Arbitrator Bias in the United States: A Patchwork of Decisions
Lathrop, Mitchell L., Defense Counsel Journal
The statutes governing arbitration in the United States universally require that arbitrators be impartial and independent. But no clear picture of what constitutes bias of a degree sufficient to disqualify an arbitrator or vacate an arbitral award has emerged from the plethora of judicial decisions which have considered the issue. A leading commentator has pointed out:
The amount of interest which will create a disqualification does not admit of any precise definition; but any circumstances indicating an evident bias in favor of either party will be open to suspicion. It is for the parties to decide whether the circumstance, thus disclosed, is such as to invite withdrawal by the Arbitrator. Arbitration laws consider impartiality so important that they quite universally provide that, upon proof of bias, the award shall be set aside. Rules attach so much importance to it that they establish qualifications and contain provisions for vacating the office when bias is proved. But, finally, and ultimately, the responsibility rests squarely upon the parties: If they wish to appoint impartial arbitrators they may do so, for the parties make their own choice. (1)
The seminal case dealing with arbitrator bias is Commonwealth Coatings v. Continental Casualty. (2) Plaintiff Commonwealth Coatings was a subcontractor. When the prime contractor failed to pay Commonwealth Coatings for a painting job completed by Commonwealth Coatings, Commonwealth Coatings sued the sureties on the prime contractor's bond to recover the sums due. The painting contract contained an arbitration provision for the resolution of disputes.
Both parties appointed an arbitrator, and the two party-appointed arbitrators selected the third arbitrator, an engineering consultant for building construction projects. One of the consultant's regular customers was the prime contractor whose sureties were defendants in the case. The evidence showed that the consultant's relationship with the prime contractor was sporadic, and there had been no dealings between them for about a year immediately preceding the arbitration. At the same time, the prime contractor's utilization of the consultant's services was repeated and significant. The consultant had even rendered services on the very projects which were involved in the lawsuit.
The parties proceeded to arbitrate the dispute. The facts concerning the close business relationship between the consultant and the prime contractor were unknown to Commonwealth Coatings and were never revealed to it by the consultant or the prime contractor until after an award had been made. Commonwealth Coatings challenged the award on the ground of arbitrator bias, among others. Nevertheless, the District Court refused to set aside the award and the Court of Appeals affirmed. (3) The United States Supreme Court granted certiorari. (4)
In a 6-to-3 decision, the Supreme Court reversed, holding "that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed. If arbitrators err on the side of disclosure, as they should, it will not be difficult for courts to identify those undisclosed relationships which are too insubstantial to warrant vacating an award." (5) The Court observed:
It is true that arbitrators cannot sever all their ties with the business world, since they are not expected to get all their income from their work deciding cases, but we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review. We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias. …