Reflections on arbitrators’ duty of disclosure

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REFLECTIONS ON ARBITRATORS’ DUTY OF DISCLOSURE: THE ELDORADO CASE

Natália Salvador Veiga[1]

 

  1. Introduction

             Constituting the arbitral tribunal is a fundamental step in initiating arbitration proceedings. The parties’ ability to be involved in the selection of the decision-makers is often seen as a key advantage of arbitration over litigation, and in many cases proves to be attractive to parties seeking to resolve a dispute. Indeed, the role of the arbitrators is seen to be so crucial that, as Jean-Flavien Lalive once stated, “arbitration is only as good as the arbitrators.”[2]

As neutral decision-makers, arbitrators must remain impartial and independent of the parties involved in the proceedings. The principle of impartiality requires that the arbitrator’s state of mind should not be affected by bias, while the principle of independence refers to the objectivity of the relationships between the arbitrator and the parties or their attorneys. In order to minimize information asymmetry between the arbitrators and the parties involved in a given dispute, arbitrators have a duty to disclose circumstances that are likely to raise justifiable concerns regarding their impartiality or independence.[3]

Certain countries, like Brazil, have enacted national statutes establishing the arbitrators’ duty to disclose. Soft law also plays an essential role in this regard. However, there is no exhaustive set of rules on what the arbitrators must reveal, which has led to many animated practical and academic discussions on the topic. Some key issues that remain unclear include (i) what should be disclosed and to what extent (IBA Guidelines), (ii) whether disclosure only covers the relationship between the arbitrator and the parties or whether it covers their lawyers as well, (iii) whether it is better to take a more conservative approach to disclose information so as to not derail arbitration, and finally (iv) whether the parties have any duty to investigate disclosures.

This analysis aims to provide some insights on this topic in light of a recent decision issued by the São Paulo Court of Appeals.[4] In staying an award on liability in a multibillion-dollar ICC dispute over the sale of a pulp manufacturer, the court recognized that there was evidence that one of the arbitrators failed to disclose information regarding his relationship with one of the parties’ attorneys.

Though the case remains subject to court-ordered confidentiality in Brazil, it was considered sufficiently relevant to be broadly publicized in international media. On the basis of the information publicly available, it is possible to reflect on the extent to which the duty of disclosure plays a role in international arbitration, as well as its implications over both arbitral and judicial proceedings.

 

  1. Case summary: facts and procedural overview

 

The arbitration leading to the aforementioned award involves the fulfillment of conditions precedent to the sale of shares in Eldorado Brasil Celulose S.A. (“Eldorado”). J&F Investimentos S.A. (“J&F”) and CA Investment (Brazil) S.A. (“CA”) entered into share purchase agreements in 2017, through which they agreed that CA would acquire 100% of Eldorado’s      shares owned by J&F  in a transaction worth approximately USD 2.7 billion[5] through three separate successive tranches. The first two were completed at a value of nearly USD 682 million, resulting in CA holding an interest of 49.41% and J&F holding an interest of 50.59% in Eldorado.

However, issues arose during the third phase of the acquisition. The remaining shares were supposed to be sold subject to the satisfaction of conditions precedent, mainly related to a seller’s guarantee release. The parties disagreed on whether the guarantees had been released in a timely manner, leading J&F to cancel the deal. Both sides accused each other of not complying with certain conditions set forth in the initial agreement, and in September 2018, CA filed an arbitration claim against J&F under the ICC Rules.[6] The arbitral tribunal was constituted in March 2019, with CA appointing Anderson Schreiber (Brazil) and J&F appointing José Emilio Nunes Pinto (Brazil). The co-arbitrators nominated Juan Fernández-Armesto (Spain) as chairman.

In February 2021, the arbitral tribunal issued a partial award determining that J&F must comply with the agreement to sell its remaining stake in Eldorado to CA. The award also found that J&F had acted in bad faith when it terminated the deal.[7] In July 2021, J&F filed a lawsuit in the São Paulo courts claiming the award should be set aside on the basis that, inter alia, arbitrator Anderson Schreiber had violated his duty of disclosure.

J&F alleged that Anderson Schreiber failed to disclose his ties to CA’s former counsel in the arbitration, such as the existence of an expense apportionment agreement Mr. Schreiber’s previous law firm had entered into with CA’s lawyers. In J&F’s view, this agreement demonstrated that the arbitrator and the lawyers allegedly shared offices and employees in Rio de Janeiro and São Paulo as recently as two years prior to the arbitration proceedings.

In a preliminary decision on an interlocutory appeal, the São Paulo Court of Appeals[8] stayed the award and granted J&F’s request for interim relief. Upon initial review, the court recognized that Anderson Schreiber’s statement of impartiality and independence “lacked further information (…), as it appears possible that the arbitrator had a professional relationship with CA’s lawyers.”[9]

A final decision on this interlocutory appeal is yet to be issued, meaning that the interim relief awaits confirmation. However, in August 2021, Anderson Schreiber sent a letter to the ICC in which he stepped down from his role as arbitrator in the case, albeit denying every single accusation against him.[10] [11][12]

 

  1. Critical analysis

 

Parties usually base their choice of arbitrators on factors such as qualifications and expertise, powers of persuasion, reputation and nationality.[13] When appointed, arbitrators are generally asked to either disclose any conflicts of interest they may have or otherwise affirm that they have none. In institutional arbitrations, they are also informed of their duty to deal with the case in line with the principles of impartiality and independence, and to notify any potential conflicts that may arise during proceedings. Under Article 14(2) of the ICC Rules of Arbitration – applicable to the Eldorado case – parties have 30 days to challenge the appointment of the arbitrators if they consider their declarations demonstrate evidence any conflict of interest. This process assists in establishing transparency with the parties, enhancing the legitimacy of arbitration.[14]

According to Article 14(1) of the Brazilian Arbitration Act (Federal Law No. 9,307/1996)[15], “prior to accepting the service, an individual appointed to serve as an arbitrator must disclose any circumstances likely to lead to justifiable doubts as to his or her impartiality or independence.”[16] The disclosure itself, however, does not imply the existence of a conflict of interest or a presumption to that effect.[17] Furthermore, Article 20 states that a party wishing to challenge an arbitrator “must do so at the first opportunity once the arbitration commences.”[18]

Considering that little guidance is available in regard to what the arbitrator must disclose, arbitration practitioners (counsels, arbitrators, parties, and experts) have to look to other sources to seek out the best standards. The IBA Guidelines on Conflicts of Interest in International Arbitration have an essential role in this context, as well as the AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes. These documents reflect internationally accepted standards on how arbitrators may assess, inter alia, impartiality and independence in practice.

In the case under analysis, J&F alleged that one of the party-appointed arbitrators should have disclosed his previous connection with the other party’s lawyer. As a consequence, J&F argued that the violation of the duty to disclose per se nullified the award, because damages are presumable, and that the prejudice in this situation is in re ipsa. CA disagreed, alleging that no violation of the duty of disclosure took place as (i) the agreement dealt only with the sharing of the same office space, asserting that the law firms were completely different entities; (ii) Anderson Schreiber never negotiated the agreement, rather, it was his former partner; and (iii) the arbitrator had not even met CA’s lawyers until the day of the hearing in the arbitration proceedings. Irrespective of these elements, CA alleged that J&F should have to demonstrate how this implicated a lack of impartiality or independence, even if a violation of the duty to disclose had occurred.

Both J&F and CA have put forward strong arguments. The fact that the award was unanimous can demonstrate that Anderson Schreiber did act impartially and independently because the other two arbitrators also both ruled against J&F, including the one appointed by J&F itself. Moreover, the fact that J&F brought these accusations against the arbitrator only after an unfavorable award may indicate (i) that the party did not comply with the legally-determined requirement of speaking up at the first opportunity, and (ii) that J&F used a sandbagging strategy, that is when a party chooses not to file a procedural objection until it sees if the tribunal renders an award in its favor.[19]

Still, the court ruled in favor of J&F. Awards issued in arbitrations are generally final, and the losing party cannot file a claim seeking to nullify the award based on its merits. However, when parties allege an arbitrator’s violation of duty of disclosure, it is unreasonable to expect them to demonstrate how this violation actually affected his or her impartiality and independence. The subjective nature of this issue makes it very hard to do so, and requiring such evidence would very likely place a high burden on that party.

The preliminary decision issued by the São Paulo Court of Appeals stated that professional ties between the arbitrator and the lawyers of the parties occurring “at a given recent period of time, must be, as a rule, part of the certificate drawn up by the contracted judges” and that “trust in the arbitrators providing an equidistant assessment of the litigants’ claims depends intrinsically on the information they provide in advance to those who, in turn, can freely interfere in their appointment or rejection.”[20]

Therefore, the São Paulo Court of Appeals’ decision seems cautious because it reflected objective legal grounds, especially considering that “a party is not required to establish that there are circumstances demonstrating that an arbitrator lacks independence or impartiality,” but rather, “it is sufficient to show that there are ‘circumstances likely to give rise to justifiable doubts’ that he or she lacks these requirements based on objective grounds.”[21] As previously mentioned, this conclusion is in line with the Brazilian Arbitration Act.

 

  1. Conclusion

 

This is a typical hard case. It concerns arbitrators’ duty of disclosure in a highly complex dispute, giving rise to intricate debates on issues central to arbitrators’ roles as decision-makers. Due to the counterparty’s appointed co-arbitrator failing to disclose a potential conflict of interest, one of the parties claimed this could have impacted his performance. Meanwhile, the other party has questioned not only the timing of the allegations, as the former party raised its concerns directly before the Judiciary during the post-award stage, thus after losing the arbitration, but also the absence of proof that the arbitrator acted without impartiality and independence.

Since little information is currently available to the public, it would not be wise to reach a conclusion on the outcome of this case at this stage. However, the discussion regarding the arbitrators’ duties sheds light on an interesting topic that legal scholars do not explore very often: do parties have a duty to thoroughly investigate the arbitrators’ background once they are appointed?  Will the challenge to the arbitrator’s impartiality be weaker if brought only after an unfavorable award     ?

In any event, arbitrators and parties must be diligent and vigilant in their duties during arbitration proceedings. Frivolous claims that aim to set aside awards and seek to review a case’s merits based on unreasonable arguments, and arbitrators who violate their duties as decision-makers can only serve to jeopardize arbitration as an institution. Awards should be annulled when – and only when – objective legal requirements are explicitly fulfilled.

The arbitration community awaits the outcome of the Eldorado case with great anticipation, which should undoubtedly fix essential guidelines on arbitrators’ duty of disclosure.

[1] LL.M. in International Business Regulation, Litigation and Arbitration from New York University School of Law (2022). Specialization in civil procedure law from Fundação Getulio Vargas School of Law of São Paulo (2018). Bachelor of Law from Pontifical Catholic University of São Paulo (2015). Attorney.

[2] Jean-Flavien Lalive, Some practical suggestions on international arbitration, in Melanges en l’honneur de Nicolas Valticos: Droit et Justice, 289 (Pedrone, 1989).

[3] Franco Ferrari & Friedrich Rosenfeld, Introduction to International Commercial Arbitration 74-75 (Edward Elgar Publishing, 2021).

[4] 2nd Reserved Chamber of Business Law, Interlocutory Appeal No. 2168253-82.2021.8.26.0000 (Braz.).

[5] The agreement was originally worth BRL 15 billion.

[6] Case No. 23909/GSS.

[7] Global Arbitration Review, https://globalarbitrationreview.com/conflicts-of-interest/brazilian-court-stays-pulp-award-over-potential-arbitrator-conflict (last visited Dec. 6, 2021).

[8] 2nd Reserved Chamber of Business Law, Interlocutory Appeal No. 2168253-82.2021.8.26.0000 (Braz.).

[9] Translation by the author.

[10] Global Arbitration Review, https://globalarbitrationreview.com/arbitrator-resigns-brazilian-pulp-case (last visited Dec. 6, 2021).

[11] The case even had criminal implications, because the Civil Department of the Police of Rio de Janeiro started an investigation against Anderson Schreiber at J&F’s request (O Globo, https://blogs.oglobo.globo.com/lauro-jardim/post/jf-versus-paper-excellence-mais-um-capitulo-da-guerra-judicial.html – subscription required, last visited Dec. 6, 2021).

[12] On April 5, 2022, José Emilio Nunes Pinto (the arbitrator appointed by J&F) also submitted his resignation request to ICC to leave the dispute (Valor Econômico, https://valor.globo.com/legislacao/valor-juridico/coluna/jandf-x-paper-excellence-arbitro-deixa-processo-na-briga-por-controle-da-eldorado.ghtml – subscription required, last visited Apr. 6, 2022).

[13] Ferrari & Rosenfeld, supra note 3, at 72.

[14] Id. at 74.

[15] The law applicable to the case as per the parties’ choice.

[16] This rule aligns with Article 12 of the UNCITRAL Model Law on International Commercial Arbitration.

[17] Ferrari & Rosenfeld, supra note 3, at 77; IBA Guidelines.

[18] “Article 20 does not provide for the consequences of such failure regarding a timely objection. Case law indicates that the consequence could be a preclusion (estoppel), depending on the objection raised, as discussed in this book.” (André Abbud, Daniel Levy & Rafael Alves, The Brazilian Arbitration Act: A Case Law Guide 103 (Kluwer, 2019).

[19] As exemplified by Horacio Alberto Grigera Naón “[o]ther objections may be part of a sandbagging strategy aimed at laying traps to be used in a future attempt to challenge the arbitral award or the arbitrators (Horacio Alberto Grigera Naón, Chapter 1. What Duties do Counsel Owe to the Tribunal and Why?, in Players Interaction in International Arbitration 15 (Kluwer, 2012).

[20] Translation by the author.

[21] Ferrari, supra note 3, at 76.

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