Arbitrator bias in the United States: a patchwork of decisions.

• Author: Lathrop, Mitchell L.

The statutes governing arbitration in the United States universally require that arbitrators be impartial and independent. But no clear picture of what constitutes bias of a degree sufficient to disqualify an arbitrator or vacate an arbitral award has emerged from the plethora of judicial decisions which have considered the issue. A leading commentator has pointed out:

The amount of interest which will create a disqualification does not admit of any precise definition; but any circumstances indicating an evident bias in favor of either party will be open to suspicion. It is for the parties to decide whether the circumstance, thus disclosed, is such as to invite withdrawal by the Arbitrator. Arbitration laws consider impartiality so important that they quite universally provide that, upon proof of bias, the award shall be set aside. Rules attach so much importance to it that they establish qualifications and contain provisions for vacating the office when bias is proved. But, finally, and ultimately, the responsibility rests squarely upon the parties: If they wish to appoint impartial arbitrators they may do so, for the parties make their own choice. (1) The seminal case dealing with arbitrator bias is Commonwealth Coatings v. Continental Casualty. (2) Plaintiff Commonwealth Coatings was a subcontractor. When the prime contractor failed to pay Commonwealth Coatings for a painting job completed by Commonwealth Coatings, Commonwealth Coatings sued the sureties on the prime contractor's bond to recover the sums due. The painting contract contained an arbitration provision for the resolution of disputes.

Both parties appointed an arbitrator, and the two party-appointed arbitrators selected the third arbitrator, an engineering consultant for building construction projects. One of the consultant's regular customers was the prime contractor whose sureties were defendants in the case. The evidence showed that the consultant's relationship with the prime contractor was sporadic, and there had been no dealings between them for about a year immediately preceding the arbitration. At the same time, the prime contractor's utilization of the consultant's services was repeated and significant. The consultant had even rendered services on the very projects which were involved in the lawsuit.

The parties proceeded to arbitrate the dispute. The facts concerning the close business relationship between the consultant and the prime contractor were unknown to Commonwealth Coatings and were never revealed to it by the consultant or the prime contractor until after an award had been made. Commonwealth Coatings challenged the award on the ground of arbitrator bias, among others. Nevertheless, the District Court refused to set aside the award and the Court of Appeals affirmed. (3) The United States Supreme Court granted certiorari. (4)

In a 6-to-3 decision, the Supreme Court reversed, holding "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." (5) The Court observed:

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. (6) In the years which have followed Commonwealth Coatings, courts have been divided on precisely what is a sufficient showing of bias to justify disqualification of an arbitrator or vacation of an award. The situation is made even more confusing because under most circumstances, an arbitrator cannot be disqualified for bias until after the award has been made. (7)

In Excelsior 57th Corporation v. Kern, (8) the New York trial court dismissed a petition to stay an arbitration and to disqualify the arbitrator appointed by Ralph W. Kern. In 1965 the parties had entered into a long term lease of property owned by Kern. The lease provided for periodic recalculation of the rent. For the period of August 1990 to August 1998 the rent was agreed to be either $ 310,000 or 6% of the appraised value of the land, whichever was greater. The lease contained an arbitration provision which provided that if the parties were unable to agree on rent for the period, they would resolve the dispute by arbitration.

Excelsior 57th Corporation commenced an arbitration in July 1990 and named Jerome Block as its arbitrator. Kern brought a special proceeding seeking Block's disqualification on the grounds that he had previously worked on an unrelated matter with Excelsior's counsel and was, therefore, not "fit and impartial." After the trial court refused to stay the arbitration or disqualify Block, the arbitration proceeded. The umpire and Excelsior's party-appointed arbitrator, Bryant, agreed and an award was issued, to which Block dissented. The trial court confirmed the award and entered judgment in favor of Excelsior.

Kern appealed. Block had revealed that during the pendency of the arbitration proceeding, the umpire...