The ‘evident partiality’ standard under US arbitration law
May 2013 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION
A recent US federal appellate court decision concerning review of arbitration awards under the US Federal Arbitration Act (FAA) is a reminder of the risks parties face when conflicts of interest arise in arbitration. Below, we discuss the decision and review some steps parties can take in view of the controlling law. The decision concerns the issue of when a US court may vacate an arbitral award under the FAA on account of the ‘evident partiality’ of an arbitrator. (9 U.S.C. § 10.) Although primarily concerned with domestic US arbitration, the FAA may apply to the recognition and enforcement of foreign arbitral awards, such as where an arbitration between non-US parties is held in the US.
Relevant US law
The majority of US Circuit Courts, including the Second Circuit sitting in New York, have adopted variations of a ‘reasonable person’ standard for motions to vacate awards based on an arbitrator’s evident partiality. These tests are grounded in the Supreme Court’s plurality opinion in Commonwealth Coatings Corp. v. Continental Casualty Co. (393 U.S. 145), particularly in Justice White’s concurring opinion. Vacating an arbitration award is not something courts do lightly, however, and the FAA allows only limited review of arbitral proceedings and awards. The mere existence of a relationship between a party and an arbitrator is not enough, and courts often find that an undisclosed relationship is too trivial or unsubstantial to warrant vacatur. Indeed, as several courts have recognised, arbitrators will often be selected for industry expertise, and depending on the size of the field, it can be quite common for the arbitrators to have some connection to the parties or to prior, similar disputes. Thus, cases vacating an arbitration award are, in some sense, atypical.
Thomas Kinkade Co. v. White(2013 WL 1296238)
On 2 April 2013, the US Sixth Circuit Court of Appeals (which encompasses the states of Michigan, Ohio, Kentucky, and Tennessee) issued its decision affirming a lower court’s decision vacating an arbitration award issued after a five-year arbitration. The award was issued in favour of Nancy and David White, art dealers who had a contractual dispute with the Thomas Kinkade Co., a company controlled by a popular artist of the same name. The arbitration panel consisted of three arbitrators, one appointed by each of the parties and a so-called ‘neutral’ appointed by the party-appointed arbitrators who served as the Chair. In the words of the court, the arbitration “was a model of how not to conduct one”. Among other things, and the key issue before the court, was that five years and nearly 50 hearing days into the arbitration, the Chair informed the parties of two engagements recently taken on by his law firm. The first came to the firm from the arbitrator appointed by the Whites. The second was for David White himself. Kinkade filed a motion with the American Arbitration Association (AAA) seeking to disqualify the Chair, but the motion was denied, as was a subsequent demand submitted to the Chair directly.
Soon after, the Chair afforded the Whites significant procedural and substantive advantages, such as allowing them to supplement the proof in support of their damages claim, after the hearings, with documents improperly withheld for years The tribunal ultimately awarded the Whites more than $1.4m, and denied a ‘virtually uncontested’ claim by Kinkade for the return of paintings that the Whites had not paid for. Kinkade moved to vacate the award pursuant to the FAA.
Consistent with the majority view in the US, the Sixth Circuit noted the standard for ‘evident partiality’ is whether “a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration”, which requires showing more than the appearance of bias but less than actual bias. The court found that Kinkade met this standard because of the substantial engagements of the Chair’s law firm by both David White and the arbitrator White appointed. Moreover, the only plausible explanation for the significant favours provided to the Whites, so late in the arbitration, was that the business provided to the Chair’s firm had made him partial to the Whites.
Picking up on the holdings of some prior cases that suggested that full disclosure by an arbitrator prevents a finding of evident partiality, the Whites attempted to save the award in their favour by pointing to the fact that the Chair disclosed the engagements. Rejecting this argument, the court specifically noted that by initiating business relationships with a party midway through the arbitration process, the Chair of the tribunal jeopardised the legitimacy of the process regardless of the disclosure given. Moreover, the court held that the Chair’s disclosure, five years into the arbitration, actually made matters worse by putting Kinkade in the difficult position of either objecting, and risk offending the Chair, or staying silent, and thereby appearing to condone the conflict of interest.
Some suggested strategies
Parties in arbitration can take steps to try to avoid having evident partiality threaten the arbitration process and the validity of an ensuing award. First, all the major international arbitral institution rules require arbitrator independence and impartiality. For example, Article 11(1) of the ICC Rules states that “[e]very arbitrator must be and remain impartial and independent of the parties involved in the arbitration”. The International Centre for Dispute Resolution (ICDR), the United Nations Commission on International Trade Law (UNCITRAL), and the London Court of International Arbitration (LCIA) rules all contain similar provisions. Thus, by choosing among these or similar rules, a party can have some comfort that the requisite impartiality is in place at the start.
Second, parties should pay strict attention to arbitrator selection and carefully consider all possible conflicts or other indications of partiality that arise during the selection process. The International Institute for Conflict Prevention & Resolution (CPR) has a ‘Due Diligence Evaluation Tool for Selecting Arbitrators and Mediators’ that contains suggested questions to ask in evaluating potential arbitrators. In addition, the International Bar Association’s ‘Guidelines on Conflicts of Interest in International Arbitration’ sets out specific examples of situations that, in the opinion of a working group of international arbitration experts, either do or do not require arbitrator disqualification. Resources of this nature can be extremely helpful.
Finally, even the most careful attention to arbitrator selection cannot help where a conflict arises during the arbitration proceedings. To at least provide maximal notice of a potential issue, parties should ensure that the rules governing the proceeding provide for continuing disclosure obligations – i.e., such as in Article 11(3) of the ICC Rules. If evidence of impartiality arises during the proceeding, parties must seriously consider the risk of staying silent. The general rule is that parties, should they wish to raise an objection to the arbitrator’s impartiality, must do so once they have actual knowledge of the objectionable facts, and failure to do so results in a waiver of the right to object later.
Philip D. Robben is a partner and Melissa E. Byroade is an associate at Kelley Drye & Warren LLP. Mr Robben can be contacted on + 1 (212) 808 7726 or by email: firstname.lastname@example.org. Ms Byroade can be contacted on +1 (212) 808 7772 or by email: email@example.com.
© Financier Worldwide
Philip D. Robben and Melissa E. Byroade
Kelley Drye & Warren LLP