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In affirming confirmation of an arbitration award, the Third Circuit Court of Appeals held that a party is bound by an arbitration award when its actions clearly evince an objective intention to become a party to the arbitration. Additionally, the mere fact an arbitration panel may have learned a party intended not to pay the arbitration fee did not establish that the arbitrators had a financial stake in the arbitration's outcome.
In HSM Construction Services, Inc. v. MDC Systems, Inc., No. 06-2584, 2007 WL 2030278 (3rd Cir. July 16, 2007), HSM hired MDC to prepare expert engineering reports. HSM failed to pay MDC, claiming MDC provided an unusable expert disclosure report. In response, MDC filed an arbitration claim. During arbitration, HSM Management argued it was not a party to the contract. The arbitration panel found HSM Construction and HSM Management jointly and severally liable for $86,969.
The district court confirmed the award. On appeal, HSM argued that the arbitration panel manifestly disregarded the law by finding HSM Management liable where it was not a party to the agreement between HSM Construction and MDC. Further, HSM asserted the arbitration panel was partial to MDC.
The Court held that HSM Management was bound by the arbitration award, as HSM Management's outward manifestations clearly evinced an objective intention to be a party. Both MDC's proposals and a letter from HSM to MDC were signed as "HSM" by Dennis McCubbin, the General Counsel of HSM Management and HSM Construction. Additionally, HSM Management was the entity that paid MDC for its services.
The Court also found that HMS failed to raise any genuine issue of arbitrator bias. The fact the arbitrators may have learned that HSM intended not to pay the arbitration fee did not establish that the arbitrators had a financial stake in the arbitration's outcome. The Court noted that circuit courts have applied two competing standards. The Court reached its conclusion by applying the "reasonably construed" bias standard, which finds evident partiality only when "a reasonable person would have to conclude that the arbitrator was partial to [one] party to the arbitration." Nonetheless, the same result would be obtained under the less stringent "appearance of bias" standard, which requires arbitrators "not only to be unbiased but also avoid even the appearance of bias."
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