Second Circuit ruling
Significance for international arbitration practitioners
On February 3 2011 the US Court of Appeals for the Second Circuit ruled in Scandinavian Reinsurance Co v St Paul Reinsurance Co that the failure of two arbitrators to disclose their service as arbitrators in another concurrent arbitration did not constitute a conflict that would warrant vacating an award, even though the undisclosed arbitration involved "a common witness, similar legal issues, and a related party".(1) While Scandinavian Re concerned a domestic reinsurance arbitration, the decision is significant for international arbitration practitioners because it provides further guidance about the appropriate level of arbitrator disclosure and reaffirms that unless a failure to disclose is suggestive of bias, an arbitral award should be confirmed.
In 2007 St Paul Reinsurance Company Ltd and St Paul Re Ltd filed a demand for arbitration against Scandinavian Reinsurance Company Ltd seeking to recover unpaid losses stemming from a stop-loss retrocessional agreement between the parties.
While the St Paul arbitration was ongoing, another reinsurance arbitration that involved two of the same arbitrators, a common witness and similar issues – but different parties – was commenced by a company called Platinum Underwriters Bermuda Ltd. Specifically:
- the same arbitrator was appointed by the claimant in both the St Paul and Platinum arbitrations;
- the same chairman was appointed in both arbitrations;
- business relationships existed between St Paul and its affiliates and Platinum and its affiliates;
- a past employee of both Scandinavian and Platinum testified in both proceedings; and
- the two arbitrations shared similar legal issues.(2)
Although the arbitrators in the St Paul arbitration made ongoing disclosures during the course of the arbitration, they did not disclose to the parties in the arbitration that they were serving as arbitrators in the Platinum arbitration.
The arbitral tribunal issued an award in favour of St Paul in August 2009. Two months later, Scandinavian learned that the two arbitrators had served together in the Platinum arbitration, but had failed to disclose their concurrent service during the St Paul arbitration. Thereafter, on November 16 2009, Scandinavian filed a petition to vacate the St Paul arbitration award pursuant to Section 10(a)(2) of the Federal Arbitration Act on grounds of evident partiality.
The federal trial court concluded that in view of the similarities between the two arbitrations, the arbitrators' service in the Platinum arbitration amounted to a material conflict of interest in the St Paul arbitration that should have been disclosed to the parties.(3) As a result, the court found that the arbitrators' failure to disclose their service warranted vacating the St Paul arbitration award under Section 10(a)(2) of the Federal Arbitration Act for evident partiality.
Second Circuit ruling
The Second Circuit reversed the federal trial court's judgment and concluded that the arbitrators' overlapping service did "not, in itself, suggest that they were predisposed to rule in any particular way in the St Paul arbitration", and that their overlapping service could not, therefore, constitute evident partiality on its own.(4) Accordingly, the Second Circuit focused its inquiry on whether the specific overlapping service in both the St Paul and Platinum arbitrations was indicative of bias.(5)
In considering the question of bias, the Second Circuit ruled that evident partiality may be found only "where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration".(6) To determine whether bias was present, the Second Circuit enumerated a non-exhaustive list of factors for courts to consider, including:
- the extent and character of the personal interest, pecuniary or otherwise, of the arbitrator in the proceedings;
- the directness of the relationship between the arbitrator and the party he or she was alleged to have favoured;
- the connection of that relationship to the arbitrator; and
- the proximity in time between the relationship and the arbitration proceeding.(7)
After evaluating the facts of the St Paul arbitration against those factors, the Second Circuit rejected any claim of bias or evident partiality. Significantly, the Second Circuit noted that it was inappropriate "to vacate an award solely because an arbitrator fails to consistently live up to his or her announced standards for disclosure, or to conform in every instance to the parties' respective expectation regarding disclosure".(8) Rather, the question that courts must examine is whether "the facts that were not disclosed suggested a material conflict of interest" because non-disclosure by itself does not constitute evident partiality".(9)
Significance for international arbitration practitioners
Scandinavian Re is significant for international arbitration practitioners because it clarifies further the level of disclosure that is necessary to satisfy an arbitrator's obligations under Chapter 1 of the Federal Arbitration Act and, by implication, an arbitrator's obligations under Chapters 2 and 3 of the act, which incorporate the New York and Panama Conventions respectively. In short, the Second Circuit found that unless a non-disclosure is indicative of bias, such that a reasonable person would have to conclude that an arbitrator was partial to one side, an arbitral award will not be overturned.
Notably, the Second Circuit built on its decision in STMicroelectronics NV v Credit Suisse Securities (USA) LLC(10) and recognised that the mere fact that arbitrators may have had prior interactions or experience is irrelevant on its own to the question of bias. Specifically, in language that is highly apposite for international arbitration practitioners, the Second Circuit recognised that in "specialized fields such as reinsurance, where there are a limited number of experienced arbitrators, it is common for the same arbitrators to end up serving together frequently".(11) Consequently, non-disclosed concurrent service on two separate tribunals cannot, in and of itself, provide a basis for refusing to confirm an award.
Scandinavian Re represents yet another decision from the Second Circuit clarifying the boundaries of appropriate arbitrator disclosure. Practitioners should follow the court's useful guidance (and enumerated factors) to determine whether conduct is sufficient to warrant vacatur on the basis of evident partiality.
For further information on this topic please contact JP Duffy or Ian Mahoney at DLA Piper by telephone (+1 212 335 4500), fax (+1 212 335 4501) or email ([email protected] or [email protected]).
(1) No 10-0910-cv, 2012 US App LEXIS 2082, at *3-4 (2d Cir Feb 3 2012).
(3) Scandinavian Reins Co v St Paul Fire & Marine Ins Co, 732 F Supp 2d 293, 307-09 (SDNY 2010).
(4) Scandinavian, 2012 US App LEXIS 2082, at *4.
(5) Id, at *32 (stating that because "[t]he evident-partiality standard is, at its core, directed to the question of bias…[it] follows that where an undisclosed matter is not suggestive of bias, vacatur based upon that nondisclosure cannot be warranted under an evident-partiality theory").
(6) Id, at *3-4 (quoting Applied Indus Mats Corp v Ovalar makine Ticaret Ve Sanayi AS, 492 F3d 132, 137 (2d Cir 2007)) (internal quotations mark omitted) (emphasis added).
(7) Id, at *33 (quoting Three S Del Inc v DataQuick Info Sys Inc, 492 F3d 21 520, 530 (4th Cir 2007)) (internal quotation marks omitted).
(10) 648 F3d 68, 71 (2d Cir 2011) (finding that award could not be vacated where arbitrator failed to disclose that he had previously served as an expert witness on similar issues).