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To avoid vacatur of the resulting award, an arbitrator must "disclose any relationship which raises even a suggestion of possible bias" at the outset of the process, including a party's relationship to lawyers "of counsel" to the arbitrator's law firm, according to a New York appellate court.
In SOMA Partners, LLC v. Northwest Biotherapeutics, Inc., No. 418, 111745/05, 2007 WL 1746391 (N.Y. App. Div. June 19, 2007), SOMA appealed the denial of its motion to vacate an award, which had alleged that the arbitrator had an impermissible conflict of interest. At the beginning of arbitration, the parties submitted lists of potential conflicts for review by the arbitrator. The arbitrator, a partner at a New York law firm, discovered that an "of counsel" attorney at his firm's Washington office personally knew one of the parties and served on the board of a company which had a business relationship with the party. Despite this knowledge, the arbitrator did not disclose this potential conflict to the parties.
The Court found sufficient grounds to vacate the arbitration award and order a new arbitration. While the Court acknowledged that the role of spotting partiality should normally be reserved for the parties and not the judiciary, the Court stated that the parties can only do so "if, prior to the commencement of the arbitration, the arbitrator discloses to the parties all facts which might reasonably cause one of them to ask for the disqualification of the arbitrator."
The Court continued, "it is far better that the relationship be disclosed at the outset… than to have the relationship come to light after the arbitration, when a suspicious or disgruntled party can seize on it as a pretext for invalidating the award."
The Court observed that the New York Court of Appeals "has expressed a policy of maximum prehearing disclosure in arbitration proceedings," and that a neutral "should disclose any relationship which raises even a suggestion of possible bias." The Court found the relationship not disclosed here raised such a suggestion, ordered the award vacated, and ordered a new arbitration.
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