The IBA Guidelines on Conflicts of Interest in International Arbitration

Tanner De Witt Legal Update, February 2005

In response to an ever-increasing number of challenges to arbitrators, the International Bar Association (IBA) assembled a working party to consider and draft Guidelines on Conflicts of Interest in International Arbitration (the Guidelines).

The Guidelines were published on 22 May 2004 and were approved by the Council of the IBA. The Guidelines set out the Working Party’s understanding of the best current practice on the identification of conflicts of interest and disclosure rules in international arbitrations.

The Purpose

The Guidelines appear to have 4 objectives:

  1. to provide guidance to arbitrators as to what information should be disclosed
  2. to add detail to laws and arbitration rules, which by their nature tend to be quite general
  3. to add a degree of unity to International practice. Although the Guidelines expressly state that they are not intended to override any law, the Working Party states in the Introduction to the Guidelines that existing standards lack uniformity and one of its stated intentions is to:
    1. help parties, practitioners, arbitrators, institutions and the courts in their decision-making process on these very important questions of impartiality, independence, disclosure, objections and challenges.1
  4. to reduce the growing problems of conflicts of interest and particularly to reduce the number of challenges to arbitrators.

Format of the Guidelines

The Guidelines are set out in two parts. The first part sets out seven general principles, called General Standards and explanatory notes for each Standard. The second part of the Guidelines is a practical application, which divides potential conflict of interest situations into three colour coded lists: I will explain the general principles and then provide some details of the three lists.

General Standards

The General Test for Conflicts of Interest

General Standards 1 and 2 contain the general test for when an arbitrator is in a conflict of interest and cannot serve. General Standard 1 states that:

Every arbitrator shall be impartial and independent of the parties at the time of accepting an appointment to serve and shall remain so during the entire arbitration proceeding until the final award has been rendered or the proceeding has otherwise finally terminated.

There are a couple of things, which should be noted.

  1. The Working Party considered that it was a fundamental principle in international arbitrations that each arbitrator must be impartial and independent. It would be interesting to discuss whether this is a statement that everyone agrees with. Certainly, the requirement that an arbitrator must be both impartial and independent reflects the test in Article 3.2 of the Hong Kong Domestic Arbitration Rules and Article 12 of the UNCITRAL Modal Law. However it is in contrast to the test in the Hong Kong Arbitration Ordinance2 and the English Arbitration Act which only requires arbitrators to be impartial. It is also sharply in contrast with American Arbitration practice.3
  2. This requirement ends when the final award is handed down and does not continue during any challenge. This requirement is also reflected in the disclosure rules (General Standard 3 (d)).

General Standard 2 states that an arbitrator must not serve when either:

  1. he considers that he has doubts over his ability to be impartial or independent; or
  2. if facts or circumstances exist that from a reasonable third person’s point of view having knowledge of the relevant facts, give rise to justifiable doubts as to the arbitrator’s impartiality or independence, unless the parties have accepted the appointment.

Consequently if an arbitrator thinks he will be biased, he cannot accept the appointment but also if, on an objective level, there are justifiable doubts as to his impartiality then cannot accept the appointment.

General Standard 2 (c) set out a test for what is meant by ‘justifiable doubts’ which are:

If a reasonable and informed third party would reach the conclusion that there was a likelihood that the arbitrator may be influenced by factors other than the merits of the case as presented by the parties in reaching his or her decision.

2 Section 2GA requires an arbitration tribunal is required to act fairly and impartially between the parties. 3 However by virtue of General Principle 5 – the Guidelines do not apply to party appointed arbitrators who are permitted to be partial.

There are two important differences between this test and the test for bias set out in Article 3.3 of the HKIAC Domestic Rules.

  1. Article 3.3 requires an arbitrator to disclose to the parties any circumstance likely to create an impression of bias and requires a proposed arbitrator not to serve if he has any interest which, if a party knew of it, might lead him to think that the Arbitrator might be biased.
  2. The Guidelines set out an objective test for the disqualification of arbitrators, whereas the disqualification test in Article 3.3 relies on the subjective views of the parties.

There is a further difference between the Domestic Rules and General Standard 2. Under Article 3.3, no person can serve as an arbitrator in any dispute in which that person has or has had any interest which might lead a party to think that the proposed arbitrator might be biased, except by consent of the parties.

The approach of the Guidelines however is that there are some conflicts that are so severe that an arbitrator cannot serve and these conflicts cannot be waived by the parties. Examples of such conflicts are listed on the non waivable Red List and I will describe these later. This principle is also reflected by General Standard 2(d), which states:

Justifiable doubts necessarily exist as to the arbitrator’s impartiality or independence if there is an identity between a party and the arbitrator, if the arbitrator is the legal representative of a legal entity that is a party in the arbitration or if the arbitrator has a significant financial or personal interest in the matter at stake.

Disclosure

General Standard 3 sets out the general test for disclosure by the arbitrator. The test is that the arbitrator must disclose facts and circumstances which may:

in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality and independence.

The wording reflects the wording used in the ICC Rules of Arbitration.4 Although the test for disqualification is objective, this disclosure test is subjective, placing the opinions of the parties at centre stage.

However under the Guidelines, party autonomy has limits. There are certain situations which in the view of the Working Party do not require disclosure no matter what the views of the parties might be. These are the issue which appear on the so called Green List, and I will explain that later.

Further, where an arbitrator is part of a law firm, General Standard 6 makes it clear that the fact that the firm has an involvement with an associated company of a party is not in itself sufficient reason for disclosure or grounds for a conflict of interest. Each situation needs to be considered on its facts.

The Guidelines do not and cannot legislate for every conceivable situation. The proposed arbitrators must exercise their discretion to disclose information in accordance with the General Standards. General Standard 3 (c) comes to the aide of the arbitrator. It states that any doubt as to whether to disclose, should be resolved in favour of disclosure.

Disclosure does not only apply to the arbitrator. Under General Standard 7, the parties are under an obligation to disclosure any direct or indirect relationship with the arbitrator.

Waiver

General Standard 4 sets out the parties’ rights and obligations to accept or reject any arbitrator on the basis of a conflict of interest.

  1. The general rule is that the parties have 30 days to object to the appointment of an arbitrator and if they do not object in that time, they are deemed to have waived any potential conflict.
  2. However this waiver does not apply to any conflicts on the non waivable Red List.
  3. In respect of any matters on the waivable Red List, the parties need to give express consent before any arbitrator can accept an appointment.

The Lists

The second part of the Guidelines is the colour-coded lists. These lists are intended to provide a practical application of the Guidelines, specific guidance on what to disclose and on what constitutes a conflict of interest. In the event of any conflict, however, the General Standards take precedence.

The three lists are the Red List, the Orange List and the Green List.

The Red List is a list of situations where a conflict of interest exists and it is subdivided into two. The non waivable Red List sets out severe conflicts of interests, where the arbitrator must not act, whereas the waivable Red List lists situations where the arbitrator can only act with the express consent of the parties.

At the other end of the scale is the Green List, which is a list of situations where no actual or apparent conflict exists. In the middle is the Orange List, which lists situations where a conflict could exist in the eyes of the parties.

The Red List

The two-part Red List sets out those situations where a conflict of interest could arise. The situations on the non waivable Red List are illustrations of situations deriving from the principal that no person can be their own judge and therefore disclosure does not solve the problem. There are four non waivable conflicts of interest. These are:

  1. There is an identity between the arbitrator and the party, or where the arbitration is the legal representative of an entity that is a party in the arbitration.
  2. The arbitrator is a manager, director or member of the supervisory board, or has a similar controlling influence in one of the parties.
  3. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.
  4. The arbitrator regularly advises the appointing party or an affiliate of the appointing party and the arbitrator or his or her firm derives a significant financial income therefrom.

The inclusion of a non waivable list is perhaps a useful protection for disputants, particular in Hong Kong, where the practice of including arbitration agreements in standard non-negotiable tender documents means that the consensual nature of the arbitration agreement is more theoretical than real.

The waivable Red List sets out less severe situations such as:

  1. where the arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties;
  2. where the arbitrator holds shares in a party or an affiliate;
  3. where the arbitrator is a lawyer in the same firm as a firm advising one of the parties;
  4. where the arbitrator’s law firm currently has a significant commercial relationship with one of the parties or an affiliate.

In the event of the disclosure of an issue on the waivable Red List, an arbitrator can only accept the appointment with the express consent of the parties.

The Orange List

The Orange list sets out situations which could be a conflict and which must be disclosed. The Orange List includes:

  1. where the arbitrator’s law firm current acts for one of the parties in an unrelated matter without creating a significant commercial relationship;
  2. where the arbitrator and Counsel are members of the same chambers;
  3. the arbitrator has publicly advocated a specific position regarding the case that is being arbitrated;
  4. the arbitrator holds one position in an arbitration institution with appointing authority over the dispute.

Many of the situations covered in the Orange List prescribe that certain relationships are disclosed and include periods of time during which the relationship must have existed. The general rule is that where the relationship falls outside the time period, ie that a relationship previously existed but has ended before the period of time stated in the Orange List, the situation is relegated from the Orange List to the Green List. So for instance, one situation on the Orange List is:

The arbitrator has within the past three years received more than three appointments by the same counsel or the same law firm.

If the arbitrator has received three appointments but over a five year period, then the situation could be considered as falling within the Green List.

The Green List

The Green List sets out those situations, which the Guidelines considers do not raise a conflict of interest and raises no duty of disclosure. The Green List includes:

  1. where the arbitrator has previously expressed a general opinion in an unrelated forum concerning an issue arising in the arbitration;
  2. where the arbitrator has previously worked with one of the Counsel as Co-Counsel;
  3. where the arbitrator has a relationship with another arbitrator or with the counsel of one of the parties through membership in the same professional association or social organisation;
  4. where the arbitrator and a manager, director or member of a supervisory board, or any person having a similar controlling influence, in one of the parties or an affiliate of one of the parties, have worked together as joint experts or in another professional capacity, including as arbitrators in the same case.

A review of the situations on the Green List might support the views of the Working Party that these are indeed a list of issues which need not be disclosed. However, there are obvious difficulties with the drafting. This difficulty applies to situations and relationships which are listed on both the Green and Orange lists, where the only distinction is the degree of the relationship.

For instance, the arbitrator is under a duty to disclose the fact that he has a material shareholding in one of the parties if it is publicly listed5 but not when that share holding is insubstantial.6

Similarly there is an obligation to disclose close personal friendships with the parties7 but not relationships through membership of the same professional organisation or social club.8

Closing Comments

The Guidelines will provide useful guidance to proposed arbitrators, parties and their advisers on the approach to adopt when considering whether a conflict of interest exists. They might be particularly useful in arbitrations governed by laws or rules, which require arbitrators to be both impartial and independent.

It should be borne in mind however that the publication of the Guidelines is the beginning rather than the end of the story. It is worth emphasising that the Guidelines are part of a living document. They are not intended to set out any principles in concrete. Indeed the Working Party intend to revise the Guidelines based on practical experience. The Working Party has requested feedback on the actual use of the Guidelines so that consideration can be given to revision and refinement.

1. The Guidelines – Introduction Para 4.
2. Section 2GA requires an arbitration tribunal to act fairly and impartially between the parties.
3. However by virtue of general Principle 5 – the Guidelines do not apply to party-appointed arbitrators, who are permitted to be partial.
4. Article 7(2).
5. Orange List Article 3.5.1.
6. Green List Article 4.5.2.
7. Orange List Article 3.4.3.
8. Green List Article 4.4.1.