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Arbitration Nuts & Bolts: Vacating Arbitration Awards – Part III.A: Evident Partiality (Expectations of the Parties)

January 4th, 2010 Awards, Evident Partiality, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure 5 Comments » By Philip J. Loree Jr.

Introduction

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 (6th 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).

         

5 Responses to “Arbitration Nuts & Bolts: Vacating Arbitration Awards – Part III.A: Evident Partiality (Expectations of the Parties)”

  1. Phil — thanks for an excellent and thoughtful piece on the topic of neutrality, which is always top of mind in the panel selection process. Regards, Theresa

  2. George J. Biehl,Jr. says:

    I was retained a few years ago as an expert in a successful attempt to vacate an interim award by a sole AAA arbitrator in an EPLI dispute involving a discharged “whistle blower”. We established the arbitrator (an attorney) and his firm represented major P&I clubs and their Lloyds insurers (which wrote the employer’s EPLI coverage). He allowed two syndicates’ lawyer to sit in on the hearings and failed to disclose his firm’s close financial ties.

  3. Theresa,

    Thanks for your kind comments! You are absolutely right that it is important to keep evident partiality considerations firmly in mind during the selection process.

    Phil

  4. George,

    The example you cite shows how vacatur for evident partiality works as a safety valve to ensure that the parties’ expectations of neutrality are adequately met. As the court’s ruling suggests, the facts in your case would likely lead a reasonable person to conclude that the sole arbitrator was partial. And I highly doubt that the parties to the arbitration agreement contemplated that the “neutral” arbitrator would have such significant ties to one of the parties.

    Phil