By: Sanskriti Desai[*]
Published: March 6, 2022
I. INTRODUCTION
Arbitration’s primary aim is to deliver speedy decisions to parties without interference from the judicial system.[1] Further, with the increasing burden on courts,[2] arbitration has become a common platform for dispute resolution, especially among commercial parties and businesses who cannot afford to undertake longstanding suits to resolve disputes.[3] With speed and efficiency being the primary reason for parties moving towards arbitration, there is a need to ensure the presence of certain safeguards to uphold its legitimacy. One such safeguard imposed under the Federal Arbitration Act[4] is that arbitrators must remain impartial; therefore, an arbitrator’s impartiality is one enumerated ground to vacate an arbitral award.[5] However, circuit courts are divided on the correct standard to be used for deciding evident partiality of the arbitrator.[6]
II. BACKGROUND
Section 10 of the Federal Arbitration Act provides the limited grounds for vacating an arbitral award.[7] One sufficient ground for vacating an award is “where there was evident partiality . . . in the arbitrators . . . .”[8] However, the standard to determine what would be considered to be evident partiality has neither been clearly provided under the Act nor have circuit courts been able to agree on the appropriate standard.
Despite the inconsistent standard, the United States Supreme Court has provided some guidance as to what constitutes inadequate impartiality. The Court, in Commonwealth Coatings Corp. v. Continental Casualty Co.,[9] decided that an arbitrator’s failure to disclose a business relationship with one of the parties was sufficient to support vacation of a subsequent award due to evident partiality.[10] The majority opinion stated that arbitrators “must avoid even the appearance of bias”[11] and that an award may be vacated if there is a “impression of possible bias” by the arbitrator.[12] But Justice White’s concurrence raised questions on the standard set by the majority in its opinion.[13] Specifically, Justice White warned that vacation of arbitral awards, merely on the basis of non-disclosure, must not be allowed by courts, especially where the relationship between the arbitrator and the parties is trivial or “too unsubstantial to warrant vacating an award.”[14]
Although the Court established that impartiality can support vacating an arbitral award, it did not state what level of impartiality is sufficient to support that vacation, and the circuits have failed to adopt a consistent approach. The First, Second, Third, Fourth, Fifth, and Sixth Circuits adopted the “reasonable person standard,” which requires that “a reasonable person would have to conclude that the arbitrator was partial to one party to the arbitration.”[15] Alternatively, the Ninth Circuit, joined by the Eighth, Tenth and Eleventh Circuits, accepted the “reasonable impression of bias” standard, which states that even an appearance of partiality is sufficient to set aside an award on the grounds of evident partiality; the standard does not require a showing of actual bias.[16]
Unfortunately, a uniform impartiality standard is likely not imminent. The United States Supreme Court recently denied certiorari in the Monster Energy Case,[17] which presented a question as to what the correct impartiality standard is.[18] Below, the Ninth Circuit vacated an arbitral award under section 10(a)(2), finding that the arbitrator’s failure to disclose facts could give “reasonable impression of bias.”[19] The majority opinion mentions that clear disclosures made by arbitrators help parties in making informed decisions among potential neutral arbitrators.[20]
III. ANALYSIS
Pragmatically, the standard for impartiality among judges must be different from the standard of impartiality among arbitrators. Canons 2 and 3 of the Code of Judicial Conduct cover impartiality of judges and limitations on extra-judicial activities of the judge. Canon 2 provides that a judge must be impartial and fair and mentions circumstances that would lead to disqualification of judges.[21] Further, Canon 3 discusses certain extra-judicial activities that judges are not permitted to participate in to ensure their impartiality and independence.[22] While judges, reasonably, are subjected to such strict rules, the same cannot—and should not—be applied to arbitrators. This is primarily because arbitrators, as opposed to judges in federal and state courts, are not persons who confine themselves to the adjudicatory function. In practice, most arbitrators are persons directly involved in the specific industries to which the parties belong, and they are experts in these fields. The majority opinion in Morelite Construction refers to arbitrators as “key members [in tightly-knit professional communities, who] are known to one another, and in fact may work with, or for, one another, from time to time.”[23] One of the major advantages of arbitration is that the adjudicators in this process are familiar with, and have expertise in, the industry to which the parties belong; thus, the arbitrators are better enabled to decide the matter on the basis of the specific needs of the industry and the parties. Justice White’s concurrence in Commonwealth Coatings, mentions the need for the non-applicability of the standards of judicial decorum to arbitrators.[24] His concurrence then discusses that the advantage of expertise of the adjudicators in the arbitral process would be denied to parties if arbitrators are automatically disqualified by a trivial business relationship with the parties.[25] The concurrence advises that, although the judiciary must not ignore the problem of impartiality among arbitrators, the standard of impartiality applied to arbitrators must be construed broadly so as to disqualify them only where the arbitrator has substantial interest in the business of the parties or where the arbitrator has done “more than trivial business” with a party.[26]
Taking Justice White’s guidance into consideration, between the two standards, the reasonable person standard should be universally adopted because it is a more efficient and proper standard to establish evident partiality on the part of an arbitral tribunal. This standard requires a more reasonable showing on the part of the party claiming evident partiality of the arbitral tribunal,[27] ensuring that arbitrators are not arbitrarily precluded from adjudicating. As stated in the Sixth Circuit’s opinion in Thomas Kinkade Co. v. White,[28] the reasonable person standard requires a showing greater than an appearance of bias, but less than actual bias, to meet it.[29] Under this standard, “a party ‘must establish specific facts that indicate improper motives on the part of the arbitrator.’”[30]
Conversely, the reasonable impression of bias standard allows vacation of an award on the mere showing of an undisclosed relationship between the arbitrator and the party,[31] irrespective of the trivial nature of the relationship, which may be wrongly used by parties against whom the award was given and may want the award to be vacated. The dissent in the Ninth Circuit’s Monster Energy case raises important issues about the extent of the disclosures that the majority requires an arbitrator to make under the reasonable impression of bias standard.[32] Insightful questions that the dissent poses include whether it is enough to reveal the fact that the arbitrator is an owner, or must the arbitrator instead disclose information such as how large the ownership interest is.[33] The dissent’s concern is reminiscent of Justice White’s concurrence in Commonwealth Coatings, where Justice White stated that an arbitrator cannot be expected to provide the parties with their unabridged business biography and that “arbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial.”[34] The same concerns were also raised in opinions by other circuit courts that adopted the reasonable person standard. For example, in Morelite Construction v. New York City District Council Benefit Funds,[35] the Second Circuit focused on the “small size and population” of the arbitration industry and that the same requires relaxed judicial scrutiny.[36]
While it is important for courts to step in when evident partiality is discovered in an arbitral tribunal, court intervention must be limited in its context so as to ensure that every trivial relationship between a party and an arbitrator does not become a cause for vacation of the arbitral award. This required limitation becomes especially relevant when the ground of impartiality of the arbitrator becomes an opportunity for losing parties to file frivolous suits to vacate an arbitral award. Such juditial waste can be avoided if parties choose to agree to rules of arbitral institutions such as the International Chamber of Commerce (“ICC”) or the American Arbitration Association (“AAA”). Both the ICC[37] and AAA’s[38] rules provide that arbitrators must be impartial and independent and require the arbitrator to submit a clear statement mentioning all facts and circumstances that could give rise to reasonable doubts as the arbitrator’s impartiality.
Further, these institutional rules also impose time limits on challenge of appointment of arbitrators on the basis of impartiality. Although there is a duty on the arbitrators to disclose any relationship with the parties, the maintenance of an efficient system requires an imposition of time-limits on the parties to raise the issue of partiality of arbitrators. Imposing time limits ensures that an issue regarding impartiality is raised within a reasonable period after the appointment of the arbitrators, preventing the possibility of an arbitrator’s purported partiality being used as a tactic to delay the enforcement of the arbitral award. Those kinds of practical measures maximize efficiency of societal costs. Therefore, until the courts adopt a uniform standard on the issue, the acceptance of institutional rules would ensure reduction in the claims of evident partiality to set aside arbitral awards.
IV. CONCLUSION
Arbitration emerged as a quick and inexpensive dispute resolution mechanism, alternative to judicial adjudication of disputes. It encourages parties to move away from the judicial system and to choose an alternative mechanism to resolve their disputes, involving adjudication by private persons, who are not regulated by the laws which traditionally apply to judges in federal and state courts. Although arbitrators are not subject to the same rules of procedure of courts and the code of judicial conduct, their conduct cannot have requirements so long such that it denies the parties’ due process rights, especially the right to a fair hearing. Thus, although parties may choose an alternative and private manner of adjudication of disputes, the adjudicators involved must remain impartial and independent, so as to ensure that the adjudication is conducted in a fair manner. To ensure that fairness, the FAA provides limited grounds for setting aside an arbitral award, one of which is the evident partiality of arbitrators.
Between the two standards of impartiality that currently divide the circuit courts, the reasonable person standard is the better way to evaluate allegations of impartiality of the arbitrator. Whereas the reasonable impression of bias standard can exclude arbitrators because of trivial connections to one of the parties, the reasonable person standard imposes a more fair, yet stringent requirement, which makes sure that the justifications for preventing evident partiality are properly furthered.
Until the courts come to a conclusion on a uniform standard of review of partiality, parties must take steps to ensure that the issue of partiality of arbitrators does not arise. Impartiality can be safeguarded by adopting rules of arbitral institutions such as the ICC and AAA, which include specific rules to ensure impartiality of arbitrators and require broad disclosure from arbitrators, guaranteeing their impartiality and independence. Further, these rules include important timing requirements, which impose that the issue of evident partiality of arbitrators is raised within a limited period of time. Requiring timely challenges helps reduce societal costs and ensures that the ground of evident partiality is not used as a delaying tactic by the losing party to merely avoid enforcement of the arbitral award. If either the reasonable person standard is universally adopted or if more parties adopt rules of arbitral institutions, arbitration can continue to be an integral, and efficient, avenue to resolve disputes.
Footnotes
[1] See Leo Kanowitz, Alternative Dispute Resolution and the Public Interest: The Arbitration Experience, 38 Hastings L.J. 239, 255 (1987); see also Elizabeth A. Murphy, Note, Standards of Arbitrator Impartiality: How Impartial Must They Be – Lifecare International, Inc. v. CD Medical, Inc., 1996 J. Disp. Resol. 463, 466 (1996).
[2] See Gilles Cuniberti, Beyond Contract–The Case for Default Arbitration in International Commercial Disputes, 32 Fordham Int’l L.J. 417, 428–30 (2009).
[3] See Cuniberti, supra note 2, at 423–24; see also Kanowitz, supra note 1, at 255–56.
[4] Federal Arbitration Act, 9 U.S.C. §§ 1–14.
[5] See 9 U.S.C. § 10(a)(2).
[6] Compare Morelite Constr. Corp., v. N.Y. City Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2d Cir. 1984), with Schmitz v. Zilveti, 20 F.3d 1043, 1046–47 (9th Cir. 1994).
[7] 9 U.S.C. § 10.
[8] 9 U.S.C. § 10(a)(2).
[9] See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968).
[10] See id. at 150.
[11] See id.
[12] See id. at 149.
[13] Id. at 150–52 (White, J., concurring).
[14] Id. at 152.
[15] See Morelite Constr. Corp., v. N.Y. City Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2d Cir. 1984); see also Thomas Kinkade Co. v. White, 711 F.3d 719, 723–24 (6th Cir. 2013); JCI Commc’ns Inc., v. Int’l Brotherhood of Elec. Workers, Local 103, 324 F.3d 42, 51 (1st Cir. 2003); Consol. Coal Co., v. Local 1643, United Mine Workers of Am., 48 F.3d 125, 129 (4th Cir. 1995); Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240, 253 (3d Cir. 2013); Positive Software Solutions Inc., v. New Century Mortgage Corp., 476 F.3d 278, 281–83 (5th Cir. 2007) (adopting a standard closer to the reasonable person standard by emphasizing Justice White’s concurrence in Commonwealth Coatings, where bias must be “clearly evident”).
[16] See Schmitz v. Zilveti, 20 F.3d 1043, 1046–47, (9th Cir. 1994); Olson v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 51 F.3d 157, 160 (8th Cir. 1995) (adopting a similar approach to that of the Ninth Circuit); see also Middlesex Mut. Ins. Co. v. Levine, 675 F.2d 1197, 1201–02 (11th Cir. 1982) (adopting the reasonable impression of partiality standard but reasoning that the alleged partiality must be “direct, definite and capable of demonstration rather than remote, uncertain and speculative”); Ormsbee Dev. Co. v. Grace, 668 F.2d 1140, 1150 (10th Cir. 1982) (adopting a similar standard to that of the Eleventh Circuit).
[17] Monster Energy Co. v. City Beverages LLC, 141 S.Ct. 164 (2020).
[18] See Petition for a Writ of Certiorari, Monster Energy Co. v. City Beverages, LLC (No. 19-1333), 2020 WL 2949949, at i.
[19] See Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130, 1138–39 (9th Cir. 2019), cert. denied, 141 S.Ct. 164 (2020).
[20] See id. at 1138.
[21] See Model Code of Judicial Conduct rules 2.2, 2.3, 2.11 (2007).
[22] See Model Code of Judicial Conduct rules 3.1–3.11 (2007).
[23] Morelite Constr. Corp., v. N.Y. City Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 83 (2d Cir. 1984).
[24] See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 150–52 (1968) (White, J., concurring).
[25] See id.
[26] Id. at 151–52.
[27] See Morelite Construction Corp., 748 F.2d at 83–84; see also Thomas Kinkade Co., 711 F.3d at 724.
[28] Thomas Kinkade Co. v. White, 711 F.3d 719 (6th Cir. 2013).
[29] See id. at 724.
[30] Id. (quoting Anderson, Inc. v. Horton Farms, Inc., 166 F.3d 308, 329 (6th Cir. 1998)).
[31] Schmitz v. Zilveti, 20 F.3d 1043, 1046–47 (9th Cir. 1994).
[32] See Monster Energy Company, v. City Beverages, LLC, 940 F.3d 1130, 1139–41 (9th Cir. 2019) (Friedland, J., dissenting), cert. denied, 141 S.Ct. 164 (2020).
[33] See id. at 1141.
[34] See Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 150 (1968) (White, J., concurring).
[35] Morelite Constr. Corp. v. N.Y. City Dist. Council Benefit Funds, 748 F. 2d 79 (2d Cir. 1984).
[36] See id. at 83–85.
[37] 2021 Arbitration Rules, Int’l Chamber of Com., at Article 11 (Jan. 1, 2021), https://bit.ly/3oOTjDh.
[38] Commercial Arbitration Rules and Mediation Procedures, Am. Arb. Ass’n. 40 (Oct. 1 2013), https://bit.ly/3GSAyVB.
About the Author
Sanskriti Desai is a Master of Laws candidate at Penn State Law. She has received her Bachelor of Laws degree from ILS Law College at the University of Pune, in India. She has experience working as a legal consultant with startups, in India, on various entity formation and corporate governance issues as well as their Venture Capital negotiations. During her undergraduate law degree, she has published articles in the law journal of the law school, on topics including the Consumer Protection Act, 2019, Medical Termination of Pregnancy Amendment Bill, 2020 and an article which she co-authored on the topic Feminist critique of Human Rights. Also, she holds a certification as a Company Secretary, with the Institute of Company Secretaries of India, which she completed with a 2nd All-India Rank.
Suggested Citation: Sanskriti Desai, Uncertainty Among U.S. Courts: Standard for Evident Partiality of Arbitrators, Penn St. L. Rev.: F. Blog (Mar. 6, 2022), http://www.pennstatelawreview.org/the-forum/uncertainty-among-u-s-courts-standard-for-evident-partiality-of-arbitrators/.