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Case Notes: Two Recent Decisions Address the Duties of a Disinterested Arbitrator

by ~ John Matosky, Rachel M. Davison, and John T. Harding

The two recent decisions discussed below are among the growing number of cases that address what it means to be a "disinterested arbitrator." In the Scandinavian Re case, the Second Circuit vacated an award based on two arbitrators' failure to disclose their participation in a separate arbitration, despite the arbitrators' belief that they would not be influenced by that separate proceeding. In the Wausau case, a federal district court in Wisconsin considered whether a party-arbitrator's ex parte communications with the party who had appointed him required his disqualification under a state law that required that party-appointed arbitrators be true "neutrals." These cases, and similar challenges to arbitrator qualifications and disclosures, highlight the importance of panelists' full disclosure of all potentially material information, and the need to consider whether to clearly define the role of the party-appointed arbitrator in arbitration agreements.

Case Note: Scandinavian Re v. St. Paul
Recent decision highlights the importance of arbitrators full disclosure of all potential conflicts

By John Matosky, Prince, Lobel, Glovsky & Tye LLP

Do arbitrators exhibit "evident partiality," providing grounds to vacate an arbitration award, by failing to disclose that they are serving as arbitrators in a simultaneous but separate arbitration, where the two arbitrations involve tangentially related parties, share similar issues and include a common material witness?. On February 23, 2010, the U.S. District Court for the Southern District of New York (Scheindlin, J.) vacated an award on these grounds in Scandinavian Reins. Co. v. St. Paul Fire & Marine Ins. Co., No. 09 Civ. 9531 (S.D.N.Y. 2010), holding that the arbitrators participation in the second arbitration was, in the particular circumstances of the case, a material conflict of interest that should have been disclosed, notwithstanding the arbitrators good faith belief that they would not be influenced by any information learned during the other arbitration.

The Scandinavian Re Arbitration

Scandinavian Re and St. Paul submitted a dispute to arbitration concerning a finite retrocessional agreement. Pursuant to the arbitration clause, each party appointed an arbitrator, and the two party-appointed arbitrators appointed a neutral umpire. Although not required by the agreement, all three arbitrators were ARIAS certified and, as such, were required to abide by the ARIAS-US guidelines, including the requirement that they disclose any interest or relationship likely to affect their judgment, resolving doubts in favor of disclosure. During the organizational meeting, and at various other times, the arbitrators disclosed their involvements with the parties, counsel for the parties, and each other.

The Platinum Bda Arbitration

Following the organizational meeting in the Scandinavian Re Arbitration, Platinum Bda, a reported successor in interest to St. Paul, demanded arbitration of a dispute relating to a finite retrocessional agreement it had entered with PMA Capital. Two of the arbitrators in the Scandinavian Re Arbitration, namely the umpire and St. Paul’s party-appointed arbitrator, were appointed to serve on the Platinum Bda arbitration panel. Neither of the common arbitrators disclosed their involvement in the Platinum Bda arbitration to the parties in the Scandinavian Re arbitration.

Vacatur Proceedings

Following an award in St. Paul’s favor in the Scandinavian Re Arbitration, Scandinavian Re learned that the two arbitrators had failed to disclose their involvement in the Platinum Bda arbitration and petitioned the federal district court in New York to vacate the award on the grounds of the arbitrators “evident partiality. The court agreed with Scandinavian Re. Concluding that the two arbitrators involvement in the Platinum Bda arbitration constituted a material relationship that required disclosure, the court vacated the arbitration award. More specifically, the court held that failing to disclose such a relationship satisfied the Second Circuit’s “evident partiality standard.

The court rejected St. Paul’s argument that there could not have been a conflict of interest because Platinum Bda and St. Paul had no direct corporate inter-relatedness, and neither arbitrator at issue had a direct relationship with a party or a financial interest in the outcome of the arbitration. Instead, the court found that St. Paul and Platinum Bda had a “substantial relationship and that, by participating in the two arbitrations which overlapped in time, shared similar issues, involved related parties and included a common witness, the arbitrators placed themselves in a position where they could receive ex parte information, be influenced by recent credibility determinations made regarding the common witness, and influence each other’s thinking on the issues. It further held that the failure to make appropriate disclosures had deprived Scandinavian Re of the opportunity to object to the arbitrators. Finally, the court concluded that the arbitrators good faith belief that they could remain impartial was irrelevant given the objective standard of evident impartiality. The case was remanded for arbitration in front of a new panel of arbitrators.

John Matosky may be reached at
 2010 Prince, Lobel, Glovsky & Tye LLP. All Rights Reserved.

Case Note: Party Appointed Arbitrators - Advocates or Neutrals?
By Rachel M. Davison and John T. Harding, Morrison Mahoney LLP

Party-appointed arbitrators generally walk a fine line. As counsel we are familiar with the process of selecting party-appointed arbitrators who will advocate for the position of the party who appointed them, while still maintaining a level of neutrality such that a favorable award will not be vacated on the grounds of evident partiality. The disclosure and disqualification processes serve to protect against corrupt arbitrators and preserve the appearance of propriety in arbitration proceedings. Arbitrators disclose their experience, relationships and prior representations to permit an evaluation of neutrality and afford the other party an opportunity to seek disqualification if an arbitrator is too biased. In the past, some amount of partisanship on the part of the party-appointed arbitrator has been tolerated and accepted so long as a “full disclosure is made. It may not remain that way.

In a recent decision from the U.S. District Court for the Western District of Wisconsin, a party-appointed arbitrator narrowly escaped disqualification based upon a claim that he was not “neutral. Employers Ins. Co. of Wausau v. Certain Underwriters at Lloyds of London, No. 09-201, 2009 U.S. Dist. LEXIS 89945 (W.D. Wis. Oct. 29, 2009). The Wausau case has important ramifications for insurance and reinsurance counsel whose practice includes claims that are subject to arbitration using party-appointed arbitrators.

Wausau was engaged in an arbitration proceeding with Lloyd’s as a result of Lloyds refusal to indemnify Wausau for certain risks that Lloyds claimed were outside the scope of the reinsurance. The three applicable reinsurance agreements between the parties provided for the selection of a three-person panel as follows:

    One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing choose an impartial and disinterested third arbitrator who shall preside at the hearing.

Wausau chose Paul Hawksworth, and Lloyds selected Trevor Clegg. After several months of discussions, Hawksworth and Clegg were unable to agree on the appointment of a third arbitrator. However, the reinsurance agreements provided for this contingency by allowing either or both parties to petition the federal court having jurisdiction over the geographical area in which the arbitration was to take place to select a third arbitrator from a list of six individuals, three proposed by each party-appointed arbitrator. Wausau invoked this procedure and requested that the court appoint a neutral third arbitrator from the list of six candidates proposed by Hawksworth and Clegg. From that list, the court appointed N. David Thompson because he seemed to be the most qualified of the candidates to act as the third arbitrator, having the most industry experience and substantially more experience as an umpire than any of the other candidates on the list. The court noted that he also had no significant connections to any of the parties or their appointed arbitrators.

At the same time, Lloyds sought to disqualify Wausau’s party-appointed arbitrator (Hawksworth) based upon Wisconsin law and the reinsurance agreements requiring that “all arbitrators [] be impartial and disinterested. (Pursuant to a choice of law provision, the reinsurance agreements at issue were to be governed by and construed in accordance with the law of Wisconsin.) Wisconsin law follows the U.K. rule (rather than the general rule in the U.S.) for determining arbitrator neutrality and requires that every arbitrator on the panel be unbiased unless the parties agree otherwise or there are applicable arbitration rules to the contrary. Borst v. Allstate Ins. Co., 717 N.W.2d 42, 48-49 (Wis. 2006)(interpreting Wis. Stat. 788.10(1)(b), which discusses the vacation of an arbitration award for “evident partiality or corruption on the part of the arbitrators). Under Wisconsin law, if an agreement to arbitrate is silent on the issue of partisanship, even party-appointed arbitrators are presumed to be neutral and independent.

Lloyds argued that Hawksworth was not neutral because Lloyds suspected, but had no proof, that Hawksworth may have engaged in ex parte communications with Wausau about the merits of the dispute. In addition, Lloyds created the following chain of connections that it claimed supported its contention that Hawksworth was not neutral: (1) Hawksworth was certified as an arbitrator by ARIAS; (2) the Vice President of ARIAS at the time was senior counsel for Liberty Mutual; and (3) Liberty Mutual was Wausau’s parent company. Lloyds contended that Hawksworth must, therefore, be beholden to Wausau and could not be impartial or neutral during the arbitration.

For its part, Wausau did not argue that Hawksworth was “neutral. Instead, Wausau argued that the Federal Arbitration Act, rather than Wisconsin law, governed the reinsurance agreements and provides the relevant legal standard for neutrality. Under the Federal Arbitration Act, party-appointed arbitrators are held to a lower standard of impartiality than umpires/neutrals. Unlike Wisconsin law, the Federal Arbitration Act specifically allows a party-appointed arbitrator to act as an advocate for the party who appointed him or her.

In the end, the court side-stepped the choice of law issue (and did not even raise the issue of whether Wisconsin law might be preempted by the Federal Arbitration Act). Rather, the court held that there was no need to disqualify Hawksworth because Lloyds had failed to show that Hawksworth was biased or not neutral. The court characterized Hawskworth’s connections with Wausau as being “too attenuated to create even the appearance of bias.

If other states choose to follow Wisconsin’s lead and require that all arbitrators be completely disinterested and neutral, the days of the party-appointed arbitrator as advocate may be numbered. Parties wishing to continue to be able to utilize such a system may need to do more than include the standard panel selection clause in an arbitration agreement providing that each side has essentially unfettered discretion to select an arbitrator and then the two party-appointed arbitrators select the third. Instead, they should include specific language to allow party-appointed arbitrators to act as advocates. Otherwise, party-appointed arbitrators may have to be wholly independent and impartial if they are to escape the type of judicial scrutiny evidenced in the Wausau case.Choose right burberry uk sale, replica patek philippe watches,replica breitling watches and breitling watches for sale also can make you shiny.

Rachel Davison may be reached at John T. Harding may be reached at
2010 Morrison Mahoney LLP. All Rights Reserved.

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