Arbitrator Impartiality – An Elusive Standard?

It is quite common in certain insurance or reinsurance contracts for the parties to include an arbitration clause so as to identify the chosen means of dispute resolution.

For those threatened with the prospect of litigation, the ability to avoid the court system offers many significant advantages including: (1) the ability to receive a decision in a more expedited fashion than may be provided by the courts; (2) the expenditure of fewer costs to get that decision; and (3) the ability to have experienced and knowledgeable arbitrators decide the merits of the dispute rather than trying to bring a judge “up to speed” on complicated insurance or reinsurance concepts.

While contracts often identify different variations on how arbitration is to take place, parties remain unsure of the standards that the courts may employ to measure an arbitrator’s impartiality. Two recent cases from different federal circuits of the United States Court of Appeals highlight the challenges in this area. See, Nationwide Mutual Insurance Company v. Home Insurance Company, 429 F.3d 640 (5th Cir. 2005); Positive Software Solutions, Inc. v. New Century Mortgage Corporation, et al., 2006 WL 52276 (5th Cir. Tex) Jan. 11, 2006.

In Nationwide, Nationwide appealed a district court order denying its attempt to vacate a final arbitration award issued in a reinsurance dispute with Home.

Of direct interest, Nationwide sought to vacate the final award of the arbitration panel on the ground that the Home’s party-appointed arbitrator displayed evident partiality. In addition, Nationwide alleged that Home’s party-appointed arbitrator engaged in improper ex parte contacts with one of Home’s attorneys and with employees of the entity charged with addressing some of Home’s obligations with Nationwide.

Specifically, Nationwide alleged that during the course of the arbitration, Home’s arbitrator failed to disclose certain business and social relationships with Home and its counsel. To support its appeal, Nationwide maintained that the act of not disclosing those contacts alone supported a finding of evident partiality on the part of Home’s arbitrator.

Noting that this was a matter involving a party-appointed arbitrator, the Sixth Circuit Court of Appeals rejected Nationwide’s approach and followed an objective inquiry into whether a reasonable person would have to conclude that the arbitrator was partial to one party to the arbitration. Finding that the arbitrator had disclosed the business-related questions raised by Nationwide to the parties in the arbitration and was entitled to have contact in a social context with some of the individuals in question without constituting improper or prohibited ex parte contacts, the Court of Appeals affirmed the District Court’s decision denying Nationwide’s vacator petition.

* In New Century, the question was whether an arbitrator’s failure to disclose that seven years before the arbitration he and his former law firm were co-counsel in a lengthy litigation matter with one of the law firms involved in the arbitration justified vacating the arbitration award. In this non-insurance related arbitration, the parties were in dispute over intellectual property issues.

Arbitration took place under the guidelines of the American Arbitration Association where the parties jointly selected the arbitrator in question after reviewing various candidates’ credentials and ranking them in order of preference. The two parties jointly ranked the arbitrator in question the highest of all the candidates considered for the position. The arbitrator was informed of his appointment via a letter that specifically identified the counsel representing each of the parties.

In addition, the arbitrator returned the “Notice of Appointment” letter and noted that he had nothing to disclose in response to twelve questions concerning any prior contacts that he may have had with the parties in question or the counsel involved in the arbitration. After the arbitrator ruled against Positive Software in the arbitration, Positive Software conducted a detailed investigation into the arbitrator’s background and discovered the arbitrator and his firm had been in a prior professional relationship with New Century’s arbitration counsel.

After examining a significant history of case law addressing arbitrator impartiality, the Fifth Circuit held that an arbitrator selected by the parties displays evident partiality by the very failure to disclose facts that might create a reasonable impression of the arbitrator’s partiality. The Fifth Circuit further held that evident partiality is demonstrated from the non-disclosure of facts that might create a reasonable impression of the arbitrator’s partiality, regardless of whether actual bias is established.

In addition, the court stated it was not adopting an inflexible per se rule in nondisclosure cases. While an arbitrator selected by the parties need not disclose relationships that are trivial, an arbitrator should always err in favor of full disclosure. In turn, the Fifth Circuit Court of Appeals affirmed the district court’s decision in relevant part concerning the attempt to vacate the award.

These two cases show the tension that exists with respect to the neutrality or impartibility of an arbitrator. While the Court in Nationwide moved beyond a simple “failure to disclose” standard when determining whether there was a question of evident partiality, it was analyzing the question in the context of a party-appointed arbitrator.

With respect to the New Century case, the Court adopted a “failure to disclose” standard in a single (non-party appointed) arbitrator situation where the arbitrator’s failure to disclose appears to have been somewhat egregious.

In the end, much of the controversy can be solved by full disclosure on the part of all arbitrators, so as to minimize arguments of bias or evident partiality.

Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess. His practice is focused on litigation and arbitration of insurance coverage and reinsurance matters throughout the country, including general coverage, directors and officers liability, professional liability, environmental, and asbestos cases. Questions and responses to this article are welcome at aboris@tsmp.com.