Author: Lori Baitarian**
| Jurisdiction: International |
Topics: Third-party Funding Independence and Impartiality Arbitrators and Arbitral Tribunals |
This is a summary of the June 20, 2020, TagTime episode by Cecilia Azar† titled “Conflicts of Interest in International Arbitration: Debates and dilemmas surrounding third-party funding and party representation.”[1]
The regulation of conflicts of interest is not dissimilar to walking on a tightrope. From the perspective of an arbitrator, running a conflict check and deciding whether to disclose or not to disclose information feels like balancing on a very fine line and in order to uphold the arbitration process and its integrity, the arbitrator must make the right decision at the right time.
One of the many advantages of arbitration is that parties are given the opportunity to select their arbitrators. This freedom to select arbitrators is an important consideration for parties in deciding to include an arbitration agreement in their contract. Parties may select arbitrators based on their name, reputation, or area of expertise, and it is not unusual for parties to select arbitrators whom they are acquainted with. While arbitration institution rules and domestic legislation stipulate that arbitrators must be impartial and independent, one cannot deny that there is a link between the party and the arbitrator it appoints. The key in addressing this issue lies in understanding the importance of a thorough conflict check and respecting the duty of disclosure.
Conflict checks and the duty of disclosure are regulated by domestic legislation, institutional rules and soft law such as the IBA Guidelines on Conflict of Interest in International Arbitration. Mexican law, for example, stipulates the arbitrator’s initial disclosure and continued duty of disclosure.[2] Institutional rules such as the LCIA Arbitration Rules,[3] ICC Rules,[4] the IBA Guidelines[5] and the UNCITRAL Arbitration Rules[6] all refer to the duty of the arbitrator to be and to remain impartial and independent of the parties at all times during the arbitration proceeding. On the question of conflict-checks and the duty to disclose, the IBA Guidelines are the main soft law document which is widely accepted and used by the arbitration community. It is referred to by arbitrators when deciding on possible appointments and disclosure and by parties and their council when selecting an arbitrator or when assessing the impartiality or independence of an arbitrator.
The IBA Guidelines lay out three categories, or lists, of situations that are likely to arise in the practice of arbitration. The “red list” includes situations which raise justifiable doubts as to the arbitrator’s impartiality and independence and which must always be disclosed by the arbitrator. The red list is further divided into “waivable” situations, for which parties must expressly provide written consent if the arbitrator’s appointment were to continue, and “non-waivable” situations, which would result in the automatic disqualification of the arbitrator. The “orange list” includes situations which may raise doubts about the impartiality and independence of the arbitrator. The arbitrator is under a duty to disclose such situations, after which the parties can make an informed decision whether to request that the arbitrator be disqualified or not. Finally, the “green list” includes situations where no appearance and no actual conflict of interests exists from an objective point of view. In other words, the arbitrator may accept the appointment without the need to make a disclosure.
Although arbitration rules and the IBA Guidelines have been a widespread tool for arbitrators in deciding on questions of conflict check and disclosure, there is a need to constantly revise the rules and guidelines to adapt to changes and advances in the practice of arbitration. One specific issue on which the rules and IBA Guidelines are silent is third party funding. To date, there is no general rule requiring parties to disclose a third-party funding agreement and the IBA guidelines do not provide for the specific case of disclosure or non-disclosure relating to third-party funding.
Third party funding is a scheme whereby a third-party finances all or part of a party’s arbitration costs. In case of a favorable award, the third-party funder will be remunerated by the party based on an agreed percentage of the amount granted by the award (a success fee) or through a more sophisticated formula. In case of an unfavorable outcome, the funder’s investment is lost. There is no doubt, therefore, that the third-party funder has an interest in the outcome of the case. Third-party funding has created new challenges as undisclosed relationships between the arbitrator and the third-party funder may give rise to arbitrator conflict of interest, threatening the independence and impartiality of the arbitral tribunal. In its 2018 report, the ICCA Queen Mary Task Force on Third-Party Funding in International Arbitration has agreed that the existence of third-party funding in an international arbitration may create the possibility of a conflict of interest between the arbitrator and the funder.[7] The task force also acknowledged that the knowledge of the existence and the identity of a third-party funder is essential for arbitrators to evaluate and make necessary disclosures and potential conflicts of interest. This, in turn, is important to avoid challenges to an arbitral award and to preserve the integrity of international arbitration.
In addition to disclosing potential conflicts of interest between the arbitrator and the parties, the arbitrator also has the duty to disclose potential conflicts of interest with party representatives. The complexity of these conflict-checks has also grown over the past years as the arbitration community has witnessed an increase in the number of cases being arbitrated and in parties hiring counsel teams across different law firms.
Similar to the IBA Guidelines on Conflict of Interest, the IBA has also issued Guidelines on Party Representation. Article 5 of these Guidelines state that a person should not accept representation of a party in the arbitration when a relationship exists between the person and the arbitrator.[8] Article 7 of the Guidelines states that subject to some exceptions, a party representative should not engage in any ex parte communication with an arbitrator concerning the arbitration.
It is important to note that conflicts checks and disclosure are a continuous process. It is common to have changes in legal representation during the arbitration proceeding. For example, new members might join a party’s counsel team or an arbitrator might change law firms. In these situations, it is crucial for the tribunal, the other party and the arbitral institution to be informed in a timely manner and to run the necessary conflicts checks and make disclosures if needed. Furthermore, prior to a hearing, a list of participants must be defined and disclosed to the other party.
As the practice of international arbitration continues to grow, its importance and complexity also grow, giving rise to new challenges. Since conflicts checks and disclosure are among the pillars of arbitration, it is of the utmost importance for arbitrators to commit to thorough conflicts checks and timely disclosures to uphold the integrity of the arbitration process. It is also crucial for the arbitration community to constantly revise the arbitration rules and guidelines to address new issues and challenges such as third-party funding.
[1] Cecilia Azar, Conflicts of Interest in International Arbitration: Debates and dilemmas surrounding third-party funding and party representation, TagTime (June 10, 2020), available at https://member-delosdr.org/video-tagtime-cecilia-azar-on-conflicts-of-interest-in-international-arbitration-debates-and-dilemmas-surrounding-third-party-funding-and-party-representation/.
[2] Article 1428 of the Mexico Commerce Code states that “A person who has been designated as a candidate for appointment as an arbitrator shall reveal, without delay, all circumstances which could raise doubts about his or her impartiality and independence, to the parties from the time of appointment, and during the time of the performance of the arbitration functions, unless he or she has already done so.”
[3] LCIA Arbitration Rules Art. 5.3: “All arbitrators shall be and remain at all times impartial and independent of the parties; and none shall act in the arbitration as advocate for or representative of any party. No arbitrator shall advise any party on the parties dispute or the outcome of the arbitration.”
[4] ICC Rules of Arbitration Art. 11.1: “Every arbitrator must be and remain impartial and independent of the parties involved in the arbitration”
[5] IBA Guidelines Sec. 2 (a): “An arbitrator shall decline to accept an appointment or, if the arbitration has already been commenced, refuse to continue to act as an arbitrator, if he or she has any doubt as to his or her ability to be impartial and independent.”
[6] UNCITRAL Arbitration Rules Art. 12: “Any arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence.”
[7] Int’l Council for Com. Arb., Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (Apr. 2018), https://cdn.arbitration-icca.org/s3fs-public/document/media_document/Third-Party-Funding-Report%20.pdf.
[8] Int’l Bar Ass’n, Guidelines on Party Representation in International Arbitration (2013), https://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.
* This post is part of a series summarizing episodes of Delos Disputes Resolution TagTime webinars. A list of past TagTime webinars is available at https://delosdr.org/index.php/past-webinars/.
** Lori Baitarian is an LL.M. candidate at Columbia Law School (’21). She has over two years experience working in arbitration and dispute resolution in the Middle East and North Africa.
† Cecilia Azar is a partner at Galicia Abogados, specializing in arbitration, mediation and legal proceedings relating to arbitration. She has specialized in the energy, infrastructure, construction and family/commercial mediation sectors over the past 10 years. She was Secretary General and Counsel at the Arbitration Center of Mexico (CAM). She is currently Vice-President of the ICC Mexico Arbitration Commission, member of the Executive Committee of WWA and member of the Steering Committee of REAL. She was chair of the Mexican Arbitration Institute (IMA) from 2019 – 2021. She has international experience as counsel for the Mediation in Mexico Project, sponsored by the American Bar Association and USAID. She has been recognized by Who’s Who and Chambers Latin America over the last 8 years.