The Duty of an Attorney as Arbitrator to Disclose Possible Bias
| Publication year | 1989 |
| Pages | 859 |
| Citation | Vol. 05 No. 1989 Pg. 859 |
1989, May, Pg. 859. The Duty of an Attorney as Arbitrator to Disclose Possible Bias
Many arbitration awards are attacked by the losing party, even though the statutory grounds to vacate an award are limited. Occasionally, a court will vacate an award when an arbitrator was tainted by possible bias which was not disclosed to the parties prior to the award. This ground, often involving an attorney serving as arbitrator, has been considered in a number of recent opinions.
A severe rule has been adopted by the federal courts under the United States Arbitration Act and has been followed in states having statutes like the Colorado Uniform Arbitration Act.(fn1) This rule is that an arbitration award will be set aside for "evident partiality," even though there is no evidence of actual bias on the part of the arbitrator. This happens when the arbitrator fails to disclose dealings with the parties or their counsel, unknown to the moving party, that create an appearance of possible bias. Colorado courts are likely to adopt this rule when they consider the issue.
Most attorneys are probably aware of a general duty to disclose possible bias before they accept an appointment as arbitrator. In arbitration proceedings administered by the American Arbitration Association ("AAA"), the proposed arbitrators are reminded of that duty of disclosure. It is disconcerting, therefore, to see arbitration awards vacated because of failure by attorneys to make adequate disclosure before serving as arbitrators. Although the duty of disclosure rests on all arbitrators, not just on attorneys, it is particularly important that attorneys discharge this duty because so many arbitrators are attorneys.
This article discusses the legal framework requiring disclosure of possible bias. It then relates a number of situations which have arisen involving lack of disclosure by an attorney before acting as arbitrator. Brief mention is also made of the special problems of party-appointed arbitrators for arbitrations not administered by an established organization.
Colorado adopted the Uniform Arbitration Act in 1975.(fn2) One of the five grounds for vacating an award is that "there was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct prejudicing the rights of any party." A motion to vacate an arbitration award on this ground must be made within ninety days after delivery of the award to the moving party. Another ground to vacate is that "the award was procured by corruption, fraud, or other undue means," which may be raised within ninety days after those matters are known or should have been known.(fn3)
Colorado appellate opinions have not dealt with whether to vacate an award for nondisclosure of possible bias. One opinion did deal with the nature of partiality of arbitrators and ruled that choosing arbitrators from the industry being attacked (securities industry) did not make the arbitrators partial.(fn4)
More than thirty states, including Colorado, have adopted the Uniform Arbitration Act,(fn5) which contains limited grounds for vacating an arbitration award. A number of courts have construed the phrase "evident partiality by an arbitrator" as including failure by an arbitrator to disclose possible bias which is more than trivial.(fn6) One court has gone so far as to adopt a per se rule that failure to disclose any previous employment of the arbitrator by a party is cause to vacate an arbitration award.(fn7)
However, a showing of actual bias or proof of improper conduct is not necessary;
A ground to vacate an award may be waived by failure to raise it prior to the award if the party knew of the facts,(fn11) and perhaps if the party should have known of the facts. The award may be vacated for nondisclosure by one arbitrator even though there was a unanimous decision by three arbitrators and the others were not tainted by the nondisclosure.(fn12)
The leading decision setting aside an award for lack of disclosure by an arbitrator based on the federal act is the U.S. Supreme Court opinion in Commonwealth Coatings Corp. v. Continental Casualty Co.(fn13) This opinion has been heavily relied on by the state courts. The arbitrator in that case was not an attorney, but a consulting engineer. However, the matters of nondisclosure are like those which frequently would be encountered by an attorney. Arbitration was not conducted by the American Arbitration Association, but under another common form of contractual arrangement providing that each party would appoint an arbitrator and the two would select the third arbitrator.
The dispute involved a subcontract for a painting job between the prime contractor and a subcontractor. The third arbitrator conducted a large engineering consulting business for many clients in the building construction industry. One of his regular clients was the prime contractor involved in the arbitration, who had used his services from time to time at irregular intervals. There had been no dealings between them for about a year immediately preceding the arbitration, but during the previous four or five years the arbitrator had received fees of about $12,000 from the prime contractor, which included services on the very projects involved in the arbitration. These facts concerning the previous business connections between the arbitrator and the prime contractor were unknown to the subcontractor and were never disclosed by the arbitrator until after the award had been made.
The district court refused to set aside the award, ruling that there was no evidence of any actual fraud or bias. The arbitrator was a leading and respected consulting engineer. He was also a personal friend of the attorney for the subcontractor, and that attorney candidly admitted that, if he had been told about the arbitrator's prior relationship, he did not think he would have objected. That ruling was affirmed by the circuit court, but was reversed in a divided opinion by the U.S. Supreme Court.
There was no majority opinion. Four of the justices adopted the opinion of Justice Black, vacating the award for failure to disclose the previous business relationship. That opinion stated:
... it is true that arbitrators cannot sever all their ties with the business world, since they are not expected to get all their income from their work deciding cases, but we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review. We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias.(fn14)
Justice White wrote a concurring opinion, joined by Justice Marshall, explaining that arbitrators are not automatically disqualified if both parties are informed in advance of the relationship or if the relationship is trivial. He suggested that disclosure in advance would aid in preserving "an amicable and trusting atmosphere" and also would reduce the likelihood of attack on an award.(fn15) As to the specific details to be disclosed, he added:
Of course, an arbitrator's business relationships may be diverse indeed, involving more or less remote commercial connections with great numbers of people. He cannot be expected to provide the parties with his complete and unexpurgated business biography. But it is enough for present purposes to hold, as the Court does, that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed. If arbitrators err on the side of disclosure, as they should, it will not be difficult for courts to identify those undisclosed relationships which are too insubstantial to warrant vacating an award.(fn16)
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