In a recent decision, the Supreme Court affirmed that an arbitral award may be set aside where a party has breached its obligation to disclose information, even when no other grounds exist for setting the award aside.(1)
In Moskowitz v Menorah Mivtachim Insurance, the parties had agreed to refer a dispute between the claimants (a couple who owned an insurance agency) and the respondent (an insurance company) to arbitral proceedings governed by the Arbitration Law 1968. The arbitration agreement named a specific individual (a retired district judge) chosen by the parties to serve as sole arbitrator. After the arbitral award had been issued the respondent discovered an extensive set of relations between the arbitrator and the claimants which had not been disclosed, including:
- a long standing acquaintance between the father of one of the claimants (a prominent lawyer) and the arbitrator, who had been residents of the same building for several years;
- the father's involvement in the appointment of the arbitrator through a partner at his legal firm;
- the existence of landlord-tenant relations between the claimants and a niece and nephew of the arbitrator during the course of the arbitration; and
- the presence of the arbitrator at the opening of an art gallery belonging to one of the claimants.
The district court ruled that the arbitrator had been unaware of these connections and therefore had not breached his disclosure obligations when appointed as arbitrator or during the proceedings. However, it also determined that the claimants had been aware of these relationships and had not disclosed them to the other party. The district court also found that had the respondent been aware of these relations between the arbitrator and the claimants, it would likely not have agreed to the arbitrator's appointment. The court thus set aside the award, stating that where a party had knowingly breached its disclosure obligations and it was proven that the other party would have been unlikely to enter into an arbitral agreement had the withheld information been disclosed, failure to set aside the award would serve to reward the concealing party for its wrongful behaviour.
The claimants appealed to the Supreme Court claiming that no legal grounds existed for setting aside an arbitral award in the absence of any real fear of arbitral bias or miscarriage of justice, even where a party had breached its disclosure obligations.
The Supreme Court upheld the district court ruling. The decision emphasises the importance of the parties' consent as the basis of the arbitration process. Due to the consensual nature of arbitral agreements, a flaw in consent may lead to an award being set aside, including one caused by the breach of a party's disclosure obligation.
The court stated that the source of the disclosure obligation is the duty of parties to conduct all stages of arbitration in good faith and in accordance with the rules of fair play. Further, the legitimacy of the arbitral process is very much a function of these rules, such that when the good-faith obligation is compromised, so too is the foundation of the parties' consent to arbitrate. The good-faith obligation includes the duty of the parties to disclose information. Citing existing precedent, the court reiterated that in matters of disclosure, the duty to act in good faith is a broad and active one, imposing positive obligations on the parties. Since the rule in disclosure is "if there is any doubt, there is no doubt", each party has a duty to disclose information that may be essential to the formation of the other side's consent and not to purport to replace the other side's discretion with claims as to the insignificance or irrelevance of information not disclosed. The breach of this obligation undermines the consensual underpinning of the arbitration, and where such duty has been breached an arbitral award may be set aside.
The court may set aside an award under Article 24(10) of the Arbitration Law, which allows courts to set aside arbitral awards if "a ground exists on which a court would have set aside a final, non-appealable judgment". This provision, the court stated, is purposefully vague and intended to contend with rare cases such as a breach of the natural rules of justice or the discovery of new facts unknown to the parties in the course of arbitration. The court also allowed that it could not rule out setting aside the award on the grounds of Article 24(1) (whereby an award may be set aside if the agreement to arbitrate was invalid) or Article 24(2) (which determines that an award made by an improperly appointed arbitrator may likewise be set aside).
The Supreme Court relied on Articles 24(1) and 24(2) to refute the claimants' argument that an award can be set aside only where there the award is marred by a flaw or deficiency in the award itself, such as any suspicion of impropriety or bias on the part of the arbitrator. These articles demonstrate that arbitration (unlike court proceedings) is based on consent of the parties and that there may be situations – such as defects in the parties' consent that render an arbitral award invalid or a case of mistake or fraud that is equally damaging to the parties' agreement – which are entirely disconnected from the content of the awards or any deficiency therein, but for which there is no remedy but to set the award aside.
The Supreme Court noted that setting aside an arbitration award on such grounds is a remedy that should be awarded only on rare occasions where the breach of good faith is so glaring that the court cannot allow the award to stand. The court stressed that this was the first time it had ordered setting aside on the basis of failure to disclose relevant facts in the negotiations of an arbitration agreement. As the court was aware of the risk of encouraging a losing side to attack an award improperly by raising a challenge that it had failed to raise prior to the issuance of the award, it drew narrow boundaries for a challenge based on the failure of disclosure. For such a challenge to succeed, it must be proven that the non-disclosing party's lack of good faith goes to the root of the agreement to arbitrate or appoint a particular arbitrator, such that a plausible case exists that had the other party been made aware of the undisclosed information, it would not have agreed to the arbitration or choice of arbitrator. The court also stated that it may be more willing to set an award aside when the information not disclosed could have affected the consent to enter the arbitration, rather than the appointment of an arbitrator, as such an omission may not always affect the agreement to arbitrate. However, where the arbitral agreement names a particular arbitrator, as in the case at hand, the court will be more likely to set an award aside where information relating to the arbitrator is not disclosed by a party.
Moskovitz relates to domestic arbitration. Whether Israeli courts would apply similar reasoning when dealing with applications to enforce international arbitral awards must also be considered. The Arbitration Law provides for the application of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards to enforcement applications and Israeli courts have generally shown a strong pro-enforcement inclination, based on their international and liberal approach to enforcement. However, Moskowitz and its emphasis on broad and active disclosure as the basis of consent to arbitrate could result in additional arguments against enforcement based on the application of Article V(1)(a) of the convention (regarding the invalidity of the arbitration agreement) or Article V(1)(d) (regarding the improper composition of the arbitral tribunal). This would undoubtedly lead to a detailed discussion of whether failure to disclose rendered the arbitration agreement void or merely voidable, a matter which the Supreme Court decided not to consider in Moskowitz, as it was able to set aside the award based on a domestic law that permitted setting aside on the same grounds on which a court could set aside a final, non-appealable judgment. However, as this is not grounds for setting aside under the New York Convention, it remains to be seen how the court's reasoning will be applied in the international sphere.
For further information on this topic please contact Zvi Nixon or Lauren Sobel at E Landau Law Office by telephone (+972 2 561 8845) or email (firstname.lastname@example.org or email@example.com). The E Landau website can be accessed at www.elandau.co.il.
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