Most insurance and reinsurance arbitrations fall within the scope of the Federal Arbitration Act (“FAA”) because they involve interstate commerce. But vacating an FAA arbitration award (there is no “appeal”) is an uphill battle. Only limited grounds exist to mount the challenge and very few challenges are successful. Evident partiality is one of those grounds.
Section 10 of the FAA, at 10(a)(2) provides that a final arbitration award may be vacated “where there was evident partiality or corruption in the arbitrators, or either of them.” In a recent case, a New York court analyzed this ground for vacatur and concluded that inferred evident partiality mandated that the arbitration award be vacated. TCR Sports Broadcasting Holding, LLP v. WN Partner, LLC, No. 652044 (N.Y. Sup. Ct. N.Y. Co. Nov. 4, 2015).
In TCR Sports, the dispute was between professional baseball teams over television fees–a far cry from insurance and reinsurance. Nevertheless, an FAA arbitration is an FAA arbitration whether it is a broadcast fee sharing contract or a reinsurance contract. The case focuses on various grounds for vacating an arbitration award, but it is the evident partiality ground that is most relevant.
The court noted that counsel for the respondent concurrently represented Major League Baseball (“MLB”), its executives and closely related entities in nearly 30 other matters, including interests associated with all three arbitrators during the same period. Essentially, the team that brought the arbitration, while agreeing to an “inside baseball” arbitration (i.e., industry insiders who knew each other and inevitably had many connections–not unlike insurance and reinsurance arbitrations), did not agree to having its opposing party being represented by counsel who was concurrently representing MLB and one or more of the arbitrators or their clubs in other matters. Although objections were made about this conflict, they were basically ignored.
While no court had ever found evident partiality under similar facts (the court suspected that arbitrators in similar situations disqualify themselves, thus accounting for the lack of precedent), this court did. The court noted that no reasonable steps were taken by MLB to protect the arbitral process against the claims of unfairness that resulted here. Yet, the court found that nothing was done except to assure the petitioners that their concerns would be preserved and not waived.
Based on the unique circumstances of this case, the court inferred evident partiality. The court found, that the failure to take any reasonable steps to address the counsel conflict concerns were objective facts that were unquestionably inconsistent with impartiality. The court concluded that the complete inaction objectively demonstrated an utter lack of concern for fairness, which was so inconsistent with basic principles of justice that the award must be vacated. What follows is an important statement by the court that is applicable to any arbitration:
Evident partiality is no minor issue. Indeed, it may well be that its opposite, neutrality, is so fundamental to any adjudicative process that trust in the neutrality of the adjudicative process is the very bedrock of the FAA. It is upon that foundation, and in great reliance upon it, that courts can defer to processes decided upon and designed by private contract. But without neutrality, where partiality runs without even the semblance of a check, the alternative process created does not warrant–and cannot be given–the great deference that arbitrators, and their awards, are bestowed by the courts under the FAA.
The decision has been appealed so we will see what an intermediate court of appeals has to say about inferring evident partiality under these facts.