Under Article 18(4) of the Japan Arbitration Act (“JAA“), arbitrators have an ongoing obligation to disclose circumstances which may give rise to justifiable doubts as to their impartiality or independence. In the latest judgement in a series of appeals relating to an application to set aside an arbitral award, the Japanese Supreme Court confirmed that this disclosure obligation will only be breached where an arbitrator is aware of such circumstances but fails to disclose them, or could have learned of such circumstances through a reasonable investigation but did not.
In June 2011, Japan Commercial Arbitration Association (“JCAA“) arbitration proceedings were brought by the Sanyo Electric Co. Ltd and Sanyo Asia Pte Ltd. (the Claimants), against its US counterparties to a sale and purchase agreement for air conditioning equipment (the Respondents) in relation to certain breaches of contract. The seat of the arbitration was Osaka, Japan, and the tribunal was to be composed of three arbitrators.
At the outset of the arbitration, the presiding arbitrator, a partner in the Singapore office of an international law firm, had made a statement of independence to the JCAA and the parties:
- confirming that he was not aware of any past of present circumstances which would give rise to justifiable doubts as to his impartiality; and
- making a reservation, in line with his firm’s policy, that colleagues at his firm may represent third parties having a conflict with the parties to the arbitration or may represent any of the parties in the arbitration or their affiliates in matters unrelated to the arbitration, however that he would not be involved in or receive any information in relation to such matters while the arbitration proceedings were pending.
Neither of the parties raised any concerns or objected to the advance disclosure at the time.
Approximately 18 months after the arbitration started, a new lawyer joined the San Francisco office of the presiding arbitrator’s law firm. The new lawyer in question had represented one of the Claimants’ subsidiaries in an ongoing antitrust class action in California both prior to and after joining the law firm, while the arbitration proceedings were ongoing.
On 11 August 2014, the tribunal handed down an award which found in favour of the Claimants on virtually all counts.
Osaka District Court challenge
On 13 November 2014, the appellants (the Respondents) challenged the award in the Osaka District Court on the basis that the presiding arbitrator had failed to adequately disclose the potential conflict of interest.
The Respondents argued that the arbitral award should be set aside on the basis that the failure to declare the potential conflict of interest meant that the composition of the arbitral tribunal was (i) in violation of Japanese laws and regulations (in breach of Article 44(1)(6) of the JAA), in particular the ongoing obligation on arbitrators to disclose without delay to parties any circumstances likely to give rise to justifiable doubts as to their impartiality or independence under Article 18(4) of the JAA, and (ii) in conflict with public policy (in breach of Article 44(1)(8) of the JAA). The District Court dismissed the challenge in March 2015, on the basis that the circumstances in question did not give rise to any justifiable doubts regarding the arbitrator’s impartiality or independence.
Appeal to Osaka High Court
The District Court’s decision was appealed to the Osaka High Court, which set aside the award in June 2016. The High Court found in particular that:
- Arbitrators have an ongoing obligation during the course of proceedings to disclose without delay all facts that would likely to give rise to justifiable doubts as to their impartiality or independence under Article 18(4) of the JAA. An advance declaration and waiver of potential future conflicts of interest was considered too abstract, and lacked the factual specificity required to enable parties to determine whether or not to challenge the appointment of an arbitrator.
- Arbitrators have an ongoing duty to identify disclosable facts. The High Court took the apparent view that, in this case, the potential conflict could have been identified with minimal difficulty through the arbitrator’s law firm’s conflict check processes. The High Court found that, regardless of whether the conflict had not been identified, or had been identified and cleared but not disclosed, the arbitrator had breached its obligation and this had led to grave procedural defects in the arbitral process. This was deemed sufficient ground to set aside the award under Article 44(1)(6) of the JAA.
At the time, the High Court’s decision attracted significant attention from arbitration practitioners. While the Japanese courts are widely perceived as pro-arbitration and have a track record of dismissing arbitral award challenges, this decision marked a strict approach being taken to the disclosure of conflicts, with breaches of disclosure obligations potentially leading to the setting aside of arbitral awards, even if unintentional and not affecting the final arbitral result.
The High Court’s decision was further appealed to the Supreme Court.
Supreme Court decision
On 12 December 2017, the Supreme Court set aside the High Court’s decision and referred it back to the High Court for further determination. The Supreme Court found as follows.
- It agreed with the High Court’s decision that the duty of disclosure was an ongoing one, and that the purpose of this obligation was to ensure the effectiveness of the process for challenging arbitrators. Merely telling parties in the abstract that circumstances under Article 18(4) of the JAA could potentially arise does not constitute proper disclosure as it lacked the necessary specificity to enable parties to challenge an arbitrator.
- It also found that the disclosure obligation was not limited to facts which an arbitrator was actually aware of, but extended to circumstances which an arbitrator could have become aware of had a reasonable investigation been conducted. In this sense, the Supreme Court also agreed with the High Court judgement.
- However, the Supreme Court found that, in this case, it was unclear:
- whether the arbitrator had in fact been aware of the conflict before the award was rendered;
- whether the arbitrator’s law firm was aware of the conflict; and
- what sort of conflict check systems was in place at the arbitrator’s law firm.
On that basis, it did not consider that the facts as presented were sufficient to allow the High Court to conclusively find that the arbitrator could have become aware of the potential conflict, had a reasonable investigation been conducted.
The recent Supreme Court judgement confirms many of the principles expounded in the High Court decision which practitioners should take note of, namely that (i) the duty of disclosure is an ongoing one, which continues beyond the initial appointment, and (ii) arbitrators have an obligation to conduct reasonable enquiries regarding disclosable information. However, the Supreme Court focused more on the factual aspect of the case – in particular whether the arbitrator was in fact aware of or should have been aware of the potential conflict. It failed, however, to provide guidance to practitioners as to what would be deemed a reasonable investigation to identify potential conflicts.
The case serves as a reminder to all arbitrators hearing cases seated in Japan to ensure that they have thorough processes in place to identify potential conflicts on an ongoing basis and promptly notify parties of any changes of circumstances which might give rise to justifiable doubts as to their impartiality or independence.