Arbitrator’s Conflict: Risks and Remedies

By Oleg Rivkin
Originally published in Corporate Counsel Magazine (February 2016)

When corporate counsel and their outside lawyers think of conflicts of interest in the context of litigation or arbitration, what normally comes to mind is the typical situation. A lawyer is conflicted because her firm represents the opposing party in another matter, be it another litigation, another arbitration or a transaction. These types of conflicts are common and their resolution fairly routine. But what happens if it is the arbitrator’s law firm that represents one of the parties to the arbitration in another matter? Arbitrators, particularly in the field of international arbitration, are often partners in large firms. To complicate the situation, what happens if this conflicting representation is discoveredafter the arbitrator has already issued his ruling on the merits? As was made clear in a recent decision by Court of Cassation, the highest court of France, the consequences can be dire.

The facts of the French case are straightforward. Columbus Acquisitions, Columbus Holdings and Caribbean Fiber Holdings brought breach of contract claims against Auto-Guadeloupe Investissement (AGI) before the International Centre for Dispute Resolution (ICRD). At the time of his appointment, the sole arbitrator, Henri Alvarez, a partner with the Canadian firm Fasken Martineau, disclosed that his firm “has represented Leucadia National Corporation” but that “at present there are no matters” in which Fasken represented Leucadia. The reason this was critical is that Leucadia is the parent of Caribbean Fiber Holdings.

The arbitration proceeded first on the issue of liability and, after a hearing, the arbitrator issued a partial award on liability, finding AGI liable, with damages potentially exceeding $100 million.

After the partial award was issued, AGI learned from reviewing Fasken Martineau’s website that several months earlier — while the arbitrator was deliberating on his decision — the firm had represented Leucadia on a $575 million transaction involving the Spanish copper mine Cobre Las Cruces. From AGI’s perspective, this was a game changer.

The matter came before the French courts when Columbus brought the partial award there for execution. AGI challenged the award on the basis of the arbitrator’s conflict of interest. (In the meantime, Alvarez resigned and was replaced by another arbitrator in the damages phase, which was later stayed pending the outcome in France.)

In its ruling, the Court of Cassation found that had the conflict been timely disclosed, AGI would have been justified in having “reasonable doubt regarding the independence and impartiality of the arbitrator.” Since the conflict was not disclosed, the appropriate remedy was to nullify the liability award in its entirety, which the court did. Thus, six years of arbitration and litigation and millions in legal fees were wasted.

Lessons Learned

First and most fundamentally, an arbitrator taking on a case is no different from a lawyer taking on a litigation or a transaction. Both must be conflict-free. In fact, U.S. courts as well courts of other countries emphasize that arbitrators must avoid even the impression of possible bias. But the consequences of a conflicted arbitrator are potentially much more serious. If a lawyer is discovered to have a conflict in the middle of litigation, the worst thing that happens to her client is that she and her firm resign and another lawyer picks up where she left off. This may be inconvenient and there may be costs involved for motion practice and the incoming lawyer’s learning curve, but the important thing is that the court’s rulings up to that point still stand. If, on the other hand, an arbitrator is discovered to have a conflict, the entire proceeding is potentially wiped away. The award you got is not worth the paper it’s written on.

Second, avoiding an arbitrator’s conflict is to a certain extent out of your control. The main responsibility is on the arbitrator and the arbitral organization that appoints him. All you can do is ensure there are no conflicts on your end, i.e., that the arbitrator and his firm do not represent yourcompany. However, unless the information is public, you have no way of knowing whether his firm represents one of the other parties. In a multi-party arbitration this is a real risk. Consider Columbus’s situation. It had no conflict with the arbitrator or his firm. It obtained an award in its favor. And yet, because the arbitrator’s firm represented the corporate parent of another party, Columbus’s award was annulled.

Inasmuch as you can never be completely sure that the arbitrator is fully conflict-free, there will always be some risk. The risk can be mitigated by taking the following steps.

1. Conduct a thorough conflict check on your end. Make sure your arbitration counsel does the same. The check should be comprehensive; it should include all corporate parents, subsidiaries and related companies.
2. Confirm conflict databases. After the arbitrator is selected, make sure that his and his firm’s name are in the appropriate conflict databases so that any subsequent conflict check flags it. From the moment he is appointed as arbitrator, his firm is off limits to your entire company.
3. Conduct your own investigation, at least of public records and preferably more. Do not rely solely on the arbitrator’s assurance that he is without conflict. The investment is well worth it, considering what’s at stake.
4. Request periodic confirmations that the arbitrator remains unconflicted. As the arbitration progresses, have your counsel confirm with the arbitral organization that there are no conflicts. This is not at all common and is liable to raise eyebrows at organizations like the International Centre for Dispute Resolution (ICDR). But you are well within your rights. The codes of ethics for arbitrators promulgated by the International Bar Association and the American Bar Association impose on arbitrators an ongoing obligation to be free of partiality and appearance of partiality. And every arbitration organization has a strong interest in making sure its awards are upheld by courts. In fact, it would not be surprising if, in light of the Court of Cassation decision, the major arbitration organizations modified their procedures to require periodic recertifications from arbitrators that no conflict exists.
5. Conduct periodic searches for potential conflicts. Along the same line, conduct, or have your arbitration counsel conduct, Internet searches for potential conflicts between the arbitrator and the other parties in the course of the arbitration. If something shows up, bring it to the attention of the arbitral organization and request an explanation.
6. Consider arbitrators from small arbitrator-only shops rather than big firms. The risk of conflict is substantially lower.

With these in mind, go forth and arbitrate!