Not so conflicted

British investors have hit back against Argentina’s petition to set aside an investment treaty award.

As I wrote about Argentina’s initial petition to US courts last month in the AWG Group v. Argentina case…

In the US court filings, Argentina is arguing that one of the three arbitrators had a conflict of interest. Gabrielle Kauffman-Kohler, a Swiss arbitrator, was appointed by the investors at the start of the case in 2003. During the course of the proceedings, she was separately appointed to the executive board of UBS – a major Swiss bank that happened to be the top shareholder in one of investor complainants.

According to Slater and Toweill, the arbitrator received over $300,000 in annual compensation for serving on the board. Half of this came in the form of UBS shares that gave her a direct financial stake in the company’s profitability in Argentina (and elsewhere). For comparison, her compensation for the arbitration case was $3,000 per day. Unless she worked 50 days a year over the course of the case (a doubtful proposition for one of the busiest arbitrators in the business), her UBS stake was probably greater.

Lawyers for AWG Group have dropped the, err, inconvenient fact that Kaufmann-Kohler was only on the UBS Board for a few months, and had resigned before rendering merits awards in the case. (I got AWG’s filings through Pacer – I don’t think it is publicly linkable anywhere.)

But the filing sheds further light on the relatively weak oversight mechanisms of investment arbitration. As Elliot Friedman (AWG’s lawyer) writes:

The tribunal’s Award is entitled to great deference under the FAA and decades of consistent Supreme Court jurisprudence. The FAA [US federal arbitration act] establishes an “emphatic federal policy in favor of arbitral dispute resolution,” which “applies with special force in the field of international commerce.”… Proceedings to confirm awards are “intended to be summary,”

Friedman further details the fact that Kaufmann-Kohler’s two fellow arbitrators were asked to – and ruled against – her disqualification:

Under the parties’ agreed procedures, the challenge was resolved by the two unchallenged arbitrators—including Argentina’s appointee, Professor Pedro Nikken, an eminent Venezuelan lawyer and former President of the Inter-American Court of Human Rights. The two unchallenged arbitrators found no connection at all between Professor Kaufmann-Kohler and Respondent AWG, and a trivial and immaterial connection between Professor Kaufmann-Kohler and AWG’s co-claimants. In a comprehensively reasoned decision, the unchallenged arbitrators ruled that Professor Kaufmann-Kohler’s service as an independent director of UBS in no way impaired her independence or impartiality…

The Petition asks this Court to review de novo, and then reverse, the Tribunal’s decision on the second challenge to Professor Kaufmann-Kohler. Such far-reaching review would, however, contravene the deference owed an arbitral tribunal’s decisions under the FAA.

It is undisputed that the unchallenged members of the Tribunal had jurisdiction over Argentina’s challenges to Professor Kaufmann-Kohler. Accordingly, the resolution of the second challenge—like that of all other matters within the Tribunal’s jurisdiction—is entitled to considerable deference…

Argentina cannot show “evident partiality” in this case. Reasonable persons, including distinguished arbitrators appointed by Argentina itself, have already rejected the allegations of partiality made against Professor Kaufmann-Kohler.22 The Tribunal’s decision on the second challenge thus demonstrates that not all reasonable persons “would have to conclude” that Professor Kaufmann-Kohler’s affiliation with UBS rendered her incapable of judging impartially. Id. Argentina’s argument must fail on that basis alone.

Friedman is probably correct on the law. Indeed, he makes multiple cites to the recent US Supreme Court case that reaffirmed US courts’ practice of deference to investment arbitrators.

However, I question how easy it would be for “reasonable” co-arbitrators to rule that one of their colleagues should be removed from the case. There is the social connection that they would risk severing after months of working together. And because arbitrators lack tenure, and rely on their co-arbitrators to recommend them for further work, the incentives are against disqualifying one of your own. If US courts were to “pierce the veil” of how arbitrators police each other, they might find it lacking.

Would US appellate courts be more likely to review a lower court case, if the deciding lower court judge had failed to recuse themselves from a case with a conflict? It seems like that is the roughly analogous issue, after making adjustments for the procedural differences in three-member ad hoc tribunals.

In any case, if Friedman’s facts are backed up, AWG Group would likely prevail. But US courts could do a service if they reasoned through the case carefully.