English Court identifies "weaknesses" in the 2014 IBA Guidelines on Conflicts of Interest when considering challenge of an Award for apparent bias

In the case of W Limited v M SDN BHD [2016] EWHC 422 (Comm) the Claimant, W Limited, sought to challenge two awards in the English Court for serious irregularity under s68(2) of the Arbitration Act 1996. The challenge was founded on apparent bias of the arbitrator based on an alleged conflict of interest. No actual bias was alleged.

The case has wider importance for the international arbitration community because the Claimant referenced the 2014 IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines) to substantiate its position, in particular, paragraph 1.4 of the Non-Waivable Red List.

Having applied the English law test for apparent bias and considered the IBA Guidelines, the English Court identified a number of "weaknesses" in the IBA Guidelines. This included the inability of parties or arbitrators to apply "case-specific judgment" to a Non-Waivable Red List situation. The court also commented that the conflict situation identified in this case was, in many respects, less serious than some of those identified in the Waivable Red List. Despite the conflict situation falling squarely within paragraph 1.4 of the Non-Waivable Red List, the court concluded that there was no apparent bias and dismissed the challenge.

Background

The s68 challenge arose out of an LCIA arbitration between the two parties. A sole arbitrator, Mr David Haigh QC, was appointed and made two awards in the arbitration. Mr Haigh QC is a partner in a Canadian Law firm, but worked almost exclusively as an arbitrator with little or no involvement in the running or decision making of the firm.

Mr Haigh QC made a statement of independence in 2012 making some immaterial disclosures following a conflict check at his law firm. It later transpired that Mr Haigh QC's law firm provided substantial legal services to a company, "Q", and derived significant revenue from that work. During 2012, Q had been purchased by a company "P". The Defendant was already a subsidiary of P, so as a result of that purchase the Defendant and Q became affiliates. There was substantial press coverage of this purchase.

Mr Haigh QC's law firm's conflict check system did not draw Q or its new relationship with P or the Defendant to Mr Haigh QC's attention. Mr Haigh confirmed that he was not aware of this or his firm's continuing work or the press coverage and that had he been aware, he would have wished to make a disclosure to the parties.

The Claimant relied upon paragraph 1.4 of the Non-Waivable Red List of the IBA Guidelines which reads as follows: "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 Claimant alleged that, because Mr Haigh QC's law firm advised an affiliate of the Defendant and derived significant financial income from that advice there were justifiable doubts as to Mr Haigh QC's independence and impartiality and that apparent bias was therefore made out.

The test under English law

The Court first considered the English law position on apparent bias as set out in Porter v Magill: whether "a fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased". The court reviewed the facts in this case. It considered that Mr Haigh QC was effectively a sole practitioner using the secretarial facilities of his firm. He was committed to transparency and he would have made a disclosure had he been alerted to the situation.. The firm did not advise the parent company P or the Defendant, nor was there any suggestion that Mr Haigh QC did any work for the client company Q. On the basis of the test under English law, the court concluded "without hesitation" that a fair minded and informed observed would not have concluded that there was a real possibility that the tribunal was biased or lacked independence and impartiality.

However, the court's attention had been drawn by the Claimant to the IBA Guidelines. The IBA Guidelines have been considered of assistance (albeit not binding) by the English court in the past. The court therefore considered it "valuable and appropriate to examine them at least as a check". The court commended the "distinguished contribution" made by the IBA Guidelines and their objective to assist in assessing impartiality and independence. However, it considered that the present case identified weaknesses in them.

The court found it hard to understand why a situation where advice is being given to an affiliate and the arbitrator is not involved in that advice (particularly without reference to the arbitrator's awareness or lack of awareness of that advice) should automatically fall in the Non-Waivable Red List. To determine whether there could be a conflict (apparent or real) required "case-specific judgment". The court also suggested that if a disclosure of such a situation were made, it should be open to the parties to accept that situation by waiver.

The court considered submissions made by the Claimant that there was a real possibility of bias in this case "because that is what we are told through Paragraph 1.4"; in effect, that because the facts fitted within Paragraph 1.4 an assumption of bias was made out. The Court considered Paragraph 2 of Part II of the IBA Guidelines which expressly qualifies the Non-Waivable Red List with the phrase "depending on the facts of a given case" and General Standard 6(a) which states similarly. While this might suggest that the non-waivable nature could be affected depending on the facts of the case, the court considered this was undermined by General Standard 2(d).  This provision states, without qualification, that justifiable doubts "necessarily exist" as to the arbitrator's impartiality or independence "in any of the situations described in the Non-Waivable Red List". This was compounded by Paragraph 2 of Part II that states that "acceptance of [a Non-Waivable Red List situation] cannot cure the conflict".

The Court also considered some of the situations allocated to the "Waivable Red List" which, amongst others, included where the arbitrator had given legal advice on the dispute to a party. The court considered that "these situations would seem potentially more serious than the circumstances of the present case; again suggesting that the circumstances of the present case do not sit well within a "Non-Waivable Red List".

The Court's decision

The Court concluded that there was no real possibility that Mr Haigh QC was biased or lacked independence or impartiality under English law. The Court stated that, while it "would be possible simply to say that the 2014 IBA Guidelines are not a statement of English law and then not enter into any examination of them" the present arbitration was international. The Court should consider the IBA Guidelines and explain why it did not, with respect, think they could be correct. The s68 challenges to the awards were dismissed.

Comment

This is an important decision for arbitration practitioners, not just within England and Wales, but internationally. The IBA Guidelines are very widely applied by arbitrators and practitioners looking to make appointments.  The decision unsurprisingly confirms that the English Court will not consider itself bound by the IBA Guidelines,  but the Court's in depth analysis also identifies potential "weaknesses" in the IBA Guidelines, particularly the lack of case-specific judgment to be applied to conflict situations currently listed in the "Non-Waivable Red List" category.  More broadly, the case also provides a useful practical example of how rigidly to apply the IBA Guidelines in a conflict situation.

International arbitration practitioners will continue to apply the IBA Guidelines. The English Court viewed the relationship in this case worthy of disclosure and considered it important that the arbitrator would have made that disclosure had he been aware of the facts. The judgment does, however, serve to make the point that a mechanical application of the traffic light system in the IBA Guidelines, without the application of careful judgement as to the specific circumstances of the case, is not the correct approach to take. This may open up greater scope for arbitrators and practitioners to challenge the suggestion that they should be automatically conflicted out of "Non-Waivable Red List" situations which they do not consider affect independence and impartiality.  It may also prompt appointing parties – and prospective arbitrators – to be more bold when considering appointments in circumstances where there may be no genuine conflict situation but there is a perceived risk of a tactical challenge being made.

For further information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.