Disqualifying arbitrators for failure to make complete disclosures after Scandinavian Re v. St. Paul Re: what is "evident partiality"?

• Author: Dotseth, Keith A.

This article originally appeared in the May 2012 Insurance and Reinsurance Committee Newsletter.

Following the Southern District of New York's decision in the Scandinavian Reinsurance Co., Ltd. v. St Paul Fire & Marine Insurance Company case, (1) commentators involved in arbitrations around the world vigorously debated whether the decision marked the entry into a new era of full arbitrator disclosures, allowing parties to be fully informed of any significant connection the arbitrator had with the potential witnesses or issues likely in dispute. Meanwhile, other commentators charged that the decision was the beginning of the end for the arbitration system, suggesting that requiring such full disclosures, arguably greater than that required of federal court judges, would doom arbitration by foreclosing parties from obtaining arbitrators who were knowledgeable and experienced in the field over which they presided. Needless to say, now that the Second Circuit has reversed the Southern District of New York's decision, Scandinavian Reinsurance Co., Ltd. v. St Paul Fire & Marine Insurance Company, (2) it is possible the hues and cries from both sides of the aisle will again rise up.

Rather than engage in the overwrought debates about whether the decision offers extreme hope or doom, this brief note seeks to offer a straightforward discussion of what really was decided in the Scandinavian Re case and what realistic lessons can be taken from the decision. Viewed from a more tempered lens, the recent pronouncement from the Second Circuit does offer additional guidance for those looking to determine whether a particular arbitrator has demonstrated sufficient "evident partiality" to justify disqualification or possible vacatur of an arbitration award. And, it adds a worthwhile caution for arbitrators to provide a full and fair disclosure of their relevant background.

The Boundaries of "Evident Partiality"

The Federal Arbitration Act (FAA) allows federal district courts to vacate an arbitration award under Section 10(a)(2) "where there was evident partiality of corruption in the arbitrators, of either of them." There are a variety of decisions interpreting this particular portion of the FAA and offering a broad array of different standards that might be applied by a court considering whether to vacate ah arbitration award. All of these decisions seek to define what level of misconduct or bias satisfies the notion of "evident partiality." Whether a failure to make a timely or full disclosure can constitute "evident partiality" is a much more narrow inquiry. But, it has not produced a much more narrow set of standards from the courts.

The United States Supreme Court's Commonwealth Coatings Corp. v. Continental Casualty Co. (3) decision considered the question of whether a failure of ah arbitrator to disclose a financial relationship between himself and the prevailing party was sufficient to justify vacating the arbitration award due to "evident partiality." In that case, the arbitrator had conducted "repeated and significant" business with the prevailing party, including being involved in providing services for one of the specific projects that was a subject of the dispute being arbitrated. The Supreme Court found the failure to disclose the "repeated and significant" financial relationship presented sufficient evidence of "evident partiality" to support vacating the arbitration award under the FAA Section 10(a) (2) standards.

Significantly for the host of courts seeking to interpret the "evident partiality" standard as applied in Commonwealth, the decision reached by the Supreme Court was by a vote of six justices, with the court issuing both a plurality opinion and a concurring opinion. As a result, subsequent courts have been left to determine whether the plurality or the concurrent opinions fully describe the basis for the Court's decision.

The differences between the plurality and concurrent opinions are not slight. In the opinion for the plurality, written by Justice Black, the Court declared under Section 10(a)(2) that arbitrators "not only must be unbiased but also must avoid even the appearance of bias." (4) The plurality opinion categorically declared...