Certain Underwriting Members of Lloyds of London v. Insurance Company of the Americas, No. 17-1137-cv (2d Cir. June 7, 2018) [click for opinion]

Petitioners-Appellees, Insurance Company of the Americas (“ICA”) appealed an order vacating an arbitral award (the “Award”) issued in a reinsurance dispute between ICA and Certain Underwriting Members of Lloyds of London including those members subscribing to Treaty No. 02072/04 (the “Underwriters”). The issue on appeal was whether the Award was void for evident partiality under the Federal Arbitration Act (“FAA”), 9 U.S.C. 10(a)(2), based on the failure by ICA’s party-appointed arbitrator to disclose close relationships with former and current directors and employees of ICA.

The district court weighed the conduct of ICA’s party-appointed arbitrator under the standard governing neutral arbitrators—that of a reasonable person standard—and concluded that the ICA-appointed arbitrator was impermissibly partial to ICA. The district court found that the ICA-appointed arbitrator’s “undisclosed relationships” with ICA representatives were “significant enough to demonstrate evident partiality” and were “far more significant, more numerous and involve[d] more financial entanglements than are present in” other cases from the Second Circuit. Additionally, the district court was “troubl[ed]” by the apparent willfulness of the non-disclosures, in particular the arbitrator’s silence during the testimony of ICA’s director. Notwithstanding these concerns, the district court did not take issue with the substance of the Award, did not connect the arbitrator’s conduct to the panel’s decision, and made no finding that the arbitrator had a personal or financial interest in the outcome of the arbitration.

On appeal, the U.S. Court of Appeals for the Second Circuit held that a party seeking to vacate an award under Section 10(a)(2) must sustain a higher burden to prove evident partiality on the part of a party-appointed arbitrator, who is expected to espouse the view or perspective of the appointing party. The court of appeals explained that the FAA does not proscribe all personal or business relationships between arbitrators and the parties, adding that “the balance of case law in the second circuit supports the proposition that when a purported financial interest or financial relationship between an arbitrator and a party to arbitration is indirect, general[,] or tangential, courts should not vacate arbitration awards.” Courts must require a showing of something more than the mere appearance of bias to vacate an arbitration award.

Notwithstanding the foregoing, the court of appeals held that a party-appointed arbitrator is still subject to some baseline limits to partiality. An undisclosed relationship between a party and its party-appointed arbitrator constitutes evident partiality, such that vacatur of the award is appropriate, if: (1) the relationship violates the contractual requirement of disinterestedness; or (2) it prejudicially affects the award.

Consequently, the court of appeals vacated the order and remanded for the district court to reconsider its decision under the proper standard.

A version of this post originally appeared in the July 2018 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

 

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