October 27, 2007

Arbitrators, Evident Partiality, and Contrived Ignorance

By Michael Moffitt

“Evident partiality” is one of the very few grounds upon which a court may vacate an arbitral award under Section 10 of the Federal Arbitration Act. The typical target of Section 10(a)(2) is an arbitrator who knows of a conflict of interest, fails to disclose it, and therefore fails to secure a waiver from the parties. Now, what if an arbitrator suspects the potential for a conflict of interest, but shields himself or herself from information in order to avoid confirming or disconfirming the existence of a conflict? If he or she doesn’t know of a conflict, is the arbitrator biased? In other words, can an arbitrator avoid restrictions against conflicts by contriving ignorance of the potential conflict?

A recent Second Circuit case came close to saying, “No, an arbitrator cannot avoid evident partiality by contriving his or her own ignorance,” but the court stopped short of reaching this conclusion. And I think it stopped short appropriately.

The Second Circuit opinion, Applied Industrial Materials Corp. v. Ovalar Marine Ticaret Ve Sanayi, 492 F.3d 132 (2d. Cir 2007), upheld a District Court opinion vacating an arbitral award on the basis of evident partiality. The appellate opinion does an excellent job of laying out the facts of the case, for those who are interested. The quick version is that one of the arbitrators (Fabrikant) in the dispute between AIM and Ovalar learned, part way through the arbitration, that a subsidiary of the Fabrikant’s company was engaged in contract negotiations with Oxbow, the parent company of AIM. Fabrikant disclosed that the contract talks were going on, declared that he had no involvement with them, and told the parties he saw no reason to withdraw as arbitrator. Neither party objected, and Fabrikant went on to rule against Ovalar. In subsequent investigations (surely undertaken only once they had reason to seek a basis for avoiding the arbitrators’ judgment), Ovalar discovered that Fabrikant’s subsidiary had a pre-existing contractual relationship with Oxbow as well, to the tune of $275,000, and they sought vacatur of the arbitral ruling on this basis. Fabrikant’s defense was, essentially, “I was unbiased in this case because (a) I didn’t know about the existing contract, and (b) I erected a ‘Chinese Wall’ to shield myself from gaining any knowledge about the contract under negotiation or anything else about that business relationship.” Fabrikant did not disclose anything about the “Chinese Wall” to either of the arbitration parties. And that is what ultimately made the Second Circuit’s decision easy.

The Second Circuit did NOT hold that contrived ignorance (though a “Chinese Wall” or other mechanism) is never sufficient to protect against evident partiality. Questions regarding the contriving one’s own ignorance are complex and fascinating. (For the most thorough treatment, see David Luban, Contrived Ignorance, 87 Geo. L.J. 957 (1999).)

What the Second Circuit said was, quite sensibly, “When an arbitrator knows of a potential conflict, a failure either to investigate or disclose an intention not to investigate is indicative of evident partiality.” 492 F.3d. at 138. The Second Circuit wanted Fabrikant either to “(1) investigate the conflict (which may reveal information that must be disclosed…) or (2) disclose his reasons for believing there might be a conflict and his intention not to investigate.” 492 F.3d. at 138.

The courts have been clear that “evident partiality” aims at actual bias, rather than merely the appearance of bias. To the extent that’s true, then it’s not clear to me that an arbitrator couldn’t contrive her or his own ignorance successfully. If I don’t know I have a set of interests contrary to those of one of the parties, can I be partial? Fabrikant began contriving his ignorance only after learning enough to believe a “Chinese Wall” to be necessary. That’s too late in most cases—and it’s certainly too late to do without securing a waiver from the parties. But what if Fabrikant had so thoroughly contrived his own ignorance at the outset that he never even became aware of the reason to suspect a conflict?

It is relatively common for the same person to wear a vast number of different hats, depending on the circumstance. Arbitrator, management team member, agent, attorney, investor, owner, firm member, business partner, and so on. I wonder whether contrived ignorance will become more commonplace as a means of addressing the potential for conflicts in the context of arbitration.

The Second Circuit case involving Fabrikant was easy. I doubt the next one will be so obvious.

Michael Moffitt

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