remove the Arbitrator under s24(1)(a) of the Act on grounds which included the following.

(1)   There was a legal and business connection between Farran and the Arbitrator. The Arbitrator had been retained as legal counsel to Finance Bank when Farran was its chairman. In addition, the Arbitrator's father, who was co-partner in the law firm he had founded together with the Arbitrator and a third party, had acted and continued to act as legal counsel to both Farran and Finance Bank and retained a close internal role at Finance Bank, where he was a member of the executive management.

(2)    The Arbitrator was involved in the negotiation and drafting of the agreements that the parties had entered into after the Loan Agreement.

(3)   The Arbitrator's conduct in relation to C's challenge to his impartiality gave rise to justifiable doubts as to his impartiality.

The Arbitrator refused to refrain from issuing an award until after determination of C's application, despite both sides requesting that he do so (although his award remained unpublished at the time of the hearing of C's application as his fees were unpaid).

The issues

The two issues which were considered by the Court were as follows:

(1) whether there were circumstances which give rise to justifiable doubts as to the Arbitrator's impartiality; and

(2) if so, whether C took part or continued to take part in the arbitration proceedings, without raising the objection forthwith, at a time when they knew or could with reasonable diligence have discovered the existence of such circumstances, and therefore had lost their right to object under s73(1) of the Act.

Issue 1: Circumstances which gave rise to justifiable doubts as to the Arbitrator's impartiality

The Court held that there were three sets of circumstances which gave rise to justifiable doubts about the Arbitrator's impartiality for the purposes of section 24(1)(a) of the Act.

(1)  The legal and business connection between Farran and the Arbitrator

The Court, referring to the IBA Guidelines as being indicative of what the international arbitration community recognises as cases of conflict of interest or apparent bias, considered the following circumstances:

-       The Arbitrator's law firm had acted for Farran personally, and for Finance Bank, in relation to substantial commercial matters from which the firm derived a significant financial income. This fell within one of only four situations identified in the "Non-Waivable Red List" in the IBA Guidelines, which give rise to justifiable doubts about the arbitrator's independence and impartiality and in which an arbitrator should refuse appointment.

-       Such activity had occurred since 2012 and could be expected by the Arbitrator to continue. The situations in the "Waivable Red List" in the IBA Guidelines include where "the arbitrator currently represents or advises one of the parties or an affiliate of one of the parties" and where "the arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties".

The Court concluded that a fair minded observer would take the view that these circumstances gave rise to a real possibility that the Arbitrator would be predisposed to favour Farran in the dispute in order to foster and maintain the business relationship with himself, his firm and his father, to the financial benefit of all three. Such possibility would not be significantly diminished if the financial benefit would accrue to the Arbitrator's father rather than to the firm. 

The Court also found that the Arbitrator's attitude would reinforce a fair minded observer's doubts as to his impartiality. The Arbitrator had, in an erroneous denial of his duty of disclosure, asserted that it was for C to do due diligence in relation to any connections he had with Farran which might justify doubts as to his impartiality, not for him to volunteer them if they did exist.

(2) The Arbitrator's involvement in the negotiation and drafting of the Execution Agreement

Whilst the involvement of the Arbitrator in drafting the Execution Agreement would not give rise to any apparent bias if D's claims were confined to the rights and obligations of the parties under the Loan Agreement, the situation changed when D relied on the Execution Agreement to support a claim for transfer of shares rather than a money award, and relied on the arbitration clause in that agreement to confer jurisdiction upon the Arbitrator. In the circumstances, to a fair-minded observer, there would be a real possibility that the Arbitrator would wish to decide in favour of D the issue of his jurisdiction in respect of claims under the arbitration clause which he and/or his father had been responsible for drafting.

In circumstances where it was possible that D had been advised by the Arbitrator and/or his father as to the terms and effect of the arbitration clause, his was potentially a situation where the arbitrator had given legal advice on the dispute to a party or an affiliate of one of the parties and/or where the arbitrator had previous involvement in the case, both of which situations are included in the Waivable Red List of the IBA Guidelines.

(3) The Arbitrator's conduct of the s24 application

The judge was persuaded that two aspects of the Arbitrator's conduct gave rise to justifiable doubts about his impartiality.

-       The first was his refusal to postpone the publishing of his award. Save in exceptional circumstances, an arbitrator should give effect to the parties' desire that the tribunal should postpone its award until after determination of a court challenge which is capable of affecting his jurisdiction to make such an award.

-       The second was the content and tone of the Arbitrator's communications with the parties, once the dispute as to impartiality and jurisdiction had arisen, and with the Court thereafter. As respondent to an application for his removal, an arbitrator is entitled to put before the Court his evidence; however, he must not appear to take sides and must subsequently still be able to judge impartially the parties' respective cases. The Court concluded that, in  advancing arguments on behalf of D which D had not advanced for themselves, and questioning C's good faith in bringing the s24 application, the Arbitrator had become too personally involved in the issues of impartiality and his jurisdiction to guarantee the necessary objectivity required to determine the merits of the dispute.    

Issue 2: Loss of right to object under s73

The Court found that each of these three sets of circumstances (see (1) to (3) above) was sufficient on its own to give rise to justifiable doubts about the Arbitrator's impartiality. Accordingly, C's right to object would only have been lost if the conditions in s73 of the Act were satisfied separately in respect of each of the three sets of circumstances.

In relation to sets (2) and (3), it was not suggested by D that C had taken steps in the arbitration proceedings without voicing relevant objections after the occurrence of those circumstances. C had therefore not lost its right to object.

The Court also found that C had not lost the right to object in respect of set (1), on the basis that they had not taken part in the proceedings at any relevant time without raising an objection. In respect of the activity by which C, it was argued, had taken part in the proceedings, the Court held as follows.

-       An agreement to "freeze" the arbitration proceedings and silence or inactivity in the face of the other side's revival of the arbitration process could not amount to a first taking part.

-       Requests or agreements to adjourn a procedural hearing could not of themselves amount to a first taking part (although they might amount to continuing to take part where the party had already invoked the tribunal's jurisdiction), as they merely sought to preserve a party's opportunity to participate or object at the hearing it sought or agreed to postpone.

-       C's indication that they would be appointing their own arbitrator could not amount to taking part – it could not amount to invoking the jurisdiction of a tribunal when C had not yet recognised the tribunal as being properly constituted.

It was not necessary for the Court to undertake an analysis of the state of C's actual or constructive knowledge of the connections between Farran and the Arbitrator, which the Court noted might prove difficult to do in respect of any particular point of time.

Comment

This decision confirms the English Court's position that arbitrators have a duty to voluntarily disclose any circumstances that may cast doubt on their impartiality, even where the parties might be able to discover these through their own due diligence. (Please see here for our article on a recent decision by the Paris Court of Appeal on the scope of the arbitrator's duty of disclosure). It is also a warning to arbitrators defending a challenge to their impartiality that they must remain, and be seen to remain, capable of an impartial determination of the merits of the dispute.

Parties may find useful the Court's comments in respect of steps they may take without losing the right to make an objection to an irregularity affecting the tribunal or the proceedings under s73 of the Act. They should note, however, that it remains crucial for a party to make an objection promptly as soon as it discovers grounds for doing so, and that a party may lose its right to object under s73 if it takes part (or continues to take part) in proceedings when it could have discovered the grounds for the relevant objection "with reasonable diligence".

For further information please contact Nicholas Peacock, Partner, Naomi Lisney, Associate, or your usual Herbert Smith Freehills contact.