A recent decision originating from the United States Court of Appeals for the Second Circuit has established a new standard for determining issues of arbitrator bias. Applied Industrial Materials Corp. v. Ovalar Makine Ticaret ve Sanayi, A.S., 06-3297-cv (2d Cir., July 9, 2007). The court, in confirming the order of the district court vacating an arbitration award, held that when an arbitrator has reason to believe that a "nontrivial" conflict may exist, he or she must either investigate the conflict or disclose to the parties in the arbitration the intention not to investigate it any further.

The court was careful to state that it was not creating a free-form duty to investigate and that the failure to perform an investigation is not, by itself, sufficient to vacate an arbitration award. However, if an arbitrator becomes aware of a potential conflict but decides not to investigate it, his or her failure to inform the parties of the decision not to perform further inquiries is indicative of evident partiality.

The umpire in the underlying arbitration informed the parties that the company of which he was president and CEO had entered into negotiations with the parent company of one the parties. However, unknown to the parties, the arbitrator did not investigate further and, instead, erected a "Chinese Wall" and asked to be excluded from any information about commercial relationships between the two companies. After the panel had rendered a decision on liability, in which the umpire cast the deciding vote, one of the parties conducted its own investigation and discovered that the arbitrator's company and the other party's parent were not just in negotiations but had entered into contracts that generated significant revenue for the arbitrator's company.

Requiring an arbitrator to investigate conflicts or to disclose the decision not to make further inquiries, the court reasoned, serves the goals of encouraging arbitrators to deal with conflicts early in the arbitration process and limiting motions to vacate by disgruntled parties.

Click here to view the Second Circuit's decision.