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International Arbitration in the U.S. A fundamental and universally accepted tenet of international arbitration is that arbitrators must be impartial and independent.1 This principle appears in rules of the major arbitral institutions that administer international arbitrations, rules that provide a means to challenge arbitrators for perceived lack of impartiality and/or independence.2 In further recognition that impartiality and independence precept are cornerstones of arbitration, Section 10(a)(2) of the Federal Arbitration Act (“FAA”) permits an arbitration award to be vacated “where there was evident partiality or corruption in the arbitrators, or either of them,” one of only four enumerated bases for vacatur in the FAA.3 Chapter 1 of the FAA covers domestic arbitrations, Chapter 2 implements the New York Convention, and Chapter 3 implements the Inter-American Convention on International Commercial Arbitration. Chapter 1 applies to international arbitrations to the extent it does not conflict with Chapters 2 and 3. Consequently, grounds enumerated in Chapter 1 for setting aside domestic arbitration awards, including “evident partiality,” also apply to international awards rendered in the United States. Although the phrase “evident partiality” is linguistically facile, its application has proven problematic for the courts, especially when the question involves an arbitrator’s failure to disclose any of his or her prior dealings with any of the parties. The Supreme Court of the United State’s sole decision interpreting the “evident partiality” standard in the nondisclosure context is Commonwealth Coatings Corp. v. Continental Casualty Co.4
Setting the Stage: Commonwealth Coatings v. Continental Casualty Co. In Commonwealth Coatings, the neutral arbitrator was an engineering consultant.5 During the appointment process, the neutral arbitrator failed to disclose that one of the parties sporadically used his services. Although no dealings occurred between them for about a year, over the course of the previous four to five years the arbitrator received fees of about $12,000 from the party, including fees for services rendered on the very projects involved in the arbitration. The Supreme Court, in a fractured opinion, held that the arbitrator’s failure to disclose the relationship warranted a vacating of the award on grounds of evident partiality. The plurality opinion in Commonwealth Coatings, authored by Justice Black,6 took “a very hard line on the ethical standards of arbitrators,”7 requiring “arbitrators [to] disclose to the parties any dealings that might create an impression of bias.”8 In reaching this conclusion, Justice Black noted that “[w]e have no doubt that if a litigant could show that a foreman of a jury or a judge in a court of justice had, unknown to the litigant, any such relationship, the judgment would be subject to challenge.”9 Justice Black reasoned that, while arbitrators are not expected to sever all ties with the world, the courts are to be scrupulous in safeguarding the impartiality of arbitrators.10 Arbitrators “not only must be unbiased but also must avoid even the appearance of bias,”11 thereby assuring continued confidence in the arbitration system. Justice White, joined by Justice Marshall and “glad to join” Justice Black, wrote additional remarks, emphasizing that “[t]he Court does not decide today that arbitrators are to be held to the standards of judicial decorum of Article III judges, or indeed of any judges.”12 Justice White also emphasized 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.”13
The “Evident Partiality” Conundrum After the Supreme Court’s 1968 Commonwealth Coatings decision, the issue of vacatur arose in various other factual contexts. However, confusion in the Commonwealth Coatings opinion gave lower courts little guidance, and most courts struggled with the import of Justice White’s concurrence. As one court noted, “[a]lthough it is difficult to extract from the cases [applying Commonwealth Coatings] more than a mood, the mood is one of reluctance to set aside arbitration awards for failure of the arbitrator to disclose a relationship with a party.”14 There is no consensus among the circuits, but the test that has emerged can best be characterized as a case-by-case objective inquiry into partiality or a reasonable impression of bias standard.15 Although vacated awards due to nondisclosure occur primarily where an undisclosed ongoing financial relationship exists,16 other undisclosed relationships have not warranted vacatur. For example, in Andros Compania Maritima, S.A. v. Marc Rich & Co.,17 the neutral arbitrator failed to disclose that he had in the recent past served on 19 arbitration panels with the president of one of the firms involved in the arbitration and for 12 of those panels the president had been one of the arbitrators who selected the challenged arbitrator to serve as the neutral. Nevertheless, the court denied vacatur, observing that “[e]xpertise in an industry is accompanied by exposure, in ways large and small, to those engaged in it . . . .”18 Similarly, in ANR Coal Co., Inc. v. Cogentrix of N.C. Inc.,19 the court upheld an award despite the fact the arbitrator’s law firm represented the company that indirectly caused the dispute in arbitration. In Ormsbee Dev. Co. v. Grace,20 although the arbitrator and the law firm representing a party to the arbitration had clients in common, the court refused to vacate the award, noting that to honor the request for vacatur would require “potential neutral arbitrators [to] sever all their ties with the business world.” 21
Nondisclosure of Trivial and Insignificant Relationships do not Warrant Vacatur: The Fifth Circuit’s recent en banc decision in Positive Software Solutions, Inc. v. New Century Mortgage Corporation22 reflects not only a “mood of reluctance” but also the continuing lack of consensus among the judiciary regarding a proper application of Commonwealth Coatings. In Positive Software, the arbitrator failed to disclose that, seven years before the commencement of the Positive Software arbitration, he and other members of his firm represented Intel in litigation involving seven law firms, six lawsuits, and 34 lawyers. The lawyer representing New Century in the Positive Software arbitration had also represented Intel. The evidence indicated that although their names appeared together on pleadings, the arbitrator and New Century’s counsel never participated together in any meetings, telephone calls, hearings, depositions or trials. The arbitrator’s failure to disclose this relationship was discovered after entry of the award. Armed with this newly discovered information, Positive Software sought to vacate the award. The district court ordered the award vacated, finding that the arbitrator failed to disclose “a significant prior relationship with New Century’s counsel,” thus creating an appearance of partiality requiring vacatur.23 On appeal, the Fifth Circuit’s panel opinion, in accordance with Justice Black’s hard line approach in Commonwealth Coatings, affirmed the District Court, stating an “arbitrator selected by the parties displays evident partiality by the very failure to disclose facts which might create a reasonable impression of the arbitrator’s partiality. The evident partiality is demonstrated from the nondisclosure regardless of whether actual bias is established.” 24 Subsequently, the Fifth Circuit considered the issue en banc, reached the opposite result, and held that vacatur was not warranted.25 Focusing on Justice White’s statements, the Fifth Circuit determined that Justice White, while supporting a policy of arbitrator disclosure to enhance the selection process, also concluded, in a practical vein, that an arbitrator “cannot be expected to provide the parties with his complete and unexpurgated business biography.”26 Consequently, Justice White’s “opinion fully envisioned upholding awards when arbitrators fail to disclose insubstantial relationships.”27 The Fifth Circuit further interpreted Justice White’s joinder to be pivotal to the decision in Commonwealth Coatings, to be based on a narrower ground than Justice Black’s opinion,28 and to be the Supreme Court’s effective ratio decidendi.29 Accordingly,
Applying the “reasonable impression of bias” standard practically, the Fifth Circuit found that the arbitrator’s failure to “disclose a trivial former business relationship does not require vacatur of the award.”31 Having concluded that the proper standard was one of “practicality rather than utmost rigor,” the Fifth Circuit nevertheless found that even if Justice White’s “joinder” was not read as a limitation on Justice Black’s opinion in Commonwealth Coatings, vacatur was not essential because the facts of Commonwealth Coatings were readily distinguishable. In Commonwealth Coatings, the undisclosed relationship was a repeated, substantial and recently terminated business relationship that involved the payment of fees and included services on the very projects at issue in the arbitration, while the undisclosed relationship in Positive Software was “tangential, limited and stale.”32 The dissenting opinion in Positive Software, written by Judge Reavley, found the Supreme Court’s decision in Commonwealth Coatings to be absolute and subject to but one interpretation:
The dissent further found “that it is quite pellucid that six Justices of the Court agreed that despite the fairness and impartiality of the arbitrator, failure to disclose ‘any dealings that might create an impression of possible bias’ justifies the vacatur of the award.”34 Judge Weiner, specially concurring with Judge Reavley’s dissent, additionally stated, “That a potential arbitrator himself might deem one or more of such relationships to be so de minimis as not to require its divulgence is irrelevant; such culling of information by a candidate must never be allowed to seep interstitially into the disclosure calculus.” 35 In the absence of full disclosure, “the system fails when the nominee for the post of arbitrator takes it upon himself to make the value judgment whether a relationship is so inconsequential that it need not be disclosed at all.”36
Hear No Evil, See No Evil –Undisclosed Chinese Wall Affords No Protection: Judge Weiner’s dissent – and his concern that an arbitrator may make a value judgment regarding the significance of a relationship – foreshadowed the fact pattern faced by the Second Circuit in Applied Industrial Materials Corp. v. Ovalar Makine Ticaret ve Sanayi, A. S.,37 a case involving an arbitrator’s unilateral decision to erect a “Chinese Wall” to shield him from a conflict. In Ovalar, AIMCOR and Ovalar were joint venturers. AIMCOR purchased and transported petroleum coke to Ovalar, which then distributed the coke in Turkey. The contract provided that any disputes would be settled by ad hoc arbitration in New York. When a dispute arose over the distribution of profits under the joint venture, the parties resorted to arbitration. The arbitration agreement was very specific regarding the arbitrators’ disclosure obligations and provided that no person could serve as an arbitrator who had a financial interest in the arbitration’s outcome.38 Pursuant to the parties’ agreement, Charles Fabrikant, chairman, president and CEO of Seacor Holdings, a multi-billion dollar company with 50 offices in 30 countries, was selected as the third arbitrator and chairman of the panel. Prior to the commencement of the arbitration hearing, the arbitrators were advised that AIMCOR was being sold to Oxbow Industries and that the transaction might be “relevant to the disclosure issue.” Fabrikant submitted a disclosure statement indicating that he “had no personal or business relationship with any of the parties to this proceeding, or their affiliates,” and would “reserve the right to amend or add to this disclosure should future circumstances warrant it.”39 Thereafter, the arbitration panel determined that the hearing would be bifurcated between liability and damages. After this determination, Fabrikant sent the following email to the parties:
In a 2-1 decision, with Fabrikant casting the deciding vote, the panel found Ovalar liable to AIMCOR for breach of contract. Two months later, while the issue of damages was still to be decided, Ovalar’s counsel wrote to Fabrikant asking him to withdraw. After the liability award, Ovalar conducted an investigation which revealed that a commercial relationship existed between SCF, a division of Fabrikant’s company, and Oxbow, the parent of AIMCOR. Ovalar’s claim was that SCF had been transporting petroleum coke for Oxbow, that this relationship generated approximately $275,000 in revenue, and that the relationship predated the liability hearing. Fabrikant refused to withdraw, revealing that when he was initially informed that SCF was engaged in discussions with Oxbow, he erected a “Chinese wall” by instructing SCF’s president that he “wished to know nothing about SCF’s conversations, or be a party to information about our activities with Oxbow or be consulted concerning any business with them.” Fabrikant concluded that because he was unaware of the relationship until he received the letter from Ovalar, “I see no reason to withdraw from the panel.”41 When AIMCOR moved to confirm the partial arbitration award, Ovalar moved to vacate the award on the grounds that Fabrikant’s failure to recuse himself violated the Federal Arbitration Act, 9 U.S.C. § 10(a). The district court ordered the award vacated. In affirming the order of vacatur, the Second Circuit stated:
The Second Circuit further held that a “reasonable person looking at an arbitrator’s decision not to investigate and his concomitant failure to inform the parties of the ‘Chinese Wall,’ would conclude that evident partiality existed.”43 In reaching this conclusion, the court noted that an arbitrator’s subjective good faith is not the test: “Once the arbitrator was aware that a nontrivial conflict of interest might exist, the calculus changed.”44
Disclose, Disclose, Disclose Lest Ye Be Subjected to Scrutiny by the Hypothetical Reasonable Person Thus, it can be argued that the question of vacatur for nondisclosure devolves into one of degree. The courts have had little difficulty finding a failure to disclose ongoing financial dealings establishes evident partiality. Few would contend the ongoing business relationships between the parties in Commonwealth Coatings and Ovalar were “trivial” or “insignificant.” But how “trivial” or “insignificant” are other undisclosed matters and should they be disclosed? The inherent difficulty is that a matter that is “trivial” or “insignificant” to one may be important to another. The rules of the various international arbitral institutions couch disclosure obligations in terms such as, an arbitrator “must disclose any facts or circumstances that might call into question the arbitrator’s independence in the eyes of the parties”45 or an arbitrator must “sign a declaration to the effect that there are no known circumstances known to him likely to give rise to any justifiable doubts as to his impartiality and independence.”46 But an arbitrator’s failure to comply with the disclosure obligations of an arbitral institution “plays no role in applying the federal standard embodied in the FAA.”47 The International Bar Association, in the hopes that “greater consistency and fewer unnecessary challenges . . . could be achieved by providing lists of specific situations . . . that do, or do not warrant disclosure or disqualification of an arbitrator,” created the “IBA Guidelines on Conflicts of Interest in International Arbitration” (“Guidelines”).48 The Guidelines consist of three lists. Items on the Red List are required to be disclosed and typically result in disqualification; items on the Orange List should be disclosed and will typically not result in disqualification; and items on the Green List need not be disclosed. However laudable these Guidelines, they do not resolve the evident partiality conundrum. For example, the Orange List contains a bright line three year limitation for disclosure of certain types of relationships, a concept not found in case law. Moreover, the Green List, by declaring that certain relationships need not be disclosed, permits an arbitrator to make the very value judgment cautioned against by Judge Weiner and consequently, does not necessarily comport with the evident partiality standard of the FAA. No court has ever held that certain types of relationships need not be disclosed, as the Guidelines suggest. To the contrary, the courts urge ample (but not necessarily exhaustive) disclosure. As stated by Justice White in Commonwealth Coatings, “it is far better that the relationship [i.e., a potential conflict between and arbitrator and a party] be disclosed at the outset, . . . than to have the relationship come to light after the arbitration, when a suspicious or disgruntled party can seize on it as a pretext for invalidating the award.”49 Consequently, given the elusive and intensely litigated objective standard adopted by most circuit courts and the absence of a decisive opinion by the Supreme Court of the United States, prudence dictates that an arbitrator disclose all known relationships without qualification, no matter how trivial they may appear. The courts, however, have made clear that the failure of an arbitrator to disclose an “insignificant” matter is not a game of “gotcha,” for the mood of the courts continues to be one of reluctance to set aside arbitration awards for an arbitrator’s failure to disclose a relationship with a party. Unfortunately, until the Supreme Court breaks its almost 40 years of silence, vacatur based on an arbitrator’s failure to disclose will continue to be betwixt and between. Ann Ryan Robertson is an attorney with Ajamie LLP, a litigation boutique. Robertson holds a J.D. and LL.M. in International Economic Law from the University of Houston Law Center. She is one of only 20 lawyers representing the United States on the ICC Commission on International Arbitration. A Fellow of the Chartered Institute of Arbitrators, Robertson serves on the executive committee of the Chartered Institute of Arbitrators, North American Branch. Robertson is a founding member of ArbitralWomen and a member of the Houston International Arbitration Club. In addition, she coaches the University of Houston Law Center’s Willem C. Vis International Commercial Arbitration Moot team, which competes each year in Hong Kong.
Endnotes 1. The March 2004 revision of the AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes and the July 2003 revision of the AAA Commercial Arbitration brought the American rules into line with the international standard that all arbitrators are to be independent and impartial. Prior to that time, party-appointed arbitrators were presumed to be non-neutral. 2.See ,e.g., International Chamber of Commerce (ICC) Rules of Arbitration, Chap. 7.1-7.3, 11, www.iccwbo.org; The London Court of International Arbitration (LCIA) Rules, Art. 5.2, 5.3, 10.3, www.lcia-arbitration.org; Center for International Dispute Resolution International Arbitration Rules, Art. 7-9, www.adr.org; Arbitration Rules of the Singapore International Arbitration Centre, Rules 9-10, www.siac.org. 3. Section 10(a) of the Federal Arbitration Act provides four bases for vacatur:
9 U.S.C. § 10 (a)(2007). Additionally, an award subject to the FAA can be set aside on the ground of “manifest disregard of the law.” Several courts have indicated that the manifest disregard for the law standard is applicable to international arbitration awards rendered in the United States. SeeApache Bohai Corp. LDC v. Texaco China BV, 480 F.3d 397 (5th Cir. 2007); Jacada (Europe) Ltd v. Int’l Marketing Strategies, Inc., 401 F.3d 701 (6th Cir. 2005); Bluebell, Inc. v. Western Glove Works, Ltd., 816 F. Supp. 236 (S.D.N.Y. 1993); Sanluis Developments, L.L.C., et al v. CCP Sanluis, L.L.C., ____ F. Supp.2d ___, 2007 WL 2219115 (S.D.N.Y. 2007) (pending publication) 4. 393 U.S. 145, 89 S.Ct. 337 (1968) (plurality opinion). 5. The contract between the parties contained an arbitration clause that permitted the subcontractor to appoint one arbitrator, the prime contractor to appoint the second arbitrator and these two together to select the third arbitrator, who was to be neutral. 6. Joined by Justices Fortas, Harlan, and Stewart. There is a split among the circuits regarding whether Commonwealth Coatings is, in fact, a “plurality” opinion. The Ninth Circuit has held that because three justices dissented, the vote of Justice White or Justice Marshall was necessary for the formation of a majority for reversal. SeeSchmitz v. Zilveti, 20 F.3d 1043, 1045 (9th Cir. 1994). 7.Merit. Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 681 (7th Cir. 1983). 8.Commonwealth Coatings, 393 U.S. at 149. 9. Id. at 148. 10.Id. at 150. 11.Id. 12.Id. 13.Id. 14.Merit Ins. Co., 714 F.2d at 682. 15. Most courts have followed Justice White’s concurrence and have rejected “appearance of bias” as the relevant standard where nondisclosure is not alleged and have adopted a case-by-case objective inquiry into partiality. See Morelite Const. Corp v. New York District Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2nd Cir. 1984) (holding that complaining party must show that “a reasonable person would have to conclude that the arbitrator was partial to one party”); Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 (6th Cir. 1989); (adopting Morelite standard); Kaplan v. First Options of Chicago, 19 F.3d 1503, 1523 (3rd Cir. 1994) (same); Peoples Security Life Ins. Co. v. Monumental Life Ins. Co., 991 F.2d 141, 146 (4th Cir. 1993) (same); Merit Ins. Co., 714 F.2d at 681-682, cert. denied, 464 U.S. 1009, 104 S.Ct. 529 (1983) (stating that if the circumstances are “ powerfully suggestive of bias” such that “a man of average probity might reasonably be suspected of partiality” vacatur might be warranted). 16.See Commonwealth Coatings, 393 U.S. at 146; Morelite,, 738 F.2d at 81 (arbitrator’s father was General President of the union involved in the arbitration dispute); Olson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 51 F.3d 157, 159 (8th Cir. 1995) (arbitrator was a high-ranking officer in a company that had a substantial ongoing business relationship with one of the parties); Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994) (arbitrator’s law firm had previously represented the parent company of one of the parties in at least nineteen cases over a thirty-five year period, including a case that had ended less than two years before the arbitration). 17. 579 F.2d 691 (2d Cir. 1978). 18.Andros, Id. at 701. 19. 173 F.3d 493 (4th Cir 1999). 20. 668 F.2d 1140 (10th Cir. 1982). 21.Id. at 1150. 22. 476 F.3d 278 (5th Cir.) cert. denied, __ U.S. __, 127 S.Ct. 293 (2007) (En Banc Opinion) 23.Positive Software Solutions, Inc. v. New Century Mortgage Corp., 337 F.Supp. 2d 862,865 (N.D. Tex. 2004). 24.Positive Software Solutions, Inc. v. New Century Mortgage Corp. 436 F.3d 495, 502 (5th Cir. 2006) (Panel Opinion). 25. On June 11, 2007, the Supreme Court of the United States denied certiorari. 26.Positive Software, 476 F.3d at 281 (En Banc Opinion) (citing Commonwealth Coatings, 393 U.S. at 151). 27.Id. (citing Commonwealth Coatings, 393 U.S. at 152). 28.Id. 29.Id. at 282 (relying on Marks v. United States, 430 U.S. 188-89 (1977)). 30.Id .at 283 (emphasis added). 31.Id. 32.Positive Software, 476 F.3d at 285 (En Banc Opinion) The Fifth Circuit further supported its interpretation with numerous public policy grounds finding that vacatur “in situations such as this” would “seriously jeopardize the finality of arbitration,” by the proliferation of ”expensive satellite litigation over nondisclosure” and would rob arbitration of expertise “because the best lawyers and professionals, who normally have the longest lists of potential connections to disclose, have no need to risk blemishes on their reputations from post-arbitration lawsuits attacking them as biased.” Moreover, “the mere appearance of bias standard would make it easier for a losing party to challenge an arbitration award for nondisclosure than for actual bias” and “would hold arbitrators to a higher ethical standard than federal Article III judges.” 33. The dissenting opinion was authored by Judge Reavley, joined by Judges Wiener, Garza, Benavides and Stewart. Judge Wiener specially concurred to Judge Reavley’s dissent, joined by Judge Reavley. Judge Reavley had authored the earlier Panel Opinion. 34.Positive Software, 476 F.3d at 286 (Reavley dissenting). Like the majority, the dissent proffered public policy grounds to support its position, noting that the ability to prove improper influence and bias is rarely possible, and “[i]t is imperative that we not allow even the good faith memory of the potential arbitrator to control disclosure for . . .it is the protection and reassurance of the party that matters most.” 35.Id. at 291 (Wiener concurring in Reavley dissent). 36.Id. at 293. 37. 492 F.3d. 132, 2007 WL 1964955 (2d Cir. 2007) (pending publication) 38. The agreement provided, in pertinent part:
The agreement did not specifically address whether the arbitrators were required to make additional disclosures after commencement of the arbitration. However, the agreement did provide that “[n]o person shall serve as an arbitrator who has or has had a financial or personal interest in the outcome of the arbitration or who has acquired from an interested source detailed prior knowledge of the matter in dispute.” (emphasis supplied). 39.Ovalar, 2007 WL 1964955 at *1. 40.Id. at *2. 41.Id. 42.Id. at *4 -5. 43.Id. at *5. 44.Id. 45. ICC Rules of Arbitration, 7.2. 46. LCIA Rules of Arbitration, 5.3 47.Positive Software, 476 F.3d at 285, n.5. 48. www.ibanet.org/images/downloads/Arbitration_guidelines_2007.pdf 49.Commonwealth Coatings, 393 U.S. at 151 (White concurring)
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