Arbitrator's failure to disclose potential conflict of interest prevents confirmation of foreign arbitral award in the country

In a widely publicized decision rendered on April 19, 2017, the Superior Court of Justice (STJ) held that an arbitrator's failure to disclose material facts affecting his independence and impartiality precludes the confirmation of the respective arbitral award in Brazil, as it violates the national public policy.

The case stemmed from the sale of the Ometto sugar cane and ethanol business to the Spanish company Abengoa. The Spanish company commenced arbitration proceedings under the auspices of the ICC, in which it basically sought damages arising from seller's alleged misrepresentation concerning the crushing capacity for one of the mills.

A panel of three arbitrators seated in New York found in favor of Abengoa and awarded the Spanish company over US$ 110 million in damages.

Shortly after the arbitral award was rendered, it was discovered that the chairman of the arbitral tribunal failed to disclose that his law firm had received significant legal fees from Abengoa during the course of the arbitration. The chairman admitted to failing to conduct the proper conflicts check, but denied any knowledge of his firm's relationship with Abengoa at the time the award was rendered.

Ometto then filed an action to annul the award before the Southern District of New York. However, the federal court did not vacate the arbitral award holding that the petitioner failed to demonstrate the existence of evident partiality under a more stringent interpretation of the Federal Arbitration Act. The Second Circuit upheld this decision and the Supreme Court refused to hear the matter, even though the Ninth Circuit applies a different test of evident partiality to annul arbitral awards in similar situations.

Ometto's last stand would be before the Superior Court of Justice (STJ), the highest court on federal law issues and also responsible to weed out foreign decisions that violate fundamental tenets of Brazilian law.

The STJ has a clear pro-arbitration position on foreign arbitral awards, as it confirms most of the foreign decisions. The court appropriately exercises restraint in analyzing the merits of cases already decided by arbitral tribunals seated abroad.

However, the STJ does not rubber-stamp all decisions submitted for confirmation. Consistent with Article V(2)(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Brazilian Arbitration Act specifically authorizes the STJ to refuse confirmation of awards that violate the national public policy. In other words, awards that violate fundamental principles of Brazilian law will not be recognized in this country.

The STJ rejects most public policy defenses as an undue attempt to re-litigate the matter. It is only in those rare circumstances, in which fundamental principles of Brazilian law are threatened, that the STJ interferes. That was exactly the case in the Abengoa v. Ometto dispute, according to the STJ.

By an 8 to 1 decision, the STJ held that "the chairman's failure to disclose to the parties objective elements that compromise his impartiality and independence under Brazilian law prevents the confirmation of the respective awards in this country".

The court further stated that "given the contractual nature of arbitration, which underscores the trust relationship between the parties and the arbitrator, the breach of an arbitrator's duty to disclose any circumstances that are reasonably capable of casting a doubt over his impartiality and independence prevents the confirmation of the arbitral award in this country."

Independence and impartiality of arbitrators represent an absolute requirement of all arbitral proceedings; they are essential to arbitrators' judicial role and, as such, represent a fundamental principle of both Brazilian and international arbitration. For this reason, arbitrators have a duty to disclose facts that affect their independence and impartiality and failure to do so is likely to be sanctioned by the Brazilian courts, as indicated by the STJ's recent decision.

The recent decision in the Abengoa v. Ometto saga appears to set the tone for the STJ's role during confirmation proceedings. The court will (as it should) continue to exercise restraint when analyzing public policy defenses. However, the justices sitting on the nation's capital are poised to safeguard the integrity of the arbitration process by "repealing only those actions and legal effects that are absolutely incompatible with the Brazilian legal system".

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