PACIFIC CHINA HOLDINGS LTD v. GRAND PACIFIC HOLDINGS LTD

HCCT5/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.5 OF 2007

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 J U D G M E N T

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1. By this originating motion, the applicant (Pacific China) seeks an order removing Mr James Carter (“Mr Carter”) as an arbitrator from the tribunal of three arbitrators currently conducting an arbitration between the parties herein.  Throughout, the applicant has emphasized that no impropriety or deliberate misconduct is alleged against Mr Carter.  The issue raises an important question of principle relating to disclosure and whether apparent bias has been shown justifying the removal of Mr Carter from the tribunal.

Background

2. The relevant facts, in outline, are as follows.

3. Grand Pacific and Pacific China are the two parties to an arbitration.  Under the rules governing the proceedings (the Rules of Conciliation and Arbitration of the International Chamber of Commerce (“ICC”)) each party nominated one arbitrator.  Grand Pacific nominated Mr Carter and Pacific China nominated Ms Sally Harpole (“Ms Harpole”).

4. By agreement between the parties, the nominated arbitrators (who had been subsequently formally appointed as such by the ICC) would then nominate a third arbitrator by agreement.  If they were unable or failed to reach a consensus, the third arbitrator would be appointed by the ICC.

5. Mr Carter and Ms Harpole were confirmed as co-arbitrators on 25 September 2006 and were given 30 days to make a joint nomination of a third arbitrator, who would be the chair.

6. It is a fact that in the days following his appointment, Mr Carter made unilateral verbal contact with the solicitors of Grand Pacific.  Pacific China claim, and this is the sole issue in the application, that Mr Carter should disclose all the content and details of such contacts.  Mr Carter’s response, both from himself and from Grand Pacific’s solicitors, has been consistently stated on more than one occasion and in writing that the verbal communications were of a “non-substantive” nature and concerned possible candidates for the third arbitrator.  He has declined to make any further disclosure.

7. This application naturally proceeds on the basis that the short response as given is true, there being no issue as to Mr Carter’s honesty and integrity.

8. No rules were laid down as to how the nominated arbitrators should go about their task of reaching a consensus on the identity of the third arbitrator.  It is worthy of note that the initial reaction of both arbitrators was to discuss the matter with the party who had, respectively, nominated them.  However, at an early stage, Mr Charles Allen (of Sidley Austin, Pacific China’s solicitors) wrote to Ms Harpole, on 2 October 2006, in the following terms (inter alia) :

“The agreement between the parties is that the party-appointed arbitrators will nominate the third arbitrator.  It is neither an express nor, in our view, an implied term of that agreement that there should be discussions amongst the parties and the arbitrators as to the identity of the third arbitrator, although our clients have no objection to there being such a discussion provided it is conducted transparently.

We do not consider it appropriate for any part of that discussion to take place between the parties and their nominated arbitrators on an ex parte basis.  Such a discussion conducted on that basis would, in our view, be inconsistent with the strict terms and spirit of the ICC Rules which require arbitrators to be and remain independent of the parties (Article 7-1).  It would also be inconsistent with the terms and spirit of the Hong Kong Arbitration Ordinance, which requires arbitrators to act fairly and impartially as between the parties (section 2GA(1)(a)).”

9. Subsequent requests for all details of communications, both written and verbal, between Mr Carter and the solicitors who had nominated him (Allegaert, Berger and Vogel) were refused subject to the limited response referred to above.

10. Such refusal led to this application.  It is not in dispute that this court has jurisdiction to resolve the question of whether Mr Carter should be removed as an arbitrator and that the matter be determined under the procedural laws of Hong Kong.

The applicant’s position

11. Mr Robert Whitehead, SC for the applicant, submits that once the arbitral process has begun the lack of disclosure, as complained of in this case, constitutes a lack of transparency which should be construed as apparent bias.  He emphasizes that his argument is based on apparent bias, not actual bias.  Such disclosure and transparency, he submits, is required by Hong Kong law.

12. The applicant makes the following points :

(1)     The starting point in Hong Kong law may be found in section 2GA of the Arbitration Ordinance :

“(1)    When conducting arbitration proceedings or exercising any of the powers conferred on it by this Ordinance or by the parties to any such proceedings, an arbitral tribunal is required—

(a)   to act fairly and impartially as between the parties, giving them a reasonable opportunity to present their cases and to deal with the cases of their opponents; …”

(2)     The above section is engaged in this issue because the arbitral process has commenced once Mr Carter has been appointed.  Section 2GA is not limited to the determination of the merits of the dispute.  It includes any of the arbitrator’s powers.

(3)     Mr Carter was acting in accordance with his powers when he unilaterally contacted Allegaert Berger and Vogel on the subject of a possible chairman.

(4)     The power granted to Mr Carter was by letter and was specific.  It stated :

“… The agreed procedure is that the two arbitrators nominated by the parties and appointed by the ICC should nominate the third arbitrator/chairman of the Arbitral Tribunal.  Should such procedure not result in a nomination within the time limit fixed by the ICC, the third arbitrator/chairman shall be appointed by the ICC pursuant to the ICC Rules.”

 It did not confer power on Mr Carter to engage in confidential talks.  It could have done so had that been the wishes of the parties.

(5)     Authority for the above principle may be found in Hebei Import & Export Corp. v. Polytek Engineering Co. Ltd (No. 2) [1998] 1 HKC 192 where Chan CJHC said in the Court of Appeal :

“We have also been referred to a number of cases regarding the ‘misconduct’ of an arbitrator in receiving evidence or communication from one party to the arbitration.  We do not think we need to go into these cases.  In our view, they simply illustrate that the principle of natural justice demands that arbitration proceedings, like litigation, must not only be conducted fairly but also be seen to be conducted fairly, lest this undermines the public's confidence in the arbitration process.”

In the same case, in the Court of Final Appeal ([1999] 2 HKC 205) Sir Anthony Mason NPJ added :

“… In this respect, the opportunity of a party to present his case and a determination by an impartial and independent tribunal which is not influenced, or seen to be influenced, by private communications are basic to the notions of justice and morality in Hong Kong.”

(6)     When applying the principle, the test to be adopted is that of the “fair-minded and informed fictitious observer”.  Apparent bias is established if such an observer would regard the communications in issue as unfair and/or lacking transparency.

(7)     If any unilateral communication takes place, however limited, there can be no justifiable reasons not to disclose the entire contents, mode and location (i.e. all the details) of it when requested.

(8)     Mr Carter’s written justification (on 26 October 2006) of the conduct is misconceived.  Mr Carter relied on the American Code of Ethics which states :

“In an arbitration in which the two party appointed arbitrators are expected to appoint the third arbitrator, each party-appointed arbitrator may consult with the party who appointed the arbitrator concerning the choice of the third arbitrator.”

He went on to say :

“… The good sense of this, I have always thought, lies in the fact that this lets each party (through its counsel) both express objections to a potential nominee who may have a conflict unknown to the two arbitrators considering him or her, or about whom one party is for whatever reason uncomfortable, and also lets the parties’ counsel express in private any concerns or questions they might have about a particular person’s health or qualifications — a subject that many would be reluctant to commit to a written exchange on a public record of sorts, particularly if they ultimately decide that they would be prepared to agree to that person’s appointment.  Limited contacts of this sort in the selection process are healthy and entirely consistent with all arbitrators’ duty to decide a matter fairly and impartially when the Tribunal hears the case.”

Mr Whitehead points out that this arbitration is governed by the rules and regulations of the ICC which does not incorporate the American Code of Ethics.  Moreover, the American Code specifically states that all written communications should be copied to all parties (unless otherwise provided) (the “AAA Code of Ethics”)

(9)     Mr Whitehead also criticizes Mr Carter’s argument.  He submits the very opposite to Mr Carter’s letter is the preferred approach.  If one side is “uncomfortable with” or concerned about the “health or qualifications of” a proposed arbitrator, the other side is entitled to know about it and why.

(10)    Finally, Mr Whitehead notes the lack of evidence about what did, in fact, occur.  Other than the written response that the communications were “non substantive and only concerned possible candidates for a chairman” nothing is known about the frequency of the contacts or their location.  Neither is there any evidence that the contacts ceased after 17 October other than Ms Harpole’s email to Sidley Austin that she and Mr Carter would make a “fresh start”.

The response

13. The respondent has been represented by Ms Teresa Cheng, SC.  She submits at the outset that the single issue to be decided is whether Mr Carter should be removed as an arbitrator.  All cases are fact sensitive and the issue should be resolved in context.

14. The context put simply is this.  Initially, both Mr Carter and Ms Harpole spoke privately to the parties who appointed them.  The respondent has stated that there were no communications after 17 October 2006.  The answer to the request for full disclosure has consistently been that there is no obligation to disclose and that such communications that did occur were non-substantive and only concerned possible candidates.  Mr Carter’s integrity is not in issue.  In these circumstances, should Mr Carter be removed?

15. I agree with Ms Cheng that the answer is “No”.  The following factors, arguments and authorities weigh in favour of a negative answer :

(1)     Initially, in the absence of any written procedure for electing a chairman the arbitrators themselves, by conduct, agreed that confidential communications on the matter could take place.

(2)     The applicant knows, for a fact, that none of the communications concerned the merits of or the issues in the arbitration.

(3)     Pursuant to Article 11(1) of the ICC Rules, the applicant made a challenge to Mr Carter’s appointment on identical grounds to the motion before this court.  There is no criticism of the procedures followed in that challenge.  All parties had the opportunity to make written submissions.  The challenge was rejected.  The ICC then proceeded to appoint the third arbitrator.  It is true that no reasons were given for its decision but that is in accordance with the ICC’s own rules and procedures.  Although the challenge was “on paper” only and no reasons were given, it was nonetheless conducted in compliance with ICC procedure, by experienced ICC members and as such can be accorded some weight in the respondent’s favour.

(4)     By the same token, it would be somewhat blinkered to simply dismiss the AAA Code of Ethics as irrelevant.  One should not lose sight of the fact that this is an international arbitration.  Hong Kong has a high profile for international arbitrations.  International arbitrators of the highest repute and calibre sit here.  In this context, the AAA Code, to which Mr Carter referred in his correspondence, whilst plainly not determinative of the issue before this court, can and should be weighed in the balance as a matter of some relevance.  The degree of relevance may vary from case to case, depending on its facts.

(5)     It is not possible to make a blanket declaration or statement that, in all cases, either (a) once appointed all communications shall be disclosed or on the other hand, (b) unilateral communications are permitted save concerning the issues in dispute.  The test in Porter v. Magill [2002] 1 AER 465 has to be applied to this arbitrator in these circumstances namely “whether the fair minded and informed observer, having considered the relevant facts, would conclude that there was a real possibility that the tribunal was biased”.

(6)     Many of the authorities and indeed section 2GA of our Arbitration Ordinance refer to the duties and obligations of “The Tribunal”.  In the present case, the issue arose before “the tribunal” had been formed.  This, in itself, supports the submission that much of the law relied on by the applicant relates to the duty of arbitrators to have no private communications with the parties once the arbitration has commenced and in relation to the issues in dispute and not to the preliminary question of the selection of arbitrators who might be suitable to hear a particular case.

(7)     In the factual context of this case it is a matter of some (but relatively minor) significance that the applicant’s solicitor, Mr Charles Allen, did not immediately object to the communications when he was first aware of them (which commenced immediately upon the appointment of both arbitrators).  He took a few days to mull it over (my expression, not his) and seems to have embarked on his objection out of an excess of caution.  Such a scenario goes against the prospect of even apparent bias in the mind of the informed bystander.  Such a bystander would know, inter alia, that both arbitrators instinctively did the same thing, both arbitrators agreed to cease when requested to do so (out of an excess of caution) and the ICC made no criticism of Mr Carter and confirmed his appointment.

16. Kirby J’s dictum in Johnson v. Johnson (2000) 201 CLR 488 (HCA) provides us with a helpful description of the informed bystander and it is worth repeating in full :

“The attributes of the fictitious bystander to whom courts defer have therefore been variously stated.  Such a person is not a lawyer.  Yet neither is he or she a person wholly uninformed and uninstructed about the law in general or the issue to be decided.  Being reasonable and fair-minded, the bystander, before making a decision important to the parties and the community, would ordinarily be taken to have sought to be informed on at least the most basic considerations relevant to arriving at a conclusion founded on a fair understanding of all the relevant circumstances.  The bystander would be taken to know commonplace things, such as the fact that adjudicators sometimes say, or do, things that they might later wish they had not, without necessarily disqualifying themselves from continuing to exercise their powers.  The bystander must also now be taken to have, at least in a very general way, some knowledge of the fact that an adjudicator may properly adopt reasonable efforts to confine proceedings within appropriate limits and to ensure that time is not wasted.  The fictitious bystander will also be aware of the strong professional pressures on adjudicators (reinforced by the facilities of appeal and review) to uphold traditions of integrity and impartiality.  Acting reasonably, the fictitious bystander would not reach a hasty conclusion based on the appearance evoked by an isolated episode of temper or remarks to the parties or their representatives, which was taken out of context.  Finally, a reasonable member of the public is neither complacent nor unduly sensitive or suspicious.”

17. In short, in the context of this case, any sensible onlooker would trust the arbitrators to have conducted themselves professionally, properly and without inflicting any wounds, however slight, on the fairness of the proceedings.

18. Taken together, the above factors persuade me that the challenge to Mr Carter’s appointment must fail.  I so order with an order for the costs of and incidental to this motion be to the respondent.