Master’s Thesis
The impact of third-party funding on the arbitrator’s
independence and impartiality in light of the current legal
framework within international commercial arbitration
by
Rebecca Mulder 10144838
Commercial Private Law University of Amsterdam
11 August 2016
Acknowledgement
Foremost, I would like to thank my supervisor Onno Hennis for his guidance and support throughout the whole process of carrying out the research and writing this thesis. I would also like to express my gratitude to Eduardo Zuleta, who provided very insightful answers to my specific questions and who was very open to interesting discussions in which we had a few differing points of view. My sincere thanks go out to Rein Philips for offering more understanding of the standpoint of a third-party funder in relation to the central issue of this work. I thank Otto de Witt Wijnen as well, for his more general contribution to the research process and finally, my appreciation goes out to Doeke den Teuling for co-evaluating this work.
Abstract
The requirement of an arbitrator being fully independent and impartial is undoubtedly a fundamental principle of arbitration. Third-party funding (TPF) has over the past years become increasingly popular. This phenomenon could pose a risk as to the arbitrator’s independence and impartiality, especially if the third-party funder has some sort of relationship with the arbitrator. The main aim of this work is establishing whether the current legal framework within international commercial arbitration does sufficiently guarantee the arbitrator’s independence and impartiality in case of TPF. From an internal perspective, it is analysed how the independence and impartiality of arbitrators is currently regulated in light of two different scenarios. In the first scenario, the arbitrator is aware of the fact that a party to the arbitration is being financed by a third-party funder he has some sort of relationship with. In the second scenario, only the funded party and the third-party funder know about their agreement, the arbitrator that might be conflicted is (still)
unaware of the third-party funder’s involvement. A high level descriptive comparison of the current arbitration laws and rules in light of the two different scenarios demonstrates that the arbitrator’s independence and impartiality in case of TPF is merely indirectly regulated trough provisions on disclosure and challenge. The arbitration laws and rules do not explicitly refer to TPF. This system suffices with regard to the first scenario, but the second scenario is currently not being addressed. Besides the category of arbitration rules and laws that directly govern arbitrations and can be binding as such, best practices or guidelines are also taken into account. The 2014 IBA Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines) are at this moment the only to explicitly address TPF and its impact on the independence and impartiality of the arbitrator, also with regard to the second scenario. Therefore, an in-depth normative analysis of the IBA Guidelines follows. It becomes apparent that the two best practice provisions that focus on TPF are either vague and do not add any value to the existing more general approach, or disproportionate which poses questions as to compliance. Consequently, the IBA
Guidelines do not effectively tackle the issue in relation to scenario 2. Therefore, it must be concluded that the current legal framework within international commercial arbitration does not sufficiently guarantee the arbitrator’s independence and impartiality in case of TPF. Another revision of the IBA Guidelines and further action undertaken by arbitral institutions and states are proposed as future recommendations.
1 Introduction...4
1.1 Research...5
1.2 Methodology...6
2 What is TPF and what is its influence on the independence and impartiality of arbitrators?...8
2.1 TPF...8
2.2 Arbitrator’s independence and impartiality...9
2.3 A potential conflict of interest...10
2.4 Conclusion...12
3 How is the independence and impartiality of arbitrators currently regulated in case of TPF?...13
3.1 Arbitration rules and laws...14
3.1.1 Arbitration rules...14
3.1.2 National arbitration laws...17
3.2 IBA Guidelines...19
3.2.1 General Standards...21
3.2.2 Practical Application – the Red, Orange and Green List...24
3.3 Conclusion...26
4 Is the arbitrator’s independence and impartiality sufficiently safeguarded under the IBA Guidelines?...27
4.1 Party disclosure...27
4.2 Identity equation...31
4.3 Authority of the IBA Guidelines...33
4.4 Conclusion...35
5 Final conclusion...36
Primary sources...38
1 Introduction
Over the past years, the phenomenon third-party funding (hereinafter TPF) has become increasingly popular in both international commercial and investment arbitration.1 For the purpose of this work, TPF will be referred to within the context of international
commercial arbitration and is understood as the situation in which an investor, who is explicitly not a party to the arbitration agreement, agrees to pay the arbitration costs of one of the parties and in return, receives an agreed share of the proceeds of the case if the funded party wins. The funded party and the third-party funder (hereinafter the Funder) lay down the specific terms of their agreement in a so called funding agreement.
There are several benefits and potential risks to TPF, but this work mainly focuses on the involvement of a Funder adding a complicating dimension to the arbitration proceedings. The given fact that the Funder has made a financial investment and wants to realize a return on this investment by the party that is being funded winning the case, leads to the situation in which the Funder typically becomes quite involved in the arbitration
proceedings. There is a risk of a potential conflict of interest between the Funder and an arbitrator both involved in the same case. The objectivity of the arbitrator can be at stake, for example, if the arbitrator is a partner of a law firm with whom the Funder has a professional relationship.
The frequency of the occurrence of conflicts of interest between arbitrators and Funders could arguably influence the relevance of the discussion. One might claim that such conflicts may only arise in a very limited amount of cases, but several authors have argued thatconflicts of interest between arbitrators and Funders are arising with greater frequency due to the growth of the TPF industry, which leads to more TPF cases in general, and also due to the highly concentrated nature of the industry.2 Irrespective of the quantity of conflicts of interest between Funders and arbitrators, it must be stressed that the
requirement of the arbitrator (or the judge when it considers state court litigation) being completely independent and impartial, forms the very basis and justification of dispute
1 Marius Nicolae Iliescu, ‘A Trend Towards Mandatory Disclosure of Third Party Funding? Recent Developments and Positive Impact’ (Kluwer Arbitration Blog, 2 May 2016) < http://kluwerarbitrationblog.com/2016/05/02/a-trend-towards-mandatory-disclosure-of-third-party-funding-recent-developments-and-positive-impact/> accessed 6 June 2016; Susanna Khouri, Kate Hurford and Clive Bowman, ‘Third party funding in international commercial and treaty arbitration – a panacea or a plague? A discussion of the risks and benefits of third party funding’ (2011) 4 Transnational Dispute Management 1.
2 Nadia Darwazeh and Adrien Leleu, ‘Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’ (2016) 33(1) J Intl Arbitration Kluwer L Intl 32; Jonas von Goeler, Third-Party Funding in International Arbitration and
its Impact on Procedure (Kluwer Law International 2016) 253; Jennifer Trusz, ´Full disclosure? Conflicts of Interest Arising from
Third-Party Funding in International Commercial Arbitration’ (2013) 101 Georgetown L J 1651. ‘All signs, however, indicate that conflicts of interest are arising with greater frequency in the arbitral process due to the growth of the third-party funding industry.’.
resolution in general and is fundamental to guaranteeing fair proceedings. Therefore, it is highly important that the arbitrator’s independence and impartiality is sufficiently
safeguarded under all possible circumstances. 1.1 Research
The aim of this work is to examine whether the current legal framework within international commercial arbitration suffices with regard to safeguarding the arbitrator’s independence and impartiality in case a potential conflict of interest arises between the Funder and the arbitrator. The main issue has been captured by the following research question:
‘Does the current legal framework within international commercial arbitration sufficiently guarantee the arbitrator’s independence and impartiality in case of TPF?’
This central research question will be addressed through the following sub questions:
1. What is TPF and what is its influence on the independence and impartiality of arbitrators?
2. How is the independence and impartiality of arbitrators currently regulated in case of TPF?
3. Is the arbitrator’s independence and impartiality sufficiently safeguarded under the IBA Guidelines?
In order to answer the sub questions, and finally, the research question, first a general outset will provide an insight in TPF and the problematics regarding the independence and impartiality of arbitrators within that context. Secondly, a descriptive analysation of the current legal framework regarding the impartiality and independence of arbitrators will be provided. Here, on must bear in mind that the international commercial arbitration’s legal framework is not clear-cut, due to the multiple laws and sets of rules that may apply to an international arbitration case. The law that governs the recognition of the agreement to arbitrate, the law that governs the arbitration proceedings themselves3, the law or set of rules that the
tribunal applies to the actual dispute4 and finally the law that governs the
recognition and enforcement of the final award, all play their part throughout an arbitration. The applicable law to an arbitration consists of a combination of
mandatory and non-mandatory provisions, differing in every individual case due to what the parties have agreed upon. Because of the widespread available legal resources and the diffuse nature of regulation of arbitral proceedings, this work will first aim at providing a general understanding of how the arbitrator’s independence and impartiality is regulated, using a high level comparative approach. Then, a more in-depth normative analysis of the IBA Guidelines 2014 on Conflicts of Interest in International Arbitration (hereinafter the IBA Guidelines), which
specifically address TPF and its possible impact on the arbitrator’s objectivity, will follow. The status quo of the legal framework will be evaluated on the basis of two different scenarios. The first scenario comprises the situation in which the
arbitrator is already aware of the fact that one party to the arbitration is receiving financial support from a Funder he is somehow familiar with (hereinafter Scenario 1). In the second scenario, only the funded party and the Funder know about their agreement, the arbitrator that might be conflicted is not informed about the
Funder’s involvement (yet) (hereinafter Scenario 2). Finally, an overall conclusion with regard to the research question will be drawn.
1.2 Methodology
A thorough understanding of TPF and its implications for arbitrator independence and impartiality, which gave rise to the main research question and purpose of this work, result from research on prominent literature and discussions with
practitioners, such as Rein Philips,Managing Director of Redbreast Litigation Finance. This work comprises legal research, in which the law itself is the central research object. Here, ‘the law’ is interpreted as the global system of authoritative rules that governs arbitrator independence and impartiality. The overall goal of this legal research is largely to inform all stakeholders to the arbitration practice of the effectiveness of the current state of the law in regard to issues on arbitrator
independence and impartiality resulting from TPF. The entire legal research is carried out from an internal perspective. The initial goal is to describe the current legal system of international commercial arbitration, which consists of different
sources: arbitration laws, rules and guidelines. The rights and duties emerging from these sources are initially being assessed through a descriptive comparative law approach. This assessment is carried out in light of the two proposed scenarios. The conclusions following this comparison lead to a critical normative evaluation of the IBA Guidelines. In this regard, direct contact was sought with Eduardo Zuleta, Co-Chair of the 2014 IBA Arbitration Committee, and thus, directly and intensively involved in the development of these guidelines. The analysis of the IBA
Guidelines, based on both critical morality of the law and positive morality of the law, lead to the overall conclusion, which comprises a normative standpoint from the internal perspective, including some prescriptive future recommendations.
2 What is TPF and what is its influence on the independence and impartiality of arbitrators?
2.1 TPF
TPF is not a phenomenon typically connected to arbitration, as it originates from state court litigation. It must be stressed that there is not one single generally accepted definition of TPF, since it remains debatable what exactly should fall under the scope of this term. If one focuses on the aspect that an entity or person that does not participate in the proceedings as an actual party provides some sort of funding, a very large amount of all cases would include TPF, as for example insurance, legal aid and even loans would fit the description. Also, although it is typically the claimant who is being funded, TPF can also occur at the side of the defendant. However, in this work, the scope of TPF will be reduced in that sense that it is only referred to in the context of international commercial arbitration and that the Funder is an investor that provides financing for the claimant’s arbitration costs, in return for an agreed share or percentage of the positive results if the claimant wins the case.
TPF comes in different forms and shapes as it depends on the specific
arrangements the Funder and the client agreed upon.5 This also regards the intensity of the involvement of the Funder. The Funder and the funded party can agree upon ‘classic litigation funding’ which implies that the Funder merely provides the financial means, while the funded party remains fully in charge of the management and conduct of its case.6 The Funder’s position here is somewhat comparable to the position of a bank.7 However, it has become more common that the funded party does not only rely on the Funder for financing, but also entrusts the Funder with the full management of the case.8 The willingness of the Funder to practically take over the whole case can be easily explained by its desire to realize a profit from the investment by winning the case.
5 Francisco Blavi, ‘Towards a Uniform Regulation of Third Party Funding in International Arbitration’ (2015) 18 6 Intl Arbitration L Rev 143-144.
6 See for example <http://redbreast.com/services/> accessed 26 July 2016.
7 Telephone interview with Rein Philips, Managing Director of Redbreast Litigation Finance (27 July 2016). 8 ibid.
Funders generally prefer to keep their involvement confidential. Therefore, the funding agreement often contains a confidentiality or non-disclosure clause. The Funder’s reasons for keeping its relationship with the party it is funding under the radar can for example lie in its effect on the tribunal’s decision on costs and the opponent party’s possibility to strategically anticipate to the fact that the party is being funded (for instance in relation to the possibility of settlement of the case).9 2.2 Arbitrator’s independence and impartiality
According to Redfern and Hunter, ‘it is a fundamental principle in international arbitration that every arbitrator must be, and must remain, independent and impartial of the parties and the dispute’.10 Other authors refer to the arbitrator’s duty to remain independent and impartial as ‘a universally accepted principle of international arbitration’11, the ‘cornerstone of modern international arbitration’12 and what ‘legitimates the whole concept of arbitration altogether’13. The absolute importance of an independent and impartial arbitrator is undisputed.
The concepts independence and impartiality are usually referred to in the same breath. Although both are criteria for assessing whether an arbitrator is biased and lacks objectivity, the two have different meanings. The independence of an arbitrator concerns questions arising out of an existing relationship between the arbitrator and one of the parties to the proceedings. The connection between the arbitrator and one of the parties could for example consist of a financial
relationship, a friendship, the party and the arbitrator being (former) colleagues, etc. The existence of such relationship is a factual situation, which can be proven with factual evidence and is therefore objective.14 In contrast, the impartiality of the
9 Jennifer Trusz, ´Full disclosure? Conflicts of Interest Arising from Third-Party Funding in International Commercial (2013) 101 Georgetown L J 1672.
10 Nigel Blackaby and others, Redfern and Hunter on International Arbitration, Student Version (6th edn, Oxford University Press, New York 2015) 254.
11 Burcu Osmanoglu, ‘Third-Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest’ (2015) 32(3) J Intl Arbitration Kluwer L Intl 332.
12 Nadia Darwazeh and Adrien Leleu, ‘Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’ (2016) 33(1) J Intl Arbitration Kluwer L Intl 132.
13 Julian Bordacahar, ‘The Double Requirement that the Arbitrator Be Independent and Impartial’ (Global Arbitration News, 27 February 2015) <http://globalarbitrationnews.com/the-double-requirement-that-the-arbitrator-be-independent-and-impartial-20150227/> accessed 3 May 2016.
arbitrator is a subjective and more abstract concept.15 It relates to the state of mind of the arbitrator, which could lead to actual or apparent bias.
A key characteristic of arbitration is that parties can choose their own decision makers. For international arbitrations, tribunals consisting of three arbitrators are most common. In such cases, usually each party selects one arbitrator and either those two appoint the third, or, in case of an institutional arbitration, the third member of the tribunal is selected by the appointing authority within that
institution. Less frequently, international commercial disputes are decided upon by only a single arbitrator. This tends to be in less comprehensive and complicated cases. If merely one arbitrator will decide upon the case, in general, the parties jointly appoint that one person. This might lead to difficulties, since at that moment the parties are having a dispute, but this would minimize the appointed arbitrator lacking independence in relation to one of one of the parties. Problems regarding the arbitrator’s objectivity most likely arise between an arbitrator and the party that appointed him itself. If a Funder manages the case of the funded party, the Funder influences the decision who should be appointed as arbitrator in name of the funded party.16 It is generally questionable whether an arbitrator that is appointed by one of the parties can possibly be expected to be completely unbiased in relation to that party in the first place. This more general point of criticism as to party-appointed arbitrators will not be addressed in this work.
2.3 A potential conflict of interest
The notion of independence and impartiality of the arbitrator has traditionally been linked to the direct parties to the arbitration. Even though a Funder is not a party to the arbitration agreement, which forms the very basis of the proceedings and grants the tribunal jurisdiction, that Funder’s involvement can most certainly have an impact on the arbitrator’s objectivity once the arbitrator is aware of the situation. The arbitrator’s knowledge of the involvement of a certain Funder could potentially influence both his independence and impartiality and ‘the potential conflicts that it raises cannot be underestimated’.17
15 ibid.
16 Telephone interview with Rein Philips, Managing Director of Redbreast Litigation Finance (27 July 2016).
17 Jennifer Trusz, ´Full disclosure? Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration’ (2013) 101 Georgetown L J 1669.
The arbitrator’s duty of impartiality means that he has to ‘maintain open minded and decide the case based on the evidence presented to him, free from any
preconceptions’.18 An arbitrator may have certain thoughts and feelings (a certain ‘state of mind’) regarding the concept of TPF in general and this may influence his impartiality. An arbitrator might feel less compassionate towards a claimant that is being funded, because he initiated the arbitration proceedings, bearing less
financial risks than an unfunded claimant would. Besides a financial benefit, the funded party has an advantage resulting from the thorough assessment Funders generally carry out, before deciding whether agreeing upon funding would be advantageous. Also, the Funder addresses the dispute as a mere financial investment, which could raise ethical questions. These considerations may
influence the arbitrator’s impartiality, resulting in a negative attitude toward TPF. Vice versa, the arbitrator might assume that the claimant’s case has strong merits, because obviously, Funders are only willing to invest in cases with a high
probability of a positive outcome. Since the arbitrator’s impartiality concerns his state of mind, it is difficult to prove his lack thereof, unless he has made explicit statements regarding TPF in general or he used some of the above considerations in supporting his decision-making.
This work mainly focuses on the potential conflict of interest between the arbitrator and a specific Funder arising out of a certain relationship or connection between those two involved in the arbitration. This concerns the independence of the
arbitrator specifically. The following examples can illustrate this potential risk. The Funder and the arbitrator are good friends and regularly get together in private. The arbitrator is a partner at a law firm and directly renders professional services to the Funder. The Funder invests in another case in which the concerning arbitrator acts a lawyer. The Funder was repeatedly involved in the appointment of the arbitrator over the course of several years.
It must be stressed that not every relationship between an arbitrator and a Funder necessarily leads to a manifest lack of independence on the side of the arbitrator. Whether the arbitrator is actually conflicted very much depends on the specific facts and circumstances of a given case. Redfern and Hunter have summed up four
criteria to be considered when deciding upon the arbitrator’s independence.19 How closely the arbitrator is connected to the Funder, how intense and frequent the interactions between the two are, to what extent the arbitrator is dependent on the Funder for benefits or advantages arising out of that relationship and how
significant such benefits or advantages are, are factor that can affect the likelihood of the relationship actually influencing the arbitrator’s independence of judgment.20 Obviously, in a given case, a respondent did not initiate the arbitration and one could imagine that he is not happy about this claim against him. He might be unwilling to cooperate, or even actively want to frustrate the proceedings. He could do this by denying the arbitrator of the claimant’s choice and challenging that arbitrator merely to disrupt the proceedings and cause delay. As thoroughly argued by Redfern and Hunter, challenges without merit should remain without
consequences and unmeritorious disruptive tactics should be discouraged.21 2.4 Conclusion
The first sub question ‘What is TPF and what is its influence on the independence and impartiality of arbitrators?’ can be answered as follows. Although the exact definition and scope of TPF are debatable, here it is defined as the situation in which an investor agrees to pay the claimant’s arbitration costs and in return, receives an agreed share of the positive results of the case, if any. TPF could have negative consequences on the independence of an arbitrator when the Funder has some sort of relationship with that specific arbitrator. The independence and impartiality of the arbitrator are both absolutely fundamental to arbitration and must therefore be sufficiently safeguarded, also in case of a potential conflict of interest which arises from TPF.
19 ibid 269-270. 20 ibid. 21 ibid 279-280.
3 How is the independence and impartiality of arbitrators currently regulated in case of TPF?
As discussed, international commercial arbitration does not entail one singular and uniform legal framework. The law and rules applicable to a given arbitration depend on the seat of the arbitration and the choice for applicable law or rules agreed upon by the parties. An exhaustive discussion of all possible combinations of applicable arbitration laws and rules goes beyond the scope and purpose of this work. It will be described how the arbitrator’s impartiality and independence in case of TPF is currently regulated by comparing rules and laws in the field of international commercial arbitration. This comparative review will be carried out in light of Scenario 1 and Scenario 2.
Initially, in Scenario 2 an actual conflict of interest is impossible because the arbitrator is not aware of the involvement of the Funder he is familiar with. After all, the arbitrator’s decision-making cannot be influenced by circumstances he does not know about. Still, addressing Scenario 2 is highly relevant, because the state of the arbitrator’s knowledge at a moment in the past is very hard to prove and there is no way to assure that the arbitrator actually is and remains unaware of the fact that one of the parties is being funded.22 There are two major risks if the involvement of the Funder that has some sort of relationship with the arbitrator comes to light at a later stage in or even after the proceedings. First, if the potential conflict is being revealed while the arbitration proceedings are already underway, the non-funded party can start a challenge procedure, which could ultimately lead to disqualification of that arbitrator. Challenges and replacement of the arbitrator obviously results in disruption of the proceedings, delay and extra costs. Secondly and arguably even more important, if the involvement of the Funder and the potential conflict of interest becomes apparent after the final award has been rendered, enforcement may be frustrated based on the New York Convention23. The award could also be challenged or set-aside at the court of the seat of the arbitration, based on the lex arbitri.24 In both cases, the award becomes useless and the arbitration proceedings have served no purpose at all.
22 Burcu Osmanoglu,‘Third-Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest’ (2015) 32(3) J Intl Arbitration Kluwer L Intl 327.
23 art V(d) United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958); For a list of the 156 contracting states see <www.newyorkconvention.org/countries> accessed 1 May 2016.
In most forms of regulation, the arbitrator’s independence and impartiality in case of TPF is indirectly regulated through the more general provisions of disclosure and challenge. Generally, both prior to and after appointment, the arbitrator must, depending on the given facts and circumstances, disclose if his objectivity becomes questionable. Besides that, either party has the possibility of starting a challenge procedure. In such procedure, a neutral third decides whether an arbitrator should be removed and replaced. In an
institutional arbitration, the institution handles the challenge according to its own rules. In an ad hoc arbitration, the challenge procedure is subject to the agreement of the parties and if they have not agreed upon this subject, they must consult state courts, according to the lex arbitri.
Besides the category of arbitration rules and laws that directly govern arbitrations and can be binding as such, best practices or guidelines can also play a significant role. Contrary to the vast majority of the arbitration rules and laws, the IBA Guidelines do explicitly
address TPF and its impact on the independence and impartiality of the arbitrator. Therefore, these guidelines will be analysed more comprehensively.
3.1 Arbitration rules and laws 3.1.1 Arbitration rules
The UNCITRAL Model Law on International Commercial Arbitration (1985) with amendments as adopted in 2006 (hereinafter the Model Law) has been developed to increase harmonization and modernization of national arbitration laws and it claims to reflect ‘worldwide consensus on key aspects of the international
arbitration practice’.25 Therefore, the approach of the Model Law can be seen as a representation of a widely accepted approach as to regulation of the arbitrator’s independence and impartiality. It provides that the appointing authority must have due regard to considerations likely to secure the appointment of an independent and impartial arbitrator.26 Article 12 addresses disclosure and challenge and provides that an arbitrator (also prior to appointment) must disclose without delay any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. He may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence. The only difference between the standard for disclosure and the standard for challenge is the word
25 <www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration.html> accessed 29 April 2016. 26 art 11 (5) Model Law.
‘likely’, which is only connected to disclosure. This implies that the disclosure-test has a lower threshold than the challenge-test and that can be explained by the prevailing idea that not every disclosure leads to a (successful) challenge. The UNCITRAL Arbitration Rules (as revised in 2010) (hereinafter the UNCITRAL Rules) consist of a set of rules parties can agree to apply to their dispute in an ad hoc arbitration. Under these rules too, the appointing authority must take into account considerations likely to secure the appointment of an independent and impartial arbitrator.27 Articles 11 to 13 fall under subheading ‘disclosures by and challenge of arbitrators’ and the same standards for disclosure and challenge apply as under the Model Law. Additionally, the annex to the UNCITRAL Rules provides model statements of independence, to be signed by arbitrators.
Under the arbitration rules developed by the International Chamber of Commerce (hereinafter the ICC Rules), arbitration is administered by the ICC International Court of Arbitration, assisted by the ICC Court's Secretariat.28 This labels ICC arbitrations as institutional. Article 11 of the ICC Rules requires every arbitrator to be and remain impartial and independent of the parties involved in the arbitration.29 The (prospective) arbitrator must disclose any facts or circumstances which might be of such nature as to call into question the arbitrator's independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator's impartiality.30 This means that disclosure regarding
independence is assessed using a subjective test, whileimpartiality is subject to an objective standard. Also, prior to appointment, the arbitrator must sign a statement of impartiality and independence. The Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules (hereinafter the Guidance Note) confirms that any doubt must be resolved in favour of disclosure.31 As per February 2016, the Guidance Note stresses that arbitrators should consider a relationship between an arbitrator and any entity having a direct economic interest in the dispute.32 This phrase matches the definition of TPF as set out the IBA Guidelines.
27 art 6 (7) UNCITRAL Rules.
28 <www.iccwbo.org/about-icc/organization/dispute-resolution-services/> accessed 1 May 2016. 29 art 11 (1) ICC Rules.
30 art 11 (1) and (2) ICC Rules.
The ICC is the first arbitration institution to mention TPF in relation to disclosure by the arbitrator. The test for challenge is an ‘alleged lack of impartiality or independence, or otherwise’.33 A failure to disclose by the arbitrator is not in itself a ground for disqualification, but will be considered by the Court in assessing whether a challenge is well founded.34
According to the arbitration rules of the London Chamber of International
Arbitration (hereinafter the LCIA Rules), arbitrators must be and remain impartial and independent of the parties at all times35 and tribunals have the duty to act fairly and impartially as between all parties.36 Each candidate signs a written declaration, stating ‘whether there are any circumstances currently known to the candidate which are likely to give rise in the mind of any party to any justifiable doubts as to his or her impartiality or independence and, if so, specifying in full such
circumstances in the declaration’.37 Each arbitrator has a continuing duty to
disclose circumstances which are likely to give rise in the mind of any party to any justifiable doubts as to his or her impartiality or independence.38 Circumstances that give rise to justifiable doubts as to the arbitrator’s impartiality of independence or him not acting fairly or impartially as between the parties, form grounds for revocation of the arbitrator’s appointment by the LCIA Court or challenge of the arbitrator by any party.39 During the arbitration it is prohibited for the parties to contact an arbitrator regarding the arbitration or the dispute, unless such contact has properly been disclosed.40
The International Dispute Resolution Procedures of the American Arbitration Association Rules 2014 (AAA Rules), state that arbitrators must be impartial and independent.41 Prior to appointment, an arbitrator must affirm that he is
independent and impartial in a notice of appointment.42 He must disclose any
33 art 14 (1) ICC Rules.
34 Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration para 19. This approach is exceptional compared to other arbitration rules, as it is generally accepted that a failure to disclose does not affect the assessment of the grounds for challenge.
35 art 5.3 LCIA Rules. 36 art 14.4 (i) LCIA Rules. 37 art 5.4 LCIA Rules. 38 art 5.5 LCIA Rules. 39 art 10 LCIA Rules. 40 art 13.4 LCIA Rules. 41 art 13 (1) AAA Rules. 42 art 13 (2) AAA Rules.
circumstances that may give rise to justifiable doubts as to his impartiality and independence.43 Disclosure by either the arbitrator or a party does not
automatically lead the assumption that such information gives rise to justifiable doubts as to the arbitrator’s impartiality or independence.44 It is generally
prohibited for parties to communicate with an arbitrator relating to the case, except to discuss a candidate arbitrator’s independence and impartiality.45 Existing
circumstances that give rise to justifiable doubts as to the arbitrator’s impartiality or independence form a ground for challenge of the arbitrator.46
Comparison of the several arbitration rules leads to the following conclusions. The arbitration rules all adopt a quite similar approach. Each set of arbitration rules contains a duty of disclosure by the arbitrator. Whether the arbitrator should actually disclose is determined according to the specific test the applicable rules require. Despite some obvious differences47, in general one could state that in Scenario 1, the independence and impartiality of the arbitrator is sufficiently safeguarded by the arbitration rules, due to the arbitrator’s duty of disclosure which is present in all kinds of arbitration rules. Following disclosure of the relationship between the arbitrator and the Funder, the non-funded party could consider starting a challenge procedure. However, the arbitration rules do not sufficiently address Scenario 2, for two reasons. First, the arbitrator cannot possibly disclose facts and circumstances he is unaware of, which means that the arbitrator’s duty to disclose is not effective in this situation. Secondly, the current arbitration rules do not provide for some sort of obligation or responsibility at the side of the funded party to make disclosures in order to protect the arbitrator’s objectivity. The AAA Rules do explicitly acknowledge the possibility of disclosure by a party, but this does not constitute an obligation or even an encouragement to disclose the funding
relationship by the funded party. 3.1.2 National arbitration laws
When parties initiate an ad hoc arbitration and have not agreed upon the procedural aspects or application of some set of procedural rules (such as the UNCITRAL
43 ibid.
44 art 13 (4) AAA Rules. 45 art 13 (6) AAA Rules. 46 art 14 (1) AAA Rules.
Rules), the national arbitration law of the seat of the arbitration, the lex arbitri, applies.
Article 12 of the Model Law has inspired many countries to adopt a similar provision in their national arbitration laws. Australia, Canada, Mexico, the Netherlands, New Zealand and Singapore have even adopted the wording of this article in full.48 The IBA Guidelines, which will be discussed hereafter, are also based on the text of article 12 Model Law.49 However, a significant amount of remaining states have adopted different approaches towards the notion and
regulation of the independence and impartiality of the arbitrator. For example, the UK Arbitration Act only refers to impartiality and fairness, while remaining quiet on independence.50 Additionally, England applies the test whether ‘a real danger of bias’ exists.51 On the other hand, Switzerland does not at all refer to impartiality.52 It goes beyond the scope of this work to thoroughly outline all different national approaches as to protection of the objectivity of the arbitrator. However, a similar conclusion as to the arbitration rules can be drawn. Currently, under the national arbitration laws, the independence and impartiality of arbitrators when a Funder is involved in the arbitration proceedings is regulated through disclosure by the arbitrator and challenge by a party. Disclosure by the funded party is generally not encouraged by these general and usually more abstract national provisions.
Therefore, Scenario 1 is sufficiently addressed, but Scenario 2 remains
problematic. Accordingly, it can be concluded that currently, the laws and rules that are directly binding in arbitrations cases inadequately safeguard the arbitrator’s independence. As a result, the focus shifts to soft law mechanisms, such as best practices as laid down in guidelines. The China International Economic and Trade Arbitration Commission and the Hong Kong Arbitration Center have jointly developed the draft Guidelines for Third Party Funding in Arbitration (hereinafter the CIETAC HKAC TPF Guidelines).53 Paragraph 2.9 of the CIETAC HKAC TPF Guidelines requires that a funded party discloses circumstances regarding the
48 Otto de Witt Wijnen, Nathalie Voser and Neomi Rao, ‘Background information on the IBA Guidelines on Conflicts of Interest in International Arbitration’ (2004) 5(3) Business L Intl 441-448.
49 Explanation to General Standard 2 (b) IBA Guidelines. 50 arts 24 (1) (a) and 33 (1) (a) UK Arbitration Act 1996.
51 Otto de Witt Wijnen, Nathalie Voser and Neomi Rao, ‘Background information on the IBA Guidelines on Conflicts of Interest in International Arbitration’ (2004) 5(3) Business L Intl 441.
52 ibid.
funding relationship that might give rise to any possible issues of conflict of interest under applicable laws and rules to the tribunal and the other party. This means that these draft guidelines do address Scenario 2. However, the phase of public consultation has only just ended.54 Also, these guidelines seem to mainly focus on the Asian arbitration practice.55 At this moment, the final version of these guidelines is awaited and it remains unclear what the impact will be on the
international commercial arbitration practice as a whole. However, the
International Bar Association (hereinafter IBA) was the first, and is at this moment still the only, to specifically address TPF and the lack of regulation with regard to Scenario 2 through an established set of guidelines. The IBA Guidelines, which can currently be considered leading on the topic of conflicts of interests in arbitration, will therefore be discussed in more detail.
3.2 IBA Guidelines
The IBA introduced the first version of the Guidelines on Conflicts of Interest in International Commercial Arbitration in 2004 (hereinafter the 2004 IBA
Guidelines). These guidelines form a set of principles or best practices consisting of a first part of General Standards including explanations, and a second part, the Practical Application of the General Standards, including lists of factual
circumstances, divided in different categories. The IBA developed these guidelines with the aim at assisting arbitrators, parties, arbitral institutions and courts in their decision-making in relation to conflict issues and the guidelines were designed to be applied by different legal cultures.56 They are not legal provisions, but consist of so called soft law. This means that they are not binding as such and do not override applicable national law or arbitration rules adopted by the parties, as explicitly stated in the introduction to the guidelines.57 However, the working group that drafted the 2004 IBA Guidelines concluded from their research, that many
jurisdictions do not provide specific (mandatory) rules on conflicts, and if they do,
54 CIETAC HKAC TPF Guidelines 3. ‘The public consultation will finish on 19 July 2016.’
55 Lacey Yong, ‘CIETAC advises on third-party funding in Hong Kong’ (Global Arbitration Rev, 20 May 2016)
<http://globalarbitrationreview.com/news/article/35344/cietac-advises-third-party-funding-hong-kong/> accessed 30 May 2016. 56 IBA Guidelines on Conflicts of Interest in International Arbitration 2014 i; Otto de Witt Wijnen, Nathalie Voser and Neomi Rao,
‘Background information on the IBA Guidelines on Conflicts of Interest in International Arbitration’ (2004) 5(3) Business L Intl 434.
the guidelines are not inconsistent with such rules.58 It is especially the practical and concrete nature of the guidelines which makes them valuable, as they can be used as a toolkit when applying the laws and rules, which are often of a more general and abstract nature. The 2004 IBA Guidelines have been considered rather successful, because they have frequently been used by arbitration practitioners and they have been relied upon by arbitral institutions and state courts.59 71 per cent of the respondents to the 2015 Queen Mary International Arbitration survey have seen the guidelines being used in practice.60 Due to several developments and issues that have arisen since the issuance of the 2004 IBA Guidelines, the Conflicts of Interest Subcommittee was established to review and revise the original version.61 In that context, TPF was explicitly mentioned as a new issue that had received attention in the international arbitration practice.62 In 2014, the IBA issued its revised
Guidelines on Conflicts of Interest in International Arbitration. The Co-Chairs of the 2014 IBA Arbitration Committee stressed that TPF is a ‘contentious issue’ and that the latest IBA Guidelines accept the reality of TPF and its increasing
popularity.63 The committee consulted the suggestions of the ICCA-Queen Mary Task Force on Third-Party Funding in deciding ‘what to incorporate, how to incorporate or whether to actually incorporate any standards addressing TPF’.64 Finally, it was decided to introduce direct references to TPF in the IBA Guidelines. This means that as from 2014, these guidelines, unlike the arbitration rules or laws65, explicitly refer to TPF and address the questions TPF could raise regarding arbitral independence and impartiality.
1.1.1 General Standards
58 Otto de Witt Wijnen, Nathalie Voser and Neomi Rao, ‘Background information on the IBA Guidelines on Conflicts of Interest in International Arbitration’(2004) 5(3) Business L Intl 435.
59 Nigel Blackaby and others, Redfern and Hunter on International Arbitration, Student Version (6th edn, Oxford University Press, New York 2015) 257; Nathalie Voser and Angelina Petti, ‘The Revised IBA Guidelines on Conflicts of Interest in International Arbitration’ (2015) 33(1) ASA Bulletin Association Suisse de l'Arbitrage Kluwer L Intl 8; Eduardo Zuleta and Paul Friedland, ‘The 2014 Revisions of the IBA Guidelines on Conflicts of Interest in International Arbitration’ (2015) 9(1) Dis Res Intl 56.
60 Queen Mary School of International Arbitration and White & Case, ‘2015 International Arbitration Survey: Improvements and Innovations in International Arbitration’ (School of International Arbitration, Queen Mary University of London) 35
<www.arbitration.qmul.ac.uk/research/2015/index.html> accessed 30 December 2015. 61 IBA Guidelines ii.
62 ibid.
63 Eduardo Zuleta and Paul Friedland, ‘The 2014 Revisions of the IBA Guidelines on Conflicts of Interest in International Arbitration’ (2015) 9(1) Dis Res Intl 59.
64 Telephone interview with Eduardo Zuleta, Co-Chair 2014 IBA Arbitration Committee (2 August 2016). 65 Except for the Guidance Note to the ICC Rules as discussed previously.
The IBA Guidelines consist of seven General Standards. According to General Standard 2 – Conflicts of Interest, an arbitrator must decline an appointment or, if the proceedings are already underway, refuse continuation of his work as arbitrator if he has any doubts to his ability to be impartial or independent. The same applies if certain existing or arising facts or circumstances which would give rise to justifiable doubts as to the arbitrator’s impartiality or independence from the point of view of a reasonable third person having knowledge of the relevant facts and circumstances. Section c of this General Standard clarifies that doubts are
justifiable if such reasonable third party would conclude that there is a likelihood that the arbitrator’s decision-making may be influenced by factors other than the merits of the case. This General Standard on conflicts of interest is based on the widely adopted article 12 of Model Law, which has been discussed previously.66 Under that provision the question is whether the involvement of the Funder would be likely to give rise to justifiable doubts. The IBA leaves the word likely out, adds guidance on when doubts should be considered justifiable, applying a ‘reasonable third person test’, and refers to the Non-Waivable Red List for circumstances that necessarily raise justifiable doubts.67
In the event that an arbitrator is aware of the involvement of a Funder (Scenario 1) and that fact may give rise to doubts as to his independence and impartiality in the eyes of the parties (as opposed to in the eyes of a reasonable third party, which is applicable to the conflict of interest test for challenges), the arbitrator must disclose this to the parties, the arbitration institution or other appointing authority (if
applicable) and the co-arbitrators. General Standard 3 of the IBA Guidelines – Disclosure by the Arbitrator provides for this. The IBA followed the general trend that any doubt as to whether an arbitrator should disclose certain facts or
circumstances should be resolved in favour of disclosure.68 With regard to
disclosure the subjective test applies, while when determining whether there is an actual conflict of interest, the objective test is prescribed. This can easily be explained by the base thought that not every disclosure indicates an actual conflict of interest that can lead to challenge and disqualification of the arbitrator. The threshold of disclosure is relatively low, as it does not necessarily have further
66 Explanation to General Standard 2 (b) IBA Guidelines. 67 General Standard 2 (c) and (d) IBA Guidelines.
consequences. However, the IBA has stressed that there are situations that could never lead to disqualification of the arbitrator under the objective test as set out in General Standard 2, and thus, must not be disclosed.69 Examples of these situations are summed up in the Green List. This limitation as to disclosure relates to the wish to prevent tactical challenges by the non-funded party, with the sole aim of
disrupting and delaying the proceedings. In short, the IBA’s approach towards disclosure by the arbitrator is quite similar to that of the discussed arbitration rules and laws, in that sense that the arbitrator must assess the nature of his relationship with the Funder and he then determines whether disclosure is necessary.
The particular importance of the IBA Guidelines in relation to this work’s central issue follows from the IBA’s direct references to TPF in General Standard 6 (b) and General Standard 7 (a). General Standard 6 (b) states:
If one of the parties is a legal entity, any legal or physical person having a controlling influence on the legal entity, or a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration, may be considered to bear the identity of such party.
According to this provision, the Funder can under certain circumstances be considered to effectively be the equivalent of the party it is funding. However, the IBA Guidelines remain silent on how the situation should be assessed and under what circumstances the Funder should actually be assumed to effectively be the funded party. Also, the IBA Guidelines do not indicate what the actual
consequences of application of General Standard 6 (b) are. It is not explained whether the Funder bears the identity of the funded party merely for the purpose of application of General Standard 6 or perhaps for the complete IBA Guidelines, possibly even including its practical application lists. The latter would imply quite a drastic approach as to addressing TPF.
Whereas General Standard 3 introduces an ongoing duty to disclose by the arbitrator, General Standard 7 concerns the duty of both the parties and the arbitrator. It is the second provision that explicitly addresses TPF and it stresses
that not only arbitrators, but also (funded) parties have certain disclosure obligations.70 General Standard 7 (a) reads as follows:
A party shall inform an arbitrator, the Arbitral Tribunal, the other parties and the arbitration institution or other appointing authority (if any) of any relationship, direct or indirect, […] between the arbitrator and any person or entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration. The party shall do so on its own initiative at the earliest opportunity.
This provision clearly acknowledges the problematics of the arbitrator not always being aware of the situation that one of the parties receives funding from a Funder that arbitrator is in some way familiar with or connected to (Scenario 2). The explanation clarifies that ‘any person or entity with a direct economic interest in the award to be rendered by the arbitration’ includes an entity providing funding for the arbitration.71 According to this General Standard, the funded party has the duty to inform, simply put, everyone involved in the proceedings of any
relationship, direct or indirect, between the arbitrator and the Funder. This is a relatively strict and extensive duty to disclose TPF at the side of the funded party. There is no room for assessment of the intensity of the relationship between the Funder and the arbitrator and possibly the existence of justifiable doubts or alike, prior to actual disclosure by the funded party. All sorts of relationships must be disclosed, irrespective of their nature. Also, the funded party has the obligation to investigate any information that is reasonably available to it and must make a reasonable effort to ascertain and disclose such information.72 This means that the funded party cannot simply claim that is was not aware of the relationship between the Funder and the arbitrator, if this information could have reasonably been obtained. The main aim of the duty of disclosure by the funded party is preclusion of a challenge by the non-funded party based on the relationship between the funded party and the arbitrator that became apparent after the appointment of that arbitrator.73
3.2.1 Practical Application – the Red, Orange and Green List
70 Eduardo Zuleta and Paul Friedland, ‘The 2014 Revisions of the IBA Guidelines on Conflicts of Interest in International Arbitration’ (2015) 9(1) Dis Res Intl 58.
71 Explanation to General Standard 7 (a) IBA Guidelines.
The General Standards in Part I provide best practices with regard to disclosure and challenge. In order to offer more specific guidance to arbitrators, parties,
institutions and courts as to which information should be disclosed and what circumstances do or do not constitute justifiable doubt as to the arbitrator’s impartiality and independence, the IBA introduced a system of application lists in Part II: Practical Application of the General Standards of the IBA Guidelines.74 The system consists of three lists, categorised by the colours of a traffic light: red, orange and green, which have become well-known in the global arbitration practice.75 These lists indicate concrete factual circumstances and specific situations that could give rise to justifiable doubts as to the arbitrator’s
independence and impartiality. The IBA stressed that the lists are non-exhaustive as they cannot cover every possible situation and the facts of a given case always need to be taken into account when assessing whether justifiable doubts exist according to the lists.76
First, there are two separated red lists: the Waivable Red List and the
Non-Waivable Red List. These lists relate to assessment of whether there is an objective conflict of interest. The non-waivable version concerns situations that are so ‘severe’ that acceptance of the situation by the parties through a waiver cannot cure the conflict of interest.77 The examples on the Waivable Red List are ‘serious, but less severe’, and therefore the parties can decide that the arbitrator can remain in place, provided that both parties are fully aware of the conflict of interest
situation.78 Secondly, the Orange List sums up situations that would require disclosure by the arbitrator under General Standard 3.79 An arbitrator needs to assess on a case-by-case basis whether a given situation, even though not mentioned on the orange list, is nevertheless such as to give rise to justifiable doubts as to his or her impartiality or independence.80 Finally, the Green List consists of examples in which from an objective point of view there is no apparent and no actual conflict of interest, and therefore, the arbitrator has no duty to
74 Part II: Practical Application of the General Standards of the IBA Guidelines para 1.
75 Eduardo Zuleta and Paul Friedland, ‘The 2014 Revisions of the IBA Guidelines on Conflicts of Interest in International Arbitration’ (2015) 9(1) Dis Res Intl 57.
76 Part II: Practical Application of the General Standards of the IBA Guidelines para 1. 77 ibid para 2.
78 Part II: Practical Application of the General Standards of the IBA Guidelines para 2. 79 ibid para 3.
disclose such situations.81 Here, the IBA expressed that there should be a certain limit to disclosure.82
The main issue of this work, the situation in which a Funder is somehow related to an arbitrator, directly and undoubtedly falls under three of the examples on the lists.83 These three list items contain the phrase ‘an entity that has a direct economic interest in the award to be rendered in the arbitration’, which could clearly include a Funder.84 First, if the arbitrator is a manager, director or member of the
supervisory board, or has a controlling influence on the Funder, this constitutes a non-waivable conflict of interest and the arbitrator should step down.85 According to the system of the IBA Guidelines, this situation constitutes a very severe conflict of interest that cannot be resolved and therefore, the arbitrator is unable to act, despite acceptance of the parties. The other two examples that concern TPF are placed on the Orange List. A close personal friendship, or to the contrary, enmity between the arbitrator and a manager, director or member of the supervisory board of the Funder, are examples of situations that must be disclosed by the arbitrator.86 The Green List does not at all refer to ‘an entity that has a direct economic interest in the award to be rendered in the arbitration’, and therefore no situation is listed there that refers to TPF directly. The three situations that do refer to the Funder, constituting a controlling influence by the arbitrator over the Funder and a personal friendship or enmity between the arbitrator and the Funder, seem particularly valuable in Scenario 1. The Orange List reflects situations in which the arbitrator has a disclosure obligation.87 The arbitrator cannot know he must disclose his personal friendship with the Funder if he is unaware of the Funder being involved in that particular arbitration. In case of the example on the Non-Waivable Red List, the arbitrator must not act as such, but here again, the arbitrator does not know he should step down if he is unaware of the involvement of the Funder. Also, it is quite remarkable that the introductory paragraphs to the Practical Application part only refer to General Standards 2 up to 4. General Standard 7 (a), which regulates
81 Part II: Practical Application of the General Standards of the IBA Guidelines para 7. 82 ibid.
83 1.2 of the Non-Waivable Red List and 3.4.3 and 3.4.4 Orange List IBA Guidelines.
84 Explanation to General Standard 6 (b) IBA Guidelines. ‘Third-party funders and insurers in relation to the dispute may have a direct economic interest in the award.’
85 1.2 Non-Waivable Red List IBA Guidelines. 86 3.4.3 and 3.4.4 Orange List IBA Guidelines.
the funded party’s duty to disclose the relationship between the Funder and the arbitrator, is not at all mentioned in Part II, and the enumerated examples seem to fully focus on the position of the arbitrator and not at all on disclosure by the funded party as required in Scenario 2.
3.3 Conclusion
After analysation of the current legal framework and obtaining a deeper
understanding of the specificities of disclosure and challenge in the context of TPF, the question ‘How is the independence and impartiality of arbitrators currently regulated in case of TPF?’, can be answered as follows. Overall, a combined system of disclosure and challenge is in place to ensure the arbitrator’s
independence and impartiality. The arbitration rules and laws do not specifically refer to TPF. In light of the two different scenarios, it can be concluded that with regard to Scenario 1, the existing arbitration rules and laws sufficiently guarantee that the arbitrator discloses his connection with the Funder, if necessary. Then, then the non-funded party has the opportunity to start a challenge procedure. In that way, it is guaranteed that an independent and impartial arbitrator decides upon the dispute. However, Scenario 2 is in most instances not addressed at all. A this moment, only the IBA Guidelines are in place that take account of TPF specifically, including Scenario 2. The question remains whether the IBA Guidelines sufficiently and effectively safeguard the arbitrator’s independence when a Funder finances one of the parties.
4 Is the arbitrator’s independence and impartiality sufficiently safeguarded under the IBA Guidelines?
General Standards 6 (b) and 7 (a) and the three listed situations in Part II of the IBA Guidelines explicitly refer to TPF. However, this does not automatically mean that the independence of an arbitrator who is related to an involved Funder is effectively protected. 71 per cent of the respondents to the 2015 Queen Mary International Arbitration survey is convinced that TPF is an area that requires further regulation.88 This implies that quite a substantial part of the current arbitration practitioners does not believe that the current IBA Guidelines adequately regulate TPF. I claim that the IBA’s approach as to TPF is questionable in three different respects.
4.1 Party disclosure
General Standard 7 (a) provides for a duty of disclosure at the side of the funded party. As discussed, such duty is generally absent in the arbitration laws and rules, but is certainly necessary with regard to the problems that may arise in Scenario 2. However, the IBA requires disclosure of any relationship between the Funder and the arbitrator by the funded party to everyone involved in the proceedings, without prior consideration as to whether such disclosure is actually necessary to safeguard the arbitrator’s objectivity.
According to the IBA, ‘there is a tension between, on the one hand, the parties’ right to disclosure of circumstances that may call into question an arbitrator’s impartiality or independence […], and, on the other hand, the need to avoid unnecessary challenges against arbitrators in order to protect the parties’ ability to select arbitrators of their choosing.’89 The Green List which points out situations in which disclosure should explicitly not take place is fully in line with the IBA’s reasoning that implies that when requiring disclosure, some sort of balance must be struck. The funded party should only be required to disclose the Funder’s
involvement if such is justified.Questions arise when assessing the different approaches as to disclosure by either the arbitrator or by the funded party. Who is in the best place to determine, in each scenario respectively, whether the
88 Queen Mary School of International Arbitration and White & Case, ‘2015 International Arbitration Survey: Improvements and Innovations in International Arbitration’ (School of International Arbitration, Queen Mary University of London) 3.
circumstances at hand constitute doubts as to the arbitrator’s independence and impartiality that require disclosure to everyone involved in the proceedings? As discussed, in Scenario 1 it is generally accepted that the arbitrator individually assesses whether he should make a disclosure and that he will refrain from doing so if it turns out to be unnecessary according to the applicable laws and/or rules. With regard to Scenario 2, the IBA Guidelines require the funded party to make a
disclosure without such prior assessment. I argue that this approach should be considered problematic for two reasons.
First, it is unrealistic to expect the funded party to disclose any relationship to everyone involved, including the opposite party, without prior assessment of that relationship. Although one could argue that first, the funded party and the Funder have a considerable incentive to disclose their relationship, because disqualification of the arbitrator or annulment or non-enforcement of the final award would lead to major negative (financial) consequences for them too, and secondly, the more a Funder is involved, the more unlikely it is that it can keep its involvement a secret90, one must bear in mind that the Funder and the funded party have contractually agreed to keep their relationship confidential. Therefore, the
probability of them deciding to do just the opposite seems small, especially if they are convinced that the relationship is not at all severe and will not possibly
constitute a conflict of interest.
Secondly, the requirement of the IBA is disproportionate. On what basis is it justified that if the arbitrator is unaware of the involvement of the Funder, disclosure to everyone involved is required without a prior assessment, while in case the arbitrator did find out about the involvement of the Funder by himself, disclosure only takes place if required? This constitutes a great difference in approach towards disclosure, merely based on the knowledge of the arbitrator. According to the IBA’s own statements, information should only be disclosed if such is necessary. Therefore, I claim that the relationship between the Funder and the arbitrator should always be assessed prior to disclosure. However, this
assessment should not be carried out by the funded party himself. As Darwazeh and Leleu pointed out, the funded party and the Funder might not have knowledge
of all information required to actually properly assess the potential conflict at hand.91 Besides that and more importantly, ‘it is not for them unilaterally to make such judgment call’.92 The Funder and the funded party are in an inherently biased position and the disclosure affects everyone involved in the arbitration and can have serious consequences to the entire proceedings.
Therefore, I suggest that all relationships between the Funder and the arbitrator should in first instance be disclosed by the funded party to the arbitrator it concerns. If the funded party discloses the information to the arbitrator at hand, Scenario 2 turns into Scenario 1 and from there on, the arbitrator could assess whether he should fully disclose the relationship, which would be completely in line with the current approach taken within the overall arbitral legal framework. This would require another revision of General Standard 7 (a). I propose the following:
A party shall inform an arbitrator, the Arbitral Tribunal, the other parties and the arbitration institution or other appointing authority (if any) the arbitrator of any
relationship, direct or indirect, […] between the that arbitrator and any person or entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration. The party shall do so on its own initiative at the earliest opportunity.
Zuleta stated that this approach was not followed during the 2014 revisions,
because ‘that arbitrator would have information that the other arbitrators would not have. It would not be possible to allow the Funder to disclose that information to one arbitrator and let that arbitrator withhold that information and let him decide that it is not information he needs to disclose.’93 Zuleta here stressed the importance of transparency and claimed that ‘the situation that the arbitrator has the
information and decides not to disclose and the funder has the same information creates a conflict’.94 However, exactly the same situation occurs if the arbitrator finds out about the involvement of the Funder himself. The arbitrator individually decides whether he should make a disclosure and he can choose to withhold the information. This generally accepted approach, which prevents challenges for the
91 Nadia Darwazeh and Adrien Leleu, ‘Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’ (2016) 33(1) J Intl Arbitration Kluwer L Intl 133.
92 ibid.
wrong reasons, would, following Zuleta’s reasoning, in many cases create a conflict of interest, as it is never certain what kind of information either of the parties has and withholds. If the criterion is that the information that the arbitrator decides not to disclose cannot be possibly known by either of the parties, the general approach of arbitrator disclosure cannot be accepted any longer. Therefore, the argument that requiring disclosure by the funded party initially only the
arbitrator it concerns is unacceptable in terms of transparency does not hold. An alternative option that has been posed by Trusz is disclosure of the relationship by the funded party to the arbitral institution.95 It would be possible for the Funder to only inform the institution, let it do a conflicts check and decide whether the arbitrator and the opponent party should be notified of the situation. The Funder can then be ‘secure in its knowledge that only the institution will learn of the funding relationship’, unless disclosure is necessary to secure the independence of the arbitrator.96 Obviously, this option is not available in an ad hoc arbitration and besides that, it is questionable whether arbitration institutions are willing take on this role.97 Direct disclosure by the funded party to the arbitrator that is linked to the Funder would be possible under all circumstances and in all forms of
arbitration.
Ensuring compliance of a duty to disclose is generally problematic. There is no effective system of enforcement in place to guarantee disclosure, certainly not by a funded party who agreed upon non-disclosure. Therefore, the funded party should be encouraged to help prevent the adverse effects of doubts as to the arbitrator’s independence and impartiality, rather than being subject to too strict obligations that appear very disproportionate. After all, the required disclosure will most likely constitute a breach of the funding agreement. The current IBA Guidelines
insufficiently take that fact into consideration. Altering the duty to disclose by the party to everyone involved into a disclosure merely to the concerned arbitrator would in all probability have a positive effect on compliance.
95 Jennifer Trusz, ´Full disclosure? Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration’ (2013) 101 Georgetown L J 1675.
96 ibid.
97 Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer Law International 2016) 288.
