Ruling favours strict approach to disclosure

International arbitrators must boost their conflict searches after a French court ruled a conflict unknown to a Canadian arbitrator proved enough to render his award unenforceable, according to experts.

In a Dec. 16 judgment that has set tongues wagging in the international arbitration community, France’s Court of Cassation, the highest appeal court for civil cases in the country, upheld a lower court’s decision to overturn an award by Fasken Martineau DuMoulin LLP partner Henri Alvarez in a dispute over a telephone cable company based in Guadeloupe.

Earl Cherniak, a member arbitrator at Toronto’s Arbitration Place, says he can “only sympathize” with Alvarez, who he describes as “one of the most senior and respected arbitrators in the country.” 

“He thought he had made a full disclosure, but it turned out he hadn’t. Even though it could not have affected his judgment, because he didn’t know about it, the award was nevertheless held invalid. It’s a cautionary tale for the rest of us that arbitrators must not only be impartial but they must also be seen to be so,” says Cherniak, also a senior partner in the Toronto office of Lerners LLP.  “Another court might have come to a different conclusion once they accepted he had no idea and said ‘no harm, no foul,’ but it’s a judgment call.”

He says the stricter approach to disclosure taken by the French court creates additional problems for arbitrators based at larger law firms with multiple offices in different cities and, in many cases, different countries around the world.

“The search is going to have to be more intensive in those cases,” Cherniak says. “The fact a disclosure is made at the start when the arbitrator is appointed is not the end of the matter. Disclosure obligations are continuous, and an arbitrator needs to disclose any potential conflict that comes to his or her attention. If you’re from a big firm, that obligation is more likely to develop than if you’re out on your own.”

Columbus International and Caribbean Fiber Holdings brought the arbitration in question against Auto-Guadeloupe Investissment after AGI cancelled a deal to sell its interest in CFH to Columbus. Both sides agreed to retain the Vancouver-based Alvarez as sole arbitrator in 2009, despite him revealing that lawyers in Faskens’ Toronto office had done work for CFH’s parent company, Leucadia National Corporation in the past. 

However, after an initial award that went against it in March 2011, AGI challenged Alvarez’s appointment when it became clear that the law firm’s work for Leucadia had actually been ongoing during the arbitration, unknown to Alvarez. The company had discovered a post on the Faskens web site dated December 2010, boasting about its role in a $575-million deal in which Leucadia offloaded its interest in a Spanish copper mine. The item was repeated in the pages of Lexpert magazine while Alvarez deliberated on his award following the closing of arguments.

The International Centre for Dispute Resolution, which administered the arbitration, rejected AGI’s challenge, but Alvarez resigned and was replaced. Columbus then applied successfully to a French court to enforce his award, but he lost on appeal when a judge ruled Alvarez’s declaration of independence at the outset of the arbitration was incomplete. Taking into account the size of the copper mine deal, Faskens’ three-partner team, and the firm’s publicity drive, the Paris Court of Appeal found the work was an important engagement and that Alvarez’s omission created reasonable doubt about his independence. The Court of Cassation upheld the decision in the final judgment on the matter.

Aaron Rubinoff, the co-chair of Ottawa firm Perley-Robertson Hill and McDougall LLP, says the French decision has intensified an ongoing debate about the extent of arbitrators’ disclosure obligations, and he worries it could embolden “sore losers” looking for any means to attack a decision they don’t like.

“In most cases, there are no rights of appeal, and if there’s a serious conflict, it may be irresponsible not to take some time to explore your options related to the arbitrator and jurisdiction,” he says. “But it may be equally irresponsible to take every excuse to get out of a decision that you don’t like. That could end up undermining the whole system and reduce its viability as a tool in dispute resolution.”

Pierre Dalphond, a former Quebec Court of Appeal judge who now conducts international arbitrations from his base at Stikeman Elliott LLP’s Montreal office, shares Cherniak’s sympathy for Alvarez, but he says the French decision was necessary to preserve faith in the arbitration system.

“To me, it sends the right message that transparency and independence are key to the system. Arbitration is based on the consent of the parties, and when they appoint an arbitrator together, they are relying on trust. Private arbitration has become critical to the commercial world, but if people stop having full trust in the system, they will stop using it,” Dalphond says. “For law firms and people involved in arbitration, that means they need to get a very sophisticated conflict check system that can provide all the information they need when they are approached, and raise any red or yellow flags. In the case of any doubt, you have to be prepared to dig yourself.”

Once a thorough conflicts check has been performed, Harvey Kirsh’s mantra is “disclose, disclose, disclose.”

“The worst that happens is you don’t get the retainer, but at least you preserve the integrity of the award,” says Kirsh, a veteran of international and domestic arbitrations, and the recent recipient of the Ontario Bar Association’s award for excellence in alternative dispute resolution.