Wanted: Bona Fide Arbitrator

Russia is not alone.  Under article 2 of the Swiss Civil Code, every person must act in good faith in the exercise of his or her rights and in the performance of his or her obligations.

The Swiss Supreme Court and the drafters of the new article 434 CC RF agree that prior to entering into a contract, prospective parties have a duty to inform each other of any facts that may have a significant impact on the other party’s decision to enter into the contract.  This is particularly so when there are reasons to believe that the other party is not aware of these facts.

Article 434 CC RF is crystal clear in that a party negotiating in bad faith shall be held liable in respect of any resulting damages. And, it is there in black and white that bad faith includes non-disclosure of circumstances that – having regard to the nature of the contract – must be disclosed to the other party.

An arbitrator does not escape this rule – as has been ruled by the Swiss Supreme Court (BGE 111 Ia 72).  An arbitrator has a pre-contractual obligation to disclose to the parties any circumstances likely to give rise to justifiable doubts as to the arbitrator’s impartiality or independence.
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  Accordingly, this will be so when the arbitrator has reasons to believe that the parties are not aware of these circumstances or one of the parties might rely on the arbitrator’s representations.

In institutional arbitration, prior to accepting appointment, an arbitrator is generally obliged to sign a declaration of independence.  By doing so, he informs the arbitral institution in writing of any conflicts of interest.

Where an arbitrator withholds information on potential conflicts, he jeopardises the proper conduct of the proceedings.  This is contrary to the principle of good faith to the extent that the arbitrator’s silence would deprive the relevant party of its legitimate procedural rights.

Well established by Swiss case law and legal writing, it is indisputable that an arbitrator may be held liable to pay damages in the event of a breach of the duty to disclose.  The arbitrator may be held liable for damages if the breach caused unnecessary arbitration costs – for example, where certain stages in the proceedings had to be repeated.

After coming into force, article 434 CC RF will introduce pre-contractual liability into Russian law.  Where the seat of arbitration is in Russia, the new article will apply a duty of an arbitrator to disclose conflicts of interest prior to accepting appointment.
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There is, however, no reason why applicable Russian arbitration rules may not seek to exclude arbitrators’ liability.  The Swiss Rules, for example, include a clause excluding an arbitrator’s liability for any act or omission except in cases of intentional wrongdoing or gross negligence.

By contrast, even if the arbitrator is mala fide, his breach of a duty to disclose alone will not suffice to cancel the arbitral award.