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Duty of Disclosure of Arbitrator: Haze over Its Corresponding Remedy

(This article was published in the August 2022 Issue of the Hong Kong Lawyer)

In Halliburton Company v Chubb Bermuda Insurance Ltd [2020] UKSC 48, the UK Supreme Court held that there is a legal duty of disclosure upon an arbitrator of facts and circumstances that might overshadow his or her impartiality.  This judgment was widely applauded for clarifying the English law on arbitrator conflicts, but it is puzzling that there was no practical sanction against the challenged arbitrator who was found to have failed to obey his or her duty of disclosure. 

This article will critically examine the reasoning of the unanimous Supreme Court decision as pronounced by Lord Hodge.  It will be argued that, first, the doctrinal root of the duty of disclosure is not properly entrenched; and second, the imposition of a duty of disclosure, even though conducive to fostering transparency in international arbitration, is meaningless as it carries no practical consequences.  The logical leaps regarding the resignation mechanism and proposed sanctions would be identified.  It is respectfully submitted that the Supreme Court should adopt a bright line test: an arbitrator failing the duty of disclosure should be removed with remedies to the arbitrating parties. 

Background

Following a US$1.1 billion settlement consequent to an oil well blowout in the Gulf of Mexico which led to the destruction of the Deepwater Horizon drilling rig in 2010, Halliburton sought indemnity from Chubb under its liability insurance policy through arbitration.  Without the parties’ agreement on the third arbitrator, the High Court appointed Kenneth Rokison QC after a contested hearing.  Unbeknownst to Halliburton, Mr Rokison was subsequently appointed as an arbitrator in two other arbitration references arising from the Deepwater Horizon incident.  Upon discovery Halliburton challenged the impartiality of Mr Rokison and requested removal under section 24(1)(a) of the Arbitration Act 1996 (the “1996 Act”).

The Supreme Court decided that there is a “secondary” legal duty on an arbitrator to disclose circumstances that might obscure his or her independence or impartiality.  In Lord Hodge’s view, this is sowed in section 33 of the 1996 Act which requires an arbitrator to act fairly and impartially in arbitral proceedings.  The judge considered that only if an arbitrator makes the compulsory disclosure he would fulfil such statutory duty of impartiality and the corresponding implied term in the appointment contract. 

Applying the legal principles, the Supreme Court acknowledged that a common party may indeed test its case and thereby obtain an advantage in overlapping arbitration references.  An arbitrator therefore is obliged to disclose any related appointments to clear any appearance of bias.  However, a failure of disclosure does not automatically entitle removal, but is at most a contributing factor.  As such, although Mr Rokison did default in complying with the duty of disclosure, and tainted the fairness of the arbitration by stripping Halliburton of any opportunities to flag their reservations in the process, having balanced different factors, the Supreme Court concluded that Mr Rokison needed not to resign.  

Baffling doctrinal root

At the outset, the birth defect of the duty of disclosure deprives it of any self-standing existence.  The proclaimed root – the 1996 Act – which modelled on the provisions in the UNCITRAL Model Law on International Commercial Arbitration 1985 (the “UNCITRAL Model Law”), in fact deliberately abstained from any provisions on the duty of disclosure in order to keep pace with evolving standards and expectations in the arbitration community.  The Supreme Court’s re-interpretation of section 33 of the 1996 Act not only appeared incompatible with the legislative intention but also rendered this duty bluster and bombast.  A less contentious approach, and without subordinating the legal duty of disclosure to the duty of impartiality, might be to imply it in appointment contracts by necessity and public policy considerations (Haywood v Newcastle upon Tyne Hospitals NHS Foundation Trust [2018] UKSC 22, [32]).  As further elaborated below, had the UK Parliament incorporated Article 12 of the UNCITRAL Model Law, a statutory remedy would also have been available.

A duty without remedy: Encouragement to red-light runners

The most glaring deficiency in the Supreme Court judgment is a breach of the duty of disclosure void of an adequate remedy.  This started with the Supreme Court erecting irreconcilable gateways in determining whether an arbitrator should hold the office:

1. If an arbitrator seeking an appointment becomes aware that he has no consent to make a necessary disclosure of a related arbitration reference to the non-common party, naturally he should decline the forthcoming appointment;
2. If, however, an arbitrator runs a red light and takes up the appointment before disclosing that he is appointed in a related arbitration reference, he is not removed outright but only if bias is found. 

In other words, the Court failed to provide any sanctions (or incentives) to thwart arbitrators from accepting appointments which should not have been accepted.  The inherent risks of potential bias of a common arbitrator in related appointments should not be underestimated.  It is not uncommon for parties to exploit the “inside information” loophole by appointing the same arbitrator in related arbitrations (for example Beumer Group UK Ltd v Vinci Construction UK Ltd [2016] EWHC 2283).  Given that the design of a confidential forum is born with an absence of public scrutiny and uniformity in adjudicating standards, if the courts are unable to enforce the duty of disclosure effectively, the duty is no different to a toothless tiger.  Mr Rokison leaving the picture unscathed reveals the extant lacuna in the “disclosure” mechanism which is supposed to be mandatory but in reality voluntary.

Attenuated deterrence

Another issue is whether the two proposed legal sanctions for breach of the duty of disclosure would ever achieve deterrence and provide sufficient remedy.  Lord Hodge first suggested that where a subject matter is “close to the margin”, in the sense that a reasonable person would readily conclude that its non-disclosure amounts to apparent bias, then the non-disclosure itself could justify removal of the arbitrator based on justifiable doubts as to their impartiality.  This restatement of the usual intricate test of bias does not give any stand-alone redress to the arbitrating parties. 

Secondly, it was propounded that where a matter is adjudged to be serious but non-disclosure does not lead to bias, the arbitrator may be ordered to bear costs of their own defence and/or the challenging party.  Lord Hodge ring-fenced himself in any possibility of personal claims against the wrongful arbitrator as he quoted section 29 of the 1996 Act.  Section 29, couched in broad terms, provides that “an arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his [or her] functions” unless in bad faith.  At first sight, if this provision applies, it will also block off any room for costs orders against arbitrator which amount to a form of personal liability.  In our humble submission, section 29 is not germane because, first, the disclosure obligation arises before an arbitrator assumes his or her office, after which any immunity may only be invoked; and second, any liability arising from non-disclosure is irrelevant to the (purported) discharge of functions of arbitrator.

If a breach justifies a legal response, a fair compensation at minimum ought to be the wrongful arbitrator returning any remuneration so far received, and reimbursing the parties for the costs wasted in the attempt to remove him or her in existing arbitral proceedings.  Nevertheless, it is a pity Mr Rokison was not in any way sanctioned, throwing substantial doubts on the availability of any penalty as stated.  Even if it did, costs are hardly adequate justice to the innocent arbitrating party in such a detour unnecessarily constructed, hence more comprehensive remedies are urgently required.

Available redress

As discussed above, we take the view that the duty of disclosure should be construed as a stand-alone duty and not subject to the duty of impartiality.  Moreover, as correctly pointed out by Lady Arden, breach of the duty of disclosure is a breach of the underlying appointment contract.  The Supreme Court would have had a multitude of common law remedies at its disposal to rescue Halliburton from its stranded position.  Breach of such implied duty should allow the parties to terminate the contract and claim damages, which have already been awarded in other jurisdictions (see Judgment of 12 May 1993, 1996 Rev. Arb. 411, at 411 (Paris Tribunal de Grande Instance)).  The wrongful arbitrator could also have fallen foul of misrepresentation, entitling rescission of the appointment contract.  In appropriate cases, due discharge of the duty of disclosure may be found as a condition precedent to appointment contracts.  The parties would not be contractually bound until the occurrence of the condition, thereby eliminating any legal uncertainty.

Had the Halliburton case happened in Hong Kong, a statutory mechanism for challenging an arbitrator’s appointment in section 25 of the Arbitration Ordinance (Cap. 609) could have come into play.  A challenge thereunder can be mounted on two fronts: bias or lack of qualifications agreed to by the parties.  “Qualifications” are neither defined by the statute nor explained in the explanatory note of the UNCITRAL Model Law.  By giving natural and ordinary meaning to the word, it connotes a quality that makes someone suitable for a particular job or activity (Oxford Dictionary), which should include the obligation to give full and frank disclosure.  As such, a wrongful arbitrator can be removed by the court for a mere default of the disclosure obligation without finding any bias.

Conclusion

With all due respect, the UK Supreme Court judgment in the Halliburton case raised more questions than it answered.  The Court created the legal duty of disclosure without sufficient basis, and then failed to address the needs for an adequate remedy following a breach.  The limited, if not empty, redress proposed was unconstructive either, not least it failed to exhaust all existing contractual remedies to advance the position of the arbitrating party falling victim to the non-disclosure.  As the Court is tasked to enshrine the parties’ interest in an impartial and fair proceeding, it is hoped that the Court will demonstrate commitment to rectifying this decision at a suitable opportunity.

Acknowledgement

The authors acknowledge the research guidance by Dantes Leung (Partner of Oldham, Li & Nie). Any errors, omissions and mistakes remain the sole responsibility of the authors.

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