Court: United State District Court, Southern District of New York
Date Decided: June 28, 2006
Issues Addressed: Arbitrator’s continuous duty to disclose conflicts; evident partiality of an arbitrator
Submitted by John R. Cashin*
In Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A. S., District Court Judge Robert P. Patterson, Jr. held that an arbitrator has a continuous duty of full disclosure regarding his relationship to the parties and nondisclosure of facts that might create even the appearance of partiality requires that the arbitral award be vacated.
Applied Industrial Materials Corp. (“Aimcor”) and Ovalar Makine (“Ovalar”) commenced arbitration in 1997 to resolve a dispute over their respective rights in the profits from a joint venture for the sale of petroleum coke in Turkey. The Joint Venture Agreement contained an arbitration provision requiring that disputes be resolved by arbitration in New York. The arbitration was to be decided by a Tripartite Arbitration Panel consisting of two party appointed arbitrators who collectively selected the final arbitrator to serve as chairman. The arbitration provision included the following disclosure requirements:
“… all arbitrators are required 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 to the Panel.
Such disclosure shall include relations with anyone of: a) the parties to the arbitration; b) other affiliates or associated companies of the parties.”
At the initial preliminary hearing on September 3, 2003, the Panel was advised that Aimcor was being sold and the principal suitor was Oxbow Industries.
On April 16, 2005 the Chairman of the Panel disclosed that an affiliate of his employer was soliciting business from Oxbow Industries. The Chairman made no further disclosures to the parties regarding his possible conflicts of interest.
On September 22, 2005 the Panel issued a majority opinion in favour of Aimcor with Ovalar’s appointed arbitrator dissenting. In November Ovalar discovered that the affiliate of the Chairman’s employer had been doing business with Oxbow for over a year and had earned $ 275,000 in revenue from the arrangement.
Ovalar wrote to the Chairman asking for his withdrawal from the Panel due to the commercial relationship between his employer and Oxbow, one of the parties to this arbitration. The Chairman refused to withdraw stating that the amount of business conducted with the affiliate was less than one-third of 1% of the affiliates revenue and amounted to an imperceptible fraction of his employer’s revenue. Aimcor subsequently filed a motion to confirm the award and Ovalar motioned to vacate it.
In its opinion vacating the award, the District Court made reference to the American Arbitration Association Code of Ethics for Arbitrators in Commercial Disputes and the International Bar Association Guidelines on Conflicts of Interest in International Arbitration. It concluded that the Chairman’s failure to investigate the nature of his employer’s relationship with Oxbow and his subsequent failure to make an additional disclosure did not measure up to those ethical standards of disclosure. Such non-disclosure required that the arbitral award be vacated.
The District Court’s reasoning in the case was supported by the need for an appearance of impartiality in international arbitrations conducted in the United States. Judge Petterson stated, “It is important that courts enforce rules of ethics for arbitrators in order to encourage businesses, to have confidence in the integrity of the arbitration process, secure in the knowledge that arbitrators will adhere to these standards.… Confidence in the arbitral panel to render fair and impartial decisions is important to this country’s international trade, and full disclosure is integral to the integrity of the Panel’s decision.”
* John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance litigation, arbitration and contract wording. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.
