Second Circuit Adopts Heightened Standard for Distinguishing Evident Partiality of Party-Appointed Arbitrator
The Second Circuit recently joined other circuit courts in adopting a different standard for determining the evident partiality of a party-appointed arbitrator than a neutral arbitrator or umpire. In Certain Underwriting Members of Lloyds of London v. Insurance Company of the Americas (Underwriters v. ICA), the Second Circuit vacated a district court ruling overturning an arbitration award in favor of ICA based on evident partiality due to the failure of ICA’s party-appointed arbitrator, Alex Campos, to disclose relationships with ICA representatives, including the fact that Campos’ company hired a former director of ICA (who testified on behalf of ICA at the hearing) as its chief financial officer. The district court found that these undisclosed relationships were “significant enough to demonstrate evident partiality.” Importantly, the district court expressly declined to apply a heightened burden to establish evident partiality in view of Campos’s role as a party-appointed arbitrator and instead applied the “same evident partiality standard as is required in all arbitrations.”
While the Second Circuit acknowledged the significance of Campos’s non-disclosures, and even noted that Campos appeared to violate the ethical codes of organizations such as, the AIDA Reinsurance and Insurance Arbitration Society (ARIAS•US) and the American Arbitration Association (AAA), the court vacated the district court’s ruling, applying a higher burden to demonstrate the evident partiality of a party-appointed arbitrator than a neutral arbitrator. Joining other circuits that distinguish between party-appointed and neutral arbitrators in considering evident partiality, the Second Circuit reasoned that “tolerance of certain undisclosed relationships between arbitrator and litigant are even more indulgent of party-appointed arbitrators, who are expected to serve as de facto advocates.” The court emphasized that the “distinction is salient in the reinsurance industry, where an arbitrator’s professional activity is valued over stringent impartiality.”
The court declined to “catalogue” the types of relationships that might lead to a finding of evident partiality if not disclosed, but stated that “an undisclosed relationship is material if it violates the arbitration agreement.” The court also held that an undisclosed fact is material if the party challenging the award “can show that the party-appointed arbitrator’s partiality had a prejudicial effect on the award.” Considering that the reinsurance agreement at issue required the arbitrators to be “disinterested,” the Second Circuit remanded the case to the district court to determine whether “Underwriters have shown by clear and convincing evidence that the failure to disclose by party-appointed arbitrator Campos either violates the qualification of disinterestedness or had a prejudicial effect on the award.”
It has been widely recognized among reinsurance arbitration practitioners that the extent and scope of the non-disclosures in this case were egregious and atypical. Consequently, the Second Circuit’s ruling may be met with some surprise and even consternation. But the Second Circuit did not break new ground as it followed the rationale applied by other circuit courts. At the same time, however, any perceived loosening of disclosure requirements could negatively impact the level of candor and transparency that parties expect from arbitrators and could cast further shade on a process that has been increasingly subject to criticism. It will be interesting to see whether the district court finds evident partiality even under the heightened standard applicable to party-appointed arbitrators.
If you have questions or would like more information, please contact Daryn Rush (email@example.com; 215.864.6360) or another member of our Reinsurance Group.