On February 3rd, the U.S. Court of Appeals for the Second Circuit issued its long-awaited decision in the Scandinavian Reinsurance Company Limited v. St. Paul Fire & Marine Insurance Co. case, reversing the lower court’s “evident partiality” ruling, denying Scandinavian Re’s petition to vacate the award, and granting St. Paul’s cross-petition to confirm the award.
Briefly, the parties’ dispute arose over the failure of the umpire and one of the party-arbitrators to disclose that they were simultaneously serving as panel members in another arguably similar arbitration, which overlapped in time, shared similar disputed issues, involved related parties, and included a common witness who testified in both proceedings. The federal district court found that these factors supported its conclusion that there was a material conflict of interest and that the arbitrators’ failure to disclose this conflict of interest required vacatur of the arbitral award.
In reversing the lower court, the Second Circuit unanimously held that “evident partiality” as that term is used in the Federal Arbitration Act § 10(a)(2) may be found only “‘where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.’” It ruled that Scandinavian Re had not met is burden of establishing that the arbitrators’ failure to disclose their overlapping service in the two arbitrations was indicative of bias so as to constitute a nontrivial conflict of interest requiring vacatur of the arbitral award. Their concurrent service in these arbitrations, according to the court, suggested nothing inherently negative about their impartiality nor indicated a predisposition to rule in any particular way in this arbitration even if the issues in the other concurrent arbitration were arguably similar. “[I]n ascertaining whether a relationship is ‘material’ . . . ,” the Second Circuit observed, “we think that a court must focus on the question of how strongly that relationship tends to indicate the possibility of bias in favor of or against one party, and not on how closely that relationship appears to relate to the facts of the arbitration.”
Responding to Scandinavian Re’s argument that vacatur was still warranted in this case because it was misled by the arbitrators’ repeated assurances to the parties that they understood themselves to be obligated to make thorough and ongoing disclosures, the Second Circuit disagreed that vacatur of the award was appropriate “solely because an arbitrator failed to consistently live up to his or her announced standards for disclosure or to conform in every instance to the parties’ respective expectations regarding disclosure.” “An approach that examined why an arbitrator failed to disclose a relationship would interject added uncertainty and subjectivity into our evident-partiality analysis” and could have “perverse effects.”
Scandinavian Re’s argument that vacatur was required because presentation of its arbitration case was disadvantaged by the arbitrators’ nondisclosure (e.g., it would have prepared for and presented its position differently if it had known that two of the panel members had recently heard the same witness testify in both arbitrations and defend contrary positions) was also rejected by the court: “The FAA does not bestow on a party the right to receive information about every matter that it might consider important or useful in presenting its case. A party is not entitled to the ‘“complete and unexpurgated business biograph[ies]’” of the arbitrators whom the parties have selected.”
Although the arbitrators had actual knowledge of their concurrent service in the two arbitrations and, as the Second Circuit observed, “it would have been far better for them to have disclosed that fact,” the court did “not think disclosure was required to avoid a vacatur of the Award in light of the fact that the relationship did not significantly tend to establish partiality.” Despite the outcome in this case, the court did offer the following parting comment on the importance of timely and full disclosure by arbitrators: “Disclosure not only enhances the actual and apparent fairness of the arbitral process, but it helps to ensure that that process will be final, rather than extended by proceedings like this one.”
Scandinavian Reinsurance Company Limited v. Saint Paul Fire and Marine Insurance Company, Docket No. 10-0910-cv, 2012 U.S. App. LEXIS 2082 (2nd Cir. Feb. 3, 2012), rev’g 732 F. Supp. 2d 293 (S.D.N.Y. 2010).
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