Arbitral Institutions, Arbitrators and the Parties: A Complex Relationship
It is commonly accepted that by choosing to resolve a dispute by way of arbitration, the parties waive off their right to an appeal; a right which is guaranteed if your dispute is resolved by a judge in a court. While, it certainly has its advantages of being quicker than litigation since the decision is final and binding upon the execution, it certainly has its disadvantages as well, particularly for the aggrieved party. The courts are ubiquitously reluctant to interfere in a decision rendered by the arbitrator or arbitral tribunal and one needs to have an extremely strong case to convince any judge to inter alia set aside the award.
However, as the practice of international commercial arbitration becomes increasingly widespread and encouraged by the court, the stakes continue to increase; a party that has suffered loss through patent lack of care by an arbitrator may wish to seek to recover that loss from the arbitrator, personally.
I have recently been involved in an arbitration, where it appeared that the arbitral institution had failed, in its administrative powers, to ensure that the arbitral tribunal renders an award within a reasonable time, if not expeditiously. Moreover, the appointment of the chairman of the arbitral tribunal seemed to have been ostensibly influenced by the arbitrator nominated by the other party. However, I would concede that as an aggrieved party, there is always an ulterior motive to find some loopholes or shortcomings to challenge the award.
With no option of an appeal and observing the reluctance of the court to interfere in the arbitral proceedings, few questions arose in my mind which, with the passage of time, became the scope of this article:
- What, if any, is the relationship of the parties with the arbitral institution and/or the arbitrator(s)?
- If there is a contractual relationship, to what extent are the arbitrators (who constitute the arbitral tribunal) and the arbitral institution, immune from the national laws of a jurisdiction?
- If the immunity granted is qualified and not absolute, what are the circumstances under which the arbitrators and the arbitral institutions would be held responsible?
I. RELATIONSHIP BETWEEN THE PARTIES, ARBITRATORS AND THE ARBITRAL INSTITUION
Contractual relationship between the arbitrators and the parties:
There has been some debate as to whether the rights and obligations of arbitrators stem from their “status” as arbitrators and arise directly from law or whether they arise from a contract which is entered into when they accept their appointment. Some academics argue that the contract is bi-lateral and creates rights and obligations for both the arbitrators and the parties. However, where the arbitration is administered by an arbitral institution, the contractual relationship becomes triangular.
The contractual school believes that an arbitrator is appointed by, or on behalf of, the parties to an arbitration to perform a service for a fee and therefore, in such circumstances, a contractual relationship arises between the parties and the arbitrator. “The terms of this contract may be set out in the submission to the arbitration, the relevant rules of arbitration, the terms of reference or the terms of appointment. Other terms may be imposed by operation of law and include the duty to act with due diligence and the duty to act judicially.”
Mustill and Boyd, however, take a dissenting view. They argue that:
“To proceed by finding a contract and then applying to it the ordinary principles of the law of contract will not produce a reliable answer unless a contract really exists to be found. Even in the case of a massive reference, employing a professional arbitrator for a substantial remuneration, we doubt whether a businessman would, if he stopped to think, concede that he was making a contract when appointing the arbitrator. Such an appointment is not like appointing an accountant, architect or lawyer. Indeed it is not like anything else at all.”
The English courts, however, appear to disagree with the view of Mustill and Boyd. In at least two English cases it has been decided that the arbitrators become parties to the arbitration agreement itself. In Compagnie Européene de Cerelas SA v. Tradax Export SA, Hobhouse J observed that when the arbitrators accept their appointments, they become parties to the arbitration contract and are therefore, bound by the terms of the arbitration contract.
Similarly, in the case of K/S Norjarl A/S v. Hyundai Heavy Industries Co. Ltd., Phillips J held that by accepting their appointments, the arbitrators not only undertake a due diligence obligation but also become entitled to remuneration for their services. Phillips J held that “these are conventional features of a contract to provide services.”
The Court of Appeal dismissed the appeal in the above case and the Vice Chancellor in the appeal held that:
“The arbitration agreement is a bilateral contract between the parties to the main contract. On appointment, the arbitrator becomes a third party to that arbitration agreement, which becomes a trilateral contract. Under that trilateral contract, the arbitrator undertakes his quasi-judicial functions in consideration of the parties agreeing to pay him remuneration. By accepting appointment, the arbitrator assumes the status of a quasi-judicial adjudicator, together with all the duties and disabilities inherent in that status.”
In the opinion of Michael Pryles, if the arbitrators become parties to the arbitration contract, the parties themselves cannot change the terms of the arbitration agreement unilaterally, without prior consent of the arbitral tribunal. Therefore, if certain time frames have been stipulated in the arbitration agreement for the taking of procedural steps, the parties could not agree to change those time frames without the consent of the arbitral tribunal. “Therefore, this result must follow if the view is accepted that the arbitrators become parties to the arbitration agreement.”
In many civil law jurisdictions, arbitrators are merely professionals and their liability is determined by the general principles of contractual liability contained within the civil code. This approach usually bases liability on the terms of appointment rather than the functions an arbitrator performs. Countries such as Italy, Austria and Spain have express provisions for liability, while the Netherlands, France, Poland and Germany have implied ones. In general, however, the contract between the parties and the arbitrator is subject to private law and can be characterized as a mandate with service elements (or a quasi-mandate) in exchange for the remuneration of the arbitrator.
With regards to the timing of the contract between the arbitrators and the parties, Michael Pryles opines that when a particular dispute arises, and is referred to arbitration, it is at that time that a contract comes into existence between the parties and the arbitrators, which includes the terms of the arbitration agreement or contract.
Contractual relationship between the arbitral institution and the parties:
The French courts have affirmed the contractual relationship between the parties and arbitral institution. In Société Cubic Defense System Inc v. Chambre de Commerce Internationale, the Cour de Cassation, the highest court in the French judiciary, recognized a contract between the International Chamber of Commerce (ICC) and the parties to the arbitration, and held that under the contract, the ICC is contractually obligated to fulfill its essential function as an arbitral institution, i.e. to follow the rules applicable to the arbitration, and therefore, is potentially liable for any breach of the arbitration agreement.
In the above case, the Court noted that the ICC will not be granted immunity but instead will incur liability for the breach of its contractual obligations. These obligations are not to ensure perfect arbitral proceedings, instead the Cour de Cassation held that the ICC forms a contract with each of the parties thereby committing to provide the means for an efficient arbitration. According to the French apex court, the institution will be obligated to provide an effective and efficient arbitration, suitable screening for impartial arbitrators, and a more involved oversight of the arbitral process.
Fouchard, Gaillard, Goldman explain the rationale as to how the contract between the institution and the parties comes into effect. They state that a permanent offer to contract is put out by the arbitral institution, by drafting and publishing its rules and providing fixed conditions for acceptance. This offer is accepted by the parties when they agree to resolve potential disputes through a particular institution in their contract with each other. “The contract is not perfected until the institution receives notice through receipt of request for arbitration by the parties.”
Essentially, once arbitrators accept an appointment, they have duties and obligations to both parties and hence, if an arbitrator or the institution, which is administering the arbitration, breach an express or implied term of the arbitration agreement, they may be liabile under their contractual liabilities.
II. IMMUNITY OF THE ARBITRATORS AND ARBITRAL INSTITUTION:
The principle of arbitral immunity is well established in international arbitration. However, such immunity is qualified. Arbitrators have a duty to act fairly and impartially in arbitral proceedings, and it is recognized that the arbitrators owe ethical duties to the parties. Usually arbitrators are liable for affirmative conduct taken in bad faith, but immune for conduct if an arbitrator acts honestly, without fraud and not in bad faith.
Nonetheless, arbitrators owe certain ethical duties to the parties which are enshrined in most of the laws, rules, various guidelines, including but not limited to the UNCITRAL Model Law on International Commercial Arbitration (Model Law) and ICC Rules of Arbitration (ICC Rules). The aforementioned ethical duties include:
- A duty to act fairly and uphold the integrity of the arbitration process;
- A duty to act impartially and disclose any conflict of interest;
- A duty to act independently and avoid impropriety or even the appearance of impropriety in communicating with the parties; and
- A duty to conduct the proceedings diligently.
The Australian laws do not hold the arbitrators liable for negligence in respect of anything done or omitted to be done in the capacity of arbitrator. However, arbitrators are liable for fraud in respect of anything done or omitted to be done in that capacity.
Despite the aforementioned legislative position, there are multiple judgments of the Australian courts to the contrary. The Supreme Court of Victoria in the case of Sinclair v. Bayley held that upholding the liability of arbitrators would provide parties redress and ensure a proper system of loss distribution. The Supreme Court of Victoria went on to state that where the lapse is so gross that a lack of faith can be inferred, and where the lapse is not negligent, but results in an award being aborted, an arbitrator may become personally liable for costs.
In another case Najjar v. Haines, the New South Wales Court of Appeal in a landmark judgment, enumerated four reasons why arbitrators should not ordinarily be immune at common law:
- Such immunity would be exceptional when compared to the standards to which other professionals are held;
- Parties help select the arbitrator and hence, his position is distinguishable from a judge;
- The ordinary rule in society is that a person wronged should have redress; and
- Arbitrators have a financial and vested interest in conducting cases and thus, should not be immune.
In another case, the Supreme Court of Victoria extended the liability to an arbitral institution. The Supreme Court of Victoria held in the case of Road Rejuvenating and Repair Services that the institution was liable for the misconduct of its arbitrator. However, it is important to note that in that case, the court complained of several acts, including: (1) the improper admission of legally privileged documents, (2) repeated ex parte communications with one party, (3) refusal to abide by a court order, (4) writing directly to a judge and refusing to appear in court. In justifying the breadth of this liability, the Supreme Court of Victoria stated that, “the Board should have known and its officers should have been instructed that they should not communicate directly with the arbitrator or allow him to communicate directly with them.”
Pursuant to Arbitration Act 1996, s.29, the immunity granted to the arbitrators is quite broad. There are only two specific situations which justify the liability of arbitrators in England; if an arbitral act or omission is done in bad faith, or if a court determines withdrawal of the arbitrator from the arbitration to be unreasonable. This was the position in England even prior to the promulgation of the aforementioned legislative provision. The House of Lords held in the case of Arenson v. Casson Beckman Rutley & Co that the arbitrators are in a quasi-judicial position, which is sufficient to attract immunity from suit at common law, save for any bad faith.
With regards to immunity of arbitral institutions, Arbitration Act 1996, s.74 protects any institution that is chosen to nominate the arbitrators for a dispute, in discharge of its responsibilities. Arbitration Act 1996, s.74 (2) goes on to release the institution from liability for any acts or omissions of the arbitrator.
While, the section grants immunity to institutions for their own actions in nominating the arbitrators and for any actions of the arbitrators themselves, it is silent on the scope of that immunity outside those circumstances. Robert Merkin asserts that immunity would not be granted to an institution for failing to comply with contractual obligations, such as failure to appoint arbitrators or failure to supervise the proceedings.
The French approach to arbitral immunity represents greater liability than under English and American law due to the fact that according to French law, the arbitrator is not a judge and is, therefore, more easily susceptible to liability.
In France, there is no statute that expressly provides for the liability or immunity of arbitrators. However, parties can sue arbitrators for breach of their arbitration contract for failure to perform according to the terms of reference or negligence but liability can only arise from acts or omissions falling within their purview. There have been suggestions that immunity should be granted to the arbitrator due to his jurisdictional function in rendering a final and binding decision but the French law appears to afford arbitrators no such immunity, as the private contractual nature of the arbitrator’s appointment makes him fully liable for his wrongful acts.
Grounds for arbitral liability inter alia include unjustified resignation, delay of proceedings, loss of evidence, breach of confidentiality of the deliberations. A party must demonstrate a minimum of gross negligence to challenge any error in the making of an award. The Cour de Cassation, the highest court in France, defined gross negligence as an error so egregious that a reasonably conscientious judge would not have committed it.
However, an arbitrator will be immune from liability as to his decision. However, unlike England, in France an arbitrator would be contractually liable for any gross or intentional fault, causing the arbitrator’s failure to perform his contractual obligations.
With regards to the arbitral institutions, as stated earlier, French courts affirm the contractual relationship between the parties and the arbitral institution and therefore, find it unnecessary to treat institutions as judicial bodies. It is felt that “even if national courts allowed for the complete liability of arbitral institutions, a party would still have to move beyond the exclusion of liability clauses in institutional rules in order to successfully sue an institution. However, the validity of these rules are yet to tested. Scholars suggest that, along with a French court, that these [exclusion clauses in the] rules [of institutions] are likely to be found invalid, as against public policy.”
Fouchard, Gaillard, Goldman assert that it is unlikely that exclusion of liability clauses have power to exclude liability where national laws deny arbitral immunity. Gaillard goes on to state, in an another article, that this issue is untested, however noting that even though the French court questioned the validity of such provisions in Société Cubic case but did not address the issue in reaching the denouement.
Whereas, in the U.S. and England, arbitrators and arbitral institutions are not held liable for breaching the rule governing the arbitration, in France, arbitral institutions and arbitrators are mandated to adhere to the rules applicable to the arbitration and are potentially liable for their failure to adhere to the parties’ arbitration agreement.
UNITED STATES OF AMERICA
American courts give the broadest immunity to the arbitrators and the arbitral institutions from suits for actions taken within their duties. The scope of immunity even extends to situations where the arbitrator was grossly negligent, careless, or intentionally acted in a fraudulent manner. Instead of imposing liability for bad-faith behavior such as fraud and conspiracy, the American cases hold that the arbitrator’s inappropriate behavior merely prevents them from collecting their arbitral fees.
The stature of the arbitrators and arbitral institutions can be envisaged by the U.S. Supreme Court judgment in the case of Butz v. Economou and then reiterated in Corey v. New York Stock Exchange that judgments by arbitrators are functionally comparable to those of a judge and the arbitrators are granted the same immunity as courts because of the nature of their decision making power, despite the fact that they do not hold a federal office.
The immunity that the arbitrators enjoy in the U.S. is so broad that in the case of Hoosac Tunnel Dock and Elevator Co. v. O’Brien, one of the arbitrators was alleged to have conspired with the claimant’s attorney and to have “fraudulently induced and persuaded” his two fellow members of a court-appointed panel to “unite in an award against plaintiff”. However, the Massachusetts Supreme Court held the following:
“An arbitrator is a quasi-judicial officer, under our laws, exercising judicial functions. There is as much reason in his case for protecting and insuring his impartiality, independence, and freedom from undue influences, as in the case of a judge or juror. The same considerations of public policy apply, and we are of opinion that the same immunity extends to him.”
In another case, the Iowa Supreme Court held in the case Jones v. Brown that arbitrators “are in a certain sense a court”, and that arbitrators are clothed with the same immunity as the judiciary, even though the arbitrator was said to have acted “fraudulently and corruptly” when he conspired with another arbitrator and made a decision without even holding a regular meeting.
Nonetheless, the immunity is not completely absolute and there have been instances, albeit few, where the courts have held the arbitrators and the institutions liable. In a relatively recent case of Baar v. Tigerman, Court of Appeals of California held the arbitrator and the arbitral institution to be liable and in breach of the rules governing the arbitration. It was held that due to the fact that the Court declined to grant immunity to the arbitrator, it found no immunity for the American Arbitration Association (AAA), on the rationale that when immunity does not attach to the arbitrator, it cannot protect organizations that sponsor and administer arbitrations. The case has been discussed at length, below.
III. POSSIBLE BREACHES OF CONTRACT
The list of the following potential breaches is not exhaustive. This section of the article touches upon the most likely breaches that could arise in arbitral proceedings:
Delay in rendering the award
Most national laws or institutional rules stipulate a requirement to render a timely award or act without any unnecessary delay. Stipulated below are the laws of some countries, so as to give a global perception as well as ICC Rules, which are suggested by many to be the most frequently used set of rules.
- ICC Rules
Under article 30(1) of the ICC Rules, the arbitrators are mandated to render an award within six months from:
- the date of the last signature by the arbitral tribunal; or
- by the parties of the Terms of Reference; or
- (where any of the parties refuse to take part in the drawing up of the Terms of Reference or to sign the same) the date of the notification to the arbitral tribunal by the Secretariat of the approval of the Terms of Reference by the Court.
According to Article 30(2) of the ICC Rules, the ICC International Court of Arbitration (ICC Court) may extend the time limit pursuant to a “reasoned request” from the arbitral tribunal or on its own initiative if it decides it is necessary to do so. The phrase “reasoned request” suggests that the request from the arbitral tribunal needs to be on justifiable grounds which would rationalize the extension of time period beyond the stipulated six month. Otherwise, the ICC Rules would hold little value and would be mere guidelines, rather than rules which the ICC Court and the tribunal need to follow in the process of conducting the arbitration.
However, as already stipulated above, that is not the case. In the Société Cubic case, the apex court of France, which is also the home of the ICC Court, held that the ICC is contractually obligated to fulfill its essential function as an arbitral institution; to follow the ICC Rules applicable to the arbitration, and is potentially liable for any breach of the same. This clearly and unequivocally suggests that the ICC Court is mandated to follow and adhere to the ICC Rules, and cannot treat the same as mere guidelines.
Matthew Rasmussen opines that although the rules are flexible, they still provide strict enough principles to ensure an efficient and somewhat predictable process, as “ultimately the rules are used to guarantee an orderly resolution of the dispute.”
Most importantly, under certain arbitration laws, the time limit is a “drop dead” provision, which if not complied with, terminates the authority of the arbitral tribunal and makes it functus officio, and the award would be rendered null and void.
Article 1463 of the French New Code of Civil Procedure (French Code) stipulates a period of six months for an arbitral tribunal to render an award, in the absence of other provisions in the arbitration agreement. If the parties had not agreed to an extension of time or sought an extension from the court, the tribunal would have to request an extension of time to render the award. If the tribunal fails to do so, the award rendered out of time may be set aside.
It was held in Ceckolovenska Obcendi Banka (Cekobank) v. ICC, that where parties agreed to submit their decision to an arbitral institution for resolution, a contract between the institution and the parties was formed and “this contract included the duty to render a decision, in accordance with the ICC Rules.”
In the case of Louis Juliet, Benoît Juliet v. Paul Castagnet (arbitrator), Pierre Couilleaux (arbitrator) and Adolphe Biotteau (arbitrator), the three member tribunal published its award out of time in breach of the French Code. The Court of Appeal annulled the award, as the tribunal failed to request an extension of time. In addition, one of the parties to the arbitration brought a claim for breach of contract against the arbitrators. The Cour de Cassation found that the arbitrators were liable for damages for breach of contract. The tribunal had an obligation under the French Code to obtain an extension of time from the court for delivering the award out of time, where the parties had not agreed to such an extension.
UNITED STATES OF AMERICA
Even though the American courts have a very restrictive approach and are very reluctant to breach the expansive immunity granted to the arbitral institutions and arbitrators, it was held by the Court of Appeal in E.C. Ernst v. Manhattan Construction Court of Texas, that if an arbitrator defaults on his contractual duty by failing to render a timely decision, he loses his claim to immunity because he loses his resemblance to a judge. The Court of Appeal, in this instance, held the arbitrator liable for damages for the loss caused.
In the case of Baar v. Tigerman, Court of Appeals of California held that an arbitrator who breaches his contract to render a timely award was not entitled to judicial immunity and that the authority of the arbitrator vested in him by the AAA Commercial Arbitration Rules and statutory law to make an award was, as a result, terminated.
The Court held that the arbitral immunity covers only the arbitrator’s quasi-judicial actions, not his failure to render an award. The Court recognized the immunity to protect arbitrators from civil liability for actions taken in the arbitrator’s quasi-judicial capacity but held that while an arbitrator must be protected acting in a quasi-judicial capacity, the contractual obligations of an arbitrator to the parties involved must also be upheld, i.e. rendering an award in a timely manner.
By way of background in this case, the arbitrator failed to render an award within 30 days from the date of close of hearing, as required under AAA Rules, and in fact had yet to make an award seven months after the submissions. The claimant in this case alleged breach of contract, negligence, and breach of implied covenant of good faith.
The claimant also argued that the AAA – the arbitral institution – failed to administer the arbitration properly. In that regard, the Court held that the arbitration immunity did not extend to a private arbitration association, in this case the AAA, for its administrative action. Due to the fact that the Court declined to grant immunity to the arbitrator, it found no immunity for the AAA on the rationale that when immunity does not attach to the arbitrator, it cannot protect organizations that sponsor and administer arbitrations. The Court further went on to state that even if they had found the arbitrator immune, they would not have extended that immunity to AAA due to its failure to properly administer the arbitration proceedings and thereafter, failed to properly administer the arbitration.
Independence of the arbitrators:
Arbitrators are mandated to disclose conflicts of interest, as the same is essential to the independence and impartiality of the arbitrator.
Article 1456 of the French Code, stipulates that before accepting a mandate, an arbitrator shall disclose any circumstance that may affect his or her independence or impartiality. He or she also shall disclose promptly any such circumstance that may arise after accepting the mandate.
The Model Law requires a person, when approached in connection with his possible appointment as an arbitrator, to disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without any delay disclose any such circumstances to the parties unless they have already been informed of them by him. Under the Model Law, the appointment of an arbitrator may only be challenged if inter alia circumstances exist that give rise to justifiable doubts as to his impartiality or independence.
IBA Guidelines on Conflict Of Interest (IBA Guidelines) sets out a detailed, objective test for disclosure of any conflicts of interest: any facts or circumstances that from a reasonable third person’s or from the parties’ point of view give rise to justifiable doubts as to the arbitrator’s impartiality and independence. Under the IBA Guidelines doubts are justifiable if a reasonable and informed third party would reach the conclusion that there was likelihood that the arbitrator may be influenced by factors other than the merits of the case as presented by the parties in reaching his or her decision.
The guidelines go on to suggest that justifiable doubts exist “if there is an identity between a party and the arbitrator, if the arbitrator is a legal representative of a legal entity that is a party in the arbitration, or if the arbitrator has a significant financial or personal interest in the matter at stake.”
The IBA Guidelines, the Model Law and the national laws, in this instance the French Code, all seem to emphasize on the fact that there should not be any circumstances under which the impartiality and independence of the arbitrators can be questioned.
Moreover, as stated above, one of the duties that the arbitrators owe to the parties is “a duty to act independently and avoid impropriety or the appearance of impropriety in communicating with the parties.”
The general view is that the arbitrators and the arbitral institutions have a contractual relationship with the parties and there are certain instances under which they would be liable for breach of that contract. Various practitioners and academics have given explanations as to how this unconventional contract comes into existence.
Whilst generally, the immunity given to arbitrators and arbitral institutions is quite broad, there have been instances where the courts have pierced that immunity. Cases demonstrate that delay in rendering a timely award is an offence which is not even tolerated by the U.S. courts, where normally the immunity granted to the arbitrators is quite expansive. On the contrary, it appears that French courts are not as reluctant to interfere in the arbitral proceedings as the U.S. and the English courts. The approach in France is relatively different, as the American courts treat arbitrators as judge, the French treat them as professionals who have been engaged to perform a service, failing which they will be liable for breaching their contractual obligations.
Bibliography can be made available upon request.