Everyone knows that, under the Federal Arbitration Act, one of the ways to overturn an arbitration award is to show that the arbitrator(s) exhibited “evident partiality.” See 9 U.S.C. § 10. Evident partiality “will be found where a reasonable person would have to conclude that an arbitrator was partial to one party in the arbitration.” Morelite Constr. Corp. v. New York City Dist, Council Carpenters Ben. Funds, 748 F.2d 79, 84 (2d Cir. 1984).
But wait. In the context of most reinsurance arbitrations, where each party appoints its own arbitrator, isn’t it pretty much understood – indeed, expected – that each party’s appointed arbitrator will be partial to that party’s case and advocate for a finding consistent with that acknowledged partiality? What role does the evident partiality standard play in that context?
This exact question was recently addressed by the Second Circuit in Certain Underwriting Members of Lloyds of London v. Florida, 892 F.3d 501 (2d Cir. 2018). The case involved a standard reinsurance arbitration clause that provided for the appointment of “disinterested” party-arbitrators and an umpire. As is customary, each member of the selected arbitral panel engaged in a series of disclosures regarding their past relationships with the parties. Both arbitrators disclaimed any significant relationships with the party that had appointed him. Unfortunately, one of the arbitrators “forgot” a few things, such as:
- The fact that he had been president of an HR firm that had had extensive dealings with and operated out of the same business suite as the party that appointed him;
- A former director of the party that appointed the arbitrator was the CFO of an organization that provided consulting services to the arbitrator; and
- Before the hearing commenced, the arbitrator’s company hired a former director of the party that had appointed him to serve as its CFO and that individual testified at the hearing.
The affected arbitrator’s party won the arbitration, and the other side sought to vacate on the basis of evident partiality. The district court agreed, citing the apparent willfulness of the non-disclosures, especially given the arbitrator’s failure to supplement his disclosures once it became clear that someone he plainly knew was offering testimony.
On appeal, though, the Second Circuit reversed. In so doing, the Court held that it isn’t the mere existence of a conflict, or even its non-disclosure, that drives a finding of evident partiality. Rather, the materiality of the conflict is at the heart of the analysis. And, in considering the issue of materiality, the Circuit Court found that that party-appointed arbitrators are fundamentally different from “neutrals.” The Circuit Court likewise found that the parties had contracted away any expectation of neutrality and that “[e]xpecting of party-appointed arbitrators the same level of institutional impartiality applicable to neutrals would impair the process of self-governing dispute resolution.”
Consequently, the Circuit Court parted ways with the trial court and declined to create a per se rule that would, in the context of party-appointed arbitrators, require disqualification in the face of undisclosed conflicts of interest. That being said, the Circuit Court remanded the issue to the district court for a determination of whether the party opposing the award could make a showing that the affected arbitrator’s claimed partiality had actually had an effect on the award itself. As the Second Circuit noted, the burden is not an easy one to meet because “[w]here the parties have expressly agreed to select partial party arbitrators, the award should be confirmed unless the objecting party proves that the arbitrator’s partiality prejudicially affected the award.”
Plainly, fulsome disclosures are, and should be, the norm for all arbitrators. This decision, however, recognizes the reality of reinsurance arbitrations, namely, that party-appointed arbitrators are expected to be advocates and, absent a showing of serious misconduct that can be directly tied to the outcome of the award itself, even willful failures to disclose won’t be enough to overturn an award.