Nondisclosure of Arbitrator Conflicts and the ‘Evident Partiality’ Standard
By Platt W. Davis III

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Arbitration’s goals—efficient resolution of disputes and the avoidance of expensive litigation—are achievable only by ensuring the relative finality of arbitral awards. The Federal Arbitration Act (FAA) (9 USC section 1, et seq.), which governs U.S. arbitrations involving interstate commerce, provides this assurance, essentially requiring that awards be upheld unless the arbitration has been conducted or resolved in a fundamentally unfair manner. Because an arbitral award has such force, fairness demands that the neutral arbitrator responsible for issuing that award decide the dispute on the basis of the evidence presented, unbiased by personal interests. While the rules of major arbitral institutions require that arbitrators be impartial and independent, arbitrators are often appointed because of their familiarity with the dispute’s subject matter. Predictably, they have numerous interests, contacts, and relationships within the involved industry, and possibly with a party or its counsel, creating the possibility of arbitrator bias.

To ensure that such conflicts will not affect an arbitration, potential arbitrators are generally required to disclose to the parties, in advance of being confirmed, all current and past connections that might raise questions regarding their ability to be impartial. Disclosure is also required of facts arising after the arbitrator’s confirmation that could alter the parties’ perception of the arbitrator’s impartiality. This promise of full and ongoing disclosure is designed to reinforce the parties’ confidence in the integrity of the tribunal ultimately selected and in the fairness of the arbitral process to which they are committed.

Such confidence in the disclosure process is not, however, always warranted. Through oversight, bad judgment, or an unwillingness to disclose contacts that might jeopardize their appointment, potential arbitrators often fail to disclose all relevant associations. Searches for conflicts, once conducted, are often not updated after the arbitration commences. Moreover, during the hearing, an arbitrator may act in a manner that reveals a bias not apparent from the disclosure statement. In many cases, if a party had been aware of the omitted information at the outset of the arbitration, it would have challenged the arbitrator’s ability to serve. Yet these subsequent revelations of possible bias do not automatically require removal of an arbitrator or invalidation of an award.

The potential consequences of such nondisclosure are determined under FAA section 10(a)(2), which requires removal only in the event of an arbitrator’s “evident partiality.” Although no definitive interpretation of this standard exists, courts generally require a challenging party to demonstrate evident partiality using evidence it can gather without the benefit of discovery, and to present that evidence at the earliest possible time to avoid waiving the claim. No matter how successful a challenger is in meeting these requirements, the timing of judicial review and the prevailing interpretation effectively ensure rejection of bias challenges in all but the most egregious cases. Thus, in practice, the parties’ presumed right to have their disputes resolved by someone they believe has no undisclosed conflicts often gives way to policies favoring a prompt and conclusive arbitral result.

Consequently, arbitrator challenges should be brought early in the arbitral process, when an arbitrator’s removal or withdrawal would have a relatively small effect on the parties’ time and costs. Although the chances of prevailing on a challenge at this stage (or convincing the arbitrator to resign) are greater than they are later in the process, a party deliberating whether to challenge an arbitrator should consider whether the likelihood of success is great enough to risk alienating an arbitrator who, if the challenge fails, may determine the arbitration’s prevailing party. If the challenge is not exceptionally strong, the potential for an adverse effect on the arbitration’s result may outweigh any perceived advantage to preserving the issue for judicial review. Because there is only a small chance that a reviewing court will overturn the earlier rejection of an arbitrator bias claim, preserving the point may be of questionable value and potentially counterproductive.

Waiver

A party having knowledge of facts that suggest arbitrator bias or partiality, whether based on nondisclosure or misconduct during the arbitral process, cannot wait until an award is issued to raise them. An objection must be presented as soon as the party knows, or is deemed to know, of information indicating bias. Constructive knowledge of potentially disqualifying facts exists when the information is available through reasonable search. This “reasonable search” requirement is broadly construed, and a party must thoroughly investigate a proposed arbitrator’s background to avoid waiving the right to request removal. Preservation of an evident partiality claim further requires that the challenge be clearly and formally presented, and reasserted at appropriate times.

When procedures for consideration of bias claims exist at sponsoring arbitral institutions, those procedures too must be exhausted to avoid waiving the issue. Because the attractiveness of these institutions turns in large part on their ability to ensure prompt resolution of disputes, their interest in granting such challenges is often limited and decreases markedly after the tribunal is in place.

Waivers will not be granted when the complaining party justifiably failed to learn of the potential bias until after issuance of the award or when the objection is based on the cumulative effect of information that becomes available both before and after the award is issued.

Lack of Interlocutory Judicial Relief

When a bias claim is rejected, the challenging party is normally unable to secure immediate judicial review. The manner of conducting an arbitration, including determination of an arbitrator’s fitness to serve, is generally left to the arbitral tribunal’s discretion. In addition, the FAA provides for judicial review of awards, but not of procedural orders. Most courts, therefore, conclude that they lack the authority for pre-award removal of an arbitrator, noting that a contrary conclusion would spawn repeated interim challenges and cause indefinite delay. Consequently, the opportunity for judicial review of a rejected challenge for bias normally first occurs when the parties seek to enforce or overturn the final award. Exceptions to this policy occur only when removal of the arbitrator is required to remedy a contractually improper implementation of the arbitration agreement, or when the arbitrator’s conflicts or actions are so obviously inappropriate that immediate removal is required to avoid wasting the parties’ time and money.

The practical effects of deferring judicial review of an arbitrator challenge are:

  • The alleged bias (as well as any ill will generated by the challenge itself) may affect the arbitration’s results; and
  • Judicial consideration of the issue will first occur when the odds of overturning an award for any reason are extremely low.

Limited Judicial Review of Arbitral Awards

A challenging party must overcome what courts view as the FAA’s presumption that arbitral awards should almost always be confirmed. An award can be vacated only on the extraordinarily narrow grounds found in FAA section 10(a)(1-4), which, in addition to evident partiality, include the following reasons:

  • An award was secured by fraud, corruption, or other undue means;
  • Arbitrator conduct prejudiced a party’s rights; and
  • Arbitrator action exceeded authority.

In addition, courts have overturned arbitral awards because they are “arbitrary and capricious” (i.e., without reasonable basis) or in “manifest disregard of the law.” A challenger bears the heavy burden of demonstrating that the award satisfies one of these requirements and therefore must be vacated.

In most instances, the challenging party must meet this burden without the benefit of discovery, the availability of which is a matter of judicial discretion. Discovery requests will be denied unless the requesting party can provide clear evidence of arbitrator impropriety, or show that the record with respect to the bias issue is obviously incomplete. Therefore, a party contesting an arbitrator’s right to serve must support its position using only such evidence as it is able to develop independently, often the same evidence found unpersuasive during the arbitration. The effect of the FAA’s restrictions on judicial review is significant: Courts overturn only about 10% of arbitration awards reviewed under that statute.

Interpretation of the Evident Partiality Standard

The absence of a definitive interpretation of evident partiality further complicates a challenging party’s task. The Supreme Court has addressed the meaning of evident partiality only once, in Commonwealth Coatings Corp. v. Continental Casualty Co. [393 U.S. 145 (1968)]. The Court held that an undisclosed business relationship with one of the parties, resulting in the arbitrator having a financial interest in the arbitration’s outcome, constituted evident partiality requiring his disqualification. The Court divided, however, on the proper legal basis for the decision. The plurality opinion, supported by four justices, likened arbitrator obligations to those of federal judges and concluded that failure to disclose any dealings that might create an “impression of possible bias” or “even an appearance of bias” required a finding of evident partiality. The two concurring justices noted that the Court was not requiring arbitrators to satisfy the same standards as federal judges, and found disqualification appropriate only when an arbitrator has “a substantial interest in a firm which has done more than trivial business with a party.” While encouraging disclosure of relevant facts, the concurring opinion observed that one of arbitration’s benefits is the use of arbitrators with specific industry knowledge, and concluded that such businessmen could not “be expected to provide the parties with [their] complete and unexpurgated business biography.”

Most courts have found the plurality opinion’s conclusion, that a failure to disclose creates an appearance of bias constituting evident partiality, to be too rigid. Consistent with the concurring opinion’s approach, most courts hold that evident partiality requires more than an appearance of bias but less than a demonstration of actual bias. Evident partiality is said to exist only when an arbitrator knows of, but fails to disclose, information that would lead a reasonable person to believe a potential conflict exists. When an arbitrator lacks such knowledge, disqualification is not required, even if that lack of knowledge arises from the arbitrator’s failure to search thoroughly for possible conflicts.

More than a theoretical conflict of interest is required to support a bias claim. The alleged bias must be direct, definite, and demonstrable, rather than remote, uncertain, and speculative. The circumstances relied on must be so powerfully suggestive of bias (i.e., a relationship so personally, socially, professionally, or financially intimate) as to cast serious doubt on an arbitrator’s impartiality.

The evident partiality analysis is thus both pragmatic and fact-based, with the decisive factors being:

  • The extent and character of the arbitrator’s interest;
  • How direct that relationship is or was;
  • The connection, if any, between that relationship and the arbitration; and
  • The proximity in time of the relationship and the arbitration.

An unwritten consideration is whether the court believes the challenge is just a pretext for a last-ditch effort to overturn an award. When no evidence of actual bias or prejudicial action exists in the record and the award appears reasonable, reviewing courts generally find a way to avoid disqualification. Even so, the lack of precision in this analysis sometimes leads to inconsistent results on similar facts.

One federal court, the Ninth Circuit Court of Appeals, has adopted a view close to that of the Commonwealth Coatings plurality opinion. In that jurisdiction, a potential arbitrator is held to have an enforceable duty to investigate separate from the duty to disclose. Therefore, lack of knowledge resulting from a violation of the duty to fully investigate and disclose the potential for conflicts can support a finding of evident partiality.


Platt W. Davis III, JD, LLM, is a partner in the Houston office of Vinson & Elkins L.L.P. and specializes in international
arbitration, energy, and construction law.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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