What is an Arbitrator's Duty of Disclosure?


An arbitrator undertakes an awesome responsibility. He or she will be judge, jury, clerk, stenographic reporter and appellate review tribunal compressed into a single individual. When an arbitrator decides a case it is assumed that the arbitrator heard the evidence, understood it completely and applied the law and/or principles of justice and equity to achieve the correct result. The parties must have complete confidence in the arbitrator's fairness and integrity and in his or her ability to do all of these things.

How do the parties know that the person they selected has these attributes and will do these things? In classic arbitration they knew and trusted the individual. The arbitrator was the wise old man on the fishing boat dock, whom everyone knew, and who was trusted to know more about fish than anyone else. The fishermen were able to place complete confidence in him because they knew him intimately. Today we have gone to the opposite extreme. The arbitrator who is sufficiently close to a party to have instilled this type of confidence is for that very reason arguably disqualified. The arbitrator selected ideally has no relationships with any of the parties or their counsel. The parties must attempt to select the right person based in large part upon the information they can obtain from the potential arbitrator. The disclosure process has thus become the modern surrogate for the common knowledge of the marketplace.

The classic formulation of the disclosure rule is found in Cannon II of the Code of Ethics for Arbitrators in Commercial Disputes (AAA/ABA 1977) ("the Code"): "An arbitrator should disclose any interest or relationship likely to affect impartiality or which might create an appearance of partiality or bias."

AAA Commercial Arbitration Rule 19 is very similar. The current discussion draft of the Revised Uniform Arbitration Act requires disclosure of:

  1. any direct or indirect financial or personal interest in the outcome of the arbitration, or
  2. any existing or past relationship with the parties or counsel, or
  3. any other facts reasonably likely to affect the impartiality of the arbitrator.

These disclosures are to be made before the appointment is confirmed. The duty of disclosure continues thereafter throughout the arbitration.

INTEREST

An Arbitrator must disclose a relevant "interest". The Code defines this as a "direct or indirect financial or personal interest in the outcome of the arbitration." A direct interest is not difficult to identify or define. Where the arbitrator will receive economic or personal benefit as a result of a potential award, this obviously must be disclosed. The Supreme Court has likened the role of an interested arbitrator to that of the judge is an old case where a small part of the judge's income consisted of fees collected from convicted defendants. The economic incentive to convict, however trivial in amount, was a "... manifest violation of the strict morality and fairness Congress would have expected on the part of the arbitrator..." In a state court case a party-appointed arbitrator was found to have violated his ethical obligations by failing to disclose that he was charging a contingent fee for his services in the matters.

The California Arbitration Act has micro-managed the disclosure obligation to near absurdity, but the legislature's thinking is nevertheless instructive. "Direct interest" is equated with "a financial interest in the subject matter in a proceeding or in a party to the proceeding (Cal. Code Civ. Proc. 1281.9(e), 170.1(a)(3)). An indirect interest is a similar interest held by the arbitrator's spouse or minor child, or a similar interest held by the arbitrator or by the arbitrator's spouse as a fiduciary. The courts have regarded "interest" as a matter bearing upon the integrity or the appearance of integrity which lies as the core of the arbitral process. However trivial, interest should be disclosed. This is a per se rule, not one of reason, and justly so.

RELATIONSHIPS

The obligation to disclose relationships is much more complex, and in the context of vacatur has engendered much more litigation. The Code lays down the general rule that disclosure extends to existing or past financial, business, professional, family or social relationships which might reasonably create an appearance of partiality or bias. Such relationships may be those personal to the arbitrator, that is, relationships which the arbitrator may have personally with any party or its lawyer or with any identified witness. They may also be derivative, in the sense of relationships involving members of the arbitrator's family, employer, partner or business associate.

There is a dual element of reasonableness here. Both the duty to disclose interests and the duty to disclose relationships implicate a reasonable effort to investigate their existence. Following such investigation the potential arbitrator should disclose those relationships which are likely to affect impartiality or which might reasonably create an appearance of partiality or bias. But this is not a situation where the arbitrator should deliberately try to come close to the bright line. When in doubt disclose.

I will not try to characterize the myriad cases that have dealt with failure to disclose material relationships. By way of example, awards have been overturned where arbitrators failed to disclose such relationships as a long-term social relationship with an attorney for a party, concurrent legal representation of a party in unrelated litigation, prior business dealings with a party, a prior business relationship with a party or principal of a party, and prior communications with a party concerning the subject matter of the arbitration. Similarly, failure to disclose that a party is a present or past client of the arbitrator's firm has been held ground for vacatur, although failure to discover and disclose that a party was a client of the arbitrator's former firm--unknown to the arbitrator--was not. An arbitrator who is affiliated with a law firm should perform a conflict check in order to disclose any past or present representation of a party to the arbitration by any member of the firm. There is no clear standard as to the extent to which a potential arbitrator should investigate and disclose business relationships of other members of the firm or of their family members. Nor is there a clear standard as to the extent to which a potential arbitrator should investigate and disclose relationships of the provider organization with which he or she is affiliated. A fair rule of thumb is that if in the nature of things the arbitrator is aware of these relationships and a reasonable inference can be drawn that they may influence the arbitrator's thinking they should be disclosed. The same should be true as to business relationships of the arbitrator's close family members.

BIAS

Cannon II of the Code requires disclosure of interests or relationships which might create an appearance of partiality or bias. Although actual bias may well be subsumed by this requirement, there is no specific recognition in the Code of bias as a separate subject of disclosure. AAA Rule 19 identifies bias as a separate disclosure item. Bias may exist for reasons other than interest or relationships. "Evident partiality" on the part of a neutral arbitrator is a ground for vacatur of an award under Uniform Arbitrator Act 12(a)(2) and Federal Arbitration Action 10(a)(2).

The standard for vacatur is appearance of bias; actual bias need not be shown. One may not be aware that he or she has a mental attitude or disposition toward or against a party to the arbitration or is prejudiced in relationship to the subject matter of the dispute, and even if such attitude or disposition exists it may be impossible of proof. Neither the parties' necessarily partisan views nor the strained relations which may arise or expressions of opinions which may be uttered during the course of a proceeding are competent evidence of bias or prejudice.

A potential arbitrator may have formed an opinion as to the appropriate outcome of a matter before it is presented. This would be especially true in a case where the public, including the potential arbitrator, has been bombarded by news stories and media speculation. While a competent neutral should be able to set his or her preconceptions aside and decide the matter on the evidence presented, a case can be made for the proposition that the state of mind of the arbitrator should be a subject of disclosure like any other relevant fact. Consistent with this the Guidelines adopted by the British Chartered Institute of Arbitrators emphasize that an arbitrator must be without bias or the appearance of bias and require disclosure of all facts or circumstances that might give rise to reasonable doubt as to impartiality.

KNOWLEDGE, OTHER PROCEEDINGS

The authors of the California statute focused on three-additional areas of disclosure: an arbitrator must disclose personal knowledge of disputed facts concerning the proceeding; an arbitrator must disclose prior and pending matters in which the arbitrator served or serves as a party arbitrator or attorney for a party in the arbitration; and an arbitrator must disclose prior and pending matters involving a party or attorney in the arbitration in which the arbitrator served or serves as neutral arbitrator. The latter disclosure requirements are appropriately limited to protect the confidentiality of the other proceedings.

ACCEPTANCE; VACATUR

A potential arbitrator is not automatically disqualified upon making these types of disclosures. To the contrary, if the arbitrator proceeds without objection following full disclosure the arbitrator is deemed to have been accepted and the objections to have been waived. Any resulting award may not be attacked based upon interest or relationships which are fully and timely disclosed.

The ethical standards relating to disclosure, and the legal standards relating to vacatur of an award are facially similar, but the vacatur cases should not necessarily provide the basis for evaluating ethical obligations. The arbitrator's responsibility is at the outset to the parties and to the process. A court, faced with the question whether to vacate an award after the arbitration has been completed may consider the impact upon the party opposing vacatur. If the opposing party is innocent of any wrongdoing and will be faced with the burden and expense of a new hearing this may be relevant. On the other hand if the party opposing vacatur was equally cognizant of the disqualifying interest or relationship and remained silent this too may be considered. And if the party seeking vacatur held back to see how the case turned out before asserting a known interest or association this too should be weighed, and the party might well be deemed to have waived the objection or to the subject to estoppel.

NON-NEUTRAL ARBITRATOR

One accepting the position of a party-appointed non-neutral arbitrator is subject to a duty of disclosure in order that the other party and the other arbitrators may have some insight and understanding into the non-neutral's involvement. The disclosure should be sufficient to provide such insight and understanding but need not be as detailed or specific as that of a neutral arbitrator. A party-appointed non-neutral arbitrator is not subject to disqualification by the other party based upon matter so disclosed.