Vacating a $22 million JAMS arbitration award, the Texas Court of Appeals held that a purportedly neutral arbitrator with a 13-year history of social and business encounters with a party’s attorney should have disclosed, at a bare minimum, the general nature of the friendship and thus permit the parties to further investigate the relationship before proceeding with the hearing.
The party-selected arbitrator had completed a disclosure form in which he generally disclosed that, in the previous five years, he had served as a neutral arbitrator and mediator with one of the attorneys for a party. Four days later another attorney from the same firm was added as the party’s lead counsel. The arbitrator did not supplement his disclosure to disclose his prior contact with the lead counsel, notwithstanding his receipt of wine, sports tickets, and expensive meals from the attorney.
The court acknowledged that there is always a competitive market for an experienced arbitrator whose livelihood depends upon reputation and skill, such that business and social relationships between arbitrators and attorneys are to be expected. At the same time, however, the court pointed out that disclosure of these relationships is essential to the fair and impartial nature of the arbitration process. Such disclosure, the court held, is crucial because of the enormous power, responsibility, and discretion vested in the arbitrator and the limited judicial review of the arbitrator’s decisions.
Texas courts adhere to the generally-accepted principle that an arbitration award should be vacated when the arbitrator shows “evident partiality”. The test is an objective one and asks whether an observer would develop a reasonable impression of partiality from the facts as stated. In this case, the arbitrator’s friendship with the attorney dated back to the attorney’s clerkship for a district court judge while the arbitrator served as a magistrate for the same judge. Through nearly ten years leading up to the arbitration, both the attorney and the arbitrator hosted expensive social events and private dinners for each other, and their spouses actively participated in their socializing.
Because “evident partiality” is established objectively by the nondisclosure itself, rather than the subjective standard of whether partiality actually exists, arbitrators should always err in favor of disclosure. As the Karlseng court held, “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.”
The simple solution is for an arbitrator to disclose any facts that the parties would want to consider, and to understand that this obligation continues throughout the arbitration.
Scott Simon, Esq.