Appointment of Arbitrators: By Parties or Through the Arbitral Institute?

Appointment of Arbitrators: By Parties or Through the Arbitral Institute?

A universally acknowledged premise of arbitration stems from the idea that “the quality of arbitration proceeding depends to a large extent on the quality and skill of the arbitrators chosen”.[1] The two major ways of appointing arbitrators to constitute an arbitral tribunal are either through party appointment, or via an arbitral institute. The selection of arbitrators is intertwined with the controversy of whether appointments should be made unilaterally or by a neutral body. This article aims to analyze the arguments presented by scholars and practitioners such as Jan Paulsson, Charles Brower, Michael E. Schneider and others, who stand either for or against the unilateral appointment of arbitrators and the sickness or vitality prevailing in the current system of international commercial arbitration.

With party-appointed arbitrators lies a more in-depth analysis of inventiveness as discussed by Brower. He compares the current system of international arbitration with a successful vehicle, the basic elements of which, if altered, would be deemed to have failed since not all inventions count as genuine improvements to the existing system. For him, “Any proposal that would alter any of the fundamental elements of international arbitration constitutes an unacceptable assault on the very institution of international arbitration”.[2] One of the fundamental elements that he focuses on is a party’s right to freely choose their arbitrator in the current international arbitration regime. The provisions of the New York Convention and UNCITRAL Model Law turn to set aside an award where, “The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties…[3] This denotes the importance of the arbitration agreement which allows for party-appointed arbitrators through rules or incorporation by reference within it.

The fundamental right[4] of parties to nominate arbitrators of their own choice[5] gives rise to the idea of party autonomy. The fact that parties themselves consent to refer their disputes to arbitration shows that there is freedom of contract and an element of freedom of choice to decide on a dispute resolution mechanism, which alternatively could have also been litigation in courts. This inherently and in principle gives way to parties to appoint an arbitrator who they can confide in and who makes sure that the case presented by the party which has appointed them is properly understood by other members of the tribunal.[6] In a three-arbitrator model especially, when issues are complicated and stakes are high, parties tend to appoint their own arbitrators because parties not only seem to have more faith in their choice, but also seem to place their confidence in arbitrators on the basis that there is at least one person on the tribunal who thinks like them and has a mindset like them,[7] despite a mix of cultural differences emanating from the tribunal bench.

Moreover, another reason why parties prefer to appoint arbitrators whom they feel more comfortable with is that there is a growing mistrust and lack of trust in the appointments made by an arbitral institution, especially because they use a pre-existing list of arbitrators for the selection.[8] Similarly, their appointments also lead to unfair gender distribution on the panel as reported in the OECD Consultation Paper. Additionally, as mentioned by Gómez Acebo, the idea of “mental gambling” comes into play in party-appointed arbitrators because, “Most parties and counsel…devote some time to speculating as to what candidate to be unilaterally nominated will be (closer or less hostile) to the appointing party’s position in the dispute.[9] However, this is also true for parties when their two arbitrators choose a third one. Besides this, when parties are given the opportunity to nominate an arbitrator of their preference, they tend to research and discuss with their lawyers and counsel whether their choice will settle amicably with the chair of the tribunal in case of it being appointed by an arbitral institution (as observed in the Van Dyke v Lone Star case). This leads to making choices – whether rational or not – in a phenomenon called the “illusion of control”, where one may see one’s gamble as a way of influencing the “outcome of the arbitration more than that of the other party”.[10]

On the other hand, Paulsson has referred to unilateral appointments as a “moral hazard” in international arbitration. The alternative to this is appointment by an arbitral institute, which has been considered by Professor Antoine Kassis to be an illness in the system and later criticized by Paulsson who has observed that the diagnosis made by Kassis has been imaginary and just another case of “vicarious hypochondria”.[11] Paulsson’s critique further purports that unilateral appointments are irreconcilable with the “fundamental premise of arbitration: mutual confidence in arbitrators” and that such appointments either need to be expressly forbidden or rigorously policed. Furthermore, in support of Paulsson’s thesis, Professor van den Berg has also argued that unilateral appointments must be banned because of the dissenting opinions that get voiced by the losing party’s arbitrator in most of the awards rendered by the tribunal. His main concern came from the Investment Treaty Arbitration where out of the 150 decisions reported publicly on the ICSID website, 34 cases issued a dissenting opinion with nearly all of them by the losing party’s arbitrator.[12]

The biggest concern regarding party-appointment includes the traits shown by arbitrators such as bias, misbehavior and lack of impartiality. Paulsson believes that the problem of apparently admitted bias is exemplified in cases such as the Loewen[13] arbitration where party-appointed arbitrators passed on confidential information on the tribunal’s deliberation to the appointing party.[14] Another problem with party-appointed arbitrators has been highlighted in van den Berg’s paper regarding there being a possibility for the party-appointed arbitrator to “act as an advocate for the party which has appointed him or her.”[15] This defeats the purpose of constituting a tribunal, the proceedings of which were supposed to be fair and unbiased rather than being in favor of a particular appointing party.

Moreover, an example of party-autonomy going haywire comes from Hooters of America v. Annette R. Phillips[16] where both Hooters and its employee had to appoint an arbitrator for a three-member tribunal and the third arbitrator had to be appointed from a list of arbitrators created exclusively by Hooters. This results in an apparent bias. Not having a fair chance to select independent and impartial arbitrators of one’s own choosing is prejudiced in itself.

However, the above-mentioned argument also illuminates the fact that “a higher level of collegiality” is reached when a neutral body appoints all arbitrators because the award rendered is considered to be of greater quality. Institutions select arbitrators that have special skills such as engineers, accountants, lawyers,[17] or even Supreme Court judges. Paulsson is also of the view that appointment by arbitral institutions allows for awards to be achieved in principled ways and arbitrators to be capable of exercising independent judgments. However, the advantage of unilateral appointment outshines its disadvantages where it allows for a “friend”[18] to serve on the tribunal, rather than an agent who may only provide discomfort at the time of the dispute.

Often times the relationship between an arbitrator and an appointor is more of sympathy, affinity and a duty of care rather than complete neutrality,[19] but that does not mean that parties deviate from their obligations under Model Law and the rules of arbitral statutes and agreements signed between them to appoint independent and impartial arbitrators. Having the underlying assumption that the party-appointed arbitrator will decide in favor of the appointor defeats the whole purpose of the arbitration itself. The idea that unilateral appointments must be banned because there is an implicit hope to gain advantage and tacit approval of undermining reliability, goes against the letter and spirit of the fundamental right of parties to freely select those whom they wish to be adjudicators in their matters since justice must not only be done but manifestly and indubitably be seen to be done.

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References 

[1] J. D. M. Lew, L. A. Mistelis and S. M. Kroll, Comparative International Commercial Arbitration,
(Kluwer, 2003) 232.
[2] Charles N. Brower, Michael Pulos and Charles B. Rosenberg, ‘So Is There Anything Really Wrong With International Arbitration As We Know It?’ <https://www.international-arbitration-attorney.com/wp-content/uploads/arbitrationCharles_Brower_So_Is_There_Anything_Really_Wrong_with_International_Arbitration_A.pdf> last accessed 2nd May 2019.
[3] Article 24 (2) (iv) Model Law; Article V. 1 (d) New York Convention, 1958 (NYC).
[4] Siemens AG & BKMI Industrienlagen GmbH v Dutco Construction Co., Cass. Civ. 7 Jan 1992; XVIII
YBCA 140 (1993) decision of the French Cour de Cassation which held that equal treatment of parties is a public policy ground and considered to be of fundamental importance when parties are granted their basic right to appoint arbitrators.
[5] Emilia Onyema, “Selection of Arbitrators in International Commercial Arbitration” International Arbitration Law Review (2005) 8: 45-54, 1.
[6] Yenew B. Taddele, ‘Why Party-Appointed Arbitrators: A reflection’ (Abyssinia Law, 2008) <https://www.abyssinialaw.com/blog-posts/item/1830-why-party-appointed-arbitrators-a-reflection> last accessed 1st May 2019.
[7] Richard Mosk and Tom Ginsburg, ‘Dissenting Opinions in International Arbitration,’ 15 Mealey’s Int’l Arb. Rep. 6 (2000), 9.
[8] (n 6).
[9] Ibid.
[10] Ibid.
[11] Michael E. Schneider, President’s Message: Forbidding Unilateral Appointments of Arbitrators – a Case of Vicarious Hypochondria? 29 ASA Bulletin 2/2011 (June) 274.
[12] Albert Jan van den Berg, Dissenting Opinions by Party-Appointed Arbitrators in Investment Arbitration, IV Making and Applying Investment and Trade Law in Mahnoush Arsanjani et al. (eds.), Looking to the Future: Essays on International Law in Honor of W. Michael Reisman, (Brill 2010) 821-843.
[13] Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3.
[14] Alexis Mourre, ‘Are unilateral appointments defensible? On Jan Paulsson’s Moral Hazard in International Arbitration’, (Kluwer Arbitration Blog, 5 October 2010) <http://arbitrationblog.kluwerarbitration.com/2010/10/05/are-unilateral-appointments-defensible-on-jan-paulssons-moral-hazard-in-international-arbitration/> last accessed 3 May 2019.
[15] (n 12).
[16] (1999) 173 F. 3d 933.
[17] (n 14).
[18] (n 11).
[19] Ibid.

 

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which she might be associated.

Sara Raza

The writer is a final year law student at the Lahore University of Management Sciences (LUMS). She is currently serving as the Editor of the LUMS Law Journal (LLJ). She has keen interest in reading and writing about current socio-legal issues especially those pertaining to women's rights and gender justice in Pakistan.



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