In an important decision today from the UK Supreme Court arising from the Deepwater Horizon oil rig incident, the Court upheld the principle that bias rather than a lack of independence is required to remove an arbitrator.
In Halliburton v Chubb Bermuda¹, the Court held that a fair-minded and informed observer would not have concluded that circumstances existed that gave rise to justifiable doubts about an arbitrator’s impartiality
The case is important because it highlights the difficulties of challenging the appointment of an arbitrator under the Arbitration Act 1996 (the "Act"). The issues raised in this case deal with the tension between the principle of respecting the confidentiality of arbitration proceedings against the need for disclosure of relevant issues from previous cases where there are overlapping issues and a common party in other proceedings.
The case arose from the tragic explosion and fire on an oil rig in the Gulf of Mexico, known as "Deepwater Horizon". The rig was owned by Transocean Holdings LLC ("Transocean") and leased to BP Exploration and Production Inc ("BP"). Halliburton Company ("Halliburton") provided cementing and well monitoring services to BP. Both Halliburton and Transocean had insurance liability policies with Chubb Bermuda Insurance Ltd ("Chubb").
Following an accident on the rig, a trial in the US apportioned blame between the parties. Halliburton sought to recover part of this settlement under its insurance policy. Chubb refused to pay so arbitration proceedings were commenced. Halliburton and Chubb each chose an arbitrator but were unable to agree on a panel Chairman.
While the Act² allows parties the freedom of choice to decide what is to happen in the event of a failure of the appointment process, in the absence of agreement they may apply to the Court to make an appointment³. Chubb’s preferred appointee was subsequently chosen which meant Chubb had a majority in the tribunal.
Prior to expressing his willingness to be appointed, the arbitrator disclosed that he had previously sat as arbitrator in a number of arbitrations involving Chubb. After the appointment was made, Halliburton discovered that the arbitrator had in fact sat in two other arbitration proceedings involving Chubb concerning overlapping issues.
Halliburton’s concern was not that the arbitrator had just been involved in previous arbitrations involving Chubb. At issue was that the arbitrator had previously decided cases involving overlapping legal principles where Halliburton did not know the details of those cases and where full disclosure was not made, including for reasons of confidentiality.
The Act contains a number of mandatory provisions⁴ for public policy reasons to ensure the fairness of arbitration proceedings and to support the arbitral process. One of those mandatory provisions⁵ permits parties to an arbitration agreement to apply to the Court to remove an arbitrator in limited circumstances. Halliburton therefore applied to the Court to have the arbitrator removed.
In those proceedings, Halliburton argued that an appearance of bias arose for a number of reasons, including that the arbitrator had accepted an appointment in two other arbitral proceedings involving Chubb, the fact that the arbitrator had failed to disclose those appointments, and the nature of the arbitrator’s response to the challenge to his impartiality. The judge at first instance refused the application to remove the arbitrator. Following a Court of Appeal hearing, the matter came before the Supreme Court.
The Supreme Court judgment
The Supreme Court upheld the principle that when considering an allegation of bias against an arbitrator, the objective test is whether a fair-minded and informed observer would conclude there is a real possibility of bias. When applying that test, the Court should have regard to the particular characteristics of international arbitration, including the private nature of most proceedings.
Although an arbitrator was under a legal duty of disclosure, that duty did not override the arbitrator’s competing duty of privacy and confidentiality. The arbitrator’s duty of disclosure is to disclose matters which might reasonably give rise to justifiable doubts as to his or her impartiality but disclosure can only be made if the relevant parties give their consent. A failure to disclose is a factor for the fair-minded and informed observer to take into account in assessing whether there is a real possibility of bias.
Applying the principles to this case, the Supreme Court held that the arbitrator was under a legal duty to disclose his appointment in the subsequent reference involving Chubb and Transocean. At the time of his appointment, the existence of potentially overlapping arbitrations with Chubb being the common party, might reasonably have given rise to a real possibility of bias. In failing to make that disclosure the arbitrator breached his duty of disclosure.
However, it could not be said that the fair-minded and informed observer would infer from the arbitrator’s failure to make disclosure that there was a real possibility of bias. At the time, it had not been clear that there was a legal duty of disclosure. Secondly, the Transocean arbitrations commenced several months after the Halliburton arbitration. Thirdly, the arbitrator’s measured response to Halliburton’s challenge explained that it was likely the subsequent references would be resolved by a preliminary issue (as they in fact were) and that, if they were not, he would consider resigning from the Transocean arbitrations. There was therefore no likelihood of Chubb gaining any advantage by reason of overlapping references. Fourthly, there was no question of the arbitrator having received any secret financial benefit, and, fifthly, there was no basis for inferring any unconscious ill will on his part. As a result, Halliburton’s appeal failed.
Although lack of independence can give rise to justifiable doubts of impartiality, the Act deliberately did not include this as a separate ground for the removal of an arbitrator. The Report on the Arbitration Bill from the Departmental Advisory Committee on Arbitration Law⁶ prior to the introduction of the Act, makes clear that there would be no point in including lack of independence as an independent ground if it covered cases which did not give rise to justifiable doubts as to impartiality and that there was no good reason for including non-partiality independence as a ground for removal. It was noted in the Report that there may well be situations in which parties desire arbitrators to have familiarity with a specific area of expertise, rather than being entirely independent.
This case is also important as it highlights the limited approach to disclosure of relevant circumstances under the Act. Many arbitration institutional rules impose a stricter test of disclosure. In contrast, the Act does not impose similar disclosure principles to those in other arbitral rules because the Act is drafted following an English law objective observer test. The Supreme Court sought to address this discrepancy by confirming that a duty of disclosure is not simply good arbitral practice but a legal duty in English law, albeit one that must be exercised against competing obligations of confidentiality.
The decision of the Supreme Court may disappoint some who were advocating for greater clarification and guidelines as to how bias in arbitration proceedings ought to be avoided. Some had even hoped that the Supreme Court judgment would result in a system of rigorous supervision for arbitral proceedings with arbitrators being prohibited from accepting multiple appointments involving overlapping issues and common parties.
In contrast to litigation, arbitration is largely an untransparent and unsupervised system. There are good reasons for this approach, including the commercial desire to have disputes decided in confidence, rather than in the glare of publicity through the courts, and giving parties the freedom of choice to determine how their disputes should be decided. However, parties who agree that their disputes will be decided by arbitration should also be entitled to assurance that high standards will be followed and that their case will be dealt with fairly.
The Supreme Court’s decision in Halliburton provides greater guidance to ensure that high standards in arbitral proceedings will continue to be achieved. The Supreme Court has confirmed that the Court must apply an objective test for bias of the type required by English law. An arbitrator must disclose details of previous arbitration proceedings where there are overlapping legal issues and a common party but any obligation of disclosure will remain subject to overriding duties of confidentiality.
Barry Hembling is a Partner in the construction team at Watson Farley & Williams LLP solicitors in London