An Arbitrator’s Obligation to Disclose Potential Conflicts in Japan

Aug 2021

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This post provides a review and analysis of the Osaka High Court’s decision in Prem Warehouse LLC, et. al v Sanyo Electric Co. Ltd. et. al., 11 March 2019, 2017 (RA) no. 1552

While the Haliburton v Chubb Supreme Court decision in England has been attracting headlines in relation to arbitrator conflicts and the risk of apparent bias (see our team’s post on that case here), Japan’s Supreme Court has also recently grappled with the question of arbitrator conflicts in a matter that has helped to clarify Japanese law on an arbitrator’s duty to disclose.  In Prem Warehouse LLC v Sanyo Electric Co Ltd, a case which like Haliburton also stretched back to 2015, an attempt was made to set-aside an arbitration award on the basis of a challenge to an arbitrator for failing to disclose a potential conflict of interest.  The matter was addressed at all levels of the Japanese court system but has recently been clarified following the intervention of Japan’s Supreme Court and reconsideration by the Osaka High Court.  The upshot of it all is that the Supreme Court has introduced a new legal standard for arbitrator disclosures, with an emphasis on fact-based assessments of “reasonableness,” which may well result in Japanese arbitral awards facing additional challenges in the future.

Background

The case involved an attempt to set aside an Award issued under the auspices of the Japan Commercial Arbitration Association (the “JCAA”) on the basis that the presiding arbitrator, a partner in the Singapore office of a law firm, failed to disclose the fact that an associate of the arbitrator in one of his firm’s US offices had represented an affiliate of the Claimant company in an ongoing matter unrelated to the arbitration.

Japan’s Arbitration Act (the “AA”) requires disclosure by an arbitrator of “any circumstances likely to give rise to justifiable doubts as to its impartiality or independence” (Article 18(3) & (4)), and international best practice as reflected by the IBA Guidelines on Conflicts of Interest in International Arbitration (the “Guidelines”), requires that a conflicts check should be undertaken by an arbitrator and their firm to ensure that no such potential conflict exists.  Under the Guidelines, the facts in this case represented an ‘Orange List’ situation in relation to which it was therefore claimed that a conflicts check should have been conducted.  The Orange List covers situations which ‘may’ in the eyes of the parties give rise to doubts as to an arbitrator’s impartiality or independence such that there is a duty to disclose all such situations where:

3.1.4: The arbitrator’s law firm has, within the past three years, acted for…an affiliate of one of the parties, in an unrelated matter without the involvement of the arbitrator.”

3.2.1: The arbitrator’s law firm is currently rendering services to…an affiliate of one of the parties, without creating a significant commercial relationship for the law firm and without the involvement of the arbitrator.”

Facts

The background facts are a little convoluted but the failure to disclose in this case essentially arose as a result of an administrative oversight, in that although the arbitrator’s associate had indeed acted on behalf of an affiliate of the Claimant company in unrelated US court proceedings, he did so when working with his former law firm.  When he left that law firm, the firm omitted to file a notice with the US court notifying the court that as the associate had changed law firms, there would be a change of counsel.  Consequently, the associate’s name remained on the court record.

To further complicate matters, the reason this became an issue during the course of the arbitration proceedings (and not prior to the appointment of the arbitrator) is that the affiliate company for whom the associate once acted only became an affiliate after it purchased the Claimant company part-way through the arbitration.

As a result, although it was found that the arbitrator’s firm did have a proper conflict system in place, neither the firm nor the arbitrator were aware that a potential conflict on the record existed.  The associate ceased acting for the Claimant company’s affiliate when he changed law firms and therefore did not identify it as a client for conflict purposes.  As such, the conflict check did not identify any potential conflict despite the fact that the US court records (which had not been updated) did indicate potential grounds for conflict – thereby prompting the Respondent company’s challenge in this case.

The Tribunal issued an Award in favour of the Claimant in response to which the Respondent commenced proceedings in the Osaka District Court, seeking to set-aside the Award on the basis that because of the non-disclosure, the composition of the Tribunal was contrary to Japanese law (Article 44(1)(vi) of the AA).

Osaka District Court

In what was seen by the international arbitration community as a sensible and proportionate approach in the circumstances and one which helped affirm Japan’s reputation as an arbitration-friendly jurisdiction, the Osaka District Court dismissed the setting-aside application on the basis that:

  • there were no “reasonable grounds” on which to suspect the impartiality or independence of the arbitrator and, even if the situation had been disclosed, it would not have affected the outcome of the Award; and
  • if there had there been any breach of the arbitrator’s duty of disclosure, it was “minimal” and did not warrant setting-aside the Award. Moreover, the arbitrator had submitted an “advance waiver” to the JCAA and the applicant/Respondent had not objected to it.

Commentators felt that in refusing to set-aside the arbitral award and in doing so on discretionary grounds in circumstances where the breach was minimal and had no direct effect on the outcome of the award, the District Court demonstrated a positive, pro-arbitration approach with much to recommend it.

Osaka High Court, Part I

However, the matter was then appealed in the Osaka High Court which in June 2016, overturned the District Court’s decision, placing a more significant emphasis on the applicant/Respondent’s perspective of the information that had not been disclosed.  Even though it was common ground that if the alleged potential conflict existed, it was of an insignificant nature, the High Court nevertheless found that the undisclosed information would have had a critical bearing on the Respondent’s decision to challenge the presiding arbitrator – by failing to disclose that information, the Respondent’s position was prejudiced.

In other words, the High Court found that arbitrators are not excused from disclosing facts they do not know – they “bear the burden of conducting an investigation in order to disclose any facts that can be learned without undue exertion.”  The presiding arbitrator was under a duty to investigate whether there were facts that should have been disclosed, including a duty to retrieve all information that was readily accessible.  The Court considered that had a more thorough conflicts check been carried out, the information should have been identified and should have been disclosed.  Consequently, the High Court held that the failure to identify this information represented a significant procedural defect which, even if it may not have had any direct effect on the outcome of the arbitration, was sufficient to trigger grounds for annulment under the AA.

As regards the ‘advance waiver’ issued to the JCAA, although the arbitrator had declared at the time of his appointment that colleagues in his firm might in the future engage in matters that could raise a potential conflict, the Osaka High Court found that a general disclaimer, such as the arbitrator’s advance declaration in this instance, fell short of what was required under the AA.  This recognised the difficulty for a potentially prejudiced party of being able to discover when any such conflict might arise – especially, in the context of unrelated arbitration proceedings which invariably would be conducted in private.

As such, the High Court concluded that to ensure the fairness of the arbitral procedure and resulting Award as well as to maintain confidence in the arbitral system, the Award should be set-aside: the arbitrator’s duty of disclosure was paramount to ensuring the integrity of the arbitral process.

Supreme Court

Unsurprisingly, the matter was appealed again, and in December 2017, Japan’s Supreme Court overturned the Osaka High Court’s decision.  The Supreme Court agreed with the High Court regarding the extent and ongoing nature of an arbitrator’s duty to disclose.  It also agreed that an advance waiver submitted to the JCAA by the arbitrator would not be sufficient to excuse a failure to disclose for the purposes of Article 18 of the AA.  However, the Supreme Court did not agree with the standard set by the Osaka High Court in determining whether an arbitrator had satisfied their duty to disclose.  Instead, the Supreme Court held that an arbitrator has a duty to disclose: “all the facts that would likely give rise to doubts as to his/her impartiality or independence” if they either: (i) were aware of such facts; or (ii) could have discovered such facts by conducting a reasonable investigation.

The Supreme Court found that on the facts, it was unclear whether the arbitrator was actually aware of the potential conflict and whether the arbitrator could have discovered the conflict prior to the conclusion of the arbitration, even if a reasonable investigation pursuant to Article 18(4) of the AA had been conducted.  Accordingly, the case was therefore remanded to the Osaka High Court for further consideration of these issues and in particular the question of whether the arbitrator had any actual knowledge of the potential conflict and/or whether a reasonable investigation/conflicts check had been conducted.

Osaka High Court, Part II

In March 2019, the final episode in what had become a long-running box set finally concluded with the second decision of the Osaka High Court, that:

  • the fact that an attorney at the same law firm as an arbitrator acted as counsel in an unrelated matter for an affiliate of a party involved in an arbitration case in which the arbitrator had been appointed is a matter which should have been disclosed under Article 18(4) of the AA; but
  • if the arbitrator’s law firm has established a general level conflicts check system and the arbitrator conducts a conflicts check in the way that is required under that system, the arbitrator should be evaluated as having conducted a reasonable range of investigation for potentially disclosable information.

In short, the Osaka High Court found that although the type of information which was the subject of this case should have been disclosed, the arbitrator had complied with his obligations under the AA by conducting a standard conflicts check (a “reasonable investigation”) – even though that check did not result in the disclosure of the information.  The Award was therefore upheld but only after 5 years of challenges.

Comment

Undoubtedly, the Japanese courts eventually arrived at the right decision in this case, particularly in circumstances where it was found that even if disclosed, the facts would not have impacted on the outcome of the case. Although time consuming for the parties, the decision has established a helpful precedent when questions of arbitrator related disclosure arise in the future.

Bearing in mind the increase in the number of arbitrator challenges in recent years, the case underlines the importance of ensuring that a thorough and comprehensive conflicts check system is established so that any potential conflicts of interest, even if not grounds for having “justifiable doubts” as to the impartiality or independence of an arbitrator, are disclosed to the parties.

Equally important in this context, is the finding that even if a potential conflict exists but is not detected, provided regular conflict checks are conducted, an arbitrator (and any Award that has been issued) should be protected from challenge on the basis that a reasonable investigation was in fact conducted and they therefore complied with their disclosure obligations.

For clients, the case is a reminder that it is always important to pick experienced arbitration counsel (ahem…) who will know the right questions to ask potential arbitrators so as to fend off these issues early on and in the most cost-effective manner.

While the arbitral award in this matter survived the challenge and this is therefore a positive development for Japan’s developing reputation in international arbitration, the Supreme Court’s newly formulated legal standard for arbitrator disclosures – based on a standard of “reasonable investigation” – may result in more fact-based investigations of arbitrators’ conduct by lower courts.  Given that these days, lawyers tend to move frequently between law firms and M&A transactions seem to be increasing year on year, parties should be alive to this potential for additional fact-based reviews by the courts.

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