Replacement of an Arbitrator Due to Conflict of Interest
In this Insight, we would like to share a real-life situation regarding the impartiality, independence and objectivity of arbitrators in an arbitral tribunal which we encountered during the process of resolving a commercial dispute at an arbitration center in Vietnam. Although this situation may have been unique to this particular arbitration center, we believe the facts have potential applicability to all arbitration disputes.
Arbitration Facts
In this case, we represented BS Company in a lawsuit against DTL Company. According to the procedures of the arbitration center, we selected Arbitrator A on behalf of BS Company and DTL Company selected Arbitrator B. Thereafter, we received notification from the arbitration center on forming an arbitral tribunal to settle the lawsuit between BS Company and DTL Company. This notice included Arbitrator A, Arbitrator B, and a third arbitrator, Arbitrator C. As far as we understood, Arbitrator C was nominated by Arbitrator B and Arbitrator A also agreed with the nomination 1.
Thereafter, we discovered that Arbitrator B and Arbitrator C were colleagues in a law firm. Moreover, Arbitrator C was the managing director of said law firm. Therefore, there was a significant question raised as to the impartiality and objectivity of both Arbitrator B and Arbitrator C during the proceedings. Arbitrator B and Arbitrator C may have been chosen because the arbitration center believed that they possessed the required technical competence and professional ethics for the case. However, the fact remained that Arbitrator B was selected by DTL Company and there had been an intimate labor relationship between Arbitrator B and Arbitrator C (they were colleagues in a law firm and Arbitrator C was the superior of Arbitrator B during the period of employment). In addition, further ethical red flags were raised as these two Arbitrators themselves did not disclose their working relationship to Arbitrator A or BS Company. Therefore, it was apparent that their impartiality and objectivity could not be trusted during these proceedings.
Under the regulations of commercial arbitration and the procedural rules of the arbitration center, the arbitral tribunal issues an arbitral award based upon a majority vote 2. Therefore, we decided to request a replacement of both Arbitrator B and Arbitrator C because their impartiality and objectivity were compromised by their working relationship and further, they did not honestly declare their clear and unambiguous ethical conflict.
However, such a request for replacement, which may seem straightforward in countries with a developed judiciary (such as England or America or, closer to Vietnam – Singapore), turned out to be a novel and unprecedented issue which faced significant difficulties attributable to the isolation and limitations of Vietnamese law regarding conflict of interest. Fortunately, our persistent efforts were well rewarded. Arbitrator C was finally replaced by Arbitrator D and the final award was equitable to BS Company.
Legal Grounds for Requesting Replacement of An Arbitrator
Vietnamese Law
The 2010 Law on Commercial Arbitration does not clearly and directly define the concept of “conflict of interest”. However, it generally regulates the right to change the arbitrator as follows:
Article 42, Clause 1, Subsection c, of the 2010 Law on Commercial Arbitrator provides:
“Article 42. Replacement of arbitrators
1. An arbitrator shall refuse to settle a dispute and the parties may request the replacement of an arbitrator to settle the dispute in the following cases:
…
c)There is a clear ground to conclude that the arbitrator is neither impartial nor objective;
…”
The question was whether being colleagues in a company, as in the case of Arbitrator B and Arbitrator C, would be deemed a clear ground showing that the arbitrators could be neither impartial nor objective due to the high possibility that such arbitrators would have the same opinion. In addition, failing to declare their conflict of interest by both Arbitrator B and Arbitrator C to the parties involved (including Arbitrator A and BS Company) led to doubt as to whether these two arbitrators would be fair and unbiased towards DTL Company.
Our arguments, at first, were rejected based on the following:
- Vietnamese law had no provision stating that arbitrators, who were in the same arbitral tribunal as well as colleagues in a company, could not be impartial or objective in their adjudication; and
- We had the right to request the replacement of an arbitrator, but whether the change was accepted or not depended on the decision of the arbitration center.
International Law
Recognizing that the reasons given by the arbitration center ignored or covered up the prima facie conflict of interest in this case, we went on to cite the principles and provisions of international law to clearly demonstrate the need for replacement in this case. The international standards cited were as follows:
- Item 2.a, Part I: General Standards Regarding Impartiality, Independence and Disclosure, International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration 2014 (“IBA Guidelines”) provides:
“(2) Conflicts of Interest
(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 or independent.”
- Sub-item 3.3.1 and Sub-item 3.3.2, Item 3, Part II: Practical Application of the General Standards, IBA Guidelines provides:
“(3) Orange List 3
3.3. Relationship between an arbitrator and another arbitrator or counsel
3.3.1. The arbitrator and another arbitrator are lawyers in the same law firm.
3.3.2. The arbitrator and another arbitrator, or the counsel for one of the parties, are members of the same barristers’ chambers.”
…”
Under these guidelines, as Arbitrator B was appointed by DTL Company, Arbitrator B was clearly responsible for understanding that the relationship between him and Arbitrator C was a conflict of interest which would prejudice BS Company. Further, Arbitrator B, before nominating Arbitrator C for chairman of the arbitral tribunal, should have disclosed the relationship between him and Arbitrator C instead of keeping silent.
If this conflict is not detected by the affected party (BS Company) and a request for replacement made, would it be likely that the proceedings and the award of the arbitral tribunal would be impartial and objective for BS Company?
For that reason, failing to disclose the relationship between Arbitrator B and Arbitrator C violated fundamental ethical rules and would likely directly affect the rights and interests of BS Company:
- Item 4.1, Rules of Ethics for International Arbitrators 1987 provides:
“(4) Duty of Disclosure
4.1. A prospective arbitrator should disclose all facts or circumstances that may give rise to justifiable doubts as to his impartiality or independence. Failure to make such disclosure creates an appearance of bias, and may of itself be a ground for disqualification even though the non-disclosed facts or circumstances would not of themselves justify disqualification.”
- Item 3.a, Part I: General Standards Regarding Impartiality, Independence and Disclosure, IBA Guidelines provides:
“(3) Disclosure by the Arbitrator
(a) If facts or circumstances exist that may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence, the arbitrator shall disclose such facts or circumstances to the parties, the arbitration institution or other appointing authority (if any, and if so required by the applicable institutional rules) and the co-arbitrators, if any, prior to accepting his or her appointment or, if thereafter, as soon as he or she learns of them.”
Based on the above-mentioned grounds, we were able to prove that our requests were reasonable and in accordance with the regulations as well as with international practice. Therefore, the arbitration center agreed to replace Arbitrator C with Arbitrator D. We also requested to replace Arbitrator B. However, the arbitration center did not agree because the reason affecting the impartiality and objectivity no longer existed.
We did not agree with the opinion of the arbitration center regarding Arbitrator B. Namely, by his silence over the conflict of interest, we believed that he would not be able to judge the case impartially. However, under the current laws and regulations in Vietnam, we did not have sufficient grounds for a further removal request and had to accept the decision of the arbitration center.
How Can You Protect Your Business From Conflict of Interest in Arbitration Proceedings?
From the facts above, it can be seen that ensuring impartiality in arbitral proceedings is very important and may be the difference between winning or losing the case. Through our experience with this case and other cases we would like to share with you some considerations when entering into arbitration proceedings:
1. Check the background and status of the arbitrator carefully to make sure that he/she will be able to act impartially and objectively in the process of dispute resolution.
2. If any element or event is discovered affecting the objectivity and independence of any arbitrator, you should immediately perform the right to protest 4 and fully pursue a request to replace said arbitrator. From our perspective, once the proceedings are impartial, objective and independent, the result shall also be equal and reasonable.
3. In general, we have found that when an arbitrator discovers that there is an ethical objection to them serving on the arbitral tribunal, they will cautiously settle the dispute. This is because the arbitrator is aware that if they are not impartial and objective, the arbitral award will surely be appealed through proceedings in a competent court. Further, if the case is made public, their reputation and prestige will likely be affected.
4. The international rules and common practices should be applied to support your request. In fact, Vietnam law is still lacking many regulations which would meet international standards, whereas, the reasonableness and the advancement of international rules and common practices are generally undeniable. Further, in order to protect its reputation and trustworthiness, most arbitration centers will recognize and understand that international standards must be utilized in ethical matters such as this. Finally, arbitration fees are many times higher than court fees and, therefore, nobody is willing to pay more for bad service.
5. From the above example, and in practical terms, even if Arbitrator B was not impartial and objective, an equitable arbitral award still could be guaranteed as the impartiality and objectivity of the other two arbitrators (Arbitrator D and Arbitrator A) could be ensured.
- Article 41, Clause 3, Law on Commercial Arbitration No.54/2010/QH12 issued on June 17, 2010 (“the 2010 Law on Commercial Arbitration”) provides:
“Article 41. Forming an ad hoc arbitral tribunal
3. Within 15 days after being selected by the parties or designated by the Court, the Arbitrators shall elect another Arbitrator as the Chairman of the Arbitral Tribunal. In case the Chairman cannot be elected, and the parties do not otherwise agree, they may request a competent Court to designate a Chairman of the Arbitral Tribunal.” - Article 60 of the 2010 Law on Commercial Arbitration provides:
“Article 60. Principles of issuance of awards
1. The Arbitral Tribunal shall issue an arbitral award upon majority vote.
2. In case a majority vote cannot be obtained, an arbitral award shall be issued upon the opinion of the Arbitral Tribunal’s chairman.” - Item 3, Part II: Practical Application of the General Standards, IBA Guidelines provides:
“The Orange List is a non-exhaustive list of specific situations that, depending on the facts of a given case, may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence. The Orange List thus reflects situations that would fall under General Standard 3(a), with the consequence that the arbitrator has a duty to disclose such situations. In all these situations, the parties are deemed to have accepted the arbitrator if, after disclosure, no timely objection is made, as established in General Standard 4(a).” - Article 13, the 2010 Law on Commercial Arbitration provides:
“Article 13. Loss of the right to protest
A party discovering a violation of this Law or the arbitration agreement, but still continues to conduct arbitral proceedings and does not perform the right to protest such violation within the time limit prescribed by this Law, shall lose its right to protest such violation at the arbitration center or the court.”
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