Conflicts of interest

In the recent decision of W Ltd v M SDN BHD [2016] EWHC 422, Knowles J considered a challenge by the claimant of an arbitral award on the grounds of ‘serious irregularity’ under section 68(2) of the Arbitration Act 1996. That section provides that ‘serious irregularity’ means an irregularity ‘which the court considers has caused or will cause substantial injustice to the applicant’. The claimant alleged apparent bias on behalf of the sole arbitrator, H, based on alleged conflict of interest.

The claimant argued that the matter fell within paragraph 1.4 of the Non-Waivable Red List within the 2014 International Bar Association Guidelines on Conflicts of Interest in International Arbitration. The IBA Red List contains examples of situations in which an arbitrator should not act even with the consent of all parties. Paragraph 1.4 provides that an arbitrator(s) should not act 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.’

There was no doubt that the dispute fell within paragraph 1.4 of the IBA guidelines because H was a partner at the law firm representing an affiliate of the defendant company in the arbitration. The law firm (but not H) regularly advised an affiliate of the defendant (but not the defendant) and derived substantial financial income in doing so.

At the time of H’s appointment as arbitrator, a company, Q, was a client of the law firm. A senior partner of the firm was a member of Q’s board and a shareholder in Q. The managing partner of the firm was Q’s company secretary. The defendant was a subsidiary of another company, P. P later acquired Q and on the acquisition the senior partner of the firm resigned his directorship in Q and sold his shareholding. The managing partner also resigned his office as Q’s secretary. However, since Q became a subsidiary of P, the law firm continued to provide legal services to Q, although P took its legal advice from another law firm.

On accepting the appointment as arbitrator, H made some disclosures to the parties revealed by the firm’s disclosure checks system. Those conflict check systems did not however alert him to the fact that the firm had Q as a client. Despite there being substantial publicity in due course when P acquired Q, the law firm’s conflict check system did not draw Q or its new relationship with P to his attention.

 Apparent bias

The test at common law for apparent bias is whether ‘a 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] AC 357 at [103] per Lord Hope). In Yiacoub v the Queen [2014] UKPC 22 at [12] Lord Hughes (with lords Neuberger, Mance, Clarke and Toulson) added: ‘That and similar formulations use the word “biased”, which in other contexts has far more pejorative connotations, to mean an absence of demonstrated independence or impartiality.’

In Helow v Secretary of State for the Home Department and another [2008] UKHL 62; [2008] 1 WLR 2416 at [39] Lord Mance said: ‘The question is one of law, to be answered in the light of the relevant facts, which may include a statement from the [here, arbitrator] as to what he or she knew at the time, although the court is not necessarily bound to accept any such statement at face value, there can be no question of cross-examining the [arbitrator] on it, and no attention will be paid to any statement by the [arbitrator] as to the impact of any knowledge on his or her mind: Locabail (UK) Ltd v Bayfield Properties Ltd [2000] QB 451, paragraph [19] per Lord Bingham of Cornhill CJ, Lord Woolf MR and Sir Richard Scott V-C. The fair-minded and informed observer is “neither complacent nor unduly sensitive or suspicious”, to adopt Kirby J’s neat phrase in Johnson v Johnson [2000] 201 CLR 488, paragraph 53, which was approved by my noble and learned friends, Lord Hope of Craighead and Baroness Hale of Richmond, in Gillies v Secretary of State for Work and Pensions [2006] 1 WLR 781, paragraphs [17] and [39].’

On considering the facts, Knowles J held that the fair-minded and informed observer would not conclude that there was a real possibility that the arbitral tribunal was biased, or lacked independence or impartiality. Knowles J came to his conclusions on a number of grounds. The firm was the entity which earned substantial remuneration from providing legal services to a client company that has the same corporate parent as a company that is a party in the arbitration. The firm did not advise the parent or the party and there was no suggestion the arbitrator did any of the work for the client company. Knowles J also noted that, although the publicity of the corporate acquisition would have drawn much publicity within the firm, this was not brought to the arbitrator’s attention.

As Knowles J observed: ‘… where, as here, the arbitrator made checks, and made disclosures where the checks drew matters to his attention, and the problem was that the facts in relation to Q were not drawn to his attention, the fair-minded and informed observer would say that this was an arbitrator who did not know rather than this was an arbitrator whose credibility is to be doubted, who “must have known”, and who was choosing not to make a disclosure in this one important instance.’

However, the real uncertainty lay with the wording of the IBA guidelines.

 The IBA guidelines

Knowles J identified two inter-related weaknesses in the IBA guidelines. First, there was an inherent weakness in the guidelines grouping together (i) the arbitrator and his or her firm; and (ii) a party and any affiliate of the party, in the context of the provision of regular advice from which significant financial income is derived. Second, by grouping (i) and (ii) together, the IBA guidelines failed to deal with or provide assistance on the question of whether the particular facts of a matter could realistically have any effect on impartiality or independence (including where the facts were not known to the arbitrator).

Paragraph 1.4 of the Non-Waivable Red List maintains the original text from the previous 2004 IBA guidelines with the words ‘regularly advises … an affiliate of the appointing party’. A footnote to the 2014 IBA guidelines indicates that the term ‘affiliate’ includes all companies in a group of companies.

Knowles J observed that the effect of maintaining that text when the earlier part of the paragraph has been changed was to include in the Non-Waivable Red List the situation where the advice is to an affiliate and the arbitrator is not involved in the advice, and without reference to the arbitrator’s awareness or lack of awareness of that advice. Where the facts of a matter fell within paragraph 1.4 one could see how it could cause a party to be led to focus more on assumptions derived from that fact and to focus less on a case-specific judgment.

Although English courts are not bound by the IBA guidelines, this decision will be of importance to the arbitration community, especially because London is an extremely popular choice of seat in international commercial arbitration. Knowles J’s considered analysis of the IBA guidelines illustrates their inherent weaknesses. The current wording of paragraph 1.4 has, as Knowles J identified, the potentially adverse effect of causing parties to focus more on assumptions rather than considering the specific facts of the dispute.

There is no doubt that the IBA guidelines will continue to be used (although paragraph 1.4 should be carefully redrafted), but the decision illustrates the need for parties to avoid applying them in a mechanistic way.

 Masood Ahmed is also a member of the Civil Procedure Rule Committee