by Lou Chang
When do the undisclosed "dealings" or "relationships" of an arbitrator warrant vacature of an arbitration decision? Section 10 of the Federal Arbitration Act ("FAA")1provides that an arbitration award may be vacated where it was "procured by corruption, fraud or undue means or (w)here there was evident partiality in the arbitrators."
The National Case Law
The seminal case dealing with (this issue is the United States Supreme Court case of Commonwealth Coatings Corp. v. Continental Casualty Co.2 The case involved a construction arbitration which called for a three-person panel. Each party selected an arbitrator and the two arbitrators selected a third neutral arbitrator.
The arbitration dispute arose in Puerto Rico, a relatively small community where the advocates, parties and arbitrators appear to have had substantial familiarity with the construction industry and the third arbitrator. The third arbitrator owned a big business in Puerto Rico and served in the preceding five years as a consulting engineer for the general contractor, one of the parties in the arbitration. The business relationship was sporadic, but was repeated and significant and involved fees of $12,000 over that span of time. Information regarding this business relationship was not disclosed during the course of the arbitration. After the arbitration panel issued a unanimous decision in favor of the general contractor, the losing subcontractor sought to vacate the decision. The lower courts determined that the arbitration decision should be affirmed.
A divided Supreme Court addressed the matter and issued three minority opinions. Justice Black, writing for a plurality of four Justices, reversed the lower courts. The four judge plurality stated:
We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias.
We cannot believe that it was the purpose of Congress to authorize litigants to submit their cases and controversies to arbitration boards that might reasonably be thought biased against one litigant and favorable to another.3
The plurality decision implicitly requires that a showing be made that undisclosed "dealings" "reasonably be thought" to create an "impression of possible bias".
Justice White and Justice Marshall concurred with the reversal but would require a showing that the undisclosed "relationships" or "interests" be substantial. The White concurring decision recognized that arbitrators are selected by parties because they are often persons "of affairs, not apart from the marketplace, that they are effective in their adjudicatory function."4 It stated:
[A]n arbitrator's business relationships may be diverse indeed, involving more or less remote commercial connections with great numbers of people. He cannot be expected to provide the parties with his complete and unexpurgated business biography. But it is enough for present purposes to hold, as the Court does, 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. If arbitrators err on the side of disclosure, as they should, it will not be difficult for courts to identify those undisclosed relationships which are too insubstantial to warrant vacating an award.5
Justices Fortas, Harlan and Stewart dissented and supported the position that a showing of "evident partiality" should be subject to a rebuttable presumption. In their dissenting opinion, they noted that the record reflected that the third arbitrator was a "leading and respected consulting engineer" who had performed services for most of the contractors in Puerto Rico and was well known to and personal friends with the petitioner's counsel.6 Further, the petitioner's counsel indicated that he likely would not have objected to the arbitrator because he knew the arbitrator. The dissent noted:
I agree that failure of an arbitrator to volunteer information about business dealings with one party will, prima facie, support a claim of partiality or bias. But where there is no suggestion that the nondisclosure was calculated, and where the complaining party disclaims any imputation of partiality, bias, or misconduct, the presumption clearly is overcome.
I do not believe that it is either necessary, appropriate, or permissible to rule, as the Court does, that, regardless of the facts, innocent failure to volunteer information constitutes the "evident partiality" necessary under Sec. 10(b) of the Arbitration Act to set aside an award. "Evident partiality" means what it says: conduct—or at least an attitude or disposition—by the arbitrator favoring one party rather than the other.7
From this divided decision, four Justices would require that there be a showing that the arbitrator's undisclosed information be reasonably found to create an "impression of possible bias." Two Justices would require that the undisclosed dealings or relationships be substantial. Three Justices would require that evident partiality be supported by a showing of conduct favoring one party over another and that the undisclosed information be subject to a rebuttable presumption.
What kind of "dealings" or "relationships" are sufficient to establish an "appearance of possible bias" or "evident partiality" is not defined in the Commonwealth Coatings decision. Since that decision, federal and state courts have struggled to apply its guidance to different factual circumstances.
Recent cases that have found vacature appropriate for arbitrator nondisclosure of prior connections include the following circumstances:
1. Failure to disclose that seven years before the arbitration, the arbitrator and his former law firm were co-counsel in a lengthy litigation matter with the law firm and particular lawyer representing winning party in arbitration.8
2. Failure to disclose that the arbitrator's law firm had represented the corporate parent of the defendant corporation involved in the arbitration in 19 matters over a 35-year period ending some 21 months before the arbitration.9
3. Failure of neutral arbitrator to reveal that he had served as a party-arbitrator for one of the parties.10
4. Failure to disclose that the arbitrator had represented investors with similar claims against predecessor-in-interest to respondent. 11
5. Failure to disclose that, during the arbitration, the arbitrator began work as a senior executive with a production company that was negotiating with an executive of one of the parties to the arbitration to finance and co-produce a motion picture.12
6. Failure to disclose an ex parte communication with one of the parties' attorneys regarding the possibility of serving as a mediator in an unrelated action or the arbitrator's eventual appointment as a mediator in the action constituted "evident partiality"13
7. Failure to disclose that arbitrator was an official of a non-profit association that previously and presently solicited contributions from the medical institution party during the pendency of the medical malpractice arbitration matter.14
8. Failure to disclose arbitrator's law firm's contemporaneous representation of the Commonwealth of Australia, which owned one of the parties to the arbitration, constituted "evident partiality.15
9. Party-appointed arbitrator's failure to disclose that he had been employed by the appointing party as its representative and chief negotiator to negotiate the monthly rent for the subject property with the non-appointing party constituted "evident partiality.16
Cases that have found vacature not appropriate for arbitrator nondisclosure of prior connections include:
1. Prior service as expert witness for one of the parties does not constitute evident partiality when that service...
