DEVISING THE CONTOURS OF DUTY TO DISCLOSE CONFLICT OF INTEREST IN ARBITRATION The oft-repeated mantra of “when in doubt, disclose” may not always work out in practice and can be used by recalcitrant parties to challenge arbitrator appointments simply to delay or disrupt the proceedings, and later challenge the award. Viewing arbitration from the lens of legitimacy Legitimacy is the...
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DEVISING THE CONTOURS OF DUTY TO DISCLOSE CONFLICT OF INTEREST IN ARBITRATION
The oft-repeated mantra of “when in doubt, disclose” may not always work out in practice and can be used by recalcitrant parties to challenge arbitrator appointments simply to delay or disrupt the proceedings, and later challenge the award.
Viewing arbitration from the lens of legitimacy
Legitimacy is the golden thread that runs through all modes of dispute resolution, and it is tested especially in cross-border disputes. Today, arbitration provides a sense of security for clients across jurisdictions entering into business relationships. For this private method of dispute resolution, legitimacy is primarily drawn from party autonomy and the law which facilitates this process and gives authoritative value to its outcome, i.e., the lex arbitri. An international consensus on the need to give effect to the outcome of such process is seen in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“NYC”).
It follows that there is a compelling necessity for the arbitrator, who is the protagonist, to be subjected to a high enough standard of integrity for the parties to have faith in his decision. Considerations of natural justice aside, this necessity is one of the reasons why we disallow unilateral appointment of arbitrators,1 why a particular school of thought disavows party-appointed arbitrators altogether,2 and why independence and impartiality of the arbitrator is tested time and again despite having a fairly settled and commonly accepted position of law. This article will focus on the duty of disclosure of an arbitrator and the position of Indian law on issues of conflict of interest in view of a recent decision of the Bombay High Court.3
Understanding conflict of interest in arbitration
The term “conflict of interest” can be defined as “a clash between the private interests and the official responsibilities of a person in a position of trust.”4 An arbitrator takes the role of a rational economic actor, akin to a civil judge.5 As a natural corollary, he must owe no allegiance to the appointing party and maintain independence and impartiality in both sprit and form.6
While “independence” and “impartiality” are often used interchangeably, the former requires an absence of any dependent relationship of the arbitrator with the parties that would appear to affect his judgement, and the latter—a fairly abstract and subjective standard—requires an arbitrator to not be predisposed to any question in dispute or favour one of the parties.7 Another approach towards viewing this distinction is: “[w]hile impartiality is needed to ensure that justice is done, independence is needed to ensure that justice is seen to be done.”8
Any interest or relationship of an arbitrator—personal, professional, or financial—that can be seen to potentially compromise his ability to arrive at a decision impartially and independently would therefore render him, at the very least, conflicted.9 Certain serious conflicts may even render him ineligible to act as an arbitrator ab initio.10 For the rest, the commonly accepted test is an inquiry whether “justifiable doubts” as to his independence and impartiality exist.11 This inquiry is focussed on apparent (and not actual) bias and may be undertaken from different standards, viz. “reasonable suspicion” or “reasonable apprehension” of bias, “real possibility” of bias, and “real likelihood” or “real danger” of bias.12 While the test of real danger of bias requires a higher threshold, the distinction between the rest has been rendered merely an argument over semantics over time and in practice,13 especially in arbitration. The focus of these formulae is not on a subjective assessment of independence or impartiality by parties or arbitrators, but an objective assessment from the perspective of a reasonable observer.14
Like most jurisdictions, India adopts an objective test of reasonable apprehension of bias, i.e., the inquiry is carried out from the perspective of a reasonable third person.15
When in doubt, don’t always disclose?
Arbitrators have a duty to disclose circumstances that are “likely” to give rise to justifiable doubts at the time of their appointment, which further continues till the delivery of the award.16 However, at times it becomes difficult to ascertain which circumstances warrant disclosure. The oft-repeated mantra of “when in doubt, disclose” may not always work out in practice and can be used by recalcitrant parties to challenge arbitrator appointments simply to delay or disrupt the proceedings, and later challenge the award.17 The duty of disclosure may also conflict with confidentiality obligations—an issue considered by the UK Supreme Court in 2020.18 But failure to disclose such circumstances may aggravate or, in certain circumstances, in itself be apparent bias.19 Put simply, “[w]hile ‘under disclosure’ is treacherous, ‘over disclosure’ is counterproductive and striking the right balance remains elusive.”20
Notably, the use of the phrase “likely to give rise” in Section 12(1)(a) of the (Indian) Arbitration and Conciliation Act, 1996 (“Act”) as opposed to “may give rise” suggests a narrower scope.21 Further, to provide specific guidance on disclosure by arbitrators, the Fifth Schedule of the Act identifies particular criteria that would raise justifiable doubts to their independence and impartiality.22 This criteria is drawn from the IBA Guidelines on Conflict of Interest in International Arbitration (“IBA Guidelines”) (2004 version), known as the “gold standard for disclosure,”23 but it is by no stretch of imagination a panacea for the issue of disclosure.
An exemplary precedent set by the Bombay High Court
In this context, as Indian courts encounter challenges to awards stemming from allegations of non-disclosure, the Bombay High Court’s judgement in HSBC PI Holdings v. Avitel Post Studioz offers the way forward.24 Albeit in the context of enforcement of a foreign award, the Court decided an objection under Section 48(2)(b) of the Act, which was that the failure of the arbitrator to disclose information deemed relevant by the award debtor by itself resulted in apparent bias and, thus, rendered the award unenforceable upon being opposed to the public policy of India.25 Despite the case involving a foreign award, the award debtors relied on the IBA Guidelines on the basis that it “received statutory recognition” by virtue of their “incorporation” in the Act.26
In its decision, the Court allowed enforcement of the foreign award by conducting the inquiry into justifiable doubt to the impartiality or independence of an arbitrator from the viewpoint of a “reasonable third person.”27 The Court hinted at the exhaustive nature of the circumstances under the IBA Guidelines and recognised that any circumstances that do not lead to disqualification under the objective test need not be disclosed, irrespective of the viewpoint of the parties.28 The Court observed that the “duties imposed upon the arbitrator in the context of potential conflict of interest ought not to be stretched to unreasonable lengths.”29
Lastly, the Court recognised that the arbitrator’s duty of disclosure has to be determined on a case-by-case basis, observing that “excessive disclosures unnecessarily undermine the confidence of parties in the very process of arbitration.”30 The Court thus favoured a pragmatic and commonsensical approach against risking to impose an overly wide disclosure obligation.31
In conclusion, an overly wide disclosure risks diluting the process, while non-disclosure can taint the award. This necessitates a balanced approach to an arbitrator’s duty to disclose conflicts. The Bombay High Court’s decision sets an exemplary precedent, yet it must be acknowledged that it was delivered in the context of enforcing foreign awards under Part II of the Act which contains NYC provisions. Considerations may vary when dealing with India-seated arbitrations and challenges at the annulment stage, without the benefit of pro-enforcement bias of the NYC. A thoughtful and contextual approach is vital to maintain the essence of arbitration and ensure the preservation of commercial justice in all its facets.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.