First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
In November, an Occidental Petroleum entity asked the Supreme Court to overturn the Second Circuit standard for vacating arbitral awards over apparent arbitrator bias, saying the appellate court's decision refusing to vacate a $392 million award makes arbitrators' disclosure obligations "largely irrelevant." Occidental's cert petition raises the question of whether the Supreme Court will resolve a decades-old dispute regarding the standard of "evident partiality."
Overturning an arbitral award is difficult. There are only a few ways to challenge judicial confirmation of an arbitral award.1 One way a losing party can challenge the result of an arbitration is to argue that the arbitrator displayed "evident partiality" that infected the arbitration proceedings as a whole. See 9 U.S.C. § 10(a)(2). Essentially, evident partiality means that either the arbitrator was actually biased in favor of a party, or there were facts unknown to a party at the time that could make an objective observer believe the arbitrator was biased. Generally, the essential components of evident partiality challenged are: 1) that the arbitrator had a significant relationship with a party or a party's counsel, 2) that relationship could or would have caused an objective observer to think the arbitrator was biased, and 3) that the arbitrator did not sufficiently or accurately disclose that relationship to allow the other party to make an informed decision to proceed despite the conflict. However, beyond the broad terms, there is pervasive uncertainty as to what is required to show evident partiality and mount a successful challenge to overturn an arbitral award.
The confusion surrounding the evident partiality doctrine stems from the Supreme Court's first—and only—decision that attempts to define the term, Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968). In that case, the Court considered a situation in which a neutral arbitrator failed to disclose regular business dealings with a party to the arbitration. The case resulted in three separate opinions: a four-justice plurality opinion, a two-justice concurrence, and a three-justice dissent. Justice Black's plurality opinion adopted a precise standard of disclosure that allows vacatur of an award based on the showing of a mere "impression of possible bias" and required arbitrators to "avoid even the appearance of bias." Id. at 149-50. Justice White's concurrence, on the other hand, advocated what has been interpreted as a stricter standard requiring not just an appearance of bias, but a reasonable impression of it. Id. at 150-52. Lower courts, both federal and state, have disagreed over which opinion to follow and even whether Justice Black's opinion is actually a majority opinion. See Positive Software Solutions, Inc. v. New Century Mortg. Corp., 476 F.3d 278, 281-83 (5th Cir. 2007) (analyzing Justice White's concurrence and other courts' interpretations of the effect of the concurrence on the plurality opinion's holding). Courts have also differed widely in their interpretation and application of the tests laid out by both opinions. Thus, while there is largely an agreement on the idea that evident partiality requires a challenger to prove facts showing some sort of appearance of partiality by the arbitrator, courts do not agree on what formulation of the evident partiality doctrine will meet this standard.
This dispute has arisen a number of times since the 1968 Commonwealth Coatings opinion and the Occidental cert petition puts the issue squarely before the Court. In June of this year, the Second Circuit, in Andes Petro. Ecuador Ltd. v. Occidental Expl. & Prod. Co., denied Occidental Exploration and Production Company's (Occidental) request to vacate a $392 million arbitral award issued to Andes Petroleum Ecuador Ltd. (Andes) based on the evident partiality standard. Ecuador agreed to pay Oxy nearly $1 billion to settle a dispute related to closing down a project to explore for oil in the country's rainforest. Occidental had previously agreed to pay Andes 40% of any amount it received in the resulting dispute with Ecuador. After Occidental's win against Ecuador, Andes sought to collect its percentage, but Occidental refused, stating that the settlement reflected only its 60% interest in the project and did not qualify under its agreement with Andes. Andes subsequently initiated arbitration, claiming entitlement to 40% of the award from Ecuador. In March 2021, an International Centre for Dispute Resolution (ICDR) tribunal concluded that Occidental had breached its contract and awarded Andes $391 million plus interest.
In turn, Occidental proceeded to challenge the arbitral award in federal court based on the evident partiality doctrine. Occidental alleged that one of the arbitrators, Robert Smits, had concealed bias that ultimately favored Andes. Arguing that for more than two years while the proceeding was ongoing, arbitrator Robert Smit and Andes' lead counsel, Laurence Shore, had been collaborating as co-arbitrators in a separate, concurrent, and confidential matter proceeding before the International Chamber of Commerce (ICC). Despite these allegations, the Second Circuit disagreed with Occidental's characterization of the issue. In a summary order, the Second Circuit stated that Occidental had offered only speculation that Andes had been able to obtain special access to Arbitrator Smit as a result of the relationship, which does not establish evident partiality. The Court went on to say that, "[a]s we have observed, ‘we do not think that the fact that two arbitrators served together in one arbitration at the same time that they served together in another is, without more, evidence that they were predisposed to favor one party over another in either arbitration,'" quoting the Second Circuit's 2012 decision in Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire Marine Ins. Co. 668 F.3d 60, 74 (2d Cir. 2012). "Similarly here, aside from Smit's and Shore's concurrent service, [Occidental] does not allege a ‘material relationship' such as ‘family connection or ongoing business arrangement with the party or its law firm—circumstances in which a reasonable person could reasonably infer a connection between the undisclosed outside relationship and the possibility of bias for or against a particular arbitrating party,'" the court continued, again quoting from Scandinavian Reinsurance. Id.
According to Occidental, five other circuits—the First, Third, Fourth, Fifth, and Sixth—have adopted the Second Circuit's "precedent-defying approach." Whereas the Ninth and Eleventh Circuits "continue to correctly apply the standard adopted by Commonwealth Coatings."
Still, the arguably more stringent standard of the Eleventh Circuit was not enough to vacate the underlying arbitration award in Grupo Unidos por el Canal, S.A. v. Autoridad Del Canal de Panama, where the court refused to vacate $285 million in arbitral awards issued to the operator of the Panama Canal in a dispute over a multibillion-dollar project to expand the waterway, rejecting the arguments that undisclosed ties between the arbitrators had created ongoing bias.
In its opinion, the Eleventh Circuit concluded that the arbitrators' failure to disclose several lucrative appointments and ongoing relationships between them was not enough to warrant vacating the award. The court noted that there was no evidence of actual bias in the arbitration and that the case "presented nothing that comes near the high threshold required for vacatur." As to possible bias, the court held "Grupo Unidos has established only that some of the arbitration's participants were otherwise familiar with each other, and ‘familiarity due to confluent areas of expertise does not indicate bias,'" quoting the Eleventh Circuit's 2002 decision in University Commons-Urbana Ltd. v. Universal Constructors Inc., 304 F.3d 1331, 1340 (11th Cir. 2002).
Regardless of whether the Supreme Court hears the Occidental case, these cases serve as a reminder that arbitral awards will only be vacated in exceptional circumstances with clear evidence and the evident partiality standard is no different.
Footnote
1. See 9 U.S.C. § 10; see also Convention on the Recognition and Enforcement of Foreign Arbitral Awards, § V. (incorporated into the Federal Arbitration Act, 9 U.S.C. § 207).
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