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June 03, 2010

Duties of Counsel Regarding Arbitrator Conflicts of Interest

It is essential to the integrity of the arbitral process that arbitrators make complete disclosure, at every stage of the proceedings, of relationships that might reasonably call into question their impartiality or independence in the eyes of the parties. A related principle, less discussed and less articulated in rules and law, is that a party that becomes aware, during the proceedings, of a possibly compromising relationship that an arbitrator has not disclosed, should determine promptly whether the relationship is one that should prevent the arbitrator from continuing to serve, and should raise the issue promptly or be foreclosed from doing so later on.

 

A recent decision from the US Second Circuit Court of Appeals addresses the disconcerting problem of the party that remains silent, until the award is issued, about a potential conflict of interest of one of the arbitrators that is known to that party but has not been disclosed by the arbitrator.  In this case, the potential for a conflict of interest had been known from the time the underlying contract had been signed, because that contract had made the person eventually named as arbitrator eligible to be appointed to certify the quality of the adverse party’s products. The Court held that a challenge to the award based on the arbitrator’s alleged partiality must fail, where the complaining party had knowledge of the potential conflict of interest at the time the arbitrator was chosen, and thus had sufficient information to investigate the arbitrator’s relationship with the adverse party before or during the arbitration. (Schwartzman v Harlap, 2010 U.S. App. LEXIS 10057 (2d Cir. May 18, 2010)).

 

The obligations of counsel in the Schwartzman case were relatively clear, because the potential conflict was known from the time of the contract. But when counsel becomes aware, mid-arbitration, of a possibly compromising relationship of the arbitrator, and the existence of a conflict or even a duty of the arbitrator to disclose is not clear absent further investigation, there will rarely be clear ethical and legal rules to guide the decision. If the significance of the relationship cannot be assessed without more investigation, in many legal systems the right to challenge the arbitrator’s impartiality cannot be deemed waived where waiver requires a fully-informed decision. But if the party knows or has reason to know that the information is not necessarily known to the arbitrator — such as an attorney-client relationship in a distant overseas office of her firm — then unless rules or laws require action or penalize inaction by counsel, there will be a natural temptation to have the best of both worlds for the client by awaiting the arbitrator’s award and then making a challenge if it is not satisfactory.  

 

Courts and arbitral institutions should develop rules that advance a simple and uncontroversial goal: to have the least amount of repetition of proceedings resulting from arbitrators’ voluntary or required resignations or succesful challenges to awards. That goal is best served by penalizing a party for its failure to explore fully a potential conflict of interest at the time the circumstances came to its attention. In theory, this could result in preventing succesful challenges to awards that may indeed have been influenced by a predisposition of the arbitrator toward the winning side. But in a system that values efficiency and transparency, the party who becomes aware of the potential for this outcome and uses it as a form of hedging deserve little sympathy and it seems entirely just to prevent the party from challenging the award and partiality grounds.