Arbitrators Must Investigate or Disclose, 2nd Circuit Says: Court Opens Door to Evident Partiality Attacks
Appleby, Bethany L., Dispute Resolution Journal
TOne of the selling points of arbitration under the Federal Arbitration Act (FAA) is the relative finality of an award. Arbitration awards may be vacated only under limited circumstances. The 2nd Circuit's July 9, 2007, ruling in Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanaya, A.S.,1 which imposes a duty on arbitrators to either investigate conflicts of interest of which they become aware, or inform the parties that no investigation was undertaken, opened the door a little wider for disgruntled parties to undo an award they do not like based on "evident partiality."2
Background and Procedural History
Applied Industrial Materials Corp. (AIMCOR) commenced an arbitration proceeding against Ovalar Makine Ticaret Ve Sanayi, A.S. under the FAA alleging breach of a contract to deliver petroleum coke, a chemical created during oil refinery.3 The dispute involved the distribution of profits under the contract.
The parties' arbitration agreement imposed relatively detailed disclosure and conflict-avoidance obligations on the arbitrators. For example, it said that "[p]rior to the first hearing or initial submissions," the arbitrators had to "disclose any circumstance which could impair their ability to render an unbiased award based solely upon an objective and impartial consideration of the evidence presented." They also had to decline to serve "where the arbitrator or the arbitrator's current employer has a direct or indirect interest in the outcome of the arbitration."
The parties each selected an arbitrator. Then the two party-appointed arbitrators selected Charles Fabrikant to serve as the chair of the arbitral tribunal. Fabrikant was the chairman, president and CEO of Seacor Holdings, a multibillion dollar company with 50 offices in 30 countries.
Before the hearings started, in September 2003, AIMCOR disclosed that it would be sold to Oxbow Industries and noted that the transaction might be "relevant to the disclosure issue." After receiving notice of this transaction, Fabrikant submitted a statement to the parties that he "ha[d] no personal or business relationship with any of the parties ... or their affiliates" and "reserve[d] the right to amend or add to this disclosure should future circumstances warrant it."
On April 16, 2005, after the parties agreed to bifurcate the liability and damages phases of the arbitration, Fabrikant sent an email to the parties, stating: "Gentlemen: it came to my attention yesterday, or day before yesterday, that my St. Louis office, which runs our barge operation under the name SCF, has recently been engaged [in conversation] with Ox-bow of Palm Beach. The subject of the conversation is a contract for the carriage of petroleum coke. I had no knowledge of such conversations taking place prior to the past week. I do not participate in contract negotiations or get involved in day-to-day operations of SCF."
The email continued as follows: "I would like to amend my prior disclosures. At that time I did ask if there had been contacts between my group and these parties and there were none. I do not plan to become involved in discussions between SCF and Ox-Bow, should there be further conversations between them."
He also wrote: "I do not feel my ability to decide this case on the merits is impaired."
No party responded to this disclosure. On Sept. 22, 2005, the arbitral tribunal ruled against Ovalar on liability, with the third arbitrator casting the deciding vote.
Two months later, after retaining new counsel, and learning that SCF had been transporting petroleum coke for Oxbow since 2004 (well before the liability award), Ovalar asked Fabrikant to withdraw from the tribunal. Soon thereafter, Fabrikant refused to withdraw, explaining to Ovalar that when he first learned that SCF was negotiating with Oxbow, he told SCF's president that he "wished to know nothing about SCF's conversations, or be a party to information about our activities with Oxbow or be consulted concerning any business with them. …