Hong Kong – Court Finds No Apparent Bias On Arbitrator’s Part.
In TGL v SDC [2024] HKCFI 1796, the court dismissed the Respondents’ application to set aside an Enforcement Order, whereby the Applicant had been granted leave by the Court to enforce an arbitral Award made by the Shenzhen Court of International Arbitration (SCIA) against them. The court rejected the Respondents’ contentions that by virtue of the arbitrator’s relationship with the Applicant, there was apparent bias on the arbitrator’s part.
The arbitral Tribunal
The arbitral Tribunal had been formed when the Applicant appointed one Mr Chen (a partner of a Mainland law firm, CA) as its arbitrator and the Respondents appointed another arbitrator, who both then appointed a presiding arbitrator. The Tribunal issued an award in the Applicant’s favour and the Applicant obtained an order to enforce the Award in Hong Kong (Enforcement Order).
Grounds for setting aside Enforcement Order
The Respondents applied to set aside the Enforcement Order on the grounds that given the relationship between Mr Chen and companies associated with the Applicant (CN Zhongyuan, TFE, CN Nuclear and CN Investment), there was apparent bias on Chen’s part, in that he failed to disclose that relationship and the possibility of the existence of a conflict of interest on his part. The Respondents argued that this gave rise to justifiable and reasonable doubts in the mind of an objective observer as to the arbitrator’s independence or impartiality and that the composition of the tribunal was not in accordance with the parties’ arbitration agreement, and/or the law of the Mainland and/or would be contrary to the public policy of Hong Kong to enforce the Award, as being in breach of the basic principles of natural justice, such that the Enforcement Order should be set aside and enforcement refused under sections 95(2)(e) and 95(3)(b) of the Arbitration Ordinance (AO).
It was argued that Chen’s failure to make reasonable inquiries and act impartially and independently was in breach of the SCIA Rules governing the arbitration and in breach of his duties of disclosure under Article 12(1) of the Model Law which applies by virtue of s.25(1) of the AO, and in breach of his duty to act independently, fairly and impartially under s.46 of the AO. The Respondents also relied on common law principles to argue that there was apparent bias on Chen’s part, in that an objective fair-minded and informed observer with knowledge of the relevant facts would conclude in this case that there was a real possibility that the tribunal in the arbitration was biased, and that enforcement of the Award should be refused on public policy grounds.
Shenzhen Court’s refusal to set aside the Award
After the Award was handed down, the 1st Respondent had applied to the Shenzhen Intermediate People’s Court to set it aside, on the same grounds now relied upon, namely that Chen had acted in breach of the relevant rules and regulations governing the arbitration, and that the constitution of the tribunal and procedure in it was against the agreed procedure prescribed by law. It was claimed that under Article 34 of the Mainland Arbitration Law, an arbitrator should recuse himself if he had an interest in the case, or had another relationship with the parties which may affect the fairness of the arbitration. Further, under Article 27 of the SCIA Arbitration Rules, an arbitrator should be independent from the parties and should treat the parties fairly.
Upon inquiry by the Shenzhen Court, Chen issued a Response claiming that prior to accepting the appointment, he had conducted a conflicts search, and had confirmed there was no conflict of interest in his acting. He claimed that he had no relationship with the relevant companies or Applicant to create any conflict. The SCIA also issued a Reply to the Shenzhen Court confirming that it had made inquiries with Chen, who had confirmed his independence and impartiality. The SCIA stated that the matters relied upon by the 1st Respondent, which were claimed to have affected Chen’s independence and impartiality, had taken place before the arbitration, and there were avenues for the 1st Respondent to have ascertained these matters before the first hearing. The SCIA pointed out that throughout the entire arbitration, the 1st Respondent had failed to take any action to seek Chen’s recusal, and should be treated as having waived its rights.
In SCIA’s opinion, the fact that Chen’s present or former firm had provided legal advice to the relevant companies did not give rise to reasonable suspicion as to Chen’s independence or impartiality and did not constitute reasons for recusal under the Arbitration Law and nor did the SCIA Rules require the arbitrator to make disclosure or to recuse himself.
On the basis of Chen’s Response and Reply from SCIA, the Shenzhen Court ruled that an arbitrator’s duty of disclosure or to recuse himself was confined to cases in which a relationship of conflict exists between the arbitrator and the case itself, or the parties to the arbitration, or the agents/representatives of the parties, or by virtue of other matters which may affect a fair decision. It considered that the companies stated to have business dealings with Chen were not parties to the arbitration, but were independent legal entities, with businesses which were unrelated to the dispute in the arbitration. According to the Shenzhen Court, there was no evidence of any relationship of interest between Chen and the companies which might affect the impartiality of Chen’s judgment, nor create reasonable doubt as to his independence and fairness, so as to require disclosure under the SCIA Rules. The Shenzhen Court also referred to the fact that the 1st Respondent had failed to make any application in the course of the arbitration and before the final hearing, to seek Chen’s recusal, and should be treated as having concurred in Chen’s acting as arbitrator. The 1st Respondent’s application to set aside the Award was accordingly dismissed by the Shenzhen Court.
Hong Kong Court’s Decision
The court dismissed the Respondents’ application to set aside the Enforcement Order holding:
- As the underlying contract and arbitration, which was held on the Mainland, were governed by PRC law, the court would give due regard and weight to the Shenzhen Court’s findings and dismissal of the application to set aside the Award on the grounds of procedure, constitution of the tribunal, and alleged failure to comply with PRC law. The Shenzhen Court’s decision was evidence of the applicable Mainland law, and whether there was a breach of such law and of the SCIA Rules. According to the Shenzhen Court, there was no such breach concerning the arbitrator’s duty of disclosure, and no actual or apparent bias on his part in that there were no circumstances which may give rise to reasonable doubt as to Chen’s fairness and impartiality.
- However, since the Respondents relied on the Award having been made against principles of natural justice, and claimed that enforcement of the Award would be contrary to the public policy of Hong Kong, the court still had to consider common law principles governing bias, and decide whether there were circumstances, indicating to an objective observer in Hong Kong, that there was a real possibility that the tribunal was biased, and that it would be shocking to the conscience of the Hong Kong Court to enforce the Award in such circumstances.
- Under Article 12 of the Model Law, which has effect by virtue of s.25(1) of the AO, an arbitrator approached in connection with his possible appointment as arbitrator “shall” disclose any circumstances likely to give rise to justifiable doubts as to impartiality or independence, and from the time of his appointment and throughout the entire proceedings, the arbitrator shall without delay disclose any such circumstances to the parties. S.46 of the AO requires the tribunal to be independent, and to act fairly and impartially as between the parties. A challenge to an arbitrator’s independence and impartiality, as called for by s. 46, may be made on the ground of apparent bias, on the basis that the essential rule of natural justice has been breached.
- The right to a fair hearing by an impartial tribunal is fundamental. The impartiality of arbitrators is central to the entire arbitral process, and actual or apparent bias an arbitrator’s part is a sufficient ground for setting a determination aside. The test for determining apparent bias on the part of judges applies to arbitrators. This is the “reasonable apprehension of bias” test, of whether an objective fair-minded and informed observer, having considered the relevant facts, would conclude that there was a “real possibility” that the tribunal was biased. The threshold for establishing apparent bias is “only a real possibility of unconscious bias”. The test is not whether a particular litigant thinks or feels that the judge has been or may have been biased. What matters is the viewpoint of the hypothetical objective fair-minded and informed observer.
- The test applied by the courts is that of the reasonable third person. The court is required to look at the matter through the eyes of that reasonable man, to ascertain the relevant circumstances from the available evidence as would have been considered by the reasonable man, and consider what that properly informed, independent and objective observer would have concluded, as to whether there was a real possibility of bias. The key question was what the objective observer, and not what Chen himself, considered as to the possibility or otherwise of bias, and Chen’s own statement of any impact on his mind was not relevant to the issue which the objective observer must decide. The objective observer must be treated as fully informed of the facts and circumstances constituting the association alleged and relied upon in the complaint.
- In this case, the facts which the independent third-party observer was taken to have known were: In April 2019, the Applicant commenced arbitration against the Respondents. Chen was a partner of CA, from September 2019 and formerly a partner of GL from December 2017 to September 2019. In September 2020, the arbitral tribunal was empaneled with 3 arbitrators, and Chen appointed as arbitrator on the Applicant’s nomination. Three years prior to Chen’s appointment as arbitrator, he had given a lecture or legal training to CN Zhongyuan, a subsidiary of CN Engineering which is an associated company of CN Nuclear, the 30.11% shareholder of the Applicant’s parent company. Some four or five years prior to constitution of the arbitral tribunal, CA had acted for TFE, a sister company of the Applicant, in Mainland proceedings. At some unknown time prior to the arbitration, GL, had acted for TFH, the parent company of the Applicant in Mainland litigation. In May 2022, in the course of the arbitration, a partner of CA had tendered for a project of CN Nuclear /CN Investment. The arbitral Award was issued on 23 May 2022 in the Applicant’s favour and one day after, it was announced that CA was recommended as service provider for the project of CN Nuclear/CN Investment, and on 31 May 2022, the contract was announced to be awarded to CA.
- The authorities on the test of the hypothetical objective observer have highlighted the fact that although such a person is not a lawyer, he is neither wholly uninstructed about the law in general or the issue to be decided. He is informed, reasonable and fair-minded, and would ordinarily be taken to have sought to be informed on the most basic considerations relevant to arriving at a conclusion. His conclusion would be founded on a fair understanding of all relevant circumstances and he would not reach a hasty conclusion, is neither complacent, nor unduly sensitive or suspicious. With these attributes, would the objective, reasonable and fair‑minded observer conclude that there was a real possibility that Chen was biased, and would not act impartially and fairly as arbitrator of the dispute between the Applicant and Respondents? The court was not satisfied that he would be.
- There must be “a cogent and rational link between the association and its capacity to influence the decision to be made”, before it can be concluded that by virtue of the association alleged, the adjudicator might not bring an impartial and unprejudiced mind to the resolution of the dispute. The key question is not just the existence of the association in question, but whether the nature and extent of it resulted in a reasonable bystander concluding from it that the adjudicator might be influenced by it, to be biased, or prejudiced, or partial. Where the association in question is “trivial, remote or indirect”, the court might conclude that the association is not a disqualifying one.
- CN Zhongyuan could only be described as an indirectly associated company of the Applicant’s Parent. The lecture or legal training by Chen had taken place three years prior to the Applicant’s nomination of Chen as arbitrator. Chen was a partner only after CA had acted for TFE in proceedings and Chen could not have derived any financial interest, or benefit from CA’s involvement in the proceedings. The tender submitted to CN Nuclear/CN Investment, was made by another partner of CA, allegedly without knowledge or involvement of Chen. The invitation for the tender was apparently announced after Chen’s appointment in the arbitration, and would not have been known to Chen even if he had conducted a conflict of interest search prior to accepting nomination as arbitrator.
- Chen’s past involvement or dealings with the relevant companies were not sufficiently close or frequent to cause the objective and fair-minded observer to think that Chen had a close and serious relationship with them in the wider sense, which relationship might be reasonably perceived to have a capacity to influence how Chen might approach the resolution of the dispute to be decided by him in the arbitration. When the court considers the perspective of the objective, reasonable and fair-minded observer, some reasonable leeway should be given to cater for the realities of the practical and commercial world, as the reasonable observer would accept that it would be unreasonable and unreal to expect the observance of the best and highest standards of practices, over and above what can be described to be reasonable.
- Even if a conflict search had been done by Chen before his appointment as arbitrator, it is probable and reasonable that the search would not disclose Chen’s or CA’s involvement in any work for TFE, or CN Zhongyuan, which were more remotely associated with the Applicant. Although Chen himself should know that he had given a lecture or legal training to CN Zhongyuan in 2016, this could hardly be said to be a matter which would lead a reasonable, objective and fair-minded observer to conclude that by virtue of such involvement three years before the arbitration, there was a likelihood or any real possibility that Chen would be biased, or that it was a matter which would give rise to justifiable doubts as to Chen’s impartiality or independence.
- Whilst the appearance and perception of impartiality are important, the courts do not take a hypothetical or unrealistic view of associations objected to and relied upon by a party when a claim of either disqualification or apparent bias is made. It is always a question of degree whether the nature and extent of the association is such as to give rise to reasonable doubt and suspicion as to the impartiality of the tribunal. Even if an association can be established, there must be reasonable and rational basis for the conclusion that the association is capable to influence the impartial mind of the decision maker, such that the objective and informed observer can conclude that there is a real risk of bias.
Court’s conclusion
The court concluded that in all the circumstances of this case, the objective and informed observer would not be so unduly suspicious as to conclude that because of Chen’s history of dealings with the Applicant’s loosely associated companies, he was in a position to be influenced to act partially in favor of the Applicant and would not be so unduly suspicious as to consider that Chen actually had knowledge of his partners’ tender to CN Nuclearl/CN Investment after his appointment as arbitrator, and that he had deliberately abstained from disclosing this matter to the tribunal and the Respondents. If Chen had no knowledge of the tender and any association with TFH, he was not in breach of his duty to make disclosure. Accordingly, there was no cogent and rational link between any association which Chen may have had with the Applicant, and the capacity of such association to influence Chen’s decision in the arbitration, to give any impression of possible bias on Chen’s part.
Having rejected the ground of apparent bias or lack of impartiality, the court held that there was no other reason to refuse enforcement of the Award on the ground that it was contrary to the fundamental conceptions of morality and justice to enforce the Award, or that it was so shocking to the court’s conscience as to render enforcement repugnant.
Comments
The judge in this judgment followed the objective test for determining whether there were justifiable doubts as to the arbitrator’s impartiality or independence set out in the often cited case of Jung Science Information Technology Co. Ltd. V ZTE Corporation [2008] 4 HKLRD 776 (Deacons represented Jung Science).
It was also held in Jung Science that there is a distinction between circumstances which give rise to a duty to disqualify and those which give rise to a duty to disclose. A failure to disclose, of itself, can be one of the circumstances which together with others may give rise to a reasonable apprehension of bias as a party or the public may well be left with the impression that there was intentional concealment or non-disclosure. However, in this case, the judge found that the duty of Chen to disclose did not arise for reasons explained above.
For further information, please contact:
Stanley Lo, Partner, Deacons
stanley.lo@deacons.com
