UK: Privy Council Curtails Obligation of Confidentiality in International Arbitration

Last Updated: 11 June 2003

Confidentiality has always been referred to as one of the advantages of choosing arbitration over litigation. However, the extent of this right and its enforcement can be problematic. In a recent appeal to the Privy Council the scope of the principle of privacy in international commercial arbitration had to be considered1 .

Facts

The case involved two insurance companies, Associated Electric & Gas Insurance Services Limited (AEGIS) and European Reinsurance Company of Zurich (European Re) who had entered into a reinsurance agreement dated 31 March 1980. The agreement provided for arbitration in Bermuda. Two separate disputes regarding the obligation of European Re to indemnify AEGIS were referred to separate arbitration tribunals.

A partial award was issued by the first tribunal on 19 January 2000 which essentially determined the critical dispute between the parties. European Re wanted to rely on this award in the second arbitration but AEGIS argued that they were not entitled to do so. AEGIS alleged that this would be in breach of the confidentiality obligation and that issue estoppel was not a remedy available to European Re as it was essentially an evidentiary principle. All procedural matters fall within the powers of the arbitration tribunal. On this basis AEGIS obtained an ex parte injunction to restrain European Re from disclosing the contents of the award. European Re applied to have the injunction discharged; it was refused in the first instance but was allowed by the Court of Appeal which lifted the injunction. AEGIS subsequently appealed to the Privy Council seeking the reinstatement of the injunction.

The Privy Council confirmed that AEGIS had to demonstrate that they were entitled to this injunction. Essentially the effect of the injunction obtained by AEGIS was to stop European Re referring to the award where the tribunal had decided the key issue between the parties and thereby precluding European Re from raising a plea of issue estoppel in the second arbitration.

AEGIS raised two main arguments in support of the injunction. First, they relied on the ordinary principles of the privacy of arbitration and in particular a specific stipulation of a confidentiality agreement made during the first arbitration. Secondly, they argued that the plea of issue estoppel by European Re (while not challenging the respondent’s bona fides) was so lacking in merit as to be an abuse of process.

Confidentiality

The procedural direction signed by the parties and the tribunal in the first arbitration on 6 February 1998 confirmed that as a general principle the parties would maintain the privacy and confidentiality of the arbitration, including the contents of briefs or other documents prepared and filed in the course of the proceedings. The detailed paragraphs relating to confidentiality in the order included a number of exceptions. The Privy Council agreed with AEGIS that the provisions expressly stated that the arbitration outcome would not be disclosed to any individual or entity which was not a party to the arbitration.

However, these provisions had to be assessed in light of the surrounding circumstances in which the confidentiality agreement was made and the fundamental principals and purposes of arbitration. The Privy Council acknowledged the importance of maintaining the confidentiality of documents which might be valuable to persons with adverse interests to AEGIS or European Re. However the otherwise "legitimate use of an earlier award in a later, also private, arbitration between the same two parties would not raise the mischief against which the confidentiality agreement is directed."

The court felt that there was a more fundamental factor to be taken into account. Essentially the function of arbitrators was to determine the case. Enforcement lay with the courts. If the prohibition in the confidentiality agreement prevented the award being disclosed to any individual or entity it would mean that any award would be unenforceable. The winning party could not enforce it either as a declaration of his rights or as a monetary award. The Privy Council held that the award from the first arbitration conferred a right on European Re which was enforceable by pleading issue estoppel.

Confidentiality as an implied term

The Privy Council only made a passing reference at the very end of its decision to Ali Shipping v Shipyard Trogir on the duty of confidentiality in arbitration. In that case the English Court of Appeal confirmed that confidentiality was an implied term of an arbitration agreement, although subject to exceptions. The Privy Council acknowledged the confidentiality of arbitration proceedings but concluded that the same logic could not be applied to the award. There are certain situations where the award may need to be relied on; for accounting purposes, for legal proceedings and for enforcement. Ali Shipping was therefore distinguished as it had not considered whether similar confidentiality restrictions would also apply to an arbitral award.

This decision may seem at odds with the existing law relating to confidentiality as an implied term of an arbitration agreement. However, it is clear that the Privy Council did not want to diminish the importance of the privacy of the arbitration process in this decision. Applying it to an arbitration award could render the tribunal’s award unenforceable. Had the award been confidential the injunctive proceedings commenced by AEGIS would not have been possible. This case can be distinguished from earlier English cases on confidentiality as there was an express confidentiality agreement which the court could interpret and apply. The Privy Council was not prepared to extend the confidentiality agreement signed by the parties during the arbitration to the award. Parties wishing to maintain the confidentiality of an award may wish to include an express provision to this effect.

Footnote

1 Associated Electric & Gas Insurance Services Limited v European Reinsurance Company of Zurich [2003] UKPC 11 Privy Council Decision 29 January 2003.

Article by Norah Gallagher

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

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