February 08, 2012

US Second Circuit’s View of “Evident Partiality”: Out of Synch With International Practice?

A tale from the Second Circuit: Two reinsurance executives regularly sitting as arbitrators were appointed, respectively, as party-appointed arbitrator and “umpire” (presiding arbitrator) in a reinsurance arbitration. While the case was pending but before the hearing, the same individuals were appointed, again as party-appointed arbitrator and umpire, in a second arbitration that bore certain relationships to the first. There was a similar but not identical issue of contract interpretation. There was a common witness whose testimony was important in each case. And there was a business connection, essentially successorship, between Claimant in Arbitration 1 and Respondent in Arbitration 2. These arbitrators elected not to disclose their appointments in Arbitration 2 to the parties in Arbitration 1.

After the Award in Arbitration 1, the loser learned of Arbitration 2, moved to vacate the award in a New York federal district court based on “evident partiality,” (FAA Section 10(a)(2)), and obtained the vacatur order. But last week, the US Second Circuit Court of Appeals reversed, holding that “evident partiality” depends upon objective evidence of bias, and that there no such evidence on the facts of this case. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2012 WL 335772 (2d Cir. Feb. 3, 2012)).

 

The Second Circuit declined to adopt any particular criteria by which to evaluate allegations of bias. But the Court did find “useful,” but not “mandatory, exclusive, or dispositive” considerations such as

 

(1) the extent and character of the personal interest,pecuniary or otherwise, of the arbitrator in the proceedings; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator; and (4) the proximity in time between the relationship and the arbitration proceeding.”

 

However the Court did fashion a legal standard of sorts that will probably be cited often, stating: “[A] court must focus on the question of how strongly the relationship tends to indicate the possibility of bias in favor or against one party, and not how closely that relationship appears to relate to the facts of the arbitration.”

The Second Circuit framed the question presented as whether “the failure of two arbitrators to disclose their concurrent service as arbitrators in another, arguably similar, arbitration constitutes ‘evident partiality’ ….”, But the Court devoted relatively sparse attention to the implications of the commonalities between the cases. And one might have hoped for a more searching discussion of the ways in which pre-disposition to particular result, formed in an undisclosed second arbitration, might possibly constitute evidence of bias.

 

While essentially accepting the Distirct Court’s view of the relatedness of the two arbitrations, the Court observed that “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against a party. And in support of this position the Court cites “Cf.” (i.e. by analogy) a remark of US Supreme Court Justice Anthony Kennedy to the effect that “the fact that the same judge presides over related cases ordinarily does not suggest that judge is biased.”

But the Court did not address or even acknowledge the imperfections in extending that analogy to commercial arbitration.

Suppose US District Judge X was presiding over multiple related but unconsolidated cases involving the same Ponzi scheme, and in each case was hearing claims of different investors, against the same investment manager, concerning that investment manager’s due diligence in regard to the same investment vehicle. Most observers would presumably agree there is no issue of judicial bias and no issue of procedural unfairness. The fact that the judge will, in each case before her, be influenced by evidence and legal argument in each of the cases is a known and assumed systemic risk of litigation. But that risk is offset by the public nature of federal court litigation, including full electronic access to the dockets in each case. Competent counsel may monitor the progress of each case and, indeed, by judicial process may obtain the evidence in the related cases, and have adequate opportunity to credit or discredit that evidence.

The privacy of related commercial arbitrations results in an entirely different dynamic. If not made aware of a pending related proceeding before the same arbitral tribunal, or one or more arbitrators in common to the two separate tribunals, a party is in no position even to assess the risk of that the arbitrators will develop a pre-disposition in the course of Arbitration 2 on issues central to resolution of Arbitration 1. 

Does this mean that the Second Circuit came to the wrong conclusion in Scandinavian Re? Not necessarily, especially under existing American law.

The American law concept of “evident partiality” is mainly albeit not exclusively focused on the relationships, personal and economic, between the arbitrator and the parties or their counsel. The Federal Arbitration Act does not distinguish, as international arbitration rules do, between “independence” and “impartiality.” Lack of impartiality, as it is widely understood under international arbitration rules, and in international arbitral practice, would include, for example, an arbitrator forming a judgment on crucial issues based upon her own fact investigation or her own legal research – especially if the results of such investigation or research are not disclosed to the parties during the proceedings so that they have an adequate opportunity for comments.

The arbitrator who fails to disclose her appointment in related Arbitration 2 to the parties in Arbitration 1 does not reveal any bias by the omission, but she does fail to alert the parties to the risk that an issue will be pre-judged by her and that she will seek to influence her fellow arbitrators in Arbitration 1 based on what she heard and read in Arbitration 2. Assuming Arbitration 2 is a private proceeding, the parties in Arbitration 1 proceed in ignorance of the fact that probative evidence and/or relevant legal argument is being presented to a member of the tribunal (or in the Scandinavian Re case, two members) in another case.  If the arbitrator, acting in an unbiased fashion in Arbitration 2, is persuaded by the evidence, legal argument, or witness credibility of a party positionally aligned with a party in Arbitration 1, the arbitrator has an undisclosed pre-disposition.  The election not to disclose the pre-disposition, prior to the award in Arbitration 1, implies that the arbitrator intends to deprive the party in Arbitration 1 who is disadvantaged by the pre-disposition of the ability to effectively persuade that arbitrator and the other members of the tribunal to adopt the opposite view. The arbitrator who in this fashion covertly subverts the what may be called the transparency of the arbitral decision process —  i.e. the  shared but often unstated assumptions that the tribunal will render its decision based on the record developed by the parties — may, on this view, be found to have been “evidently partial” if the undisclosed pre-disposition relates to a material matter.

 

 

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