Court Vacates $125M Award Due To Arbitrator’s Misleading Disclosures

by Stinson Leonard Street - Arbitration Nation
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Industrial power plant with smokestackToday we take a close look at that rare creature: an opinion finding sufficient basis under the FAA to vacate an arbitration award. In Tenaska Energy Inc. v. Ponderosa Pine Energy, LLC, __S.W.3d __, 2014 WL 2139215 (Tex. May 23, 2014), the Supreme Court of Texas found an arbitrator had shown “evident partiality” due to his misleading “partial” disclosures of his contacts with the law firm representing the claimant.

The underlying dispute was over whether Tenaska had breached representations and warranties to Ponderosa in a power plant purchase agreement. The purchase agreement required that any disputes be arbitrated before a panel of three arbitrators, with each party choosing one neutral arbitrator and the two party-appointed arbitrators selecting the third. Ponderosa, represented by Nixon Peabody, demanded arbitration and chose Samuel Stern as its arbitrator. Stern, along with the third arbitrator, awarded Ponderosa $125 million.

Tenaska moved to vacate the award, arguing that Stern had shown evident partiality. After “extensive discovery” on the issue of Stern’s contacts with Nixon Peabody, the trial court agreed and vacated the award. The intermediate appellate court reversed the trial court, finding that Tenaska had waived its right to argue evident partiality by not objecting to Stern’s appointment after receiving his limited disclosures. The Texas Supreme Court reinstated the district court’s order vacating the arbitration award.

Upon his appointment, Stern  disclosed that Nixon Peabody had designated him as an arbitrator in three other disputes, that he was a director of a litigation services company, LexSite, based in India, and that he had met with Nixon Peabody lawyers about outsourcing some of their discovery tasks to LexSite. However, he said the firm had done no business with LexSite and “it is not clear that Nixon-Peabody would ever have any business to give LexSite.”

The court found it material that Stern did not disclose the following facts: Stern owned shares of LexSite, was being paid $6,000 per month by LexSite to actively solicit business from U.S. law firms, had communicated multiple times with the individual lawyers representing Ponderosa on this very matter about Nixon Peabody using LexSite, and allowed Ponderosa’s counsel to edit his arbitration disclosures. The court held that “[t]aken together, this undisclosed information might cause a reasonable person to view Stern as being partial toward [Nixon Peabody’s] client, Ponderosa, to gain their favor in securing business for LexSite from Nixon Peabody.” Because the court found that the Tenaska did not have to prove “actual bias,” the fact that a reasonable, objective person could conclude Stern was partial was sufficient to vacate the award. [In a nod to Stern, the court “reiterate[d] that [its] holding should not be read as indicating that Stern was actually biased.”]

Furthermore, the court found that Tenaska did not waive its right to vacate the award by accepting Stern’s appointment after he disclosed his relationship to LexSite and his meeting with Nixon Peabody. The court concluded that because material information was withheld from Tenaska, it did not waive its partiality challenge. “To hold otherwise ‘would put a premium on concealment’ in a context where the Supreme Court has long required full disclosure.”

This case has important practical implications for arbitrators and counsel alike: if you choose an arbitrator who you believe will be a strong voice in your client’s corner, do not put that appointment at risk by making partial disclosures.

Legally, I find it interesting that even though the Texas Supreme Court acknowledged that the FAA governed, it rested its analysis largely on its own precedent decided under its state arbitration act. The court did not discuss, for example, the Fifth Circuit decision from just two years ago, finding a party had waived its claim of partiality under the FAA when it received partial disclosures from an arbitrator and took no further action. The Fifth Circuit found the disclosures at issue in that case “ were sufficient to put [the party] on notice of a potential conflict” and the party had a duty to reasonably investigate. That holding appears at odds with the Texas Supreme Court’s Tenaska decision, even though both courts are applying the FAA.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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