Part III.A of the evident partiality segment of this series discussed the parties’ reasonable expectations of neutrality.  Today we consider how those expectations are enforced. 

“Evident partiality” challenges typically arise out of one of two scenarios.  First, there are “presumed bias” cases in which the arbitrator’s relationship to the parties or the controversy would lead a reasonable person to conclude that the arbitrator was biased, even though the challenger cannot prove actual bias.    Second, there are evident partiality challenges based on allegations of actual bias.  For example, suppose a neutral said on the record during the proceedings prior to deliberations:  ”Party A, frankly I have distrusted your company’s business motives for many years, but hearing your witnesses’ testimony has simply confirmed what I’ve suspected all along.”  While the chances of an arbitrator making such a statement (let alone on the record) are exceedingly slim to non-existent, it would provide the basis for an evident partiality challenge (which would probably succeed) based on proof of actual bias. 

The difference between “presumed” and “actual” bias is simply one of proof.  One is based on circumstantial evidence and the other on direct evidence.  Our focus will be on “presumed bias” cases, because they arise with greater frequency.  Actual bias is very difficult to prove, and if it or something approaching it can be established, then that proof would in any (or most any) event meet the standards necessary to establish evident partiality.   

Enforcement of the Parties’ Expectations of Neutrality Through the Disclosure Process

There are three procedural problems with presumed bias cases.  First, courts generally cannot entertain an evident partiality challenge until the arbitrators issue a final award and the challenging party makes a timely motion to vacate, and the Federal Arbitration Act does not expressly provide procedures designed to ensure the parties’ expectations of neutrality are protected during the arbitrator selection process or any other time prior to a final award.  Second, the selection process is the juncture at which the parties’ expectations of neutrality are most vulnerable to frustration and the period during which the parties are best positioned to protect those expectations.  Third, the arbitrators themselves have the most ready access to the information the parties need to protect their expectations of neutrality. 

To protect the parties’ expectations of neutrality during the selection process, the United States Supreme Court imposed the now-familiar requirement that arbitrators disclose at the outset of the proceedings non-trivial conflicts of interest (such as ongoing business relationships with one of the parties) and any other relevant information bearing on the arbitrator’s ability to meet the parties’ expectations of neutrality.   See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968).  At least two circuits have added to that disclosure requirement an affirmative duty on the part of a neutral arbitrator to investigate when there is reason to believe a nontrivial conflict might exist.  See Applied Materials Indus. Corp. v. Ovalar Makine Ticaret ve Sanayi, A.S., 492 F.3d 132, 138 (2d Cir. 2007) (2d Cir. 2007); New Regency Productions,  Inc. v. Nippon Herald Films, 501 F.3d 1101, 1111 (9th Cir. 2007). 

A neutral arbitrator’s failure to disclose a conflict of interest of which he or she is deemed to have knowledge can result in vacatur of an award on evident partiality grounds without any showing that the arbitrator was actually biased or that the award resulted from bias.  Indeed, as the Seventh Circuit observed, if an arbitrator unduly frustrates a party’s access to information pertinent to whether he or she has the requisite degree of neutrality, there may be grounds for vacatur based not only on evident partiality, but also on the arbitrator exceeding his or her powers: “[f]ailure to comply with a[n] [express or implied] contractual requirement designed to facilitate the search for an acceptable neutral might imply that the neutral exceeded his authority, spoiling the award under 9 U.S.C. § 10(a)(4).”  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 623 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004).   

The flip side of the disclosure rule is that it provides an opportunity for the parties to vet and waive at the outset conflicts of interest that might otherwise provide the basis for a losing party to challenge the award.  If the arbitrator discloses a potential conflict, and a party fails to object, that party usually waives its right to challenge a later award based on the disclosed conflict.  See, e.g., Kiernan v. Piper Jaffray Cos. 137 F.3d 588, 593-94 (8th Cir. 1998); Cook Indus. v. Itoh & Co., 449 F.2d 106, 107-08 (2d Cir. 1971), cert. denied, 405 U.S. 921 (1972).   

Early vetting coupled with the waiver rule reduces the risk that time and expense will be invested in a proceeding that yields an award subject to vacatur.   Before the parties know the outcome of the arbitration, they are more likely to consider a potential conflict to be trivial and waive it.  But if undisclosed and not discovered until after an award has been issued, the losing party may understandably perceive the potential conflict to be more serious than it was, and move to vacate the award.  The motion may not be successful, but it may not be utterly frivolous either, and the parties and the court will end up incurring time and money costs. 

Disclosure by Appointed Arbitrators

At least in reinsurance arbitrations, appointed arbitrators are generally expected to disclose their relationships with the parties even though they are usually expected to be, at least to some degree, partial to the appointing party.  Whether or not these disclosures are required by Commonwealth Coatings is an open question and at least one circuit has suggested the answer is “no.”  See Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8^th Cir. 2007). 

Because the parties’ expectations of party-appointed arbitrator neutrality are not very high (absent contract language or agreed arbitration rules to the contrary), party-appointed arbitrator disclosures  will ordinarily not yield anything to support a successful evident partiality challenge.  And a  party-appointed arbitrator’s nondisclosures will generally not deprive the other party of information relevant to arbitrator selection, since appointed arbitrators are unilaterally and privately selected by the appointing party, and the other party generally has no say in matter as long as the arbitrator is otherwise qualified to serve. 

But at least one important purpose is arguably served by party-arbitrator disclosure.  The information the appointed-arbitrators disclose may be useful to their colleagues – especially the neutral – in determining what to make of the positions taken by the arbitrators in deliberations.  A failure to disclose that information might, in appropriate circumstances, establish that the arbitrator exceeded his powers under Section 10(a)(4) of the FAA.  Cf. Sphere Drake, 307 F.3d at 623 (“We have not been given any reason to think that umpire Huggins wanted more information from [party-appointed arbitrator] Jacks in order to know what to make of Jacks’ arguments during deliberations.”); Winfrey, 495 F.3d at 552 (”Simmons presents no evidence indicating that Butler’s partiality deceived or misled the other two arbitrators.”). 

Asserting Evident Partiality

In presumed bias cases there are typically two scenarios that give rise to a motion to vacate.  First, an arbitrator may disclose a conflict of interest that one of the parties considers indicative of evident partiality.  Assuming that a party timely objects to the conflict, the arbitrator does not voluntarily step down, the arbitrators make an award adverse to the objecting party, and the party timely moves to vacate, then the objecting party can legitimately challenge the award on evident partiality grounds.   

Second, an arbitrator may fail to disclose an actual or potential conflict of interest, which is subsequently discovered by one of the parties who promptly objects.  That party may also legitimately move to vacate the award based on evident partiality grounds.     

Establishing Evident Partiality:  Applicable Standards

Whether the case involves disclosure or nondisclosure, the potential conflict and its surrounding circumstances must be assessed to determine whether the award should be vacated.  Defining a workable standard to assess evident partiality challenges is difficult, and perhaps impossible.  The circuits have formulated various “tests” running the gamut from “a reasonable person, considering all the circumstances, would have to conclude” the arbitrator was partial, to a standard which, for all intents and purposes, permits vacatur where the alleged conflict creates an “appearance of bias.”  Compare Schmitz v. Zilveti,  20 F.3d 1043, 1047-48 (9^th Cir. 1994) (adopting “reasonable impression of partiality” test which it construed as functional equivalent of “appearance of bias”) with Ovalar,  492 F.3d at 137-38 (”[A]rbitrator is disqualified only when a reasonable person, considering all of the circumstances, would have to conclude that an arbitrator was partial to one side;” test satisfied where the “arbitrator knows of a material relationship with a party and fails to disclose it.”); see also Philip J. Loree Jr. & Costas Frangeskides,  Arbitration Practice and Procedure in U.S. and U.K. Reinsurance Disputes: Is the Grass any Greener on the Other Side of the Pond?, AIRROC Matters, Vol. 4 No. 1, at 24, 42-43 n.21-22 (Spring 2008) (Part 1) (citing cases) (copy available here). 

None of these “tests” is a consistently useful indicator of the outcome of a given case.  Reasonable people applying the tests may reach different conclusions based on the same facts, and outcomes may be influenced by fact-dependant policy considerations.  The relative strictness or laxity of a test, however, may indicate how predisposed a circuit might be toward granting relief on evident partiality grounds. 

But irrespective of how each test may be worded, whether the parties’ expectations of neutrality have been thwarted is a significant, underlying, and sometimes unspoken, consideration.  For example, as discussed in Part III.A, when the parties use tripartite arbitration without agreeing on whether, and if so, to what extent, the party-appointed must be neutral, disinterested or independent, then a court will likely conclude that the parties expected the party-appointed arbitrators to be non-neutral and (a) conclude vacatur is inappropriate even if the arbitrator would be deemed evidently partial were he or she a neutral; (b) require the challenging party to show prejudice resulting from the evident partiality; or (c) figure into the evident partiality calculus the parties’ diminished expectations of partiality.  (See Part III.A., here, and cases cited.) 

One important caveat is that a conflict remains a conflict whether or not it is disclosed, and irrespective of what the arbitrator’s subjective state of mind might be.  Suppose a neutral arbitrator owned a 25% equity interest in one of the parties, a closed corporation.  The neutral discloses the conflict and says his ownership will not affect his ability to act as a neutral.  And suppose that the neutral firmly believes what he says despite his rather significant financial interest in the matter over which he is asked to preside.  One of the parties objects, the panel rules against the objecting party, and – although no one can prove or disprove it – the umpire acts completely impartially and gives the losing party the benefit of every doubt.   Under these facts the party challenging the award would have a strong (some might say surefire) motion to vacate under the law of every (or virtually every) circuit. 

Conversely, failure to disclose a potential conflict does not provide a basis for an evident partiality challenge unless the potential conflict turns out to be an actual conflict or something awfully close to one.  We hedge here because there may be relationships between an arbitrator and a party that are material to the evident partiality calculus, but which, in and of themselves, may not qualify as actual conflicts.  The United States Court of Appeals for the Second Circuit indicated that the test for evident partiality can be satisfied where the arbitrator “knows of a material relationship with a party and fails to disclose it,” because “[a] reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.”  See Ovalar, 492 F.3d at 137-38.  That suggests to us that the Second Circuit (and perhaps other circuits) will place some weight on the circumstances surrounding the non-disclosure itself in determining whether, based on all of the circumstances, the test for evident partiality is satisfied.

We hope we have provided you with some useful, general information concerning evident partiality.  In Part IV. of this series we address Federal Arbitration Act Section 10(a)(3), which authorizes vacatur where a party was prejudiced by an arbitrator’s procedural misconduct.

In this Part III of our Nuts & Bolts feature on vacating arbitration awards (Parts I and II  here and here) we consider the second statutory ground for vacating an award under the Federal Arbitration Act:  “where there was evident partiality…in the arbitrators…” 9 U.S.C. 10(a)(2).  What constitutes “evident partiality” or arbitral bias has been the subject of numerous judicial decisions setting forth various standards and applying them to a wide range of fact patterns.  The decisions are not easy to reconcile (some may, indeed, be irreconciliable) and generally the standards are of limited utility in practice.  Matters are complicated by judicially-created rules concerning disclosure of potential conflicts of interest and the consequences that may or may not flow from a breach of those rules.  To say “evident partiality” is an elusive subject understates the case.       

 But “evident partiality” may be easier to grasp if we focus not on abstract standards or ethics, but on the parties’ reasonable expectations of neutrality in the circumstances.  Surprisingly, many courts address the subject of “evident partiality” without expressly discussing this important consideration, even when it appears to have been a significant part of the decision-making calculus.  Others have expressly used the parties’ agreement and attendant expectations of neutrality as a guidepost. 

 Understanding the parties’ reasonable expectations of partiality is only half the battle.  One must also understand the related topic of how those expectations are enforced through judicially-created rules governing disclosure and waiver of conflicts of interest, and the relevance of those rules to a motion to vacate an award under Federal Arbitration Act Section 10(a)(2).   

In this Part III.A. our focus is on the parties’ reasonable expectations of neutrality.  Part III.B. will cover the enforcement of those expectations.   

The Parties’ Reasonable Expectations of Neutrality

The principal purpose of the Federal Arbitration Act is to enforce arbitration agreements as written.  See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995).  Parties are largely free to structure their arbitration agreements as they see fit, and that freedom extends to selecting the decision makers, establishing their qualifications, and agreeing on how impartial they should be.  See Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir.), cert. denied, 464 U.S. 1009 (1983) (Posner, J.) (”parties … choose their method of dispute resolution, and can ask no more impartiality than inherent in the method they have chosen.”) (citation omitted). 

While the Federal Arbitration Act deems “evident partiality” a ground for vacating an award, the Act does not define the term or establish a baseline standard of impartiality that must be met by every arbitrator.  This contrasts starkly with the English Arbitration Act 1996, which imposes on all arbitrators effectively the same standards of impartiality applicable to English judges.  See, generally, Arbitration Act 1996 § 33(1).    

What constitutes “evident partiality” is  assessed according to a sliding scale of sorts, depending on the parties’ agreement and the surrounding circumstances.  For example, parties may agree to use only neutral arbitrators or a combination of non-neutral and neutral arbitrators.  Or other qualifications may be imposed, such as a requirement that the arbitrators be “disinterested” in the outcome and not be under the “control” of one of the parties. 

Where the parties intend one or more of the arbitrators should be neutral, then that desire for neutrality should be enforced.  In the absence of express qualifications attempting to define the degree of neutrality required, the degree of neutrality will be determined by what the parties would reasonably expect in light of the realities of the marketplace.  

Where the parties’ agreement authorizes non-neutral arbitrators, courts either find that the parties have waived by consent the “evident partiality” ground for vacatur, or impose a more rigorous test for demonstrating evident partiality than that applicable to a neutral arbitrator.  For example, the court might require the challenger to show that bias “prejudicially affected the award” or simply figure into the mix the parties’ diminished expectations of neutrality.  See, generally, Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 620 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004) (”evident partiality” ground can be waived by consent); Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8th Cir. 2007) (requiring a showing of prejudice); Nationwide Ins. Co. v. Home Ins. Co., 429 F.3d 640, 645-46 & 648-49 (6^th Cir. 2005), reh’g en banc denied  Feb. 16, 2006 (figuring into the mix the parties’ diminished expectations of impartiality). 

Tripartite Arbitration:  Party-Appointed Arbitrators  

In industry arbitration – including reinsurance arbitration – whether or not the arbitration is tri-partite or before a single arbitrator may inform the parties’ expectations of partiality.  If a single arbitrator is used, then the presumption is the parties intended the arbitrator to be a neutral, albeit one not subject to the rigorous standards of neutrality applicable to federal judges (more on that later).  

But typically arbitration agreements in reinsurance contracts and other industry arbitration agreements call for tripartite panels.  In reinsurance arbitrations, each party typically appoints an arbitrator and the party-appointed arbitrators attempt to agree on an umpire or select one by lot drawing, coin toss, Dow Jones pick or like tie-breaking procedure.  Unless the arbitration agreement provides otherwise, courts generally presume that the parties intended their appointed arbitrators to act as advocates of a sort: 

 [I]n the main party-appointed arbitrators are supposed to be advocates. In labor arbitration a union may name as its arbitrator the business manager of the local union, and the employer its vice-president for labor relations.  Yet no one believes that the predictable loyalty of these designees spoils the award. (Emphasis in original; citations omitted).

 Sphere Drake, 307 F.3d at 620.   

The New York Public Personnel Blog (Public Employment Law Press) recently reported on a rather extreme example of this principle in a case governed by New York State arbitration law, which authorizes vacatur for evident partiality of an arbitrator “appointed as a neutral.”  According to the post, a New York intermediate appellate court held that evident partiality was not established even where a party-appointed arbitrator testified in favor of the appointing party’s position at the arbitration hearing.   The court said that New York’s arbitration law did not authorize vacatur based on a party-appointed arbitrator’s evident partiality and party-appointed arbitrators may, in any event, be partial.  (Post here) 

The theory behind the tripartite structure is that it provides the best of two worlds: (a) two experienced and knowledgeable industry professionals, each of whom acts as an advocate of sorts on behalf of its appointing party; and (b) an equally experienced and knowledgeable umpire, who either casts the tie-breaking vote or brokers a consensus.  The reinsurance industry’s general acceptance of an advocacy role for party-appointed arbitrators is evidenced by the common practice of panels (usually with the parties’ consent) authorizing ex parte contact between party-appointed arbitrators and their appointing parties. 

Although courts will (absent contract language to the contrary) ordinarily assume that the parties intended party-appointed arbitrators to play an advocacy role, in the reinsurance industry there is a fair amount of disagreement concerning the degree of partiality permissible.  For example, there are some who believe that robust advocacy is appropriate, while others believe the party-appointed arbitrator should strive to give the appointing party the benefit of the doubt, but ultimately decide the matter according to the evidence and applicable law, custom and practice.  Others may have different views.  

For its part, the ARIAS-US Code of Conduct, Canon II, commentary, urges party-appointed arbitrators “to act in good faith with integrity and fairness,” “not allow their appointment to influence their decision on any matter before them,” and “make all decisions justly.”  The ARIAS-US commentary, however, is not binding on the parties (unless they so agree) and there is disagreement within the industry as to whether the standards embraced by Canon II’s commentary should be followed in practice. 

The upshot is that the line between the acceptable and unacceptable is both difficult to draw and blurry.  Checks on rampant partisanship are not imposed by the courts but by economic considerations:  Party-appointed arbitrators that overstep what other panel members perceive to be proper ethical boundaries risk diminished credibility, influence, and effectiveness, which in turn, may result in fewer appointments.  

The use of partisan arbitrators, which continues in reinsurance industry arbitration, appears to have fallen out of favor in less specialized forms of commercial arbitration.  Rule 17 of the American Arbitration Association’s Commercial Arbitration Rules reverses the presumption that party-appointed arbitrators should be non-neutral.  Rule 17 says “Any arbitrator shall be impartial and independent and shall perform his or her duties with diligence and in good faith, and shall be subject to disqualification for:”  

(i) partiality or lack of independence,

(ii) inability or refusal to perform his or her duties with diligence and in good faith, and

(iii) any grounds for disqualification provided by applicable law.

Rule 17 further provides that “The parties may agree in writing.  .  .  that arbitrators directly appointed by a party pursuant to Section R-12 shall be nonneutral, in which case such arbitrators need not be impartial or independent and shall not be subject to disqualification for partiality or lack of independence.”   The AAA rules vest in the AAA the power to “determine whether the arbitrator should be disqualified under the grounds set out above, and shall inform the parties of its decision, which decision shall be conclusive.” 

Tripartite Arbitration:  Umpires or Neutral Arbitrators

Umpires and neutrals are held to higher standards of impartiality.  Parties expect them to be fair, objective, open-minded in deliberations and not predisposed to rule in favor of either party before hearing the evidence.  They are supposed to be impartial, but are nevertheless not held to the same rigorous, statutory standards of impartiality applicable to United States federal judges.  See Sphere Drake, 307 F.3d at 621; Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83 (2d Cir. 1984); see, generally, 28 U.S.C. § 455 (disqualification standards for federal judges). 

 By not requiring neutrals to comply with judicial standards of partiality courts balance the parties’ expectations with the realities of the marketplace.  Particularly in industry arbitration, sought-after arbitrators often have many years of industry experience, which may inform their perspectives on issues important to the industry.  Intra-industry issues can pit one segment of the industry against another, and a qualified neutral may have experience in one or both of these segments.  Some degree of institutional predisposition comes with the territory, and does not necessarily disqualify the neutral.  And as industry insiders, arbitrators may know the lawyers and the parties socially and professionally, but those relationships generally do not disqualify the arbitrator from service.  These practical realities demand what Judge Posner aptly termed a “tradeoff between impartiality and expertise” – the parties bargained for dispute resolution by an industry expert and the benefit of that expertise carries with it the burdens of greater entanglement with the parties, the industry and the issues.  Indeed, if courts required the industry arbitrators — or even commercial arbitrators without an industry-specific focus — to shed or be free from this proverbial baggage, then qualified umpire candidates would be hard to come by.  See Leatherby,  714 F.2d at 679 (“people who arbitrate do so because they prefer a tribunal knowledgeable about the subject matter of their dispute to a generalist court with its austere impartiality but limited knowledge of the subject matter.”) 

Stay tuned for Part III.B, which will focus on how courts enforce the parties’ expectations of neutrality through the disclosure and vetting process and Federal Arbitration Act Section 10(a)(2).