By: Adaeze Mgbeahuru; Junior Staffer

Confidentiality is an essential part of arbitration and dispute resolution. Parties engage in arbitration and dispute resolution because of the core element of confidentiality. However, in recent times, parties in international commercial and investor-state arbitration proceedings are increasingly waiving confidentiality during and after arbitration. Recently, most institutional arbitration proceedings are open to the public. This article will discuss the trend of waiving confidentiality, focusing on international commercial and investor-state arbitrations, especially as it relates to foreign direct investment. It will also shed light on which arbitration institutions have rules that allow for parties to waive confidentiality and the pros and cons of these decisions. This article will conclude by making a recommendation for the way forward.

Different authorities define arbitration in similar ways. Some authorities define arbitration as the use of an arbitrator to settle a dispute. Others define arbitration as a procedure in which parties, by the terms of their agreement, submit a dispute to one or more arbitrators who make a binding decision on the dispute, which is known as an award.

From the last definition, the principal characteristics of arbitration are clear;

1. The parties contract to use arbitration, which gives the arbitral tribunal jurisdiction;
2. It is party-driven as the parties choose their arbitrators or elect an institution to select their arbitrator(s) for them;
3. Arbitrators are neutral;
4. Arbitration is confidential; and
5. The decision of the arbitral tribunal is final, binding on parties, and enforceable.

Another authority classified these principal characteristics of arbitration into three pillars of a well-structured arbitration proceeding: the impartiality of arbitrator(s), confidentiality in arbitration proceedings, and finality of arbitral awards. In all classifications, what is constant is the confidentiality of the process. Many consider confidentiality one of arbitration’s virtues and an advantage arbitration has over litigation. Companies and governmental entities often find arbitration more attractive than litigation because of its confidential nature.

Different jurisdictions have different requirements as it refers to confidentiality. Within the legal framework of the Arbitration Act 1996 (“AA 1996/the Act”), parties typically conduct the arbitration in private, and there is an understanding that the proceedings and documents generated are subject to confidentiality even though the Act does not impose the obligation of confidentiality. Jurisdictions like Scotland (Rule 26.2) and Singapore (Section 22 and 23) have codified provisions in the legislature to ensure confidentiality in arbitration. Further, under the American Arbitration Association (“AAA”), arbitration proceedings are generally private. The staff and AAA neutrals have the ethical obligation to keep the information confidential; however, the AAA does not have a stance as to whether the parties elect to waive their confidentiality or not. The International Centre for Settlement of Investment Disputes (“ICSID”) Convention and Arbitration Rules do not contain a general presumption of confidentiality or transparency applicable to the parties, but rather leave the decision of the level of confidentiality to the parties.

Parties traditionally conduct commercial arbitration and investor-state arbitration in strict confidentiality. Commercial arbitration and investor-state arbitration can easily be mistaken as the same, but the difference is in the nature of the claims and parties involved. International commercial arbitration is an arbitration of disputes arising out of a commercial contractual obligation, while investor-state arbitration is an arbitration of a dispute arising under a public treaty between the two contracting states which is also referred to as an investor-state dispute settlement.

Recently, in these two areas of arbitration, parties are electing to waive their confidentiality either partially or completely. States often claim they enhance transparency when they waive confidentiality in investor-state arbitrations. Additionally, states may favor the waiver of confidentiality because of public interest at stake, as there is taxpayers’ money involved in these transactions and the government represents the interest of the entire country (see Symbion Power LLC v. Venco Imtiaz Construction Company [2017] EWHC 348 (TCC)).

However, this is not entirely beneficial for both parties, for there is a risk of exposure of the investor’s trade secrets and the government’s sensitive information. Investors take great care to protect their trade secrets. They put confidentiality clauses in contracts, both with their employees and with outside parties. They also protect valuable information under intellectual property laws and employ the services of intellectual property lawyers to ensure continuous protection. It would be counter-productive for investors to put their trade secrets at risk while trying to resolve a business dispute through arbitration. For states, there is certain sensitive state information that might be at risk of being exposed if the parties waive confidentiality during and after arbitration. This might raise a national security concern or make the states vulnerable to security or trade attacks.

[C]onfidentiality is a cardinal feature of arbitration that, when waived, diminishes one of the major aspects that attract parties to arbitration instead of litigation.

Adaeze Mgbeahuru

In addition, waiving confidentiality in arbitration might harm both parties’ relationships. Foreign investors privy to the arbitration proceedings of a host state might scare away from investing there, and host states might reject investments from an investor involved in the arbitration. These are major concerns that can chill the economic growth of the investing entity and the host states alike. Foreign Direct Investment is one of the major means of income for host countries and can also contribute to its infrastructural development. States would want to maintain an excellent reputation to attract investors, which assists in growing the economy and, most times, improving infrastructure. As it involves a substantial infuse of funds, and it is long-term, investors also stand to gain substantial profit from the said investment, and investors also value an excellent reputation. A tarnished reputation affects both the state and the investor, as huge amounts of investment are at stake.

As discussed above, confidentiality is a cardinal feature of arbitration that, when waived, diminishes one of the major aspects that attract parties to arbitration instead of litigation. The new trend of waiving confidentiality because of the need for transparency is very important. However, the danger of exposing trade secrets or damaging a party’s reputation makes it a concerning trend that involves the risk of the parties losing capital and opportunities to invest. This article recommends that parties make proper risk analyses before deciding if it is in their best interest to waive confidentiality or not instead of doing so just because it is a new trend or that the other party or institutional laws demand or require it. Each party should know that one of the principal characteristics of arbitration is that it is party driven and the decision of the parties stands. They should decide at the earliest possible time before the dispute arises, for example during the business or investment contract negotiations.