Hawaii Supreme Court Adopts Strict Vacature Rule

Hawaii Supreme Court adopts strict vacature rule for arbitrator nondisclosure of possible future relationship

 

 

The Hawaii Supreme Court in Noel Madamba Contacting Co. v. Romero and A&B Green Building, LLC, (SCWC 12-00007780, Nov. 25, 2015) (referred herein as the “Madamba’ case) held that an arbitrator’s failure to disclose facts relating to a potential future relationship with the law firm that represented one of the parties involved in the arbitration creates an impression of partiality. Upon determining that the circumstances of a case present an appearance of partiality, the Court ruled that a reviewing court must vacate the arbitrator’s decision.

The Facts:

The Madamba case involved the arbitration of an owners’ claim that the contractor was in breach of a construction contract. The parties had adopted the arbitration rules of Dispute Prevention & Resolution, Inc. and was interpreted under the provisions of Hawaii’s Revised Uniform Arbitration Act. Through administrative pre-hearing procedures, the arbitrator, a respected retired Circuit Court Judge, made disclosures that while serving as a Judge, counsels for the parties in arbitration and their firms appeared before him and that since retiring from the Bench, he had served as a neutral arbitrator or mediator for the involved counsels and their firms. The disclosure made no mention relating to the arbitrator’s retirement plan. After hearings, the arbitrator issued a partial final award in favor of the owners, retaining jurisdiction to address remaining issues of attorney’s fees and costs. The losing contractor (Madamba) appealed the arbitrator’s decision.

Shortly after issuing the partial final award, the arbitrator made a supplemental disclosure that the company that was administering his retirement plan was planning to have another attorney, a retirement benefits specialist (who was in the same large law firm as the attorney who represented the owners, the Romeros, who prevailed in the arbitration action to perform some legal work regarding the arbitrator’s retirement plan. The arbitrator’s retirement plan file had been sent to the retirement benefits specialist lawyer but apparently, no work had yet been done on the file. After this information became known to the parties, the law firm returned the arbitrator’s retirement plan file to the plan administration company for reassignment to a different benefit specialist law firm.

The Hawaii Supreme Court closely reviewed the factual circumstances and ruled:

• “an arbitrator’s impartiality and appearance of impartiality is paramount”;

 

• “a circuit court’s rulings on a motion to vacate for evident partiality . . . whether a duty of disclosure exists . . . is a question of law; [and] whether it has been breached . . . is a question of fact[.]” citing Nordic, 136 Hawaiʻi at 42, 358 P.3d at 14.

 

 

• “ in the context of neutral arbitrators, “a failure to meet disclosure requirements under HRS § 658A-12(a) or (b) is equivalent to, or constitutes, ‘evident partiality’ as a matter of law.” (citing the Court’s earlier Nordic decision, 136 Hawaiʻi 29, at 50, 358 P.3d at 22;

 

• the arbitrator’s failure to disclose the possible relationship with another attorney in the firm of one of the arbitration party’s attorney “created a reasonable impression of partiality, and accordingly, the circuit court’s findings that there was no violation of [the arbitrator’s] duty to disclose under HRS chapter 658A and no showing of evident partiality are clearly erroneous;

 

• for claims of evident partiality based on a failure to disclose “an arbitrator’s nondisclosure of facts showing a potential conflict of interest creates evident partiality warranting vacatur even when no actual bias is present.” Daiichi, 103 Hawai’i at 352, 82 P.3d at 438 (quoting Schimitz, 20 F.3d at 1045); and

 

• even if the relationship at issue is a prospective or future relationship, a failure to disclose may result in a reasonable impression of partiality, and accordingly, a violation of HRS § 658A-12(a) or (b).

 

The applicable RUAA statute and arbitration agency rule:

HRS § 658A-12(a)-(b) (Supp. 2001) states:

 

(a) Before accepting appointment, an individual who is requested to serve as an arbitrator,

after making a reasonable inquiry, shall disclose to all parties to the agreement to arbitrate and arbitration proceeding and to any other arbitrators any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator in the arbitration proceeding, including:

(1) A financial or personal interest in the outcome of the arbitration proceeding; and

(2) An existing or past relationship with any of the parties to the agreement to arbitrate or the arbitration proceeding, their counsel or representatives, a witness, or another arbitrator.

 

(b) An arbitrator has a continuing obligation to disclose to all parties to the agreement to arbitrate and arbitration proceeding and to any other arbitrators any facts that the arbitrator learns after accepting appointment which a reasonable person would consider likely to affect the impartiality of the arbitrator.

 

HRS § 658A-23(a)(2) (Supp. 2001) provides:

 

Vacating award. (a) Upon motion to the court by a party to an arbitration proceeding, the court shall

vacate an award made in the arbitration proceeding if: …

(2) There was: (A) Evident partiality by an arbitrator appointed as a neutral arbitrator; (B) Corruption by an arbitrator; or… (underscoring added)

 

Dispute Prevention & Resolution, Inc. Arbitration Rule 9 provides, in pertinent part:

 

Neutral Arbitrators appointed pursuant to these Rules shall disclose in writing any circumstance, situation, or event which is likely to affect their ability to be impartial. Arbitrators must disclose (and under the RUAA, Section 12(b), have a continuing obligation to disclose) any past, present, or possible future relationship with the parties, their witnesses, their counsel or another arbitrator including any bias or any financial or personal interest in the result of the arbitration. (underscoring added)

 

The Court’s Finding:

 

Under the factual circumstances of the case, the Hawaii Supreme Court concluded that a reasonable impression of partiality was established, stating that: “the undisclosed facts demonstrated a reasonable impression of partiality, and accordingly, resulted in a violation of the HUAA’s disclosure requirements. Because [the arbitrator] was a neutral arbitrator, evident partiality was established as a matter of law. … Thus, the arbitration award must be vacated pursuant to HRS § 658A-23(a)(2)(A), which provides that the court “shall vacate an award made in the arbitration proceeding” upon a motion by a party to the proceeding if there was “[e]vident partiality by an arbitrator appointed as a neutral arbitrator[.]””

 

Author’s Comments:

 

1. The Madamba decision will make commercial arbitrations in Hawaii more vulnerable to collateral attack by disappointed arbitration parties, leading to a reduction in the efficiency and finality of arbitration as an alternative dispute resolution process.
2. The decision follows a position articulated by a minority of the United States Supreme Court articulated in the seminal case of Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), a decision under the Federal Arbitration Act.

 

In the comments to the Revised Uniform Arbitration Act (RUAA) proposed by the Uniform Law Commission in 2000, the Commission interpreted the Commonwealth Coatings case, stating:

 

In that case the Supreme Court held that an undisclosed business relationship between an arbitrator and one of the parties constituted “evident partiality” requiring vacating of the award. Members of the Court differed, however, on the standards for disclosure. Justice Black, writing for a four-judge plurality, concluded that disclosure of “any dealings that might create an impression of possible bias” or creating “even an appearance of bias” would amount to evident partiality. Id. at 149. Justice White, in a concurrence joined by Justice Marshall, supported a more limited test which would require disclosure of “a substantial interest in a firm which has done more than trivial business with a party.”   Id. at 150. Three dissenting justices favored an approach under which an arbitrator’s failure to disclose certain relationships established a rebuttable presumption of partiality.

 

A majority of the Commonwealth Coatings Court supported a less strict, more nuanced position that would assess the undisclosed business relationship and would require a determination that the undisclosed relationship be “more than trivial” or would support the recognition of a rebuttable presumption of partiality.

3. In stating that upon the finding of an “appearance of impropriety”, an arbitration must be vacated, the Hawaii Supreme Court appears to strip away the necessity of establishing that an arbitrator’s undisclosed relationship be one that involves a material or substantial conflict of interest. In the Madamba case, the offending “appearance of impropriety” was the action of the arbitrator’s third party retirement plan administrator trying to assign work relating to the arbitrator’s retirement plan to another attorney in the same law firm of one of the advocates in the arbitration. The fact that the attempted assignment to the law firm was promptly undone and did not actually involve a business relationship that benefitted the arbitrator in some financial or business way.
4. The Madamba decision makes careful and complete disclosure of past, present and “potential future relationships” more critical to the integrity of the arbitration process. The expansion of the disclosure obligations of neutral arbitrators to disclose “potential future relationships” creates a difficult challenge and a likely fertile ground for future challenges to the finality of arbitration decisions.