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Challenges in Arbitral Proceedings

It is perhaps well known that two typical challenges in arbitral proceedings are to apply to set aside an award or to remove an arbitrator. Two recent examples of such challenges can be seen in the decisions of the Hong Kong Courts in Suen Wah Ling trading as Kong Luen Construction Engineering Co. v China Harbour Engineering Co. (Group) [2007] HKCU 1216 and in Pacific China Holdings Ltd. v Grand Pacific Holdings Ltd. [2007] HKCU 1205.

The case of Suen Wah Ling trading as Kong Luen Construction Engineering Co. v China Harbour Engineering Co. (Group) [2007] HKCU 1216 concerns an application to the Court of Final Appeal for leave to appeal against an arbitration award made by the arbitrator, Mr Yeung Ming Tai, such leave having been refused by both the Court of First Instance and the Court of Appeal. The application was made on the ground that Mr Yeung had acted in breach of the rules of natural justice and the implied obligations to appear impartial and to act fairly.

Mr Yeung, the arbitrator and a Hong Kong Counsel, had advised the applicant years ago on the same subject matter before the action commenced. The applicant had on that occasion attended a single conference with the arbitrator at his chambers. Thereafter the arbitrator received no further instructions and it was not until some 40 months later that somebody from the applicant contacted the arbitrator to seek to engage his services as an arbitrator. There was no dispute between the parties that the arbitrator had no recollection whatsoever that he had previously advised the applicant in relation to the claim and that it was not until the applicant sought to set aside the arbitration award on the basis of apparent bias that the arbitrator became aware of it.

Both the Court of First Instance and the Court of Appeal dismissed the applicant's application and considered that the arbitrator in preparing his arbitration award was ignorant of the fact that he had previously advised the applicant in conference. The Courts applied the test for apparent bias, i.e. to ask whether a fair-minded and informed observer would conclude that there was a real possibility or a real danger that the tribunal was biased. Both Courts considered the answer in the negative. The Court of Appeal also addressed the question as to whether the arbitrator had acted improperly in not checking his previous files before accepting the appointment. The Court however saw no cause for the arbitrator to have done so because he had been approached by the parties to act as the arbitrator. He was entitled to assume that the parties considered him an appropriate person to act. The applicant then applied to the Court of Final Appeal for leave and the application was dismissed (with judgment handed down on 18 July 2007) as the Court did not consider that the matter was of great or general public importance. The Court further affirmed the law as to apparent bias applied by judges below and saw no ground for the applicant to raise any challenge.

In the other case of Pacific China Holdings Ltd. v Grand Pacific Holdings Ltd. [2007] HKCU 1205, the applicant (Pacific China) sought an order to remove Mr James Carter as an arbitrator from the tribunal of three arbitrators then conducting an arbitration between the parties. Mr Carter was appointed by the,respondent (Grand Pacific) and Ms Sally Harpole was appointed by the applicant. It was agreed between the parties that Mr Carter and Ms Harpole would then nominate a third arbitrator to chair the tribunal.

It was accepted as a fact by the parties that subsequent to his appointment, Mr Carter made unilateral verbal contact with the solicitors of the respondent. The applicant insisted that Mr Carter should disclose all the content and details of such contacts. Mr Carter's response had been consistently stated on more than one occasions and in writing that the verbal communications were of a "non-substantive" nature and concerned possible candidates for the third arbitrator. Mr Carter declined to make any further disclosure.

The applicant's Counsel submitted to the Court that once the arbitral process had begun the lack of disclosure constituted a lack of transparency which should be construed as apparent bias. He relied on section 2GA of the Arbitration Ordinance (Cap.341) which reads"... (1) When conducting arbitration proceedings or exercising any of the powers conferred on it by this Ordinance or by the parties to any such proceedings, an arbitral tribunal is required - (a) to act fairly and impartially as between the parties, giving them a reasonable opportunity to present their cases and to deal with the cases of their opponents.. . ". The applicant's Counsel further submitted that the principles of natural justice demand that arbitration proceedings, like litigation, must not only be conducted fairly but also be seen to be conducted fairly, lest this undermines the public's confidence in the arbitration process. The test to be adopted is that of the "fair-minded and informed fictitious observer" and apparent bias is established if such an observer would regard the unilateral communications in question as unfair and/or lacking transparency.

To justify his conduct of making unilateral communications with the respondent on the choices of candidates for the third arbitrator, Mr Carter relied on the American Code of Ethics which states "In an arbitration in which the two party appointed arbitrators are expected to appoint the third arbitrator, each party-appointed arbitrator may consult with the party who appointed the arbitrator concerning the choice of the third arbitrator. "

The respondent's Counsel submitted to the Court that the single issue to be decided in this case was whether Mr Carter should be removed as arbitrator. Both Mr Carter and Ms Harpole spoke privately to the parties who appointed them. The answer given by Mr Carter to the applicant's request for full disclosure had consistently been that there was no obligation to disclose the communications which were nonsubstantive in nature. Mr Carter's integrity was not in issue.

The Court accepted the arguments of the respondent's Counsel and held that (with judgment handed down on 18 July 2007) Mr Carter should not be removed. In this case, as there was no written procedure for electing a chairman, the arbitrators themselves had agreed by conduct that confidential communications on the matter could take place. The applicant knew that none of the communications concerned the merits of or the issues in the arbitration. Interestingly in the judgment, the Court also mentioned that one should not lose sight of the fact that this case was an international arbitration and Hong Kong has a high profile for international arbitrations and therefore the American Code of Ethics relied upon by Mr Carter, whilst plainly not determinative of the issue before the Court, can and should be weighed in the balance as a matter of some relevance.

The Court considered it impossible to make a blanket declaration or statement that in all cases, either once an arbitrator is appointed all communications shall be disclosed or unilateral communications are permitted save concerning the issues in dispute. The test to be applied to this arbitrator in these circumstances is the same test of apparent bias considered in the first case of this article, namely "whether the fair minded and informed observer, having considered the relevant facts, would conclude that there was a real possibility that the tribunal was biased." Section 2GA of the Arbitration Ordinance (Cap. 341) refers to the duties and obligations of "an arbitral tribunal". In the present case, the issue arose before "an arbitral tribunal" had been formed. The Court considered this supports the view that the law relating to the duty of arbitrators to have no private communications with the parties once the arbitration has commenced should concern the issues in dispute but not the preliminary question on the selection of arbitrators. The applicant in this case also did not immediately object to the communications when it was first aware of them. The Court was of the view that any sensible onlooker would trust the arbitrators to have conducted themselves professionally, properly and without inflicting any wounds on the fairness of the proceedings.

It can be seen from the two recent cases above that challenges in arbitration are fact sensitive. There seems to be a high hurdle to overcome before the Court can be satisfied that the impartiality or apparent impartiality of the arbitrator or the tribunal has been impaired and grant the recourse sought.