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Evident Partiality | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part I

November 23rd, 2021 Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, Evident Partiality, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, Vacate Award | 10(a)(2), Vacate Award | Evident Partiality, Vacatur No Comments »

INTRODUCTION

Evident Partiality Section 10(a)(2) of the Federal Arbitration Act authorizes courts to vacate awards “where there was evident partiality or corruption in the arbitrators, or either of them. . . .” 9 U.S.C. 10(a)(2). The next few instalments will focus on evident partiality, a later one on corruption.

What constitutes evident partiality and under what circumstances is a controversial and sometimes elusive topic. We’ve written about it extensively over the years, including hereherehere, and here, as well as in other publications. The author has briefed, argued, or both, a number of U.S. Courts of Appeals and federal district court cases on the subject over the years, including, among others, Certain Underwriting Members of Lloyds of London v. State of Florida, Dep’t of Fin. Serv., 892 F.3d 501 (2018); and Nationwide Mutual Ins. Co. v. Home Ins. Co., 429 F.3d 640 (2005).

Evident partiality 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 be irreconcilable) and the standards are often of limited utility. Matters are complicated by judicially created rules concerning disclosure of potential conflicts of interest and the consequences that may or may not flow from those rules.

But “evident partiality” may be easier to grasp if we focus not on abstract standards or ethical constructs, but on the parties’ reasonable expectations of neutrality. Surprisingly, many courts address the subject of “evident partiality” without expressly discussing this important consideration, even when it appears to have been a significant but unstated 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 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 instalment our focus is on the parties’ reasonable expectations of arbitrator neutrality. Later instalments will address evident partiality standards and how they are supposed to enforce reasonable expectations of neutrality without undermining arbitral finality; differences between evident partiality standards and judicial impartiality standards; the differing expectations of arbitral neutrality that may attend tripartite arbitration; and how evident partiality standards may implement and enforce those differing expectations; arbitrator disclosure procedures and requirements, which are designed to implement and enforce evident partiality standards; and examples of what does and does not constitute evident partiality.

EVIDENT PARTIALITY: 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 National Football League Mgmt. Council v. National Football League Players Ass’n, 820 F.3d 527, 548 (2d Cir. 2016) (“[A]rbitration is a matter of contract, and consequently, the parties to an arbitration can ask for no more impartiality than inheres in the method they have chosen.”) (citing cases); 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).

Inherent in the arbitral bargain is decision making, or at least decision tie breaking, by a neutral decision maker. Single arbitrators are required under the Federal Arbitration Act to be neutral unless the parties otherwise agree. See, e.g., Morelite v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79, 81-85 (2d Cir. 1984). In tripartite arbitration, one arbitrator (usually designated the umpire, chair, or third arbitrator) is ordinarily required to be neutral, while party-appointed arbitrators are presumed to be non-neutral, except to the extent otherwise required by the parties’ arbitration agreement. See Certain Underwriting Members, 892 F.3d at 510-11; Sphere Drake Ins. v. All American Life Ins., 307 F.3d 617, 622 (7th Cir. 2002); Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), 631 F.3d 869, 872-74 (7th Cir. 2011).

Arbitration provider rules, which may govern arbitrator qualifications in appropriate cases, may provide different rules. For example, the JAMS and American Arbitration Association rules presume all arbitrators on a tripartite panel to be neutral, unless the parties agree otherwise. JAMS Comprehensive Arbitration Rules & Procedures R. 7 (July 1, 2014); see also American Arbitration Association Commercial Arbitration Rules R-18(a) & (b) (October 1, 2013).

Section 10(a)(2) of the Federal Arbitration Act—which authorizes federal district courts to vacate arbitration awards “where there was evident partiality…in the arbitrators…”—imposes in part and enforces these neutrality requirements. Section 10(a)(2) establishes that parties who agree to arbitrate can legitimately expect that neutral arbitrators will meet a certain minimal standard of arbitral impartiality, and that arbitrators not appointed as neutrals can, in appropriate circumstances, be held to a substantial, material breach of a stipulated arbitrator qualification requirement related-to, but not necessarily coextensive with, neutrality. See Certain Underwriting Members, 892 F.3d at 510-11; Sphere Drake, 307 F.3d at 622; Trustmark631 F.3d at 872-74.

Many consider the requirement that an arbitrator be “neutral” to include two main components: the arbitrator must be (a) impartial and (b) independent. They also consider the requirement of impartiality to include a requirement that the arbitrator be “disinterested.”

While a case can be made for considering disinterestedness to be a component of impartiality, analyzing the two as separate components of neutrality promotes clarity and a more precise understanding of what comprises arbitrator neutrality. That, in turn, makes it easier for us to spot the presence or absence of neutrality in each case.

Evident Partiality: Independence

An arbitrator is independent when he or she is not directly or indirectly subject to the control of a party, potential witnesses, or the other arbitrators, is not affiliated with a party, does not act directly or indirectly in the interest of a party, and is otherwise not subject to undue influence or outside pressure. See, generally, Trout v. Organización Mundial De Boxeo, Inc., 965 F.3d 71, 80-81 (1st Cir. 2020); Demarco v. City of New York, 08-CV-3055 (RRM) (LB), slip op. at 8-9 (E.D.N.Y. Mar. 23, 2011); American Arbitration Association, The Code of Ethics for Arbitrators in Commercial Disputes Canon 1B(2) (arbitrator should not accept appointment unless “fully satisfied. . . that he or she can serve independently from the parties, potential witnesses, and the other arbitrators. . . .”) (March 1, 2004).

For example, an arbitrator would not be independent were she an agent or employee of one of the parties.

Evident Partiality: Disinterestedness

“Disinterested” means “lacking a financial or other personal stake in the outcome.” Trustmark,  631 F.3d at 872-73 (citing Caperton v. A.T. Massey Coal Co., 556 U.S. 868 (2009)); Certain Underwriting Members, 892 F.3d at 510; see Caperton, 556 U.S. at 876-81 (discussing cases). The requirement of “disinterest” was reflected in James Madison’s famous observation that “[n]o man is allowed to be a judge in his own cause; because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” The Federalist No. 10, p. 59 (J. Cooke ed. 1961) (J. Madison)); see Caperton, 556 U.S. at 876.

The rule that financial or personal interest spoils neutrality does not require proof that the decision-maker would be or was actually biased against or partial to one party or the other. It does not address whether the arbitrator actually has predispositions concerning any of the parties, witnesses, or issues.

It is prophylactic rule, based on human nature, that a person having a financial or personal interest in the outcome of a dispute cannot be considered neutral, even if the decision maker honestly believes that his or her interest in the dispute would or did affect his or her judgment, and even if it could be shown objectively that the decision maker could or did judge the dispute impartially and independently.

The rule serves two functions. First, all else equal, by disqualifying interested decision makers, it eliminates the risk that personal or financial interest will affect decision-maker neutrality. Without the rule the difficulty of proving actual bias would mean that decisions made by interested decision-makers could in many cases not be overturned because it would be difficult or impossible to prove that the interested decision maker was actually biased or partial.

Second, the rule helps encourage public confidence in decision-maker neutrality by disqualifying interested decision-makers.

Impartiality

To be neutral an arbitrator must not only be disinterested, but also impartial. See, e.g., Trustmark, 631 F.3d at 872-73; U.S.Care, Inc. v. Pioneer Life Ins. Co. of Ill., 244 F.Supp.2d 1057, 1062 (C.D. Cal., 2002). To be “impartial” means to be free from “bias or prejudice” in favor of one of the parties. See Liteky v. United States, 510 U.S. 540, 550, 552 (1994).

In Liteky the U.S. Supreme Court explained, in a case concerning judicial partiality standards, that the terms “bias,” “prejudice” and “partiality” all connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess…or because it is excessive in degree….” 510 U.S. at 550, 552.

Arbitral or judicial predispositions may be formed as a result of any number things, and can be appropriate or inappropriate, reasonable or unreasonable. But such predispositions do not constitute “partiality,” bias or prejudice unless they are wrongful or inappropriate.

The Supreme Court’s interpretation of what “bias,” “prejudice” and “partiality” mean in the judicial context in Liteky is right in line with Section 10(a)(2) itself, which authorizes vacatur where the arbitrator is “guilty” of “evident partiality.” 9 U.S.C. § 10(a)(2) (emphasis added).

Neutral versus Impartial: Terminology Glitches

Unfortunately, the terminology used by Section 10(a)(2) (and by courts interpreting it) is not always consistent with that used by arbitration providers and other arbitration professionals.

Section 10(a)(2) refers only to “evident partiality,” not neutrality. Under the terminology commonly employed by arbitrator providers, “evident partiality” would not encompass an arbitrator’s lack of independence from a party.

But courts generally, and we think correctly, consider evident partiality to include an evident personal or financial interest in the outcome of the dispute, an evident inappropriate predisposition in favor of or against a party, or an evident lack of independence.

The next instalment will begin with a discussion of how evident partiality standards are designed to enforce party expectations of neutrality without undermining arbitral finality.

Contacting the Author

If you have any questions about arbitration, arbitration-law, arbitration-related litigation, or this article, or if you wish to discuss whether the Loree Law Firm might be able to provide assistance with or representation in a particular legal matter, 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 certain federal district and federal appellate courts.  

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

Neutrality | Evident Partiality | Vacating, Modifying, and Correcting Arbitration Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part I

September 20th, 2021 Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, Enforcing Arbitration Agreements, Ethics, Evident Partiality, FAA Chapter 1, Federal Arbitration Act Section 10, Grounds for Vacatur, Nuts & Bolts: Arbitration, Party-Appointed Arbitrators, Practice and Procedure, Section 10, United States Court of Appeals for the Second Circuit, United States Supreme Court, Vacate Award | 10(a)(2), Vacate Award | Corruption, Vacate Award | Evident Partiality, Vacatur Comments Off on Neutrality | Evident Partiality | Vacating, Modifying, and Correcting Arbitration Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part I

neutral neutrality evident partialitySection 10(a)(2) of the Federal Arbitration Act (the “FAA”) authorizes courts to vacate awards “where there was evident partiality or corruption in the arbitrators, or either of them. . . .” 9 U.S.C. 10(a)(2). The next few instalments will focus on arbitrator neutrality and evident partiality, a later one on corruption. What constitutes evident partiality and under what circumstances is a controversial and sometimes elusive topic. We’ve written about it extensively over the years, including hereherehere, and here, as well as in other publications. The author has briefed, argued, or both, a number of U.S. Courts of Appeals and federal district court cases on the subject over the years, including, among others, Certain Underwriting Members of Lloyds of London v. State of Florida, Dep’t of Fin. Serv., 892 F.3d 501 (2018); and Nationwide Mutual Ins. Co. v. Home Ins. Co., 429 F.3d 640 (2005).

Evident partiality 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 be irreconcilable) and the standards are often of limited utility. Matters are complicated by judicially created rules concerning disclosure of potential conflicts of interest and the consequences that may or may not flow from those rules.

But “evident partiality” may be easier to grasp if we focus not on abstract standards or ethical constructs, but on the parties’ reasonable expectations of neutrality. Surprisingly, many courts address the subject of “evident partiality” without expressly discussing this important consideration, even when it appears to have been a significant but unstated 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 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 FAA Act Section 10(a)(2).

In this instalment of the FAQ Guide our focus is on the parties’ reasonable expectations of arbitrator neutrality; evident partiality standards and how they are supposed to enforce reasonable expectations of neutrality without undermining arbitral finality; differences between evident partiality standards and judicial impartiality standards; and the differing expectations of arbitral neutrality that may attend tripartite arbitration. One or more subsequent instalments will discuss arbitrator disclosure procedures and requirements, which are designed to implement and enforce evident partiality standards; examples of what does and does not constitute evident partiality; and procedural issues pertinent to evident partiality challenges. Continue Reading »

Faithful to the “First Principle” of Arbitration Law, the Texas Supreme Court Shores up the “Cornerstone of the Arbitral Process”

August 5th, 2014 American Arbitration Association, Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Confirmation of Awards, Contract Interpretation, Drafting Arbitration Agreements, Grounds for Vacatur, Judicial Review of Arbitration Awards, Party-Appointed Arbitrators, Practice and Procedure, State Courts, Texas Supreme Court Comments Off on Faithful to the “First Principle” of Arbitration Law, the Texas Supreme Court Shores up the “Cornerstone of the Arbitral Process”

Introduction  

Anyone versed in arbitration-law basics knows that “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted). That is the “first principle” of arbitration law (the “First Principle”) set forth in the Steelworkers’ Trilogy.[1] See, e.g., Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986).

The First Principle is integrally intertwined with “the central or primary purpose of the [Federal Arbitration Act (“FAA”)][,]” which is “to ensure that  private agreements to arbitrate are enforced according to their terms.” Stolt-Nielsen, 559 U.S. at 679 (citations and quotations omitted). To “enforce” an arbitration agreement “courts and arbitrators must give effect to the contractual rights and expectations of the parties.” Id. When courts do not give effect to the parties’ contractual rights and expectations, they violate the First Principle.

Courts and arbitrators are supposed to apply the First Principle faithfully and rigorously whenever  they interpret or apply material arbitration-agreement-terms, and in “doing so [they] must  not lose sight of the purpose of the exercise: to give effect to the intent of the parties.” See Stolt-Nielsen, 559 U.S. at 679-81. And if that admonition applies with special force in any particular context, it would be in the interpretation and enforcement of arbitrator selection and qualification provisions.

Arbitrator selection provisions are what Circuit Court Judge Richard A. Posner once dubbed the “cornerstone” of the parties’ agreement: “Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.” Lefkovitz v. Wagner, 395 F.3d 773, 780 (2005) (Posner, J.); see, e.g., 9 U.S.C. § 5 (“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”); Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(1)(d), June 10, 1958, 21 U.S.T. 2519, T.I.A.S. No. 6997 (a/k/a the “New York Convention”) (implemented by 9 U.S.C. §§ 201, et. seq.) (award subject to challenge where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties”); Stolt-Nielsen, 559 U.S. at 668, 670 (one of the FAA’s “rules of fundamental importance” is parties “may choose who will resolve specific disputes”) (emphasis added; citations omitted); Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (vacating award by panel not convened in accordance with parties’ agreement); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994) (same); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986) (same).

Americo Life, Inc. v. Myer

On June 20, 2014, a divided Texas Supreme Court in Americo Life, Inc. v. Myer, ___ S.W.3d __, No. 12-0739, slip op. (Tex. June 20, 2014), adhered to and correctly applied the First Principle by holding that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement.  Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the American Arbitration Association (the “AAA”) had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See Slip op. at 10. Continue Reading »

Arbitration and Mediation FAQs: Can I Appeal an Arbitration Award in Court?

May 21st, 2014 Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration Practice and Procedure, Awards, Drafting Arbitration Agreements, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure Comments Off on Arbitration and Mediation FAQs: Can I Appeal an Arbitration Award in Court?

Introduction

When a party is on the wrong end of an arbitration award that he, she or it thinks is fundamentally unfair, tainted by impropriety, or disconnected from the agreement the arbitrator was supposed to interpret and apply, the first question that comes to mind is whether there might be some form of recourse available. In court,  the usual avenue of relief from an adverse judgment or order is an appeal.

Can a losing party to an arbitration award governed by the Federal Arbitration Act (the “FAA”) appeal it in court? Since private arbitration is an alternative to public, government-sponsored court litigation, since the court system plays an important role in enforcing arbitration agreements, since both arbitration and court litigation share at least some of the same attributes and since in the U.S. procedural due process and the primacy of the rule of law are as dear to us as baseball and apple pie, it is natural to assume that one should be able to appeal an adverse arbitration award.

But one cannot—in any meaningful sense of the word—“appeal” an arbitration award to a court. In court litigation an appeal involves judicial review by an appellate court under which a panel of judges reviews trial-court rulings on questions of law independently—that is, as if the appellate court were deciding the question for itself in the first instance. The appellate court reviews the trial court’s findings of fact on a “clearly erroneous” or “clear error” standard of review, that is, paying a certain degree of deference to the finder of fact (the jury or trial judge). While appellate review thus does not involve a retrial on the merits, it is broad and searching, particularly where outcomes turn solely on questions of law.

The FAA does not authorize courts to review arbitration awards under an appellate standard of review, even if the parties consent to a court applying such a standard. Parties can agree before or after a dispute arises to an arbitration procedure that empowers another arbitrator or panel of arbitrators to review an award under an appellate or some other standard of review, but arbitration awards are subject to very limited and deferential review by courts and then only on a few narrow grounds.

The FAA Award-Enforcement Process

The FAA award enforcement process permits either party to make an application to vacate, modify or correct an award, or an application to “confirm” it, that is, enter judgment on it. Since the deadline for applying to vacate, modify or correct an award is considerably shorter than that for confirming an award, in many cases, parties who are seeking relief from the award make the initial application. If a putative challenging party does not timely seek relief, and the other party seeks confirmation after the expiration of the deadline for making an application to vacate, modify or correct the award, then the challenging party is time-barred from asserting grounds for vacatur or modification, even simply as affirmative defenses to confirmation. (See, e.g., L. Reins. & Arb. Law Forum post here.)

Let’s assume a party makes a timely motion to vacate an award. What will likely then happen is the other party will cross-move to confirm the award. The burden on the party seeking confirmation is pretty modest. Generally the party moving to confirm will need to show that the parties: (a) agreed to arbitrate; (b) consented to entry of judgment on the award; (c) appointed an arbitrator or panel of arbitrators; and (d) submitted the dispute to the arbitrators, who issued the award. The award is presumed valid and the court does not review its outcome or substance.

Once the modest prerequisites for confirmation have been established by a properly supported petition or motion to confirm an award, then the court “must grant” confirmation “unless the award is vacated, modified or corrected” under FAA Sections 10 or 11. 9 U.S.C. § 9. Thus, apart from those relatively rare cases where a party can show that the parties never agreed to arbitrate at all (and that the challenging party did not waive that defense), or perhaps never even impliedly consented to entry of judgment on the award, the only grounds on which the losing party can oppose confirmation are those set forth in Section 10 and 11.

The only exception might be if the award interprets the contract in a way that causes it to violate a well-defined and explicit public policy, or if the remedy the arbitrator awards violates the criminal law or requires one of the parties to do so. For example, one would not expect a court to enter judgment on an award that purported to authorize the prevailing party to inflict bodily harm on the losing party or vice-versa. That principle is simply an application of the contract-law rule that courts will not enforce contracts that violate public policy. See, generally, W. R. Grace & Co. v. Rubber Workers, 461 U.S. 757, 766 (1983); United Food & Commercial Workers Int’l Union v. King Soopers, 743 F.3d 1310, 1315 (10th Cir. 2014).

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