Party-Appointed Arbitrators and the “Evident Partiality” Standard: ‎Second Circuit Clarifies the Rules

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. ‎