While the grounds for vacating an arbitration award are exceedingly narrow, evident partiality is a ground for vacating an arbitration award under both the Federal Arbitration Act and the Texas Arbitration Act. The Texas Supreme Court recently vacated a $125 million arbitration award for evident partiality of an arbitrator who failed to disclose information that might lead an objective observer to question his partiality. Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, No. 12–0789, 2014 Tex. LEXIS 427 (Tex. May 23, 2014).
Tenaska sold a power plant to Ponderosa. When a dispute arose, Ponderosa initiated arbitration proceedings. Ponderosa was represented by Penski and Boland of the New York firm Nixon Peabody, LLP. Ponderosa designated Stern as one of the arbitrators on the three–person panel.
All three were required to be neutral. After the panel issued an award in Ponderosa’s favor, Tenaska hired a private investigator to investigate Stern.
The investigator discovered that, although Stern had disclosed that Nixon Peabody recommended him to three arbitrations in addition to the one at issue, and he met with Nixon Peabody on behalf of LexSite about outsourcing litigation discovery tasks, he failed to disclose that:
- Stern was a shareholder in LexSite and had an option to purchase additional shares;
- When LexSite changed its name to Exactus, Stern incorporated Exactus U.S. and served as its President;
- The address and telephone number for Exactus U.S. were Stern’s business address and telephone number;
- Stern met with LexSite’s CEO twice a month to discuss marketing;
- Stern’s contacts with the 700–lawyer firm of Nixon Peabody were with Penski and Boland;
- In addition to a May 2006 meeting Stern disclosed, there was a second, earlier meeting in April 2006 for LexSite to solicit business from Nixon Peabody;
- The two meetings resulted from phone calls by Stern to Penski;
- Ten days after Stern emailed Penski to inquire whether there was “any movement” on Nixon Peabody plans to use LexSite, Ponderosa appointed Stern as arbitrator;
- Penski and Boland also recommended or assisted with getting Stern recommended as arbitrator in three proceedings just after the May 2006 meeting;
- LexSite’s CEO (not Stern) contacted Penski and Boland at least twice from November 2006 to April 2007 to discuss possible LexSite business with Nixon Peabody;
- Boland edited Stern’s disclosures, including the addition of the sentence “Nixon–Peabody and LexSite have done no business, and it is not clear that Nixon–Peabody would ever have any business to give LexSite.”
The Court ruled that the standard for evident partiality is whether the information that was not disclosed might create a reasonable impression of partiality to an objective observer; a party need not prove actual bias to demonstrate evident partiality.
The Supreme Court held that Stern’s failure to disclose the extent of his relationship with LexSite and his attempts to secure business for LexSite from Nixon Peabody through Penski and Boland demonstrated evident partiality. Accordingly, the Supreme Court reversed the Court of Appeals’ judgment and reinstated the trial court’s order vacating the award and requiring a new arbitration.