Cards on the Table: Avoiding Conflicts of Interest

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Cards on the Table: Avoiding Conflicts of Interest

February, 2021
Daniel Churcher

Cases where those involved in disputes are found to have acted despite a conflict of interest are, fortunately, rare.  When they do occur, they tend to be widely reported, embarrassing to those involved and (sometimes) cause problems that are expensive to fix (if, for example, an arbitral or adjudication award is rendered unenforceable by a conflict of interest).

Two recent cases serve to reinforce the principle that where there is any doubt over a conflict, it is always better to disclose that conflict and disclose it early. If the parties are not willing to accept the conflict, the conflicted entity (be it an arbitrator, adjudicator, lawyer or expert) misses out on the appointment. That is surely preferable to not disclosing a potential conflict, only for it to come out later once costs have been incurred, and when one side of the dispute may well have an interest in removing the conflicted party. Two recent cases demonstrate the risks associated with proceeding with less than total transparency on potential conflicts.

The first case is Halliburton Company v Chubb Bermuda [2020] UKSC 48. That case arose out of the Deepwater Horizon oil spill, and more particularly three arbitrations concerning disputes arising out of the disaster. 

The first arbitration was a dispute between Halliburton and Chubb, and concerned Chubb’s liability under an insurance policy issued in Halliburton’s favour. The second arbitration was an arbitration between Chubb and Transocean Holdings, concerning an insurance policy held by Transocean. There were close parallels between the subject matter of the dispute in the first and second arbitrations, which both concerned Bermuda Form high excess insurance policies governed by New York law.

The third arbitration was a dispute between Transocean and another party (which was not central to the Supreme Court’s decision).

The same Arbitrator was appointed in all three arbitrations, and in the usual way he gave disclosure of potential conflicts prior to his appointment in the first and second arbitrations. However, when he took on his appointment under the second arbitration, the Arbitrator failed to disclose that appointment to Halliburton.

Pausing there, one might think that is was always likely that Halliburton would find out about the second arbitration, given Chubb’s involvement in both disputes. That is exactly what happened and in November 2016, almost a year after Chubb had served its defence in the first arbitration, Halliburton’s lawyers wrote to the Arbitrator asking for an explanation of the failure to disclose the second appointment.

The Arbitrator responded, stating that it had simply not occurred to him that he was under an obligation to disclose to Halliburton his appointment under the second arbitration. That explanation did not satisfy Halliburton, who asked the Arbitrator to resign. When Chubb refused to agree to his resignation, Halliburton issued proceedings in the High Court to have the Arbitrator removed.

At first instance, Mr Justice Popplewell was unimpressed by Halliburton’s position. He considered that it was positively an advantage in some circumstances to have an Arbitrator appointed to multiple arbitrations concerning the same or similar subject matter, given the savings that could result from familiarity with the background and issues. He said:

The informed and fair-minded observer would not therefore regard [the Arbitrator] as unable to act impartially in the reference between [Halliburton] and [Chubb] merely by virtue of the fact that he might be an arbitrator in other references arising out of the incident, and might hear different evidence or argument advanced in another such reference. The objective and fair-minded assessment would be that his experience and reputation for integrity would fully enable him to act in accordance with the usual practice of London arbitrators in fulfilling his duties under section 33 by approaching the evidence and argument in the [Halliburton] reference with an open mind; and in deciding the case, in conjunction with the other members of the tribunal, in accordance with such material, with which [Halliburton] will have a full and fair opportunity to engage.”

Given that there was no potential conflict, in Popplewell J’s view, there was no obligation to disclose. 

The Court of Appeal thought that in the context of international arbitration, it was always good practice to disclose potentially troublesome conflicting appointments, and that in the circumstances of this case, the overlap between the subject matter of the three disputes could give rise to a “reasonable apprehension of lack of impartiality”. The Arbitrator therefore had an obligation to disclose.

However, the Court of Appeal did not think that the failure to disclose was sufficiently serious to warrant removal of the Arbitrator: the lack of disclosure did not give rise to an inference of apparent bias, the failure was accidental, the overlap between the disputes was limited and there were no justifiable doubts about the Arbitrator’s impartiality. 

The Supreme Court undertook a comprehensive review of the obligations of arbitrators when it comes to conflicts of interest, privacy and confidentiality, and how those obligations were affected by the particular context of international arbitration. The Court also engaged in interesting discussion of the difference between party-appointed and other arbitrators (in short, under English law their duties of impartiality etc. are the same).

Ultimately, the Supreme Court agreed with the Court of Appeal:

  • A fair-minded and informed observer would conclude that the Arbitrator’s second appointment “might reasonably give rise to the real possibility of bias”, and the Arbitrator therefore had a duty to disclose. In other words, the duty to disclose arose because of a double contingency: on the facts available at the time of the second appointment, there was a possibility of a possibility of bias.
  • However, whether there was in fact a real possibility of bias fell to be determined at the time of the application to remove. By that time, the Arbitrator had explained his non-disclosure and the circumstances in which he came to be appointed to the various arbitrations, and the way in which the Arbitrations developed meant that the “overlap” between issues was limited. A fair mind observer would not conclude that there was a reasonable possibility of bias, and therefore there were no “justifiable doubts about [the Arbitrator’s] impartiality.”  

That decision can be seen as a pragmatic one: although the Arbitrator had failed to disclose something he should have disclosed, by the time of the removal hearing, once the dust had settled and the Arbitrator had had an opportunity to explain himself, it was clear that that failure was both innocent and inconsequential. Removing the Arbitrator would have had costly consequences for the parties  that perhaps were not justified by the innocent non-disclosure of the second appointment. 

Whilst disaster was averted in this instance, the whole messy (and public) affair could have been avoided had the Arbitrator heeded the Court’s warning from Davidson v Scottish Ministers [2004] UKHL 34:

“[T]he best safeguard against a challenge after the event, when the decision is known to be adverse to the litigant, lies in the opportunity of making a disclosure before the hearing starts. That is the proper time for testing the tribunal’s impartiality. Fairness requires that the quality of impartiality is there from the beginning, and a proper disclosure at the beginning is in itself a badge of impartiality.

It seems likely that in an adjudication context, the Court would apply less strict an approach. Adjudication is a temporarily binding dispute resolution mechanism, so mistakes can always be fixed later and parties are more used to “rough and ready” adjudication decisions that might fall short of what would be expected in a full arbitral award. Nevertheless, if in doubt about the propriety of accepting multiple appointments, it is suggested that disclosing those multiple appointments to the parties will usually be the safest course (subject always to due regard to confidentiality).

The next case is Secretariat Consulting PTE Limited & Ors. V A Company [2021] EWCA Civ 6. Many readers will no doubt be familiar with Secretariat, which is a global firm of consultants and experts. A cursory inspection of Secretariat’s website shows that much like a global law firm or bank, the firm makes much of its geographic spread and breadth of available expertise.

In this case, the Defendant (“Company A”) engaged a Secretariat entity (“Secretariat 1”) to provide expert services in relation to a dispute concerning a petrochemical plant. The terms of engagement referred to a specific individual (“K”) who would be responsible for the necessary work.

Subsequent to that appointment, a third party (“Company B”) started an arbitration against Company A. Company B approached another Secretariat entity (“Secretariat 2”) to provide expert services on that dispute. K wrote to Company A, notifying them of Company B’s approach, but suggesting that there was no conflict of interest because the work would be done by different offices (which were separate legal entities), and concerned different issues (albeit related to the same petrochemical plant project). Perhaps understandably, Company A’s solicitors did not agree, and said that so far as they were concerned there was a conflict, and Secretariat could not take the Company B instruction.

Secretariat decided to press on, and accepted the instruction from Company B without further discussion with Company A or its lawyers. Company A found out about this when it received Company B’s statement of case, accompanied by 26 detailed schedules all produced by Secretariat. Company A was less than impressed, and issued proceedings against Secretariat claiming that:

  • Secretariat owed it a fiduciary duty, including a duty of loyalty which precluded it or related entities from accepting instructions that gave rise to a conflict of interest.
  • Alternatively, that the terms of the retainer between Secretariat 1 and Company A precluded Secretariat 1 and other Secretariat entities, including Secretariat 2, from accepting instructions which gave rise to a conflict.

As to the first question, Coulson LJ was reluctant to make a finding of a free-standing fiduciary duty owed by experts to their clients, which duty could have “many unseen ramifications”. While he considered it was possible that experts owed a fiduciary duty to their clients, it was not necessary to make that finding in this case, because the Court of Appeal found that the same result could be achieved by reference to the terms of Secretariat 1’s retainer.

That retainer included the following provision:

"Under no circumstances shall [Secretariat 1] at any time, without the prior written approval of [the respondent's solicitors] acknowledge to any third party what is or is not a part of the Confidential Information, nor shall [Secretariat 1] acknowledge to any third party the execution of this Agreement, the terms and conditions contained herein or the underlying discussions with [the respondent's solicitors]"

There was no difficulty in finding that this duty prevented Secretariat 1 from accepting instructions which gave rise to a conflict with the retainer with the instruction from Company A. The question was whether that duty extended to other Secretariat entities, including Secretariat 2.

In order to answer that question, the Court took into account the factual matrix behind the retaining with Company A, noting that:

  • All Secretariat personnel had “Secretariat International” in their email addresses.
  • Secretariat markets itself as a single global firm, rather than “a variety of different companies who were free to act as if they were unconnected with one another”.
  • On Secretariat’s website, the individuals involved in the Company A and Company B instructions are both identified as part of “the Secretariat International team”. 

Coulson LJ took a realist’s view of what this meant:

Just standing back from the evidence, and considering the matter in the round, it would be very surprising if SCL could say that its undertaking to avoid conflicts of interest in the future only bound one particular "office" within the Secretariat "global firm", and that there was therefore nothing to stop SIUL from accepting instructions which would put it in conflict with SCL. If nothing else, such rigid demarcation between the different entities would have put SCL in breach of the terms of the Confidentiality Agreement, because the Secretariat conflict check of October 2019 and its aftermath told at least SIUL and SAL that SCL had been engaged by the respondent, and even that was prohibited by the Confidentiality Agreement.

Indeed, Mr Hollander was obliged to accept that, on his case, there would be nothing to stop SIUL from accepting a retainer from the sub-contractor in Arbitration 1, so that representatives from Secretariat would be acting for and against the respondent in the same arbitration, despite the respondent's objection. He also suggested that SCL's representation that there was no conflict of interest in March or May 2019 would not have been false, even if SIUL had already been engaged by the subcontractor in Arbitration 1. In my view, these are such commercially unrealistic positions that I baulk at any suggestion that it could be what the parties intended by the inclusion of this clause in the retainer.”

Having found that that duty existed, Coulson LJ had no difficulty finding that it had been breached by accepting the instruction from Company B. He identified a “practical test” formulated by a “well-known city firm” partner who is quoted in Hollander and Salzedo on Conflicts of Interest:

"It's not difficult to work out what a conflict is. You put yourself in the client's shoes, and ask yourself 'would you like you doing what the other client has asked you to do?' If the answer is 'no', you've probably got a conflict."

There was no need to guess how that test applied in these circumstances, because Company A had made its views known: it did not want Secretariat to accept the instruction from Company B, and Secretariat had gone ahead anyway. Stripped down to that core fact, the Court of Appeal’s decision is perhaps unsurprising.

That said, in an age of ever-increasing consolidation of expert services amongst a few global firms, this sort of scenario is only likely to become more common, at least when it comes to large scale international disputes. 

There is of course nothing stopping Secretariat (or anyone else) from changing the terms of their retainer so that different offices are permitted to accept conflicting instructions, but if they are to do so they must negotiate for that right and let the market decide whether that is acceptable. 

As with the situation in Halliburton, above, transparency is everything.

Daniel Churcher, 4 Pump Court

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