Introduction: Section 10(a)(2) Corruption
The focus of this Federal Arbitration Act Businessperson’s FAQ Guide is vacatur of awards under Section 10(a)(2) “where there was. . . corruption in the arbitrators, or either of them[.]” 9 U.S.C. § 10(a)(2). In recent posts (here, here, and here), we discussed how Section 10(a)(2) of the Federal Arbitration Act authorizes vacatur “where there was evident partiality. . . in the arbitrators, or either of them[.]” 9 U.S.C. § 10(a)(2). But Section 10(a)(2) authorizes vacatur not only for “evident partiality[,]” but also “where there was. . . corruption in the arbitrators. . . .” 9 U.S.C. § 10(a)(2).
Section 10(a)(2) is not the only Section 10 vacatur ground that concerns corruption. Section 10(a)(1) authorizes vacatur where awards were “procured by corruption. . . .” 9 U.S.C. § 10(a)(1) (emphasis added). We discussed Section 10(a)(1), and what constitutes an award “procured” by corruption, here. Much of that discussion pertains also to Section 10(a)(2) “corruption.”
There is substantial overlap between an award subject to vacatur because it was “procured” by corruption and one where the award is subject to vacatur because “there was. . . corruption in the arbitrators. . . [.]” See 9 U.S.C. §§ 10(a)(1) & (a)(2). If an award was, for example, procured by arbitrator corruption, then the arbitrators that participated in that corruption would, it seems, be corrupt, as well as the persons who participated in it, and Section 10(a)(1) and (a)(2) would both apply.
Section 10(a)(2) Corruption: the Second Circuit’s Decision in Kolel
The Second Circuit in Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99 (2d Cir. 2013), addressed the standard for corruption under 9 U.S.C. § 10(a)(2). After describing the Second Circuit’s “reasonable person would have to conclude” test for Section 10(a)(2) evident partiality (which we’ve discussed here and here), Kolel said “we have not yet articulated the standard for vacating an award under the ‘corruption’ ground of § 10(a)(2).” 729 F.3d at 104.
Quoting Karppinen v. Karl Kiefer Mach. Co., 187 F.2d 32, 34 (2d Cir.1951)—which interpreted Section 10(a)(1)—Kolel said that under Section 10(a)(1) an award “‘must stand unless it is made abundantly clear that it was obtained through corruption, fraud, or undue means.’” 729 F.3d at 104 (quoting Karppinen, 187 F.2d at 34 (cleaned up)). “We therefore[,]” said Kolel, “hold that the same standard of Scandinavian [Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012)— in which the Second Circuit discussed the “reasonable person would have to conclude” evident partiality standard—] applies to this case.” 729 F.3d at 104. “Evidence of corruption[,]” added Kolel, “must be abundantly clear in order to vacate an award under § 10(a)(2).”
Kolel rejected the Section 10(a)(1) and 10(a)(2) corruption claims before it. The award challenger submitted the affidavit of a disinterested, non-party witness (“Non-Party Witness A”), which stated “that prior to the issuance of the award, [Non-Party Witness A] . . . overheard [the neutral arbitrator]. . . advising [Person B to]. . . ‘[t]ell [the president of the award defender] that [the award defender]. . . has to give [the neutral arbitrator] another week and [the award defender]. . . will receive a [ruling] in [the award defender’s]. . . favor.’” 729 F.3d at 105 (quoting affidavit) (cleaned up). The neutral arbitrator denied Non-Party Witness A’s account, claimed to be in another part of the state at the time the conservation allegedly took place, and said that Non-Party Witness A was biased against him because of an unrelated matter in which the neutral arbitrator and Non-Party Witness A were involved. See 729 F.3d at 105-06.
The award challenger also asserted, among other things, “that [the neutral arbitrator] purposely excluded. . . [the award challenger’s party-appointed arbitrator] from the arbitration, abruptly cut off their first witness. . . , and rushed the Panel to a premature decision before the presentation of evidence.” 729 F.3d at 105.
“Even assuming[,]” said the Second Circuit, “that. . . [the conversation between the neutral arbitrator and the third party] took place exactly as. . . [the witness] describes and construing all facts in [the award challenger’s] favor, this does not rise to the level of bias or corruption necessary to vacate an arbitration award under § 10(a)(2).” 729 F.3d at 106. The Court explained that “the conversation [was] not ‘direct’ or ‘definite’ evidence of bias, but simply the arbitrator’s statement of his opinion after several arbitration proceedings.” 729 F.3d at 106 (citation omitted). The Court cited and quoted Ballantine Books Inc. v. Capital Distrib. Co., 302 F.2d 17, 21 (2d Cir.1962), which stated “[w]hile it is better in most cases for arbitrators to be chary in expressing any opinion before they reach their ultimate conclusion, and to avoid discussing settlement, it does not follow that such expressions are proof of bias.”
The Court concluded that the award challenger “has failed to show any ‘abundantly clear’ evidence of corruption, 729 F.3d at 106, and “failed to suggest—let alone to prove—what, if anything, . . . [the neutral arbitrator] stood to gain or what special connection he had with. . . [the award defender] that would have given plausible reason to corrupt his decision.” 729 F.3d at 106-07.
Corruption under Section 10(a)(2): Questions to be Answered in the Future
Kolel leaves open questions that may need to be addressed in future cases. For example, the Court said that the Scandinavian Re standard for assessing evident partiality under Section 10(a)(2) should also apply to corruption under Section 10(a)(2). Evident partiality does not require proof of actual bias; it is enough to show, by clear and convincing evidence, that a reasonable person would have to conclude an arbitrator is partial or biased. Can an award challenger establish “corruption in the arbitrators. . .” simply by showing by clear and convincing evidence that a reasonable person would have to conclude that an arbitrator was guilty of corruption? Or must the challenger demonstrate “actual” corruption?
Another question is whether under Section 10(a)(2) there must be a nexus between the corruption and the award, and if so, what the nature and extent of that nexus must be. Under Section 10(a)(1), in addition to establishing “corruption, fraud or undue means” by clear and convincing evidence, a claimant must demonstrate “that that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration. . . .” International Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); Renard v. Ameriprise Fin. Servs., Inc., 778 F.3d 563, 569 (7th Cir. 2015); MCI Constructors, LLC v. City of Greensboro, 610 F.3d 849, 858 (4th Cir. 2010); A.G. Edwards Sons, Inc. v. McCollough, 967 F.2d 1401, 1404 (9th Cir. 1992); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 (11th Cir. 1988); see Karppinen, 187 F.2d at 35.
As respects Section 10(a)(1)’s materiality requirement, Section 10(a)(1) states that the “award” must be “procured” by “corruption, fraud or undue means,” which arguably suggests a causal nexus between the proscribed conduct and the award. While under Section 10(a)(1) the conduct must “materially relate to an issue in the arbitration,” the Circuits are split on whether the fraud, corruption, or undue means must be outcome determinative—that is whether the party seeking relief must show that award would have been different but for the fraud, corruption, or undue means, or whether it is enough to show that the dishonest conduct tainted the award because it materially related to an issue in the arbitration. Some courts require the challenger to show that the corruption, fraud or undue means “caused the award to be given.” See PaineWebber, 187 F.3d at 994 (“there must be some causal relation between the undue means and the arbitration award”); A.G. Edwards & Sons, Inc., 967 F.2d at 1403 (“the statute requires a showing that the undue means caused the award to be given”). Others say that the challenger is required to show a “nexus” between the conduct and the award—that is, materiality—but need not “establish that the result of the proceedings would have been different had the fraud[, corruption, or undue means] not occurred.” See, e.g., Odeon Capital Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. 2017) (citing cases); Bonar, 835 F.2d at 1383.
In evident partiality cases under Section 10(a)(2), it is enough to show that a reasonable person would have to conclude that an arbitrator was partial to or biased against a party. Section 10(a)(2) also does not require that the award be “procured” by corruption or evident partiality; it is enough that there is “evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. § 10(a)(1). The well-developed body of law concerning evident partiality does not purport to impose on the challenger any requirement to show that the partiality or bias would have changed the outcome. If evident partiality is present then the arbitration is tainted and the award must be vacated. (See our prior evident partiality posts here, here, and here.)
Although courts have not yet directly addressed the issue, we think that in Section 10(a)(2) corruption cases it should be enough that the corruption related to an issue involved in the arbitration and that it should be unnecessary to show that the outcome of the arbitration would have been different but for corruption. Cf. Odeon Capital, 864 F.3d at 196 (construing Section 10(a)(1)).
Another issue concerns waiver. In Section 10(a)(1) cases the challenger must show “that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.” United Parcel Serv., Inc., 335 F.3d at 503; Renard, 778 F.3d at 569; MCI Constructors, 610 F.3d at 858; A.G. Edwards, 967 F.2d at 1404; Bonar, 835 F.2d at 1383. Evident partiality under Section 10(a)(2) is also subject to waiver. (See prior posts here, here, and here.)
It therefore makes sense for courts to require that in 10(a)(2) corruption cases award challengers show due diligence would not have revealed the corruption. If a court determines that due diligence is lacking, and that the challenging party consequently did not timely object to the arbitrators about the corruption, then the court should find that the challenger has waived its right to judicial review of the corruption.
Such a rule, of course, puts the objecting party in an awkward position before the arbitrators, but that is certainly the case in Section 10(a)(1) corruption cases, as well as in evident partiality cases and others where due diligence and timely objections are required. The point of requiring objections to be made to the arbitrators is ostensibly to provide an opportunity for the arbitrators to address, and if possible, cure the problem, thereby preventing the need for post-award court intervention. Of course, requiring due diligence and objections also serves to reduce the number of award challenges that courts must resolve on their merits, even if that might result in some determinations that may seem harsh or unjust to some.
What’s Next?
The next Businessperson’s Federal Arbitration Act FAQ Guide will address Section 10(a)(3) of the FAA, which authorizes vacatur for prejudicial, procedural misconduct.
Please note. . .
This guide, including prior instalments, and instalments that will follow in later posts, does not purport to be a comprehensive recitation of the rules and principles of arbitration law pertinent or potentially pertinent to the issues discussed. It is designed to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face in arbitration-related litigation and how engaging a skilled and experienced arbitration attorney can help them confront those challenges more effectively.
This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they elect voluntarily to do so.
If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should request legal advice from an experienced and skilled attorney or law firm with a solid background in arbitration law.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district and federal appellate courts.
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Section 10(a)(1) of the Federal Arbitration Act authorizes courts to vacate awards where “the award was procured by corruption, fraud, or undue means. . . .” 9 U.S.C. § 10(a)(1). Cases vacating awards on Section 10(a)(1) grounds are rare, presumably because the circumstances that would trigger relief are relatively rare.
