The panel, U.S Circuit Court Judges Dennis Jacobs, Reena Raggi, and Peter W. Hall heard arguments on Jan. 8 about whether a district court’s vacatur of an arbitration award on the grounds of evident partiality was appropriate or should be overturned.
U.S. District Court Judge Vernon S. Broderick, of New York, vacated the arbitral award against Lloyd’s of London underwriters on evident partiality grounds because the party-appointed arbitrator, Alex Campos, failed to disclose significant business relationships with the case’s original respondent, Insurance Co. of Americas, based in Longwood, Fla. Certain Underwriting Members at Lloyd’s of London v. Ins. Co. of the Americas, Case No: 1:16-cv-00323 (S.D.N.Y. March 31, 2017) (available at http://bit.ly/2uIGkqY)(For more background information on the case, see CPR Speaks at http://bit.ly/2CTlbze.)
The vacated award was for about $1.5 million, with a provision for more payments if the underlying claim exceeded $5 million.
Evident partiality on the part of an arbitrator is one of four statutory standards for vacating arbitration awards found in Federal Arbitration Act Section 10 (9 U.S.C. § 10(a)(2)).
During oral arguments at the Thurgood Marshall Courthouse in Manhattan, the circuit court judges questioned Campos’ failure to make pertinent disclosures, instead denying any business relationship with ICA, despite evidence to the contrary, and repeated hearing opportunities to divulge the business relationships.
All three circuit court judges participated in discussions with counsel about the parties’ interpretation of the “disinterestedness” requirement for arbitrators under the contract, and the disagreement as to which standards, rules, and norms were applicable in the case.
ICA’s oral argument by Phillip J. Loree Jr., a partner in New York’s Loree & Loree, highlighted that nondisclosure was a separate concern relevant to the arbitrator’s reputational risk, not to the party’s contract, which required only that the arbitrator be disinterested in the matter—especially since Campos was a party-appointed arbitrator.
Loree contended that in the reinsurance industry, where many parties have passing familiarity with one another, disinterestedness as used as a contract standard means that no arbitrator should have “a financial interest in the outcome of the arbitration.”
The important issue, Loree insisted, is whether Arbitrator Campos’ many business interests prejudiced the award or the outcome of the arbitration with evident partiality.
Timothy W. Stalker, a partner in the Philadelphia office of Weber Gallagher Simpson Stapleton Fires & Newby, who represented appellee Lloyd’s, disagreed with Loree’s narrow definition of disinterestedness.
Stalker pointed to industry arbitration norms, and the rules of the American Arbitration Association and ARIAS•U.S., that encourage arbitrators to err on the side of disclosure.
AIDA Reinsurance and Insurance Arbitration Society, better known as ARIAS•U.S., is a McLean, Va., nonprofit think tank that focuses on improving the insurance and reinsurance arbitration process for the international and domestic markets, and the source of the ARIAS•U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes, among others used in reinsurance arbitration.
Section 10 of the “ARIAS•U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes” (see http://bit.ly/2FnY52l), for example, gives arbitrators a “continuing obligation to disclose” communications and relationships with the appointing party.
Stalker argued that if Campos’ relationship with ICA had been properly disclosed, he would have objected to the appointment because even party arbitrators are supposed to be a part of the process to reach a reasonable result.
Circuit Judges Hall and Jacobs expressed concern that overruling the district court and reinstating the arbitration award would encourage party-appointed arbitrators to not properly disclose their relationships and incentivize false disclosures. Circuit Judge Jacobs also discussed the purpose of disclosure and the process to disqualify an arbitrator with the advocates.
Circuit Judge Raggi suggested that Campos’ blatant denial of a business relationship was likely fraudulent—indicative of partiality and not indicative of disinterest. In response to Phil Loree’s description of his client’s view of the contractual “disinterested” standard, she said that Arbitrator Campos’ firm received business from ICA. “That’s not disinterested to me,” said Raggi.
She provided a list of the instances of Campos’ potential interest in the outcome, including that (1) Campos is president and chief executive officer of a company that operated out of the same office suite and address as ICA; (2) Campos had hired the treasurer of ICA as his company’s chief financial officer; and (3) ICA had received technical services and leasing of employees from Campos’ company, Vensure.
Circuit Judge Raggi suggested that Campos would be required to assess the credibility of his own CFO, Ricardo Rios, which does not suggest disinterest—rather, it suggests the opposite because the business relationship would be affected. Raggi pointed out that Campos’ answer to the direct question about any relationship with ICA was “a very curious denial.”
The Second Circuit decision in the appeal may be crucial to arbitration practice. If the circuit court affirms the district court’s decision, it may set out a standard for evaluating evident partiality claims and the process of enlisting party arbitrators, as well as the continuing disclosure obligations. Or it may narrowly interpret the facts of the case and find that Campos was not “disinterested.” Nevertheless, the potential of a hefty increase in cases contesting arbitrator partiality may dissuade the court from affirming the vacatur.
An audio stream of the full proceeding is available at http://bit.ly/2DDSu9W.
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For more on evident partiality in arbitrators, see this issue’s cover story on the NFL’s arbitration system as seen by the Missouri Supreme Court.
The author is a CPR Institute 2018 intern. She is a law student at Pepperdine University’s School of Law in Malibu, Calif.
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