Caratube v. Kazakhstan: For the First Time Two ICSID Arbitrators Uphold Disqualification of Third Arbitrator

Introduction

For the first time in the history of the International Centre for Settlement of Investment Disputes (ICSID), on March 20, 2014, a proposal to disqualify an arbitrator was accepted by the two unchallenged arbitrators. The tribunal in Caratube v. Kazakhstan[1] upheld a proposal for disqualification of fellow arbitrator Mr. Bruno Boesch.[2] Together with two similar decisions by the Chairman of the ICSID Administrative Council, also reviewed in this Insight, this case suggests a notable change in the assessment of proposals challenging arbitrators under the ICSID Convention.[3]

The grounds to challenge arbitrators are generally similar among different arbitration rules, and they pertain to an alleged lack of independence or impartiality.[4] However, ICSID rules for challenging arbitrators are unusual for two main reasons. First, procedurally, the decision on a challenge is first taken by the unchallenged members of the arbitral tribunal. The more common procedure of requesting a third party to take a decision is adopted only when a sole arbitrator or a majority of the arbitral tribunal is challenged.[5]  In that case, challenges to ICSID arbitrators are decided by the Chairman of the ICSID Administrative Tribunal, who is also the President of the World Bank. Second, Article 57 of the ICSID Convention provides that a party may propose the disqualification of an arbitrator “on account of any fact indicating a manifest lack of the qualities” of impartiality or independence.[6] This threshold to evaluate the grounds for a challenge has been criticized as too strict and difficult to meet.[7] More common, lower thresholds allow for a challenge to arbitrators in circumstances that give rise to “justifiable doubts” as to the impartiality or independence of an arbitrator.[8]  

Caratube v. Kazakhstan: A First in ICSID

The case against Kazakhstan was filed at ICSID in June 2013 by Caratube International Oil Company LLP (Caratube), a Kazakh-incorporated company, and Mr. Devincci Salah Hourani, a U.S. national. The claimants appointed Prof. Laurent Aynès and the respondent appointed Mr. Bruno Boesch as arbitrators. The parties jointly nominated Dr. Laurent Lévy to act as president. In January 2014, the claimants sent a letter to the ICSID Secretariat, requesting Mr. Boesch to resign from the tribunal pursuant to Article 8 of the ICSID Arbitration Rules.[9] Mr. Boesch considered himself independent and impartial and therefore made it known that he did not intend to resign from the tribunal. The claimants then proposed his disqualification under Article 57 of the ICSID Convention.

In their proposal, the claimants submitted that respondent-nominated Bruno Boesch “manifestly cannot be independent and impartial” because of his serving as arbitrator appointed on behalf of Kazakhstan in another related case, Ruby Roz Agricol v. Kazakhstan.[10] The claimant identified similarities between Ruby Roz and Caratube and pointed out that both claims relied on essentially the same factual allegations with respect to acts and omissions and pattern of conduct. Additionally, the claimant argued that several individuals who submitted witness statements in Ruby Roz would also likely submit witness statements in Caratube. The claimants also took issue with the fact that Mr. Boesch had been appointed as arbitrator by the same firm, Curtis, Mallet-Prevost, Colt & Mosle LLP, in numerous cases including Caratube and Ruby Roz.[11]

The respondent argued that two grounds invoked by the claimants in support of the proposal were baseless and should be rejected. In relation to the burden of proof, the respondent argued that “clear evidence was required and that the heavy burden of proof required the challenging party to establish facts that made it obvious and highly probable, not only possible,” that the challenged arbitrator could not exercise independent or impartial judgment.[12] In his submission, Mr. Boesch reiterated his assurances that he was independent of the parties and was and would remain impartial throughout the proceedings.[13]

The unchallenged arbitrators concluded that “Articles 57 and 14(1) of the ICSID Convention do not require proof of actual dependence or bias; rather it is sufficient to establish the appearance of dependence or bias.” The claimants thus had to show that “a third party would find that there is an evident or obvious appearance of lack of impartiality or independence based on a reasonable evaluation of the facts in the present case.”[14]

The unchallenged arbitrators agreed with the claimants that Ruby Roz arose out of the same factual context as Caratube. They therefore concluded that the case exhibited an imbalance because of Mr. Boesch’s involvement with Ruby Roz and that Mr. Boesch could not be expected to “to maintain a ‘Chinese wall’ in his own mind.”[15] The arbitrators explained that they did not question Mr. Boesch’s moral character, his actual impartiality, or his honesty,[16] but concluded that “a third party would find that there is an evident or obvious appearance of lack of impartiality or independence based on a reasonable evaluation of the facts in the present case.”[17] Accordingly, the unchallenged arbitrators upheld the claimants’ proposal for disqualification of Mr. Boesch.[18] At the same time, the arbitrators did not impugn the involvement in both cases of the firm of Curtis, Mallet-Prevost, Colt & Mosle LLP.[19]

This decision is important for two reasons. First, unchallenged ICSID arbitrators have never previously taken the decision to disqualify a fellow arbitrator. Given that challenges are becoming more common, albeit usually unsuccessful, this decision helps to reassure stakeholders that the ICSID system continues to work when arbitrators are faced with a meritorious challenge. Second, the threshold that the arbitrators applied to evaluate the grounds for challenge was based on the assessment of the evidence by a reasonable third party. In this regard, the decision follows the standard applied by the ICSID Chairman in two recent ICSID decisions.

Other Recent ICSID Decisions Adopting the Reasonable-Third-Party Standard

On November 1, 2013, a proposal of the parties to disqualify the majority of the tribunal was accepted in Blue Bank v. Venezuela.[20] As required by the ICSID Convention, the decision was taken by the Chairman of the ICSID Administrative Council, Dr. Jim Yong Kim.[21]

The respondent challenged the claimant appointee—José María Alonso—based on his partnership in the Madrid office of Baker & McKenzie. At the time, Baker & McKenzie was representing the claimant in Longreef v. Venezuela[22] through its offices in New York and Caracas. The Chairman noted several undisputed facts: that Mr. Alonso was a partner at Baker & McKenzie; that Baker & McKenzie’s offices in New York and Caracas represented the claimant in an ongoing ICSID case against Venezuela; that Mr. Alonso was not involved with that case; and that Mr. Alonso was a member of Baker & McKenzie’s International Arbitration Steering Committee.[23]

The Chairman applied “an objective standard based on a reasonable evaluation of the evidence by a third party”[24] and interpreted the word “manifest” in the ICSID Convention “as meaning ‘evident’ and ‘obvious’ and relating to the ease with which the alleged lack of qualities can be perceived.”[25] Based on the undisputed facts and the similarity of the issues between the two ICSID cases against Venezuela, the Chairman found that a reasonable third party would find an appearance of lack of impartiality in Alonso’s judgment.[26] Hence, the Chairman upheld the challenge against Mr. Alonso, in the first ICSID decision to disqualify an arbitrator on the basis of the appearance of lack of impartiality.[27]

Shortly after, the Chairman used the same standard of assessment to decide another challenge.[28] In a decision dated December 13, 2013, the Chairman of the Administrative Council disqualified Professor Francisco Orrego Vicuña in Burlington v. Ecuador.[29] The grounds of the challenge to Orrego Vicuña were similar to those in Blue Bank and Caratube. Ecuador challenged the claimant-appointed Orrego Vicuña on three grounds: first, that the claimant’s counsel, Freshfields Bruckhaus Deringer, had appointed Orrego Vicuña too frequently; second, that Orrego Vicuña had failed to disclose the circumstances of his involvement in cases involving Freshfields; and, third, that Orrego Vicuña showed “a blatant lack of impartiality towards Ecuador as represented by his conduct during the proceedings.”[30]

The two unchallenged arbitrators were unable to reach a decision and therefore referred the case to the Chairman. The Chairman dismissed much of the proposal concerning the first and second grounds, concluding that Ecuador should have been, and likely was, well aware of Orrego Vicuña’s involvement with Freshfields before his accepted appointment, and therefore that those grounds for challenge were untimely. On the last ground, however, the Chairman noted that Orrego Vicuña had made some allegations about the ethics of counsel for Ecuador that did “not serve any purpose in addressing the proposal for disqualification.”[31] The Chairman concluded that a third party undertaking a reasonable evaluation of those remarks would conclude that they “manifestly evidence[d] an appearance of lack of impartiality” with respect to Ecuador and its counsel.[32] In upholding the challenge, the Chairman explained that the ICSID Arbitration Rules “do not require proof of actual dependence or bias;” rather, it is “sufficient to establish the appearance of dependence or bias.”[33] The Chairman’s description of the relevant standard is mirrored in decisions rejecting challenges to arbitrators.[34]

Conclusion

These are significant developments in ICSID jurisprudence on challenges to arbitrators and they align the ICSID standard with the threshold adopted by other major international arbitral institutions to assess challenges based on alleged lack of impartiality and independence. Caratube shows that co-arbitrators are ready to take a bold stance, if necessary, when deciding challenges to peers. More importantly, together with Blue Bank and Burlington, the case reveals a shift away from a strict approach to the “manifest lack of” independence or impartiality standard to a more relaxed understanding focused on evident or obvious appearance of lack of impartiality or independence based on a third party’s reasonable evaluation of the facts the case.

About the Author: Chiara Giorgetti, an ASIL member, is Assistant Professor of Law at Richmond University School of Law.