The world is small, so is the arbitration scene. Therefore, it cannot always be prevented that arbitrators and counsel know each other from previous professional encounters. But when can this fact lead to the challenge of an arbitrator? The Higher Regional Court of Frankfurt had to deal with this question – in two respects. Respondent’s counsel had worked in the same law firm as the presiding arbitrator and the arbitrator nominated by Respondent.
As to the connection between Respondent’s counsel and the party-appointed arbitrator: Respondent’s counsel and the party-appointed arbitrator were partner in the same law firm. Not only that, for ten years, they were members of the same practice group and worked at the same location. This professional relationship had ended more than ten years ago. The two lawyers had not retained personal or professional contact.
As to the connection between Respondent’s counsel and the presiding arbitrator: Respondent’s counsel was partner in the same law firm where the presiding arbitrator worked as an associate. This was from 2001 to 2005. Respondent’s counsel and the presiding arbitrator had not worked in the same practice group and they did not know each other personally.
Neither the presiding arbitrator nor the party-appointed arbitrator disclosed their former working relationship with Respondent’s counsel.
Claimant learned about this former working relationships at a rather late stage of the arbitration proceedings. The arbitration under the German Arbitration Institute’s (DIS) 1998 Rules commenced in 2017 as a result of a post-M&A dispute. After the oral hearing in January 2018, Claimant filed challenges against both arbitrators. The challenges were denied and the Tribunal issued an award rejecting all of Claimant’s claims. Subsequently, Claimant requested the Higher Regional Court of Frankfurt to decide the challenges. Claimant argued that both arbitrators violated their duty of disclosure under Section 16.1 DIS Rules 1998 and that they can therefore be challenged under Section 18.1 DIS Rules 1998.
Section 16.1 DIS Rules 1998 reads:
“Each person who is nominated as arbitrator shall without undue delay notify the DIS Secretariat of his acceptance of the office as arbitrator and declare whether he fulfills the qualifications agreed upon by the parties. Such person shall disclose all circumstances which are likely to give rise to doubts as to his impartiality or independence. The DIS Secretariat informs the parties accordingly.”
Section 18.1 DIS Rules 1998 reads:
“An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties.”
The judgment of the Higher Regional Court of Frankfurt is relevant both with respect to the scope of the disclosure obligation under Section 16.1 DIS Rules 1998 and with respect to the interpretation of Section 18.1 DIS Rules 1998.
Extensive disclosure obligation
Claimant submitted that arbitrators have to disclose any circumstances that could cast doubt on their impartiality or independence. Otherwise, the parties would not have the chance to challenge them if necessary. The fact alone that the arbitrators (allegedly) breached the disclosure duty, were sufficient to challenge them.
Respondent, on the other hand, argued that Section 16.1 DIS Rules 1998 did not oblige the arbitrators to disclose any circumstances which could only remotely justify the possibility of a challenge. There has not been a professional connection between the arbitrators and Respondent’s counsel for over ten years and since then they have neither kept professional nor private contact. According to Respondent, the arbitrators were not obliged to disclose a working relationship that dates back so far.
The Higher Regional Court of Frankfurt, however, followed Claimant’s generous interpretation of Section 16.1 DIS Rules 1998:
“In order to enable the parties to assess whether there is any reason to doubt the independence or impartiality of the arbitrators appointed, they must be aware of any connection between the arbitrator and either party. […] The duty of disclosure therefore applies to all circumstances which may raise doubts as to the impartiality or independence of the arbitrator and does not only include reasons which are ultimately sufficient for a challenge of the arbitrator […]”
The Court found that this broad disclosure obligation was breached by the party-appointed arbitrator, but not by the presiding arbitrator.
The Court decided that the presiding arbitrator did not have a duty to disclose that the presiding arbitrator worked as an associate in the same law firm where the Respondent’s counsel was partner. The connection to Respondent’s Counsel was limited to the fact that several years ago they worked in the same law firm. This fact alone – without further indications – would not raise doubts as to the arbitrator’s impartiality or independence. In this case, there were also no further indications which would lead to another conclusion: The presiding arbitrator and Respondent’s counsel had not known each other personally and they had never worked together on a case.
Contrary to the presiding arbitrator, the party-appointed arbitrator had a duty to disclose his former working relationship with Respondent’s counsel. The fact that the arbitrator and Respondent’s counsel were partners in the same law firm may raise doubts as to the arbitrator’s impartiality or independence. In contrast to the presiding arbitrator, the party-appointed arbitrator and counsel did not only work for the same law firm, they were both partners in the same practice group with common economic and financial interests. Even though they have not worked as partners of the same law firm for over 17 years, the arbitrator had to disclose this fact. It is not impossible that they are still in contact or “that they might be interested to maintain or repeat this connection”.
Violation of the duty to disclose not sufficient for a successful challenge
While the Higher Regional Court had found that the party-appointed arbitrator had violated its duty to disclose, the Higher Regional Court of Frankfurt rejected Claimant’s challenge. According to Section 18.1 DIS Rules 1998 “an arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence”. The Court decided that the mere breach of the duty of disclosure was not sufficient to assume that there are justifiable doubts as to the arbitrator’s impartiality or independence. The standard under Section 18.1 is stricter than under Section 16.1 DIS Rules 1998. Additional circumstances were necessary to assume that the arbitrator had been biased. Here, this was not the case: The arbitrator and Respondent’s counsel have not been in contact for over 17 years; after their working relationship ended, they did not stay in contact.
Therefore, the Higher Regional Court of Frankfurt ultimately rejected both challenges.