|
In affirming an order vacating an arbitration award for “evident partiality,” the Second Circuit Court of Appeals held that an arbitrator had a duty to investigate a potential conflict or at least to inform the parties that he was foregoing any investigation in order to preserve his neutrality.
In Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., No. 06-3297-CV, 2007 WL 1964955 (2d Cir. July 9, 2007), Applied Industrial Materials (AIM) and Ovalar entered into a joint venture whereby AIM delivered petroleum coke to Ovalar for distribution in Turkey.
When a dispute over profits arose, the parties submitted the dispute to arbitration pursuant to an arbitration agreement that called for an arbitration panel consisting of two party-appointed arbitrators and a third arbitrator selected by the party-appointed arbitrators. The arbitration agreement further provided that “[n]o arbitrator shall . . . sit on a [p]anel, where the arbitrator or arbitrator’s current employer has a direct or indirect interest in the outcome of the arbitration.”
The party-appointed arbitrators selected Charles Fabrikant as the third arbitrator. Several months into the hearings, during the liability phase of the bifurcated proceedings, Fabrikant discovered that SCF, a barge operation run by his multi-billion dollar holding company, was negotiating a contract for the carriage of petroleum coke with Oxbow Industries (Oxbow), which had recently acquired AIM. Fabrikant notified the parties of the negotiations.
A few months later, in a 2-1 decision, the arbitration panel found Ovalar liable to AIM for breach of contract. With the damages phase of the arbitration still pending, Ovalar retained new counsel, who wrote Fabrikant asking him to withdraw. In denying that request, Fabrikant revealed to the parties that he had asked SCF’s president to withhold from him all information regarding SCF’s discussions and activities with Oxbow, thus erecting a “Chinese Wall.”
After receiving the liability award, Ovalar conducted an investigation and uncovered an undisclosed, pre-existing relationship between SCF and Oxbow. Specifically, Ovalar discovered that during the months preceding the liability award, SCF had earned approximately $275,000 transporting petroleum coke for Oxbow.
Ovalar moved to vacate the award, arguing “evident partiality” as a basis for vacatur. See 9 U.S.C.A. § 10(a)(2). The district court granted the motion.
On appeal, the Court affirmed the finding of “evident partiality” and, accordingly, the order vacating the liability award. Specifically, the Court applied its “evident partiality” standard enunciated in Morelite Construction Corp. v. New York City District Council Carpenter Benefit Funds, 748 F.2d 79 (2d Cir. 1984) and held that a reasonable person would conclude that “evident partiality” existed where an arbitrator decided not to investigate a potential conflict and failed to inform the parties of the “Chinese Wall” that he had erected.
In reaching its holding, the Court was careful to note that “[t]he mere failure to investigate is not, by itself, sufficient to vacate an arbitration award.” Instead, the duty to investigate arises “when an arbitrator knows of a potential conflict.”
This case brushes up against the rule that “a party waives the right to challenge [a] decision based on evident partiality when it knew, or could have known, of facts suggesting partiality of an arbitrator but waited until an adverse award to pursue its concern.” Van Pelt v. UBS Financial Services, No. 3:05CV477, 2006 WL 1698861, *3 (W.D.N.C. June 14, 2006).
That rule arguably applies in this case because Ovalar learned of the emerging relationship between SCF and Oxbow during the liability phase but only objected to Fabrikant’s service as an arbitrator once an adverse award was issued.
Subscribe to a free weekly update on ADR case law and
legislation
|