Hawaii Supreme Court issues third decision on arbitration vacature due to arbitrator non-disclosure.
On June 15, 2017, the Hawaii Supreme Court issued its decision in Narayan v. AOAO Kapalua Bay Condominium, (No. SCAP-16-0000588) (“Narayan II”). In the case, the Court attempts to clarify its earlier rulings in Nordic PCL Construction, Inc. v. LPIHGC, LLC, 136 Hawai’I 29, 358 P. 3d 1 (2015)(“Nordic”) and 137 Hawai‘i 1, 364 P.3d 518 (2015) (“Madamba”).
In Narayan II, the Hawaii Supreme Court states its intent is to “clarify the scope of relationships that require disclosure.” In Narayan II, the arbitrator, a retired Circuit Court judge, made disclosures noting that the counsels involved in the arbitration case had appeared before her during her years on the Circuit Court bench. She disclosed her social membership in a golfing country club, her participation in various civic and community organizations and that she had no prior involvement or relationship with the parties to the arbitration. After conducting the arbitration proceedings and rendering her decision in favor of condominium association and against the condominium owners, the losing parties appealed the arbitration decision.
The Court, citing its earlier Madamba decision, reiterated that a court must vacate an arbitration award if there was evident partiality by an arbitrator appointed to serve as a neutral. The Court stated that:
Evident partiality may be found in two situations: when an arbitrator fails to make necessary disclosures to the parties, or when additional facts show actual bias or improper motive, even if the arbitrator makes the necessary disclosures.
The Court thus discussed these two categories of evident partiality, cases of “actual bias” and cases of “nondisclosure”. The Nordic and Madamba cases provided little guidance as to what kinds of “dealings” and “relationships”, if not disclosed, were sufficient to warrant a court’s conclusion that an arbitrator was “evidently partial” and thus mandate a reviewing court to vacate the arbitrator’s decision. In Narayan II, the Court states that relationships that are “more than trivial” must be disclosed and that “de minimis” relationships and interests and connections between a party and an arbitrator which are “long past, attenuated, or insubstantial” need not be disclosed under HRS Sec. 658A-12. A court must consider the “substantive nature” of the relationship at issue to determine whether it would give a reasonable impression of partiality.” Determining whether a relationship is “substantive” may involve the “consideration of several factors, including but not limited to the directness of the connection (or the degrees of separation) between the arbitrator and either party, as well as the type of connection or activity at issue, and its timing relative to the arbitration proceedings.”
The Court provides standards of review to determine when an arbitrator’s “relationships” and “dealings” are sufficiently material and relevant connections so as to warrant the vacature of an arbitrator’s decision if not disclosed. The Court does this by citing with approval a number of cases from other jurisdictions that dealt with the issue of an arbitrator’s non-disclosure in an arbitration case.
The Court provides the following guidelines:
- Solicitation or offer to provide arbitrator with additional pecuniary opportunities. Where an arbitrator, during the pendency of an arbitration, has an ex parte discussion with an attorney representing one of the parties in the arbitration and is solicited to serve as a mediator in another matter and thus is offered a pecuniary benefit. “The more direct an undisclosed connection between the arbitrator and a party, the more likely that it will create a reasonable impression of partiality. As such, a current direct relationship between an arbitrator and “a party, its counsel, principal, or agent” will almost always require disclosure.” Valrose Maui, Inc. v. Maclyn Morris, Inc., 105 F.Supp.2d 1118, 1124 (D.Haw.2000)
- Relationships involving pecuniary benefit require disclosure. The Court stated:
Where the relationship involves an exchange of money or other consideration, it is likely to require disclosure, particularly if the exchange was recent or ongoing during the arbitration. See, e.g., Britz, Inc. v. Alfa-Laval Food & Dairy Co., 40 Cal. Rptr. 2d 700, 707 (Cal. App. 1995). In Britz, the arbitrator failed to disclose that he was employed by one of the party counsel’s law firms as an expert witness in a separate matter.
- Currently occurring and the “concrete possibility” of a future or prospective professional, business or pecuniary relationship is a factor warranting disclosure. Citing Madamba, the Court noted: “Concrete possibilities of a future relationship have been demonstrated through evidence of negotiations, communications, or other facts showing that steps were taken to further the potential relationship during the course of the arbitration.”
- Potential benefit resulting to an arbitrator’s law firm, employer, business or company. “Disclosure is also typically required when there is a recent or current relationship between an arbitrator’s law firm or business and a party, its counsel, principal, or agent. See, e.g., New Regency, 501 F.3d 1101 (vacating an arbitration award where the arbitrator, who was an executive for a film company, did not disclose that her company was in negotiations with an executive of one of the parties to finance and co-produce a movie); Schmitz, 20 F.3d 1043 (vacating an arbitration award where the arbitrator did not disclose that his law firm represented the parent corporation of a party). Disclosure may also be required even when it is the arbitrator’s employer that has the relationship. See Olson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 51 F.3d 157 (8th Cir. 1995) (vacating an award where an arbitrator disclosed that he was an employee of a company, but did not disclose his high-ranking position or the fact that the company had an ongoing business relationship with one of the parties).
- Attorney-client relationships can be particularly significant. An example cited by the Court was the attorney-client relationship involved in the Madamba case. An arbitrator’s prospective attorney-client relationship with one of the party counsel’s law firms “will almost always require disclosure.” The Court also cited the following cases: “Beebe Med. Ctr., Inc. v. InSight Health Servs. Corp., 751 A.2d 426, 431 (Del. Ch. 1999) (requiring disclosure of an attorney-client relationship between the arbitrator and the law firm representing a party); Schmitz, 20 F.3d at 1049 (requiring disclosure of an attorney-client relationship between the arbitrator’s law firm and a party’s parent company); HSMV Corp v. ADI Ltd., 72 F. Supp. 2d 1122, 1130 (C.D. Cal. 1999) (requiring disclosure of an attorney-client relationship between an arbitrator’s law firm and a party’s owner); Houston Vill. Builders, Inc. v. Falbaum, 105 S.W.3d 28, 34 (Tex. App. 2003) (requiring disclosure of an attorney-client relationship between the arbitrator and a trade association of which parties to the arbitration were members); but see Peabody v. Rotan Mosle, Inc., 677 F. Supp. 1135, 1138 (M.D. Fla. 1987) (not requiring disclosure of attorney-client relationship between the arbitrator’s former law partner’s brother and an expert witness, as this relationship was “thrice removed” from the arbitrator and thus too attenuated).”
- Business relationships and financial dealings are also significant. The Court stated:
Business relationships and financial dealings will also tend to weigh in favor of disclosure, depending on the weight of other considerations, including the regularity and recency of the dealings, the length of the relationship, and the extent of pecuniary interest involved.
- Non-financial benefits can sometimes warrant disclosure. Indirect professional benefit accruing to an arbitrator may warrant disclosure. The Court cited Kay v. Kaiser Foundation Health Plan, Inc., 194 P.3d 1181 (2008). “In Kay, the arbitrator [a doctor who also served as a volunteer official of a non-profit association] did not disclose that she had directly solicited and received a $450 donation from one of the parties on behalf of a non-profit medical association during the pendency of the arbitration. 119 Hawai’i 219, 194 P.3d 1181. The ICA noted that there was no evidence that the arbitrator received a direct financial benefit from her work, but that it was “a significant professional activity that brought her public recognition and enhanced her reputation in the medical profession.”
- Attenuated and less direct connections may not require disclosure, even if current. The Court cited United States Wrestling Fed’n v. Wrestling Div. of AAU, Inc., where an arbitrator’s law firm had a relationship with Northwestern University, a university that was “one of the 860 other members of the NCAA, a founder of one of the parties to the arbitration. 605 F.2d at 315. This “tenuous chain” was too “remote, uncertain, and speculative to require the arbitration award to be set aside.” 605 F.2d at 320.”
- Relationships that do not allow one to curry favor with another do not require disclosure. Investors in the same corporate stock or mutual fund do not have a relationship that warrants disclosure in an arbitration. The Court cites the case of Apusento Garden (Guam) Inc. v. Superior Court of Guam, 94 F.3d 1346, 1352 (9th Cir. 1996) where an arbitrator and an expert witness in the case were both limited partners and passive investors in an apartment project development.
- Relationships that are distant in time may not require disclosure. The examples cited by the Court involved a relationship between two arbitrators that occurred more than a decade previous.
In Narayan II, the appellants asserted that the arbitrator had made an insufficient disclosure and sought vacature of her arbitration decision. The appellants asserted that the arbitrator failed to disclose that:
- An appraisal expert witness who testified in the arbitration case had previously testified before the arbitrator in prior unrelated matters;
- The arbitrator had previously served as an arbitrator and mediator on cases where an expert witness in the arbitration case was serving as the attorney for parties involved in those other unrelated arbitration or mediation cases; and
- The arbitrator had previously served as an arbitrator or mediator on several matters involving a prominent local law firm that was not involved in the instant arbitration but which represented the condominium project developer in the Narayan I case. Appellants argued that an arbitration decision favorable to the AOAO would be favorable to the condominium developer and that the arbitrator might receive favorable consideration by the law firm in future appointments to serve as an arbitrator or mediator in other matters.
Upon applying its articulated standards of review, the Court ruled that an arbitrator did not need to disclose “ongoing or past instances in which she served as a neutral and .. . a non-attorney witness appeared before her in another matter…. The mere fact that an arbitrator has observed a witness in a prior proceeding and therefore may have “had an opportunity to evaluate the person and form an opinion as to the person’s credibility[,]” without more, is not a “relationship” that requires disclosure.”
With respect to the arbitrator’s prior service as a neutral for an attorney in unrelated matters, the Court concluded that: “The mere fact that [the attorney], an expert witness in this case, had been an attorney in two cases where he appeared before the Arbitrator, without more, is not a “relationship” that creates a reasonable impression of partiality. It was therefore not clearly erroneous for the circuit court to conclude that the Arbitrator’s undisclosed contacts with [the attorney] did not give a reasonable impression of partiality.’
The Court also ruled that the arbitrator’s service as a neutral for the developer’s law firm “in unrelated matters does not have a sufficient nexus to this arbitration…. There is no actual direct connection between [the law firm] and the parties, counsel, witnesses, and Arbitrator in this arbitration…. [T]he theory that a positive outcome for the AOAO would lead to a future appointment for the Arbitrator in the Developer Action is “contingent, attenuated, and merely potential.”