Chicago International Dispute Resolution Association

A commentary reprinted from the January 2004 issue of Mealey's International Arbitration Report.

Buttressing The Pillars Of Arbitration

by J.D. Wangelin

[Editor’s Note: J.D. Wangelin is a partner with Sedgwick, Detert, Moran & Arnold, LLP, in their Chicago office. He is a leader of the firm’s arbitration and mediation practice, with a concentration in insurance and reinsurance disputes, and has extensive experience in international arbitrations, as well as domestic litigation and arbitration. The views expressed here are his own and are not necessarily those of the firm or any client thereof. Copyright 2003. Replies to this commentary are welcome.]

Following the delivery of the judgment of the Lords of the Judicial Committee of the Privy Council in AEGIS v. European Re,1 various commentaries were offered2 and a certain amount of concern was expressed that the opinion presaged a weakening of the principles of privacy and confidentiality in commercial arbitrations. This commentary offers the view that, to the contrary, the opinion fortifies confidentiality, by refining the concept, and buttresses the most fundamental advantages that arbitration offers in comparison to litigation. Beyond defining confidentiality in practical and reasonable terms, the implications of Lord Hobhouse’s opinion reinforce the other fundamental features of commercial arbitration, i.e., tribunal impartiality and finality.

The Opinion In AEGIS

The Privy Counsel opinion (opinion follows commentary) dealt with a Bermuda reinsured and a London reinsurer who had two identical issues of applicable law in serial reinsurance disputes, in the first of which the reinsurer prevailed. In the second dispute, the reinsurer sought to use the decision in the first by way of issue preclusion, that is, arguing that the issue in the second case had been determined in the first arbitration. The reinsured argued that the first proceeding was expressly confidential and that the award could not be published to the second tribunal, even to preclude it from arbitrating the same issue with the same party in the second proceeding. (Note that the two proceedings employed two different tribunals.) On application by the reinsured, an injunction issued against the disclosure of the first decision, but was revoked by the Bermuda Court of Appeal.

On appeal to the Privy Counsel (Bermuda’s court of last resort), it was held that neither the parties’ express confidentiality agreement nor the general principle of confidentiality in arbitrations prevents disclosure of the decision in the first case. It was further held that the first decision precluded the reinsured from raising the same issue in the second proceeding, their Lordships finding that disclosure of the award “would not raise the mischief against which the confidentiality agreement is directed.”3 While it acknowledged that “[c]ommercial arbitrations are essentially private,” the ruling means that “implied restrictions on the use of material obtained in arbitration proceedings”4 are limited by the legitimate uses to which the award must be put, including enforcement and, in certain circumstances, issue estoppel.

As to issue estoppel, their Lordships found that “estoppels can be described as . . . rules of public policy to stop the abuse of process by relitigation. [W]here arbitrators have . . . decided an issue, that decision binds the parties and neither party can thereafter dispute that decision.”5

The holding in AEGIS applies only to the circumstance where the same parties are arbitrating the same issue in a second proceeding. The decision has generated some concern, however, that such use of a confidential award will weaken the shield of confidentiality generally. In substance, however, the decision means only that there are sensible limits on the principle of confidentiality, such as those necessary to the enforcement of the award or, perhaps, to proof of the outcome to creditors and others with legal interests in the matter, and those necessary to avoid re-arbitrating the same rights and undermining the finality of the first award.

Expectations Of Arbitration

Commercial concerns agree to refer their most consequential disputes to arbitration, rather than submit them to court, because they expect that the process will reach a commercially sensible disposition of the controversy, while avoiding or minimizing many of the risks and disadvantages of litigation. Those risks attach particularly to lawsuits in the United States, but arbitration is generally preferred in Europe, as well. The primary components of the architecture of arbitration are these three central “pillars”:

1. That an impartial, and expert, tribunal or arbitrator will decide the case. In litigation, forum shopping is discouraged and judges are assigned randomly who have no particular background in the subject matter in dispute, no familiarity with the customs and practices of the relevant industries and have busy dockets of divers matters, which force them to give relatively superficial treatment to any given case before them. In arbitration, in contrast, the parties can select arbitrators with special expertise in the issues and industries involved in the dispute, who are disinterested and impartial, if not “neutral,”6 and who can devote the time required fully to comprehend the facts and rules applicable to the controversy. Instead of momentous determinations being made by relatively unschooled judges and cynical juries, the parties refer the matter to professionals who can be expected to reach reasonable decisions founded upon a mixture of law and industry custom. In practice, advocates may appoint party arbitrators they believe to be generally, if not specifically, sympathetic with their views on the issues, thus tending to corrupt the ideal, and, perhaps, reviving some of the vices of litigation, but such efforts have not undermined the process generally. In any case, disclosure may result in appropriate disqualification of, or neutralization of, such arbitrators.
   
   
2. Privacy and confidentiality, of course, are likewise essential attributes of arbitration that contrast to litigation in public forums. For some, these are the most attractive aspects of the arbitral process.
   
   
3. With rare exceptions,7 an arbitral award is final and, except where the parties agree to additional arbitral review by others, which is still unusual, a controversy decided in arbitration is over. Litigation, by contrast, may take parties through a trial, two levels of appeal and interim mediations and negotiations. The efficiency of arbitration compared to litigation makes arbitration attractive to any who can’t tolerate the slow attrition of litigation.

Thus, the three principle features of arbitration from which the parties expect advantage in comparison to litigation are their ability to construct an impartial and knowledgeable tribunal whose analysis of the dispute should be more well informed and industry specific than a court’s; proceedings conducted in private, which bind the parties and tribunal to keep confidential all written materials, evidence, briefs, conversations, etc., and the award; and, lastly, closure.8 These are the three “pillars” of arbitration which support an edifice increasingly more attractive than litigation to commercial disputants with issues of great business or financial moment.

AEGIS Reflects The Relationship Between The Pillars Of Arbitration

Some commentators9 have worried that this opinion could signal a step toward more drastic limitations. A careful study of the decision, however, shows this concern is misplaced. Indeed, all three of the central pillars of arbitration tend to be buttressed by this case.

Confidentiality

Specifically, of course, the Privy Counsel narrowed the shield of confidentiality in arbitration.10 Whereas, it had long been understood that confidentiality would not prevent the disclosure of an arbitral award for the purpose of enforcing it, the Privy Council in AEGIS added that an award must also be disclosed to avoid wasteful and unjust re-arbitration of the same issues between the same parties on the same contract decided in a previous arbitration. Thus, the case stands for the rather elementary proposition that confidentiality will not preempt issue estoppel, and the re-arbitration of the same controversy between identical parties will be avoided, in effect preventing an arbitral “Groundhog Day.”

Finality

Finality At the same time, though not expressly stated, the opinion buttresses finality in arbitration. “[T]he foundation of arbitration is the determination of the parties’ rights by the agreed arbitrators pursuant to the authority given to them by the parties. Section 58 of the UK Arbitration Act of 1996 says, ‘. . . an award made by the tribunal pursuant to the arbitration agreement is final and binding. . . . It is an implied term of an arbitration agreement that the parties agree to perform the award’.”11 By refusing to allow confidentiality to interfere with proof that a controversy has already been decided, the Privy Council reinforces the element of finality in the process.

process. On this point, it bears mention that the habit of some arbitrators of issuing dissenting opinions, growing more common, tends to undermine the finality of arbitral awards. Dissents should be reserved for identifiable and egregious misdeeds, not simple disagreement. If fundamental rights and due process are at stake, fine, but many dissents seem merely to advise the appointing party of the arbitrator’s fidelity to that party, as if to advertise his suitability for another appointment. The practice only undermines the finality of the process and could subject the majority award to challenge, even if unsuccessfully.

Impartiality

Though not addressed in the opinion, the first pillar of arbitration, impartiality, should likewise be buttressed by the implications of the Privy Counsel’s view that confidentiality must be enforced reasonably. Consider the circumstance, not uncommon in industries in which a limited number of experts are available to arbitrate disputes, of the appointment of an arbitrator who has previously decided the issue now in controversy in a new dispute. Consider specifically the example of an insurance dispute between an insured and one of the insurers subscribing to a London slip. Technically, each subscriber’s commitment constitutes a separate contract, though the slip fills one layer of coverage. Suppose that, after the resolution of the first case, a second is begun with another insurer on the slip, where the same issue is argued to the same arbitrator, as one of a tribunal, again in the second version of the controversy. If the theme of the Privy Council’s opinion regarding confidentiality is that it must be enforced in a reasonable fashion, and if it is axiomatic that the parties are entitled to an impartial tribunal, then it follows that confidentiality should not unreasonably interfere with disclosure of a fact pertinent to testing that arbitrator’s impartiality. The fact that a party arbitrator has already decided and issued an opinion respecting the very contract and issues in a prior case certainly could raise justifiable doubts as to his impartiality with respect to a second controversy with the same insured and another insurer.12

&nbShould arbitrators’ be required to disclose their past exposure to the parties and issues so their impartiality can fully be evaluated? On one hand, of course, arbitrators shouldn’t be disqualified only because they’ve heard the argument and decided the issue before. On the other, “hired guns” should be exposed. Of course, disclosure is the solution. Thereafter, the parties, the Tribunal and the arbitrator in question can evaluate the propriety of his continuing in a given instance. If he flouts serious opposition, he could discredit and neutralize himself.

In cases like serial arbitrations regarding subscribers to a single slip, real havoc would be wrought by inconsistent decisions, but arbitration as a system doesn’t permit either a review of prior decisions or their application as precedent. One way to avoid the issue is to reach agreement between all subscribers (preferably at the contracting stage, but post hoc is possible) that they’ll abide by the result of one proceeding. This cannot be required, of course, but is sensible, as it avoids subsequent potential litigation between subscribers over the equities.

Disclosure of the actual opinion in the prior proceeding, however, is neither necessary nor desirable, as it could influence the second tribunal, but the fact of the prior arbitration and the arbitrator’s having decided the issue surely must be disclosed if the impartiality of a tribunal is fairly to be tested.

Maintaining Arbitration’s Comparative Advantages

Far from foreshadowing a debilitation of any essential feature of arbitration as compared to litigation, the Privy Council’s opinion in AEGIS should be viewed as a modest but clear affirmation of the fundamental advantages of the process. By applying sensible limits on confidentiality, the opinion gives arbitration practical vitality and avoids the misuse of one of its essential features. Read fairly, it bolsters both of the other two essential “pillars” of arbitration, finality and impartiality, as well as the relationship between these elements of the process. By permitting otherwise confidential awards to be disclosed to avoid the re-litigation or re-arbitration of rights between the same parties decided in a prior arbitration, the finality of arbitral decisions, as between the same parties, cannot be evaded. Also, this more refined view of confidentiality gives hope that confidentiality won’t be allowed to prevent disclosure of the fact of a proposed arbitrator’s sitting in a prior arbitration in which he expressed his opinion regarding the question in a second proceeding, even if without disclosing the opinion itself, which would enhance the promise of impartiality. This view recognizes the interrelationship of the three pillars, and suggests an analytical construct that promotes a review of any one feature in the context of all three.

This view also suggests that to buttress arbitration further and make it more commercially workable, consideration should be given to the following refinements:

1. To enhance the probability of forming an impartial tribunal, the fact of an arbitrator’s prior hearing of the same issues, especially if by appointment by one of the same parties, should be disclosed, but
   
   
2. To maintain confidentiality on a sensible basis, the content of a prior opinion or dissent should not be disclosed and
   
   
3. To buttress finality, dissents should be discouraged (except in extreme cases) as they tend to undermine the enforceability and finality of awards.

Neither confidentiality nor arbitration generally are threatened by AEGIS. Indeed, the opinion suggests refinements of the process of arbitration which will strengthen its central features and enhance its superiority over litigation for resolving commercial disputes.

ENDNOTES

1. Associated Electric and Gas Insurance Services v. European Reinsurance Company of Zurich [2003] UKPC 11, herein, “AEGIS.” [Sedgwick, Detert, Moran & Arnold were counsel to European Re.] back
2. See, e.g., Gaffney, J.P., Confidentiality in International Arbitration: A Recent English Decision, Mealey’s Reinsurance, July 17, 2003. Conyers Dill & Pearman, Bulletin, Confidentiality of Arbitration Awards, July 2003, at 2-3; Clifford Chance, Insurance Review, Arbitration and Confidentiality, April 2003, at 6-8; The Incorporated Council of Law Reporting For England and Wales, Associated Electric and Gas Insurance Services Ltd. v. European Reinsurance Co. of Zurich, <http://www.lawreports.co.uk/hlpcjanc0.3.htm>. back
3. Ibid. at ¶ 11. back
4. Ibid. at ¶ 20. back
5. Ibid. at ¶ 15. back
6.Wangelin, J.D., “Effective Selection of Arbitrators in International Arbitration,” November, 1999, Mealey’s International Arbitration Report. back
7. Only the most egregious misconduct or legal error on the part of a tribunal provide sufficient bases for challenging an arbitral award. back
8. Other commonly cited advantages of arbitration in comparison to litigation include, inter alia, more lenient evidentiary and legal standards, more limited discovery, greater efficiency and lower costs, party-chosen substantive law and reduced bases for exemplary awards. back
9. See, e.g., Coudert Brothers Global Legal Advisors, London Litigation and Arbitration Group, Confidentiality Issues in Arbitration, September 2003, at 2-3. back
10. Note that confidentiality is not always inherent in arbitration, but confidentiality agreed upon will be enforced, if not contrary to the other principles of arbitration. back
11.AEGIS, op. cit., eat ¶ 9. back
12. Under the English Arbitration Act of 1996, at least, a court has the power to remove an arbitrator in circumstances “that give rise to justifiable doubts as to his impartiality.” This is not to say that an arbitrator can never review the same issue twice. However, disclosure is essential to avoid a later challenge to an award on the ground of partiality and to discourage arbitrators from becoming so closely related to one party as to appear to be a “hired gun.” back

© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com

A PDF version of this document is also available.

Peter V. Baugher, President
One South Wacker Drive, Suite 2800, Chicago, IL 60606 USA
312-409-1373 (Telephone), 312-701-9335 (Facsimile),

Web design and webmaster services by tsssystems.net. Please email  for more information.