Vacating an Arbitration Award for Lack of Disclosure by the Arbitrator

U.S. Supreme Court Precedent

The Supreme Court considered the “evident partiality” standard 50 years ago, but the justices could not agree on a single rationale. In a plurality opinion for four members of the Court, Justice Black wrote that “any tribunal permitted by law to try cases and controversies not only must be unbiased but also must avoid even the appearance of bias,” the same standard that governs judges. Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 150 (1968). He also prescribed a reasonableness standard, by stating that arbitration boards may not “reasonably be thought biased against one litigant and favorable to another.” Justice White, joined by Justice Marshall, provided a less restrictive standard in his concurring opinion, holding that “arbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial.” He noted that “where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed.” He further stated that it is not the decision of the Court that arbitrators are to be held to the standards of judicial decorum of Article III judges or indeed of any judges. The Court thus did not articulate a single standard for vacating an arbitral award for evident partiality. Most courts have since followed the less restrictive standard in the concurring opinion, using a reasonableness test to determine whether the relationship is trivial.

The D.C. Circuit Decision

The Republic of Argentina challenged an arbitration decision, contending that there was evident partiality by one of the arbitrators because the arbitrator sat on the board of directors of a financial services company with investments in two of the parties. Republic of Argentina v. AWG Grp. LTD., 894 F.3d 327, 333 (D.C. Cir. 2018). The court held that Argentina failed to meet its heavy burden of proof to challenge the arbitrator’s partiality, as the facts it set forth failed to indicate improper motives on the part of the arbitrator. Following the concurring opinion in Commonwealth Coatings, the court explained that Argentina must show that the arbitrator had a substantial interest in a firm that has done more than trivial business with one of the parties. The court found that the arbitrator’s position as a board member in a financial services company was so far removed from investment decisions of the company “that it could not have given her a substantial interest in the parties.” The court further found that the business of the firm with the two parties was trivial and stated that “speculation that [the firm’s] investment of 0.06% of its assets, most of which was credited to its clients and not its own bottom line, created a substantial interest in [the parties] is simply not enough to satisfy the Act’s high standard of proof.” The court thus held that there was no basis for vacating the panel’s award.

The Eighth Circuit Decision

The Eighth Circuit acknowledged in a recent decision that its interpretation of the term “evident partiality” has reflected some “uncertainty” over the years. However, the court stated that it “need not decide which of our constructions of the term binds us as a matter of circuit precedent” because the facts did not show “evident partiality under any of them.” Ploetz for Laudine L. Ploetz, 1985 Tr. v. Morgan Stanley Smith Barney LLC, 894 F.3d 894, 898 (8th Cir. 2018). The court noted that, in prior cases, it has interpreted evident partiality using various standards, including “an undisclosed relationship [that] creates an impression of possible bias,” “an undisclosed relationship [that] casts significant doubt on the arbitrator’s impartiality,” and a relationship that “objectively demonstrate[s] such a degree of partiality that a reasonable person could assume that the arbitrator had improper motives.” It observed that there is a lack of consensus on the meaning of “evident partiality” among federal courts and that its own “interpretation of evident partiality has migrated in the salutary direction of its plain and ordinary meaning.” In Ploetz, the arbitrator had disclosed 10 cases in which he was an arbitrator in matters involving one of the parties but failed to disclose a mediation involving the party. The court held that because he timely disclosed the 10 other cases he arbitrated, his undisclosed mediation represented at most a trivial and inconsequential addition to that relationship. The court upheld the arbitration award, stating that Ploetz does not warrant relief from the award under any of the evident partiality standards because she could not explain how the arbitrator’s undisclosed mediation creates even an impression of possible bias.

The Second Circuit Decision

In a matter of first impression, the Second Circuit held that a party must sustain a higher burden to prove evident partiality on the part of a party-appointed arbitrator who is expected to espouse the view or perspective of the appointing party. Certain Underwriting Members of Lloyds of London v. Fla., Dep’t of Fin. Servs., 892 F.3d 501, 503–4 (2d Cir. 2018). The party-appointed arbitrator in a reinsurance dispute failed to disclose dealings between the appointing party and a firm for which the arbitrator served as the president and chief executive officer and that his firm operated out of the same office space as the appointing party. The district court vacated the award, holding that the undisclosed relationships were significant enough to demonstrate evident partiality and noting the “apparent willfulness of the non-disclosures.” The Second Circuit vacated and remanded, stating that to expect the same level of institutional impartiality of party-appointed arbitrators as is applicable to neutrals would impair the process of self-governing dispute resolution. Note that this is at odds with the presumption of neutrality, unless explicitly agreed otherwise, contained in most arbitral institution rules (e.g., American Arbitration Ass’n Commercial Rule 18). The court held that an undisclosed relationship between a party and its party-appointed arbitrator constitutes evident partiality, such that vacatur of the award is appropriate if (1) the relationship violates the contractual requirement of disinterestedness or (2) it prejudicially affects the award.

Conclusion

Courts have cited “fundamental fairness” as the policy behind vacating awards for evident partiality. However, a party trying to vacate an arbitration award faces a heavy burden. As the District of Columbia Circuit and Eighth Circuit decisions show, a relationship that is more than trivial is required for an arbitration award to be vacated due to evident partiality. The Second Circuit decision articulates an even higher standard for party-appointed arbitrators who are expected to espouse the view of the appointing party.

Sunu M. Pillai is an associate with Saul Ewing Arnstein & Lehr LLP, in Pittsburgh, Pennsylvania.

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