by ~ Susan Hartnett (Email) (Web Site)
The Second Circuits recent decision in Scandinavian Reinsurance Company Ltd. v. St. Paul Fire & Marine Insurance Company, ___ F.3d ___ (2d Cir. Feb. 3, 2012) is the latest judicial opinion to address the extent to which arbitrators must disclose potential conflicts of interest, and the availability of a remedy for such non-disclosures. There, the court reversed vacatur of an arbitration award, holding that two arbitrators failure to disclose their concurrent service in a similar dispute involving a common witness, common issues, and (allegedly) a related party did not establish evident partiality under 9 U.S.C. 10(a)(2).
The District Court Ruling
We reported the district courts decision in the Summer 2010 issue of our newsletter. The district court granted Scandinavian Res petition to vacate the award against it. The district court agreed with Scandinavian Re that two arbitrators undisclosed involvement in a concurrent arbitration was a material conflict of interest" that required disclosure, and that their failure to disclose established evident partiality under s.10(a)(2).
In vacating the award, the district court rejected St. Pauls contention that the arbitrators undisclosed conduct was trivial" because it did not concern a personal or financial relationship between the arbitrators and a party. The district court noted that, although evidence of an undisclosed relationship between an arbitrator and a party is a relevant factor, it is not a dispositive factor in determining whether the undisclosed matter was material so as to require disclosure and support a finding of evident partiality under s.10(a)(2).
The Second Circuit Ruling
St. Paul appealed, and the Second Circuit reversed, holding that evident partiality" had not been demonstrated. The Second Circuit reasoned that the substance of the undisclosed matters, and the arbitrators' failure to live up to their own standards of disclosure, did not prove that either arbitrator was predisposed toward a particular result.
While the parties appear to have disagreed about the proper standard of review that should be applied to such questions (de novo or clear error"), the Second Circuit stated that it did not need to reach this question because the result below rests on legal error."
The district court, like the Second Circuit, acknowledged that evident partiality" requires more than the mere appearance or possibility of bias, and instead requires proof from which a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side." (emphasis in original). However, in the Second Circuits view, the fact that there was undisclosed overlap between the two arbitrations, or even that a particular relationship might be thought to be relevant to the arbitration at issue," was just not enough to meet Scandinavian Res high burden of proving that either of the arbitrators was actually predisposed to rule in any particular way. This is not to say that the undisclosed matter was irrelevant to the parties or arbitration. The court stated that although it would have been better for [the arbitrators] to have disclosed the fact [concurrent service], we do not think disclosure was required to avoid a vacatur of the Award in light of the fact that the relationship did not significantly tend to establish partiality."
In reaching its conclusion, the Second Circuit drew a distinction between undisclosed conduct that concerns a relationship with a party, and other arguably relevant but undisclosed matters. Although the appellate court agreed with the district court that in order to establish evident partiality, material conflicts of interest need not be direct relationships between arbitrators and the parties to arbitration," it also emphasized that the undisclosed matter here was overlapping arbitral service, not a material relationship with a party
.such as a family connection or ongoing business arrangement with a party or its law firm -- circumstances in which a reasonable person could reasonably infer a connection between the undisclosed outside relationship and the possibility of bias for or against a particular arbitrating party." While the undisclosed conduct may have been relevant and good to know, a court must focus on the question of how strongly that [undisclosed] relationship tends to indicate the possibility of bias in favor of or against one party, and not on how closely that relationship appears to relate to the facts of the arbitration.
The court rejected Scandinavian Res argument -- and the district courts observation -- that vacatur was required because nondisclosure could only be explained by bias, or that vacatur was required because Scandinavian Re had relied on the arbitrators assurances that they would make thorough and ongoing disclosures during the arbitration. The court pointedly observed that the panelists were not obligated either by contract or by specific ethical standards to make continuing disclosures. The fact that one of the arbitrators failed to consistently live up to his announced standards for disclosure or to conform in every instance to the parties respective expectation regarding disclosure was insufficient to justify vacatur. The court also pointed out that given the highly specialized and complex nature of the reinsurance dispute, and the relatively small pool of qualified panelists, it was not surprising that some overlap in service might exist.
While not discussed in the opinion, apart from noting the extreme deference accorded to arbitration awards, the Second Circuits decision is consistent with the judiciarys hands-off approach to arbitration awards, and the view of some courts that if parties contract for arbitration, they must live with the system they bargained for. It may also be that the court had some difficulty crediting Scandinavian Res concerns about the arbitrators undisclosed concurrent service, given that judges frequently preside over similar or related matters, a practice that is not viewed as creating even the appearance of partiality, much less evidence of actual partiality
The Second Circuits decision raises the question of whether, short of evidence that an arbitrator failed to disclose a personal or financial relationship with a party or its law firm, there is a remedy for a panel members failure to disclose other kinds of relevant information. Parties concerned about the panel selection process and arbitrator disclosures may respond to this decision by adding language to arbitration clauses that spells out more clearly the scope of panel members' disclosure obligations.
Susan Hartnett may be reached at firstname.lastname@example.org.
2012 Sugarman, Rogers, Barshak & Cohen, P.C. All rights reserved.
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