A number of significant international arbitrations, particularly involving claims by investors against sovereign states, are venued in Washington, D.C. A September 30, 2016, decision by the U.S. District Court for the District of Columbia provides guidance on the issue of whether the losing party may seek to vacate the award on the grounds that one of the arbitrators had a conflict of interest that impaired his or her impartiality or independence.1 In particular, the case holds (1) that where a “challenge” to an individual arbitrator occurred during the course of the arbitration, a U.S. court can take into account the “challenge decisions” issued under the rules of the relevant arbitral institution while the arbitration was pending; and (2) that in the courts of Washington, D.C. (as is the case in New York), a challenge based on “evident partiality” will only succeed where the court finds that the facts would cause a reasonable person to conclude that the arbitrator was “actually partial” — mere “impressions” or “suspicions” are not sufficient.
The case of Republic of Argentina v. AWG Group2 arose after a U.K. investor — the former holder of interests in water and sewage concessions in Buenos Aires, Argentina — obtained a $20.9 million damages award in 2015 from a Washington, D.C.-based arbitral tribunal.3 The tribunal, constituted under the U.K.-Argentina bilateral investment treaty4 and the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL), held that Argentina’s treatment of the water concessions had violated its treaty obligation to accord “fair and equitable” treatment to investors.5 Argentina moved to vacate the award, and AWG cross-moved to enter the award (plus interest) as a final judgment.
The arbitration, which ran in tandem with a parallel claim by various co-investors led by the Suez group, had a 12-year history. Shortly after Suez and AWG commenced their claims in 2003, they appointed professor Gabrielle Kaufmann-Kohler, a Swiss lawyer, as their party-appointed arbitrator. Argentina appointed professor Pedro Nikken of Venezuela. A third arbitrator, professor Jeswald W. Salacuse of the United States, was then appointed as presiding arbitrator.
In 2006, the tribunal held that it had jurisdiction to hear and determine AWG’s claims against Argentina.6 In 2007, in the wake of that decision, Argentina sought to disqualify the claimant-appointed arbitrator, Ms. Kaufmann-Kohler, on several grounds. One was that Ms. Kaufmann-Kohler had recently (in 2006) been appointed a nonexecutive director at an international bank, whose investment portfolio included an interest in one of the claimants. By prior agreement,7 both challenges were heard and rejected by the two other members of the tribunal, which noted, first, that Ms. Kaufmann-Kohler had been unaware of the bank’s investment and, in any event, that the investment did not compromise her independence or impartiality, among other things, because the size was not material.8
After the award was rendered in April 2015, Argentina commenced proceedings to vacate the award before the U.S. District Court for the District of Columbia. Among the grounds advanced by Argentina was that the arbitrator’s ties revealed “evident partiality,” warranting vacatur under Section 10(a)(4) of the Federal Arbitration Act9 (FAA).
In her opinion issued on September 30, 2016, Judge Beryl Howell first addressed the standards to be applied to the challenge. These included three threshold issues:
- What deference, if any, should be given to the 2007 reasoned decision by Ms. Kaufmann-Kohler’s co-arbitrators, rejecting the challenge to her independence and impartiality. Judge Howell determined that she should accord deference to this decision, particularly given that it took into account considerations that were relevant and applicable to the “evident partiality” test under the FAA.
- What deference, if any, should be given to a 2010 arbitral decision in a related case (Vivendi v. Argentina) that also analyzed the alleged “conflict” and arrived at a decision that was not only very critical of Ms. Kaufmann-Kohler for failing to detect the bank’s connections with Vivendi, but also implied that arbitrators were subject to a particularly stringent test in ascertaining potential “conflicts of interests.”10 In Judge Howell’s view, the 2010 decision warranted no deference because, among other things, it failed to inquire into the “materiality” of the bank’s investment in Vivendi.11
- By what standard “evident partiality” should be assessed. In this respect, Judge Howell referred to the seminal 1968 United States Supreme Court case Commonwealth Coatings Corp v. Continental Casualty Co., a plurality decision of the Supreme Court, which contains no clear majority holding. In that decision, she noted, the justices articulated two competing tests for arbitrator challenges. In his concurring opinion, Justice Byron White advocated a pragmatic test, which required a party to prove that an arbitrator had a “substantial interest in a firm which has done more than trivial business with a party.” In contrast, Justice Hugo Black advocated a stricter standard, which held arbitrators to a quasi-judicial standard, to “avoid even the appearance of bias.”
On this issue, Judge Howell noted that the D.C. Circuit had adopted Justice White’s approach and that the burden on a challenging party for vacating an arbitral award due to “evident partiality” requires the challenging party to demonstrate facts that would cause a reasonable person to conclude that an arbitrator was partial to one party to the arbitration.12 Judge Howell considered that this test was functionally identical to the 2nd Circuit standard (applicable in New York)13 — but was not the same as the (stricter) 9th Circuit standard, which follows Justice Black’s opinion and looks to whether there is an “impression” of partiality.14
Applying the D.C. standard, Judge Howell held that Argentina’s evidence was “wholly insufficient” and that the bank’s investment was “inconsequential” because it consisted mainly of shares held on behalf of third parties. The record showed that the arbitrator had no involvement in the investment decisions of the bank and that the arbitration would have a “negligible effect” on the bank’s financial fortunes.15 Because the arbitrator had served in a nonexecutive capacity and only for a three-year period during the course of the 12-year arbitration, the court held that Argentina had not demonstrated that there was “evident partiality.”16 After rejecting the remainder of Argentina’s challenges to the award, it confirmed the award, with the result that the judgment will be entered upon the full award sum (including interest).
If affirmed, the decision provides guidance for parties whose arbitrations are seated in Washington, D.C., New York and other locations whose federal judicial circuits have adopted Justice White’s test from Commonwealth Coatings.17 It confirms that in the event of a post-award challenge, an arbitrator may only be found to have displayed “evident partiality” upon a showing of specific facts and not just the mere “appearance of bias.” Moreover, the case provides a useful example of a U.S. court being willing to consider (and potentially give deference to) the reasoned “arbitrator challenge” decisions made during the course of the arbitration.