April 23 2009
In a February 2009 decision(1) the Paris Court of Appeal ruled that the duties of independence and impartiality are "the very essence of the arbitral function". The duty of independence is generally considered to relate to issues that may arise during the course of the arbitrator's relationship - whether on a financial or other level - with one of the parties. By contrast, impartiality can be described as a state of mind. These are essential duties and in order to ensure compliance, arbitrators are usually required to disclose any fact or circumstance that may affect their judgment and raise reasonable doubts in the parties' minds as to their independence and impartiality. In this case, the court of appeal discussed the scope of the duty to disclose, as applicable to an arbitrator employed by an international law firm, and illustrated what can be deemed to amount to a lack of independence under French arbitration law.
An Italian company, Tecnimont SpA, and a Greek company, J&P Avax, entered into an agreement for the construction of a propylene plant in Greece. Tecnimont subsequently brought arbitral proceedings against Avax under the International Chamber of Commerce (ICC) Rules of Arbitration, pursuant to the arbitration clause contained in the agreement.
Each party appointed an arbitrator. The two party-nominated arbitrators then appointed a chairman, who was employed by the Paris office of an international law firm.
In a statement of independence dated October 30 2002, the chairman disclosed that his firm's Washington DC and Milan offices had represented Tecnimont's parent company, Edison, in a matter which was then closed. He asserted that he had never worked for this client.
On November 12 2002 the secretary general of the International Court of Arbitration of the ICC confirmed the chairman's nomination.
In May 2007 Avax discovered at a conference in London that the chairman had not disclosed the full extent of his firm's relationship with Tecnimont, and in July 2007, it asked the chairman to clarify the matter.
On September 14 2007 Avax challenged the chairman's appointment before the ICC court, alleging a lack of independence.
On October 26 2007 the ICC court dismissed the challenge. Avax pursued the arbitration proceedings without prejudice to its position regarding the chairman's lack of independence.
On December 10 2007 the arbitral tribunal rendered a final award on the merits of the dispute.
Meanwhile, between November 2007 and January 2008 Avax had requested that the chairman provide more information on his firm's relationship with Tecnimont. By the end of March 2008 Avax had established that:
The chairman resigned from the tribunal and was replaced for the quantum phase of the proceedings.
Avax subsequently brought an action to set aside the award before the court of appeal, pursuant to Article 1502(2) of the Code of Civil Procedure on the grounds that the arbitral tribunal had been irregularly constituted due to the chairman's lack of independence.
Avax contended that the award should be set aside because the chairman had failed to comply with his duty to disclose relevant facts or circumstances that might have given rise to doubts as to his independence. Avax also argued that the award should be set aside because the relationship between the chairman's firm and Tecnimont showed that the chairman lacked independence.
Tecnimont argued that Avax's claim was inadmissible, given that the chairman's challenge had been dismissed by the ICC court for being time-barred, pursuant to Article 11 of the ICC rules and because Avax had failed to make a new challenge after discovering additional facts indicating a lack of independence following the dismissal of the first challenge. Tecnimont also argued that the chairman could not have been aware of the conflict of interest, given his firm's size and the global nature of its work.
The court considered that Avax's action to set aside the award was admissible because it had reserved the right to make such a claim after its first challenge had been dismissed by the ICC court and had obtained knowledge of the full details of the situation only after the award had been rendered.
The court of appeal held that:
"an arbitrator must disclose any facts or circumstances that may affect his [or her] judgment and raise a reasonable doubt in the mind of the parties as to his [or her] independence and impartiality, which are... the very essence of his [or her] adjudicative function..."
"The bond of trust existing between parties and arbitrators must be preserved and parties must be kept informed from the time of their appointment and throughout the arbitration proceedings of facts or circumstances which, in their eyes, could have an impact on the judgment of the arbitrator and which may affect his [or her] independence."
Finally, the court considered that, taken as a whole, the services rendered by the chairman's firm to Tecnimont, its subsidiary and its parent company amounted to a conflict of interest between the chairman of the arbitral tribunal and one of the parties to the arbitration proceedings.
As a result, the court set aside the ICC award on the grounds relied upon by Avax.
The independence of arbitrators is often defined by the French courts as an essential component of their judicial function, given that from the time of their appointment, they assume the status of a judge, which excludes any relationship of dependence with the parties. The courts consider that if a party wishes to challenge an arbitrator's independence, it must show that the arbitrator's judgement may be affected by intellectual or material ties, which create a definite risk of bias in favour of one of the parties to the arbitration.(2)
The purpose of the duty to disclose is to provide the parties with all the relevant facts to enable them to decide whether to accept or to challenge an arbitrator's appointment.(3)
This duty is articulated in Article 1452(2) of the code, which provides that an arbitrator who is aware of the existence of a reason requiring his or her disqualification has a duty to inform the parties and may accept appointment only if the parties confirm their approval of this appointment.
Most institutional rules, such as the ICC rules, provide that before his or her appointment, a prospective arbitrator must sign a statement of independence and disclose any facts or circumstances which might raise questions as to his or her independence in relation to the parties.(4)
In the February 12 2009 judgment the court defined the scope of the arbitrator's duty to disclose.
The court indicated the duration for which the duty is owed. The parties must be kept informed from the time of the arbitrator's appointment and throughout the arbitration proceedings. This requirement is clearly provided for in the ICC rules, which state that arbitrators "must be and remain" independent from the parties.(5) Even in the absence of an express provision, it is generally admitted that the duty of disclosure continues until an award is made.(6)
The court also decided the question of who owes the duty and ruled that it is not only the arbitrators themselves, but also the law firms of which they may be members and the parties that may be related to the arbitrators in question. The court noted that the chairman's firm employed a team that was responsible for managing conflicts of interest, which could have notified the arbitrator of the existence of a conflict. The court also considered that Tecnimont knew or should have known that its parent company or one of its subsidiaries was represented by the firm and therefore should have disclosed it.
Traditionally, the courts do not automatically set aside awards because of a failure to disclose information, but rather assess whether this gives rise to a sufficient presumption of a lack of independence on the part of the arbitrator.(7)
In this case, the court determined that there was a conflict of interest by looking at the services rendered by the firm employing the chairman of the arbitral tribunal.
The court considered that the accumulation of legal services provided by the chairman's firm to Tecnimont, its parent company and its subsidiary, and the amount of fees paid by Tecnimont carried significant weight.
The duty of independence owed by arbitrators requires that they may not be dependent on the parties for financial or hierarchical reasons. Accordingly, the court considered that the fact that the firm to which the chairman belonged had represented one of the parties to the arbitration in several matters gave rise to reasonable doubt as to his independence.
In order to determine the existence of a conflict of interest, the court considered the ties that existed between the chairman's firm and Tecnimont, but also other companies within the group of companies. The court also considered whether the chairman's firm was in conflict on a global level, rather than focusing its attention on the Paris office only.
This decision illustrates the strict approach adopted by the courts regarding the duty of independence. This approach is consistent with the International Bar Association (IBA) Guidelines on Conflict of Interest in International Arbitration, which contain a list of circumstances which should be disclosed and explain the importance that should be given to them. According to the guidelines, an arbitrator's law firm that has a significant commercial relationship with one of the parties or one of its affiliates falls under the 'waivable red list', which corresponds to serious situations that could give rise to doubts regarding the arbitrator's independence or impartiality, depending on the circumstances. However, because of their seriousness, such situations are considered waivable only if the parties confirm their intention to have a person act as arbitrator after becoming aware of the existence of the conflict of interest.(8)
Therefore, prospective arbitrators, firms that employ them and parties to arbitral proceedings must perform conflict searches extremely carefully, given that an arbitrator's lack of independence can be harshly penalized, as in this case, where the award was set aside and the costs awarded by the court were substantial.
For further information on this topic please contact Elie Kleiman at Freshfields Bruckhaus Deringer by telephone (+33 1 44 56 44 56) or by fax (+33 1 44 56 44 00) or by email (firstname.lastname@example.org).
(2) Paris Court of Appeal, June 2 1989, TAI v SIAPE and Germanco v SAEPA, Rev arb 1991, p 87; Paris Court of Appeal, April 9 1992, Annahold BV v L'Oréal, Rev Arb 1996, p 483; Paris Court of Appeal, January 12 1996, Gouvernement de l'Etat du Qatar v Creighton Ltd, Rev arb 1996, p 428.
(4) Article 7(2) of the ICC rules, Article 9 of the United Nations Commission on International Trade Rules, Article 6 of the International Centre for Settlement of Investment Disputes Rules, Article 7 of the American Arbitration Association International Arbitration Rules, Article 5.3 of the London Court of International Arbitration Rules, Article 17 of the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce.
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