Arbitration Trifecta, Part 3: Arbitrator Neutrality
Takeaway:
Much like judicial conflicts of interest, arbitrators must avoid even the perception of bias or partiality. Just as important, both parties have a significant interest in ferreting out any possible appearance of an arbitrator’s partiality prior to an arbitration.
Even without evidence that an arbitrator acted on any actual bias, perceived partiality can support a court vacating a significant award and requiring the parties to go through the process a second time.
The third arbitration case from the Maryland Court of Special Appeals, found here, deals with the appearance of an arbitrator’s neutrality. In The Jacobs Company, Inc. v. Innovative Insurance Solutions, LLC, the Court affirmed a lower court’s decision to vacate a sizeable award due to a perceived conflict of interest.
Facts
Jacobs obtained a $615,790.00 arbitration award (which included attorneys’ fees of $180,113.00) against Innovative. As part of the arbitration process, the arbitrator was required to disclose any known conflicts or preexisting relationships with the parties or the lawyers. The arbitrator disclosed that he was a friend of Jacobs’ counsel and counsel’s father, who was a retired judge. The arbitrator also disclosed that he was a friend of Innovative’s attorney. What the arbitrator did not disclose is that Jacob’s attorney’s father – the retired judge – also provided alternative dispute resolution services to the arbitrator’s ADR group, and in that capacity the ADR group earned nearly $6,000 from the retired judge’s services. Additionally, the arbitrator did not disclose that he agreed to assist Jacob’s attorney with an ADR presentation (however, the presentation did not take place).
Ruling
Innovative learned of these omissions after the arbitration and asked the circuit court to vacate the award. Maryland requires a court to vacate an arbitration award if “[t]here was evident partiality by an arbitrator appointed as a neutral, corruption in any arbitrator, or misconduct prejudicing the rights of any party.” Courts have taken the position that
… whether a particular nondisclosure suffices to justify vacating an award seem to turn on whether, in the court’s view, the information not disclosed was of such a nature as to lead to a reasonable belief that the arbitrator, if chosen as a neutral, could not or would not be impartial – whether, the nondisclosed information reveals a significant conflict of interest and, if so, it is the kind of conflict that can lead to a reasonable inference that the arbitrator would not be impartial. It is not necessary to show that the nondisclosing arbitrator, if selected, manifested actual bias during the proceeding. If the conflict is strong enough, evident bias may be inferred. (italics added)
More precisely, in order to vacate an award based on evident partiality, Jacobs “must prove facts sufficient to permit an inference that there was indeed partiality by an arbitrator.” Much like judicial recusal, actual bias need not be shown, but only that a reasonable party would question the arbitrator’s impartiality. Here, the arbitrator’s failure to disclose his financial relationship with Jacob’s counsel’s father and his collaboration with Jacob’s counsel on the seminar supported the lower court’s vacating the large arbitration award.
This case shows that both parties have a significant interest in ferreting out any possible appearance of an arbitrator’s partiality or bias. While Jacobs itself did nothing wrong and there was no evidence that any partiality affected the award, Jacobs nevertheless lost its significant award and must go through the process a second time.