The Second Circuit recently held that parties seeking to vacate awards under Federal Arbitration Act Section 10(a)(2) must satisfy a higher burden in showing evident partiality by a party-appointed arbitrator. The parties arbitrated a workers compensation reinsurance dispute and the losing party (Lloyds) moved to vacate the ultimate arbitral award on the ground that the prevailing party (ICA)’s selected arbitrator displayed evident partiality by failing to fully disclose his connections to ICA. The lower court vacated the award, finding that ICA’s appointed arbitrator’s undisclosed relationships were “more significant, more numerous, and involve[d] more financial entanglements” than would be acceptable, particularly in light of the “apparent willfulness” of the non-disclosure.
On appeal, the Second Circuit addressed as an issue of first impression what the appropriate standard is for a Section 10(a)(2) evident partiality challenge to a party-appointed arbitrator. The court disagreed with the lower court and instead followed the approach of other circuits in distinguishing between a heightened burden standard for party-appointed arbitrators and a reasonable person standard for neutral arbitrators. Despite the heightened burden, party-appointed arbitrators are subject to certain “baseline limits to partiality.” First, undisclosed relationships are material—and therefore warrant vacatur—if they violate the arbitration agreement. Here, the court noted, the only limitation in the arbitration agreement was that arbitrators be “disinterested,” in terms of financial and personal stake in the outcome. Second, undisclosed relationships are material if the complaining party can demonstrate the partiality had a prejudicial effect on the award.
As a result of this new framework, the Second Circuit remanded to the trial court to determine whether ICA’s arbitrator’s undisclosed relationships betrayed his disinterest or had a prejudicial effect on the arbitral award.
Certain Underwriting Members of Lloyds of London v. Ins. Co. of Am., No. 17-1137 (2d Cir. June 7, 2018).
