Decision on challenge to arbitrator in NAFTA arbitration under UNCITRAL Rules

Practical Law UK Legal Update Case Report 9-500-6733 (Approx. 5 pages)

Decision on challenge to arbitrator in NAFTA arbitration under UNCITRAL Rules

by PLC Arbitration

Background

Article 1120(1)(c) of the North American Free Trade Agreement (NAFTA) permits investors to submit disputes with a State party to arbitration under the UNCITRAL Arbitration Rules.

Article 9 of the UNCITRAL Rules requires a prospective arbitrator to disclose "any circumstances likely to give rise to justifiable doubts as to his impartiality or independence". That requirement continues after appointment. An arbitrator can be challenged if circumstances exist that give rise to justifiable doubts as to his impartiality or independence (Article 10(1), UNCITRAL Rules). These terms are not defined and arbitrators often refer to the IBA Guidelines on Conflicts of Interest in International Arbitration, which provide, in General Standard 2(c), that:

"Doubts are justifiable if a reasonable and informed third party would reach the conclusion that there was a likelihood that the arbitrator may be influenced by factors other than the merits of the case as presented by the parties in reaching his or her decision."

The challenge procedure is set out in Articles 11 and 12 of the UNCITRAL Rules:

Notice of challenge must be given within 15 days of notification of the appointment, or within 15 days after the relevant circumstances become known to the challenging party (Article 11(1)).
Unless the non-challenging party agrees to the challenge or the arbitrator withdraws from the arbitration, the decision on the challenge will be made by the appointing authority, where such authority has been previously designated (Article 12(1)(b)).

Article 1124(1) of NAFTA provides that the ICSID Secretary-General shall serve as appointing authority for arbitration under Section B of NAFTA Chapter 11.

Under Article 1128 of NAFTA, any State party to NAFTA may, on written notice to the disputing parties, make submissions to the tribunal on a question of interpretation of NAFTA.

Facts

Vito G Gallo (the claimant), a US citizen, and the government of Canada are involved in an arbitration under the UNCITRAL Arbitration Rules and Chapter 11 of NAFTA and administered by the Permanent Court of Arbitration (PCA). On 4 June 2007, Canada appointed J Christopher Thomas QC as an arbitrator. In his CV, Mr Thomas stated that he was due to retire from his firm and from counsel work at the end of 2007. He also disclosed a significant amount of work, past and present, for the government of Mexico (a State party to NAFTA).

In June 2008, Mr Thomas informed the parties of his new contact details. At about the same time, the national press in Canada and some arbitration publications reported that Mr Thomas had joined another firm (BLG) as an independent counsel. On 5 March 2009, Mr Thomas wrote to the parties, through the PCA, informing them of the change in his professional circumstances, including that he had agreed, through BLG, to advise the government of Mexico on specific legal matters. However, that letter was never received by the parties because it had been incorrectly addressed. When he discovered the error, Mr Thomas re-sent the letter on 3 June 2009. On 22 June 2009, Mr Thomas replied to the claimant's request for clarification as to the nature of his work for the government of Mexico.

On 7 July 2009, the claimant asked Mr Thomas to withdraw as arbitrator, on the ground that circumstances existed that gave rise to justifiable doubts as to his impartiality and independence. Mr Thomas declined to do so. Therefore, on 20 July 2009, the claimant wrote to the Deputy Secretary-General of ICSID (in the absence of an acting Secretary-General), seeking the immediate disqualification of Mr Thomas as arbitrator.

Decision

The Deputy Secretary-General of ICSID rejected the claimant's request for Mr Thomas' immediate disqualification. However, he ordered Mr Thomas within seven days to choose between continuing to advise Mexico, or continuing to serve as arbitrator.

Timing of challenge

The Deputy Secretary-General had to decide, as a preliminary matter, whether the claimant's challenge had been brought within the 15 day time limit stipulated by Article 11(1) of the UNCITRAL Rules. He rejected Canada's argument that the claimant had constructive knowledge, because of press coverage, that Mr Thomas continued as counsel in June 2008. If constructive knowledge were sufficient, this would unfairly place the onus on the claimant to find out information that it should have received from the arbitrator. Further, even if the claimant had known at that time that Mr Thomas continued working as counsel, that was not determinative: the relevant issue was for whom he had acted as counsel and on what topics.

On that basis, the Deputy Secretary-General found that time should be deemed to have started to run on 22 June 2009, when Mr Thomas clarified the nature of his work for the Government of Mexico. As such, the challenge had been made in time.

The merits of the challenge

The standard for a challenge under Article 10(1) of the UNCITRAL Rules was an objective one, requiring the applicant to show that there was justifiable doubt as to the arbitrator's impartiality or independence. Doubts were justifiable if they gave rise to "an apprehension of bias that is, to the objective observer, reasonable" (Challenge Decision of 11 January 1995, XXII Yearbook Commercial Arbitration 227, 234 (1997)). All relevant facts and circumstances should be considered in deciding whether that standard had been met.

Mr Thomas was advising the Government of Mexico, a State party to NAFTA and a potential participant in the arbitration pursuant to Article 1128 of NAFTA. By serving on a tribunal in a NAFTA arbitration involving a NAFTA State party, while at the same time acting as an adviser to another NAFTA State party which had a legal right to participate in the proceedings, an arbitrator inevitably risked creating justifiable doubts as to his impartiality and independence. As to Canada's argument that there was no conflict of interest because the amount of legal advice provided by Mr Thomas was de minimis, the Deputy Secretary-General's view was that:

"Where arbitral functions are concerned, any paid or gratis service provided to a third party with a right to intervene can create a perception of a lack of impartiality. The amount of work done makes no difference. What matters is the mere fact that work is being performed."

Had Mexico already intervened in the arbitration, this would have been grounds for Mr Thomas' immediate disqualification. That was not the end of the matter, however: although it had not yet done so, the possibility of Mexico exercising its right under Article 1128 of NAFTA to participate in the case would still hang over the proceedings. From the point of view of a "reasonable and informed third party" (General Standard 2(c) of the IBA Guidelines on Conflicts of Interest in International Arbitration), there would be justifiable doubts as to Mr Thomas' impartiality and independence as arbitrator if he were to continue his advisory services to Mexico for the remainder of the arbitration. For that reason, the Deputy Secretary-General ordered Mr Thomas to inform him within seven days whether he would continue to advise Mexico, or continue to serve as arbitrator in this case.

Comment

This was a pragmatic decision in the context of a NAFTA arbitration, given the possibility of Mexico intervening in the arbitration. Although both the Deputy Secretary-General of ICSID and the claimant were at pains to point out that there was no allegation of actual bias against Mr Thomas, there was an "apparent conflict of interest", which would have been a distraction if Mr Thomas were to continue in his dual role. Interestingly, there does not appear to have been any consideration as to how likely it was that Mexico would, in fact, participate in the arbitration. The mere fact that it had a right to intervene seems to have been sufficient.

Given that decisions on challenges to arbitrators under the UNCITRAL Rules are often not published, this decision provides a useful illustration of the approach that may be taken and is an example of the decision-maker applying the test in the IBA Rules.

The decision also highlights the differences between the challenge tests under the UNCITRAL Rules, on the one hand, and the ICSID Convention and ICSID Additional Facility Rules, on the other. In ICSID arbitrations, an arbitrator may be disqualified if he shows a "manifest lack" of the required qualities, which include the ability to exercise independent judgment. ICSID challenge decisions indicate that the challenging party bears a heavy burden of proof and must establish that the arbitrator's impartiality is in "clear doubt". This is arguably a tougher test than the "justifiable doubts" test under the UNCITRAL Rules and the objective standard set out in the IBA Rules, and was the subject of some debate at the BIICL Investment Treaty Forum conference on 11 September 2009. It also begs the question whether the result would have been the same had this arbitration been taking place under the ICSID Additional Facility Rules (the ICSID Convention and ICSID Arbitration Rules would not apply, since Canada has not ratified the Convention).

It is also perhaps ironic that the challenge in this case was decided by the Deputy Secretary-General of ICSID, when the decision on a challenge to an arbitrator in an ICSID arbitration is made by the remaining two members of the tribunal.

Note, finally, that in a letter to the Deputy Secretary-General dated 21 October 2009, Mr Thomas tendered his resignation as an arbitrator.

Case

Vito G Gallo v Government of Canada (14 October 2009)

Decision on challenge to arbitrator in NAFTA arbitration under UNCITRAL Rules | Practical Law