English Court rejects ‘warm and friendly’ bias claim against arbitrator in costs dispute

On January 30, 2019, Sir William Blair of the High Court of England and Wales (sitting in Commercial Court) handed down judgment in the case of Koshigi v Donna Union Foundation [1]. The decision was over costs for two discontinued claims alleging serious irregularities with an arbitration. The main irregularity was an allegation of bias: that an arbitrator sitting on the arbitration tribunal was biased as a result of a previous professional connection with counsel for one of the parties and that the arbitrator continued ‘warm and friendly’ relations with the solicitor. The High Court rejected the allegation of bias, and confirmed that not all social or professional connections between an arbitrator and counsel will result in a finding of bias.

Background

The parties to the arbitration were involved in a shareholders’ dispute. One of the claimants in the arbitration, Donna Union Foundation (“DUF”), is a minority shareholder in the other claimant, Ulmart Holdings Limited (“UHL”), a Maltese company. At arbitration, DUF sought—and ultimately received—an order, pursuant to the Maltese Companies Act, for the Koshigi Limited and Svoboda Corporation (collectively, the “KS Shareholders”) to buy out DUF’s shares in UHL, because of the KS Shareholders’ allegedly oppressive and prejudicial conduct towards DUF.

Arbitration was held at the LCIA (London Court of International Arbitration) (the “Tribunal”). The LCIA Court selected the three arbitrators, including the Tribunal Chair. The Tribunal decided that the KS Shareholders must purchase DUF’s shares in UHL (the “First Award”), then at a separate hearing, decided upon a price (the “Second Award”).

While these proceedings were ongoing, the KS Shareholders raised the issue of bias on the part of the Tribunal Chair. The issue arose when the KS Shareholders became aware (from an internet search) that the Tribunal Chair was also the chair of an international arbitration centre for which DUF’s solicitor was a board advisor. It was then revealed that the Tribunal Chair had also worked with DUF’s solicitor at an international law firm between 2005 and 2008, and that the two maintain a “warm and friendly relationship”.

Counsel for the KS Shareholders raised the issue of bias towards the end of the first hearing in October, 2017. When asked, the Tribunal Chair explained these issues to the parties. Then, shortly after the First Award was issued, counsel for the KS Shareholders wrote to the Tribunal to give notice that they intended to apply to have the First Award set aside because of serious irregularities, including bias. The Chair declined to recuse himself at that point, despite being asked to by the KS Shareholders.

The KS Shareholders formally challenged the First Award under section 68 of the Arbitration Act 1996 (challenges of arbitration awards for serious irregularities) on April 18, 2018 (one week after the hearing on the Second Award concluded) [2]. The section 68 challenge alleged:

  1. a breach of the Tribunal Chair’s duty to act fairly, impartially and without bias;
  2. that the Tribunal failed to conduct the arbitration in accordance with the procedure agreed by the parties; and
  3. that the Tribunal failed to deal with the issues put to it.

In August of 2018, the KS Shareholders issued a formal challenge to the Second Award, also under section 68 of the Arbitration Act 1996, and specifically because of the alleged bias of the Tribunal Chair. The challenge to the second award claimed that the Chair’s response to the issues, when they were raised in the first hearing, was “inappropriate” and “aggressive” [3].

The KS Shareholders discontinued their section 68 claims on September 10, 2018. At that point, the parties were embroiled in a new dispute about the enforceability of the award. Sir William was tasked with deciding on costs for those discontinued section 68 claims. Not surprisingly, he was not interested in considering the merits of the enforceability dispute, though he was interested in hearing the merits of the bias allegations at the crux of the discontinued section 68 claims.

Decision

Under English law, an arbitrator should disclose any known facts and circumstances that “would or might give rise to justifiable doubts as to his impartiality” [4]. The test for bias is therefore whether an objective fair-minded observer who was well informed of the facts, but detached from the case, would “conclude that there was a real possibility that the arbitrator was biased” [5].

In considering the facts before it, the High Court noted that the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (2014 ed) (the “Guidelines”) could provide guidance on what might reasonably be perceived as a conflict (though the Sir William also noted that the Guidelines were not themselves a binding precedent). Ultimately, the High Court did refer to the Guidelines in their judgment, and found that the Tribunal Chair’s having worked with DUF’s solicitor nearly a decade ago was far beyond the three-year period that the Guidelines would have flagged, and the allegedly “warm and friendly relationship” between the two was hardly the kind of close personal friendship that the Guidelines warn against. The High Court also found that the transcript did not indicate any kind of inappropriate response on the part of the Chair when he was asked about the issues during the first hearing. Rather, it showed that he promptly and satisfactorily answered the question. The High Court did not find anything in the arbitrator’s actions that would have given the appearance of bias to an objective outside viewer.

The High Court also took issue with the timing of the KS Shareholders’ objections. Citing the case of ASM Shipping Limited of India v TTMI Ltd of England [6], the Sir William noted that if a party sees a conflict, it is incumbent upon it to seek a Court order for the arbitrator’s removal as soon as possible, rather than waiting for the result of the arbitration, then making a challenge (which inevitably only happens when the arbitration ends poorly for the challenging party). The KS Shareholders explained this as being due to ongoing investigations, which Sir William neither accepted nor rejected. Rather, he took the view that the finding on bias was dispositive, and that he did not need to conclude anything on this issue or the other issues before him.

In the end, the High Court was unimpressed with the KS Shareholders’ conduct. In deciding to award indemnity costs, which are punitive and only available outside of the norm, Sir William noted that “[i]t is the combination of factors in this case that takes the case out of the norm” [7]. While many factors may have contributed, it seems likely that Sir William was particularly displeased about the seriousness of bias claims generally (which he noted were akin to allegations of dishonesty) coupled with the weakness of the particular claims before him. Indemnity costs were granted against the KS Shareholders, with USD $368,900 (70% of USD $527,000) to be paid within a fortnight.

Concluding Thoughts for Arbitrating Parties

This decision is illustrative that arbitrating parties should be very cautious in raising allegations of bias except in the most blatant instances. The international arbitration bar is a small one and one can anticipate the more experienced arbitrators are going to have a number of social connections with counsel. One must trust arbitrators to recognize and raise true issues of potential bias. Equally, it is incumbent on counsel to raise well founded issues of potential bias immediately.

For further reading on allegation of bias concerning an arbitrator, see our previous blog post here.

[1] [2019] EWHC 122 (Comm), online: http://www.bailii.org/ew/cases/EWHC/Comm/2019/122.html.

[2] Arbitration Act 1996 (UK), s 68.

[3] Supra note 1 at para 45.

[4] Ibid at para 47.

[5] Ibid at para 47; also see para 50.

[6] [2006] 1 CLC 656.

[7] Supra note 1 at para 59.

arbitration international arbitration commercial arbitration

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