Adjudicator's conflict of interest - The High Court's decision in Youssef v Maiden

Youssef v Maiden [2019] NZHC 3471 was, on any reading, a messy, but sadly not uncommon case.

The owners (the Youssefs) fell out with their builders (Bespoke) over the construction of a house in Mangawhai. The  Youssefs said they were unhappy with progress and would not be paying costs which arose out of inefficiencies; Bespoke said they were suspending work until they had some assurance they would be paid; the Youssefs treated the suspension as repudiation, and canceled the contract; and Bespoke rejected the allegation of repudiation and themselves canceled.

As I say, not an uncommon occurrence with each party trading cancellation notices.

Both parties referred their disputes to adjudication under the Construction Contracts Act 2002.  RICS, as authorised nominating authority, appointed Mr Maiden as adjudicator and he consolidated the opposing claims into a single adjudication.  From there, things appear to have got a bit odd.  

There were a number of procedural irregularities in the course of the adjudication, with the end result that the adjudicator held that the Youssefs had not validly canceled the contract, and on that basis Bespoke was entitled to be paid amounts owing and lost profit on the balance of the work.  

The Youssefs sought judicial review on a number of grounds:

  • a failure by the adjudicator to disclose a conflict of interest
  • the process by which the adjudicator determined that the Youssefs' cancellation was unlawful
  • breaches of natural justice

It is not apparent from the disclosed facts that a notice of willingness was issued in terms of section 35(1) or that consolidation was by agreement under section 40; the failure to issue a notice of acceptance does not appear from the judgment to have been pursued with any vigour and was disposed of in one paragraph.

Acknowledging that judicial review should not be undertaken lightly (citing Rees v Firth [2011] NZCA 668), the court proceeded to quash the adjudication determination on the grounds that the adjudicator had not disclosed a conflict of interest.

The relevant facts are that a partner in the law firm representing Bespoke had appointed Mr Maiden as an expert witness in relation to a dispute for another client, unrelated to the adjudication.  The partner acting for Bespoke was unaware that Mr Maiden was an expert witness on these matters.  It appeared that Mr Maiden was paid directly by that unrelated client.  The only commonality between the two disputes were the involvement of Mr Maiden as expert witness on one and adjudicator on the other, and the law firm acting for a party in each case, albeit using separate partners unaware of the other's activities.

To compound matters, the firm had not appointed Mr Maiden by agreement - the appointment had been made by RICS in its capacity as authorised nominating authority.  That put the microscope on the adjudicator's disclosure, or failure to make it, of a potential conflict of interest.

From the judgment, there is nothing to suggest that the adjudicator knew either of the Youssefs or Bespoke.  There is no indication that the involvement of the firm of lawyers was disclosed in the notification of appointment by RICS, or whether the adjudicator issued a notice of willingness to act as required by section 35(1).  Presumably, however, the law firms acting for the parties were disclosed at least as addresses for service in the notice of appointment.  

The question therefore arises - when receiving a notice of appointment, should the involvement of a firm of solicitors have raised alarm bells in the potential adjudicator's mind; and did Mr Maiden's unrelated involvement with one of counsel's firms raise the requirement for the consent of the parties?

The procedure in section 35 is first that a person must indicate their willingness to act (s35(1)).  The putative adjudicator must then serve a notice of acceptance in the prescribed form (s35(2), r5A and Form 2A of the Construction Contracts Regulations 2003), and the adjudication procedure then goes ahead with the claimant serving the claim within 5 working days.  There is no prescribed form for the notice of willingness.  AMINZ provides a form, which requires statements of willingness to act; compliance with the AMINZ Code of Ethics; independence and that there are no conflicts of interest; that there are no health issues which might affect the adjudication; and an ongoing obligation to disclose anything which might change those declarations.

There is no reference to conflicts of interest in the prescribed form of notice in Form 2A, other than meeting the eligibility requirements in section 34.  Section 34(3) in turn requires disclosure to the parties of "any conflict of interest (whether financial or otherwise)" and requires the agreement of the parties if such a conflict exists.

The Act (s35(3)) provides that if there is a conflict of interest, the putative adjudicator must not serve a notice of acceptance until the parties agree that the person may act, notwithstanding the conflict of interest.  Section 41(d) also imposes an obligation to disclose any conflict of interest to the parties.  There is no guidance in the Act on what may comprise a conflict of interest, and whether or not the conflict is fatal or capable of waiver by agreement between the parties.

It is implicit in the above that procedurally everything hangs off the service of the notice of acceptance.  Section 66 goes on to provide that, if a notice of acceptance is not issued, the claimant may issue a further notice of adjudication.  The expectation, therefore, is that the adjudication does not proceed if that notice is not issued.  This issue does not appear to have been argued and nor was it considered relevant by the court.  The only observations is that neither party objected.

The core issue turns on Mr Maiden's obligation to disclose the apparent conflict of interest (the balance of the issues raised were not determinative).

The judgment refers to the Saxmere decision, but is otherwise relatively sparse on reasoning, simply applying the objective test of a fair minded lay observer.  The determinative issue was the apparent bias arising from the commonality of the firm of solicitors in the two unrelated disputes Mr Maiden was engaged in.

The gold standard in assessing conflicts of interest is the International Bar Association's Guidelines on Conflicts of Interest in International Arbitration; albeit focused primarily on international arbitration, they are the clearest expression of the range of conflicts which may arise and they are widely accepted as a statement of good practice.  They also reflect the realities of the relatively small pool of experts available for such disputes.

The Guidelines classify conflicts of interest into three categories - green, not requiring disclosure; orange,  a conflict of interest may in the eyes of the parties give rise to doubts over impartiality and must be disclosed but may be waived with the consent of the parties; and red, those where on an objective assessment a conflict exists which may or may not be expressly waivable.  On the involvement of firms of lawyers, the explanatory note on Relationships provides that "The fact that the activities of the arbitrator's firm involve one of the parties shall not necessarily constitute a source of such conflict, or a reason for disclosure."

The non-waivable red list examples are where the arbitrator is an employee or representative of one of the parties; has a significant financial or personal interest in one of the parties or the outcome of the case; or the arbitrator or the arbitrator's firm regularly advises a party or a firm derives significant income from a party.  Put loosely, the arbitrator is the judge in its own cause.

The waivable red list identifies serious, but not severe, situations where the parties consider all the relevant facts and and expressly agree to the appointment.  Examples include previously providing advice or opinions to a party on the dispute or has had a prior involvement in the dispute; the arbitrator or a close family member has an interest (holding shares etc) in a party; the arbitrator advises a party or a counsel or law firm representing a party; or the arbitrator's law firm has a significant commercial relationship with a party, etc.  These are close relationships with the dispute itself or with one of the parties, short of a financial interest in the outcome.

The examples of orange list relationships include serving as counsel for or against a party in the last three years; the arbitrator has been appointed as arbitrator on two or more occasions in the last three years by a party; the arbitrator's law firm has acted for or against a party in the last three years; two arbitrators are from the same firm or chambers, etc.  This tends more towards the appearance of partiality, requiring notification but not express agreement.

The green list is more permissive, and includes the arbitrator expressing a legal opinion on a relevant issue (not directly on the case) and the arbitrator's firm renders services to one of the parties through an alliance (which does not involve sharing significant fees or other revenues) in relation to an unrelated matter.  This is far more arms' length, recognising the inherent independence of arbitrators and counsel.

While those examples are not exactly on-point, it is clear that Mr Maiden's involvement as expert witness, appointed by a client directly on an unrelated matter, would fall into the green list, and would not require disclosure.

In New Zealand, the test outlined by the House of Lords in Porter v Magill [2001] UKHL 67 was endorsed by the Supreme Court in Saxmere Co Ltd v The Escorial Company Ltd [2009] NZSC 72, in the following terms:

The question is whether a fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.

As such, the test looks far more like the red-waivable list.  In considering the test, Justice McGrath observed that knowing counsel is not of itself evidence of partiality in favour of that counsel's client.

The question before Mr Maiden, had he considered it, should have first been whether or not objectively there was any reason to conclude that there was a possibility or a perception that he might not be impartial.  Presumably he did not know the parties, which left only their counsel.  Clearly, knowing counsel is not cause for concern, applying either Saxmere or the IBA Guidelines.  Similarly, having been engaged in an unrelated matter where one counsel's firm was acting also falls short of any objective test of partiality.  It should be observed that, in acting as an expert witness in the unrelated matters, Mr Maiden presumably confirmed that he had read and had complied with the Code of Conduct for Expert Witnesses in Schedule 4 to the High Court Rules, which provides under paragraph 1 an obligation to "assist the court impartially".  This was considered by the court.  In finding that there was a conflict of interest which should have been disclosed, the court found:

In my view, the fair-minded lay observer would consider the following matters particularly significant. First, the nature of the professional relationship that will generally exist between a party’s legal adviser and expert witness. The second is that Mr Maiden had several instructions from M Ltd, all originating from Martelli McKegg. The third is that an expert witness is paid for the services and advice he or she provides. It is to be remembered that it was a disparity in financial contributions to the Judge’s and counsel’s joint venture vehicle which caused the Supreme Court to recall its judgment in Saxmere (No 1). In recalling its judgment, the Court described $37,125 as “well above the level at which a direct or indirect indebtedness from Judge to counsel should be regarded as so minimal as to be immaterial, thus giving rise to no concern”.

The difficulty with the findings in Youssef v Maiden is that where an adjudicator or arbitrator finds him or herself determining a matter where he or she has been appointed on an unrelated matter (not as adjudicator or arbitrator) by one counsel's firm, then that involvement must be disclosed under section 35.  In a small legal community like ours, that is almost certainly unsustainable.

Perhaps more troubling is that, having failed comply with the mandatory obligation under section 35 to issue a notice of acceptance, everything which followed was arguably of no effect.  It would have been a simple matter for the court to set aside the determination for a failure to comply with the mandatory provisions of the Act.  On its terms, this was not a matter which could be waived by the parties.

Regrettably, this case fails to clarify a difficult issue (for adjudicators and arbitrators) of conflict of interest and it creates a great deal of uncertainty for those who might accept appointment as either, from time to time, in addition to their normal professional activities.  Such is the growing expertise of law firms in construction that it will be increasingly common for the same firms and the same counsel to be appearing before a limited pool of disputes professionals; that will be difficult for all but those who solely arbitrate and adjudicate.