In the wake of last year's federal district court decision in Scandinavian Reinsurance Company Limited v. St. Paul Fire & Marine Insurance Co., 732 F. Supp. 2d 293 (S.D.N.Y. 2010) (currently on appeal and now awaiting a Second Circuit ruling) vacating a reinsurance arbitration award due to arbitrator evident partiality, umpire questionnaires seem to be getting longer and more detailed and organizational meeting disclosures more robust. Certainly no one wants to complete a costly and time-consuming arbitration only to have the award vacated later on evident partiality grounds.
Ongoing disclosures by arbitrators are equally critical whenever, for example, new facts emerge during the course of the arbitration, witnesses and experts are identified, additional attorneys or new counsel enter their appearances, or one's memory is jogged by a document or witness's deposition or hearing testimony. While most arbitration rules emphasize the importance of timely ongoing disclosures, their nature, scope, and timing still rest largely within the arbitrator's discretion and determining what may or may not be a non-trivial material relationship meriting prompt disclosure is not always easy despite the familiar "when in doubt, disclose" mantra.
A recent unanimous Texas Court of Appeals decision vacating a multi-million award on evident partiality grounds in a non-insurance/reinsurance arbitration offers some interesting and instructive insights into the broad range of business and social relationship courts may weigh in determining whether a neutral arbitrator has crossed the line in failing to make timely supplemental disclosures. This case arose in the context of a JAMS rules arbitration held before a single neutral arbitrator, in this case a former federal magistrate judge named Robert Faulkner. The only prior relationship that Faulkner disclosed was with one party's law firm. He stated that he had served as a neutral arbitrator within the past five years in which that party's attorney had appeared. However, shortly after Faulkner submitted his JAMS form disclosures, another attorney, M. Brett Johnson, from the same firm entered his appearance as lead counsel. Despite Faulkner's numerous prior social and professional contacts with Johnson, he made no further disclosures during the arbitration and neither did Johnson. Faulkner subsequently ruled in favor of Johnson's client, awarding him approximately $22 million in damages, including more than $6.4 million in attorneys' fees to Johnson's firm and $1.3 million in prejudgment interest.
When Johnson's client sought to confirm the arbitration award before the Texas district court, the losing party moved to vacate it on the grounds of evident partiality based on certain post-award evidence it had developed regarding Faulkner's undisclosed relationships with Johnson. Despite hearing this new evidence, the lower court confirmed the award, and the losing party appealed to the Texas Court of Appeals.
What is so fascinating about the Court of Appeals' evident partiality analysis is the degree to which it dissected the various business and social relationships between Faulkner and Johnson and the types of contacts it considered material in reaching its decision to vacate the $22 million award. Although the reader is urged to review the entire decision for a more complete understanding of the many salient facts deemed relevant by the court, the most significant ones are summarized below:
The evident partiality standard in Texas requires arbitrators to disclose facts that might, to an objective observer, create a reasonable impression of the arbitrator's partiality. "Evident partiality" is established from the nondisclosure itself, regardless of whether the nondisclosed information necessarily establishes partiality or bias. The consequences of nondisclosure are directly tied to the materiality of the unrevealed information. This standard applies not only to business and financial relationships, according to the Court of Appeals citing Texas Supreme Court precedent, but also to familial, personal, and "close" social relationships. The underlying policy is that parties can gauge the neutrality of an arbitrator only if they have access to all the information that could reasonably affect the arbitrator's partiality. Neutral arbitrators need not disclose trivial relationships or connections, but the conscientious arbitrator should err in favor of disclosure, which is a continuing obligation.
In its objective review of the facts summarized above, the Court of Appeals made the following general observations. First, it was apparent that over the years preceding this arbitration, Faulkner and Johnson "purposefully sought out social interaction with each other" and that this social relationship had "business overtones."
Second, with regard to Faulkner not recalling all of these social relationships at the time of the arbitration, the court found this to be no excuse. It confirmed that the arbitrator's duty of disclosure "requires a certain degree of introspective reflection or what is commonly known as due diligence." "While an arbitrator need not launch a full investigation into his past, an arbitrator must make reasonable effort, consistent with the effort and care ordinarily exercised by a person who seeks to satisfy a legal obligation, to inform himself/herself of the interests, contacts, and/or relationships that are required to be disclosed." When questioned during the trial court's vacatur proceeding about what efforts he had made to inform himself or refresh his memory regarding his relationship with Johnson when he first saw him enter the hearing room during the arbitration, Faulkner bluntly stated that he "didn't make any" but confirmed that he "absolutely" recognized him. For the court, this admission was especially telling. Despite Faulkner's apparent inability to recall specific times, dates, and places during the arbitration, at a minimum, the court found that the situation required Faulkner to disclose his friendship with Johnson, about which the opposing party was entirely ignorant, to enable the parties to investigate the relationship further before proceeding with the hearing. In short, Faulkner failed to disclose his "significant" longtime relationship with Johnson, the general tenor and scope of which he was obviously aware even though he may not have recalled all of the specific details at the time of the hearing. Faulkner had not fulfilled his obligation to assure the opposing party of his impartiality and to safeguard the integrity of the arbitration process.
Third, the court found Faulkner and Johnson's post-award contacts (i.e., the expensive dinner hosted by Faulkner shortly after he issued the arbitration award and the resumption of Johnson's sending a Christmas card and wine basket gift to the Faulkners after he had deliberately skipped doing so in 2007) both "relevant and enlightening" to show the same "substantial pattern of personal social contacts and potential business relationships."
It is hard to believe that the continuing disclosure alarm bells were not ringing loud and clear for Faulkner when Johnson first entered his appearance in this arbitration, and the Court of Appeals' vacation of his award seems amply justified under the circumstances presented. Perhaps the most fascinating aspect of this evident partiality case is the court's wide-ranging and thorough postmortem examination of all the business and social relationships between Faulkner and Johnson that should have triggered supplemental disclosures (e.g., sharing expensive dinners together, discussing potential unspecified "business" by telephone six times a year, sending Christmas cards and wine basket gifts, requesting Napa Valley restaurant, vineyard, and marketplace recommendations, attending a professional basketball game together, and discussing future arbitrator career plans). Although the court considered the entire universe of contacts summarized above in reaching its decision to vacate, some of them, when viewed in isolation, may not have triggered supplemental disclosures from even the most fastidious of arbitrators.
In analyzing whether evident partiality exists, a court may scrutinize and weigh virtually every type of business, financial, and social relationship, including what might be considered trivial contacts in some contexts. While an arbitrator's total recall of every detail is typically not required, the failure to disclose at least the general scope of his or her relationships with the parties, their counsel, and co-panelists will not be excused. Also, it is sobering to consider that, to develop all of these facts post-award, the trial court in this case held what must have been a very unpleasant evidentiary hearing at which Faulkner, Johnson, opposing counsel, and others (including Johnson's ex-wife) were called to testify.
Karlseng v. Cooke, No. 05-09-01002-CV, 2011 Tex. App. LEXIS 4868 (Tex. App. June 28, 2011).
TELEPHONE: (203) 227-9431
FAX: (212) 208-3003