Turkish Law Blog
Unresolved Debate of Arbitrators’ Conflicts Disclosure: Time to Unify Standards?
In this paper, I will analyze to what extent can the disarray regarding disclosure duties of an arbitrator be avoided by the implication of a unified standard in the U.S. Federal Arbitration Act (1) (“FAA”). The question revolving around the scope of conflict disclosure has been an unresolved issue within the US. (2) The FAA sets evident partiality as a ground to vacate an award, however, it fails to utilize a standard to apply evident partiality.
Let us imagine; Company X signs a contract for the sale of goods with Company Y and includes an arbitration clause within the agreement. Both Company X and Company Y are benefiting from the deal, however, somewhere along the road, they face a conflict. As per the arbitration clause in their agreement parties resort themselves to arbitration. Parties appoint arbitrators, disclosures are made, the proceedings begin and after the award has been rendered, Company X comes to discover a client-attorney relationship between Company Y’s rivals and the attorneys in the arbitrator’s firm. This information was not disclosed by the arbitrator and he claims that he was not aware. Company X wishes to take this issue to court, however, is skeptical about spending money and resources to a court proceeding where it cannot predict the outcome. This is where the gray area begins.
This article will provide the background of an existing issue on the disclosure duties of arbitrators and explain how it has been dealt with until the present time. The lack of a Supreme Court judgment or a statute to unify conflict disclosure and its extent has caused a split on the operation of Courts of the US (the “Courts”). The standard of “appearance of bias” and “reasonable person” have been applied by different circuit courts and bare significant differences. This is the reason Company X has been hesitant about how to proceed.
I will move on to discuss how the arbitral institutions have created their own standards which are clearer and more distinct compared to the FAA. In the end I will state that the uncertainty of the standard used by the Courts can be avoided if (i) the evident partiality standard set out in the FAA is expanded to provide a more detailed roadmap for the Courts or (ii) the parties adopt certain guidelines such as the International Bar Association Guidelines on Conflicts of Interest (3) (the “IBA Guidelines”).
II. The Initiation of the Controversy
The FAA, being the only source for the Courts, states in its Section 10(a) that Courts can vacate an award in cases where there was evident partiality in the arbitrators. Other than implicating the evident partiality standard, the FAA does not provide an overview of what it actually stands for.(4) This is the reason why the outcome of conflicts disclosure cases in the Courts have been uncertain starting with the Supreme Court ruling in 1968 in the case Commonwealth Coatings, Inc. v. Continental Casualty Corp(5) (“Commonwealth”).
In the controversial Commonwealth case, the third arbitrator chosen by the two party-appointed arbitrators had a relationship with the party being sued, where the nature of the relationship was that the arbitrator’s business provided consulting services amounting to $12,000. The relationship between that certain party and the arbitrator was on a need basis and had ceased one year before this certain arbitration. These facts were not disclosed until after the award had been rendered and when discovering, the petitioner challenged the award. (6)
Justice Black, writing the opinion of the court, stated that it is of utmost importance for an arbitrator to be held to the same standard as the judges(7) since there are no mechanisms for appeal. As per the court, the arbitration proceedings will not be disrupted if the arbitrators are obligated to disclose the relationship they have with the parties involved in order to avoid even the impressions of bias. (8) Lastly, Justice Black pointed out that judicial decisions are set aside even in the existence of a slightest pecuniary interest and that there is no reason to believe that this same standard should also be applied to arbitration proceedings. (9) The award was vacated.
The concurring opinion of Justice White, however, was what created the controversy. Justice White starts by indicating that the opinion of the court does not hold arbitrators to the same standard as judges and continues to say that arbitrators are not disqualified by the mere fact that they have a business relationship if this relationship is disclosed beforehand. (10) The last important point is that the arbitrator should disclose any type of business relationship where the arbitrator has a “substantial interest in a firm which has done more than a trivial business with a party.” (11)
The Differences between the Opinions
The opinion of the Supreme Court written by Justice Black and the concurrence of Justice White bare significant differences. Since Justice Black wrote the judgment with plurality and Justice White wrote a concurring opinion joined by Justice Marshall, the concurring opinion also carries influence. It is crucial to highlight these differences since these opinions are the ones that created the split in the Courts when applying the evident partiality standard.
Justice Black considered the same standard applied to judicial judges when evaluating the disclosure duties of arbitrators and concluded that even the appearance of bias triggers the duty to disclose a certain relationship with the parties.(12) Justice White said that arbitrators are not held to the same high standard and they are not automatically disqualified to serve the parties if a disclosure is made in advance. (13) As per Justice Black, even the slightest pecuniary interest is important while making disclosures, however, in the view of Justice White, the arbitrator should disclose a relationship if there is substantial interest and parties have been in a more than trivial relationship. While the opinion of the Supreme Court creates an impression or appearance of bias standard in viewing evident partiality, the concurring opinion sets a higher standard to find an arbitrator partial.
III. The Reflection of the Commonwealth in the Courts
The confusion initiating with Commonwealth has not yet been resolved given the lack of the Supreme Court to hear a new case relating to the issue. District courts in the US have dealt with the standard of evident partiality over the years and have diversified applications of it. Generally, circuit courts are divided between the “appearance of bias” standard and the stronger “reasonable person” standard. District Courts have analyzed and applied the Commonwealth case differently and therefore are holding arbitrators to different standards while forming their opinion with regards to the partiality of the arbitrators. (14)
i) Appearance of Bias Standard
The appearance of bias standard, as stemmed from Commonwealth, calls for the disclosure of any facts that would create even the slightest impression of bias. (15) As per this view, nondisclosure of any fact that could create a conflict amounts to partiality. Some of the significant cases where the Courts adopted the appearance of bias standard are detailed below.
In the New Regency Production, Inc. v. Nippon Herald Films, Inc.(16) case, New Regency and Nippon entered into a film distribution agreement. Parties faced a dispute and resorted themselves to arbitration where an award was rendered. Nippon challenged the award on grounds of evident partiality since the arbitrator failed to disclose that he started working at Yari Film Group who is involved with a principal of New Regency. (17) The court found that under the appearance of bias standard introduced in Commonwealth, nondisclosure of the employment relationship with a company in the same industry as the parties created partiality. (18) In this case, the court viewed the facts from an appearance of bias point of view, where even the impression of bias called for vacatur of the award.
In the Jean Schmitz; Leonard Schmitz, v. Carlos J. Zilveti, III; Nicholas S. Meris; Prudential – Bache Securities, Inc., aka Prudential Securities, Inc(19).(“Schmitz”) case, after the arbitration award was challenged, the court found that the failure of the arbitrator to disclose a prior relationship it had with the parent company of the party to the arbitration created an impression of bias even though the arbitrator was not aware of this fact. The award was vacated. In the two cases outlined above, it can be seen that the Court does not look further into the details of the subjective facts, but rather assumes partiality if there is an initial opinion pointing in that direction. In the hypothetical between Company X and Company Y, the Court, disregarding the fact the arbitrator had no knowledge of the relationship, would conclude that the arbitrator was, in fact, partial under the standard since he did not disclose a conflict of interest.
ii) Reasonable Person Standard
In contrast to the appearance of bias standard, in the reasonable person standard, an arbitrator who would be viewed as being partial by a reasonable person due to that relationship is obliged to disclose that certain relationship and will be found partial in lack thereof. In other words, for an arbitrator to be found partial under this standard, a reasonable person would have to conclude that there was bias. (20) The cases of the Courts applying the reasonable person standard are discussed below.
The Applied Industrial Materials Corp. v. Ovalar Makine Ticaret ve Sanayi, A.S.(21): case initiated when Oxbow, who acquired Applied Industrial, was discovered to be in business with one of Seacor’s offices in which the arbitrator was the CEO of. The award was vacated even though the arbitrator had stated that he was not involved in any part of that business. Second Circuit, in this judgment stated that arbitrators have a duty to investigate upon realizing that nontrivial conflicts of interest might exist and disclose it to the parties, if any is found.22 Court also added, on an important note, that failure to investigate does not directly point that there was partiality in the arbitrator, however when there is a duty to investigate the arbitrator shall do so.(23)
In the Ometto v. ASA Bioenergy Holding A.G.,(“Ometto”)(24) case, after the arbitration award was rendered, Ometto argued that there was evident partiality in the arbitrator Rivkin, since his colleagues at his law firm were providing legal advice to certain parties in a conflict in which Abengoa is involved in. It is accepted by the court that the arbitrator lacked knowledge of the transactions that his colleagues were involved in. (25) The court also found no error in the judgment of the district court stating that while Rivkin was careless to not investigate, arbitrators cannot be disqualified in a situation where his impartiality might be questioned. (26) Parallel to this case, the court in the hypothetical would find that the arbitrator was not partial since he cannot be held responsible for the all of the work in his law firm and it is normal that he did not come across the information regarding the relationship between the parties while conducting a conflict of interest search. According to the reasonable person standard, the arbitrator would be viewed as impartial.
After the analysis of these cases, it can be seen that at first glance the two standards are similar. Especially with the approach of the Courts to the impression of bias in a ‘practical’ way has raised the standard for partiality set out in Justice Black’s opinion in Commonwealth. However, in a deeper analysis, it can be seen that the two standards have a significant difference. In the reasonable person standard, Courts tend not to find impartiality if an arbitrator does not investigate a possible conflict when the arbitrator does not have knowledge of it. This was the issue in Ometto. In contrast, Courts that adopt the impression of bias standard tend to find that nondisclosure of any kind of conflict, either trivial or nontrivial, directly point towards the partiality of the arbitrator. (27) This view was clearly seen in Schmitz. Courts applying the reasonable person standard, such as the Second Circuit, expresses that failure to investigate may only be “indicative of evident partiality.”(28) This split of view within the Courts make it hard for arbitrators to distinguish the extent of their investigation duties followed by their disclosure duties.
IV. Strandard of Disclosure Duties in the International Arbitration Community
In order to promote arbitration and make it more reliable, arbitral institutions have produced their own sets of rules regarding the arbitral proceedings conducted under their observance. The lack of clarity within the states and the reluctance to enforce arbitral awards have called for independent institutions to take the lead. Their aim has been to develop a more pro-arbitration environment in order to provide parties with the most efficient alternative dispute resolution mechanisms. Generally, the institutional rules have more clearly defined standards in terms of the disclosure duties and partiality of arbitrators. The Rules of the United Nations Commission on International Trade Law, (“UNCITRAL Rules”)(29) and the IBA Guidelines will be analyzed.
i) UNCITRAL Rules
The UNCITRAL rules in Article 12(1), set the standard of ‘justifiable doubts’ when weighing the partiality of an arbitrator. This shows that UNCITRAL Rules adopt the objective approach, which analyzes objective reasonableness when issues of impartiality arise. (30) UNCITRAL Rules do not take in to account the subjective view of the parties, but rather view the conflict through an objective view of a reasonable person where there shall be adequate and solid grounds for an arbitrator to be found partial. (31)
ii) IBA Guidelines
The IBA Guidelines take a different approach to the issue of disclosure duties of arbitrators. IBA Guidelines create a very concrete and detailed standard in order to minimize room for uncertainty. These recognize that parties may come from different backgrounds, for example, civil law or common law, making it less likely for personal experience to varying the view on the extent of disclosure duties. (32)
The reason that the IBA Guidelines stand out from other rules is due to their Red, Orange and Green Lists. There are non-exhaustive lists of events that are categorized under these lists and they set different duties to disclose depending on which list that certain relationship or circumstance falls under. (33) The lists of IBA Guidelines are:
(i) The Non-Waivable Red List: where the arbitrator cannot act as arbitrator
(ii) The Waivable Red List: where the circumstances may potentially cause for disqualification, however parties may give express consent
(iii) The Orange List: non-exhaustive list where certain circumstances may give rise to justifiable doubts. An arbitrator should disclose any relationship that falls under this category.
(iv) The Green List: Circumstances where the arbitrator does not have a duty to disclose.
Given the detailed manner in which IBA Guidelines are set up, they have become a source in which the arbitration community heavily relies on. (34)
The silence of the FAA in the extent of the duty of disclosure of the arbitrators triggers the debate on what circumstances are to be disclosed by the arbitrators. While some Courts apply the reasonable person standard, some apply the lesser impression of bias standard. The impression of bias standard holds arbitrators to the same low standards as judges, while the reasonable person standard sets a higher standard to determine that an arbitrator is partial. The FAA could be expanded in a detailed manner in order to provide the standard that the Courts should apply in nondisclosure cases. Implementation of a standard for evident partiality in the FAA as detailed as a standard in the IBA Guidelines would solve the issue of uncertainty. To go further, the amended FAA could even give such examples of circumstances that the arbitrators are obliged to disclose, circumstances that might cause for a finding of partiality and circumstances that create a nontrivial relationship. This solution would be a long term and more stable solution for the on-going debate.
The amendment to an existing statute can take a significant amount of time, which is why a faster solution needs to be introduced. If the parties adopted certain rules in their arbitration agreement in order to lead a path for the courts, this would call for an immediate solution to the uncertainty problem. The IBA guidelines would be a reasonable choice since it is not associated with any institution and will be binding to the parties once adopted. The IBA Guidelines do not just set a standard for disclosure, it provides further information by introducing certain circumstances that must or must not be disclosed. In the event of a conflict, the courts would consider these guidelines when making a decision, which would make the outcome more reliable and predictable. Another resort for relief would be if the Supreme Court granted review for a nondisclosure case and wrote a non-controversial opinion.
This article clearly highlights the differences between the two different standards applied by the Courts. Even though the difference might not be visible at first, once the cases are broken down in detail, it is concluded that the existing split in the Court’s is substantial to create disarray in the disclosure duties of an arbitrator. In the long run, Courts can overcome this issue if the FAA is amended or the Supreme Court authors a judgment with an authoritative opinion. However, absent any of these solutions, the duty is on the parties to adopt certain guidelines for the Courts. Given the importance of arbitration in a commercial world, it is crucial that the Courts create a more concrete set of standards for a more pro-arbitration approach.
1 The FAA codified at 9 U.S.C. and enacted February 12, 1925 facilitates the relationship between arbitral awards and US courts. §10(a) of the FAA deals with grounds to vacate an award, which reads as the following:
“In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”
2 Mark Kantor, Arbitrator Disclosure: An Active but Unsettled Year, in Transnational Dispute Management (Vol 5, issue 4, 2008)
3 International Bar Association, Guidelines on Conflicts of Interest, (2004)
4 Mark Kantor at 8 (within the course materials)
5 Commonwealth Coatings, Inc. v. Continental Casualty Corp., 393 U.S. 145 (1968) (Black, J.)
6 Id. at 146
7 Id. at 148
8 Id. at 149
9 Id. at 148
10 Id. (White, J., concurring) at 150.
11 Id. at 151, 152.
12Id. supra n. 2 at 148
13 Id. (White, J., concurring).
14 Gary B. Born & Claudio Salas. The Different Meanings of an Arbitrator’s “Evident Partiality” Under U.S. Law. Kluwer Arbitration Blog (2013) (“Born Article”)
15 Commonwealth, at 149
16 New Regency Production, Inc. v. Nippon Herald Films, Inc., 501 F.3d 1101 (9th Cir. 2007).
17 Id. at 1104
18 Id. at 1106
19 Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir.1994)
20 Born Article
21 Applied Industrial Materials Corp. v. Ovalar Makine Ticaret ve Sanayi, A.S. 492 F. 3d 132 (2d Cir. 2007).
22 Id. at 138
24 Adriano Gianetti Dedini Ometto, Adriano Ometto Agricola Ltda v. Bioenergy Holding A.G., Abengoa Bioenergia Agricola Ltda., Abengoa Bioenergia Sao Jao Ltda., Abengoa Bioenergia Sao Luiz S.A., Abengoa Bioener Gia Santa Fe Ltda 549 Fed. Appx.41 (2d Cir. 2014)
25 Id. at 42
27 Seung-Woon Lee. Arbitrator’s Evidence Partiality: Current US Standards and Possible Solutions Based on Comparative Reviews in Arbitration Law Review (Vol. 9, No. 2, 2017)
28 Applied Industrial at 138.
29 UNCITRAL, Model Law on International Commercial Arbitration (1985), amended in 2006 and has been widely used among states (not the US) as national arbitration law. Article 12 Grounds for Challenge reads as: (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him.
30 Nigel Blackaby et al, Redfern and Hunter on International Arbitration, (Sixth Edition), Oxford Univ. Press, 2015, 254-267.