March 4, 2010 

Written By Attorneys: Michael J. Kurtis and Kenneth T. Levine 

This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

A reinsurance arbitration award was vacated last week by a New York federal court based upon the failure of two arbitration panel members to disclose their involvement in a concurrent proceeding involving related entities, common witnesses and similar issues. Such circumstances rose to the level of "evident partiality," according to the court, requiring that the panel's award be vacated and the matter remanded to a newly-constituted arbitration panel. Cedents, reinsurers, and practitioners should be guided by the specific circumstances of the case, and the court's analysis of such circumstances.

In Scandinavian Reinsurance Co. Ltd v. St. Paul Fire & Marine Ins. Co., et al., No. 09 cv 9531, 2010 WL 653481 (S.D.N.Y., Feb. 23, 2010), District Judge Shira A. Scheindlin of the U.S.D.C. for the Southern District of New York issued the ruling on February 23, 2010, and focused on the "evident partiality" of a party-appointed arbitrator and neutral umpire in failing to disclose the information above.

The arbitration at issue involved a dispute arising under a retrocessional agreement under which St. Paul ceded a portion of its casualty reinsurance business to Scandinavian Re. The agreement provided that any dispute arising out of the interpretation, performance, or breach of the agreement was to be submitted to a panel of three arbitrators. Each party appointed an arbitrator who, in turn, agreed upon an umpire. The court noted that all three members of the panel were ARIAS-US certified arbitrators and were therefore required to abide by and be subject to the ARIAS-US guidelines for arbitrator conduct. These require the arbitrators to "disclose any interest or relationship likely to affect their judgment," and resolve all doubt in favor of disclosure.

Although all three members of the panel made disclosures at the outset of their tenure and throughout the course of the arbitration proceedings, the umpire and one of the party arbitrators failed to disclose that they were both members of an arbitration panel in connection with an arbitration involving an entity that had succeeded to the interests of St. Paul. They also did not disclose that a key witness was involved in both arbitrations. After briefing and an evidentiary hearing, a ruling was entered in favor of St. Paul, by a majority of the arbitration panel.

The court noted that in the concurrent arbitration, both the umpire and St. Paul-appointed arbitrator (who served the same roles in the related arbitration) did disclose their involvement in another arbitration together, but failed to disclose that there was any relationship between parties to the two arbitrations. The panel ruled in favor of St. Paul's successor and the ruling was subsequently vacated by the U.S. District Court for the Eastern District of Pennsylvania on the grounds that it was not rationally derived from the arguments and evidence submitted by the parties and was "completely irrational."

The court acknowledged that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") applied to the arbitration at issue, and that under the New York Convention, the Federal Arbitration Act ("FAA") was applicable to Scandinavian Re's motion to set aside or vacate the arbitration award. Section 10(a)(2) of the FAA provides that a court may vacate an arbitration award "where there was evident partiality or corruption in the arbitrators, or either of them." Relying upon Morelite Construction Corp. v. New York City District Carpenters Benefit Fund, 748 F.2d 79 (2d Cir. 1984), the court determined that the party seeking to vacate an arbitration award must show more than an appearance of bias, but that proof of actual bias is not required.

Although the court noted the general hesitancy of courts generally to vacate arbitration awards based upon allegations of arbitrator bias, the court further opined that when an arbitrator has reason to believe that a non-trivial conflict might exist, he or she must investigate the conflict or disclose the existence of a potential conflict and his or her intention not to investigate further.

Scandinavian Re argued that if the umpire and party arbitrator had disclosed their involvement in the other arbitration, they would have objected to their continued involvement in the arbitration with St. Paul and would have sought their recusal. St. Paul argued that neither the umpire nor the party arbitrator had a financial stake in the outcome of the arbitration or a relationship with St. Paul and that the relationship at issue was not between an arbitrator and a party, but rather between an arbitrator and umpire or an arbitrator and a non-party. The court found St. Paul's position unconvincing, noting that the key issue is whether the non-disclosed relationship is material, not the identity of the parties to the relationship, and that all of the circumstances must be considered, including the timing of the relationship between the arbitrator and umpire and with witnesses to the arbitration.

The court opined that the umpire and arbitrator placed themselves in positions where they could receive ex parte information about the reinsurance business activities at issue, be influenced by credibility determinations made as to the common witness and influence each other's thinking on issues relevant to the subject arbitration. The failure to disclose was material, according to the court, even if they believed in good faith that they would not be influenced by the information obtained in the other arbitration.

Ultimately, the court ruled that the failure to disclose by both panel members met the standard for evident partiality because the undisclosed relationships were material and the panel members had actual knowledge of the relationships. As a result, the award was vacated and the case remanded to a new arbitration panel, to be selected in accordance with the provisions of the reinsurance agreement.

While the court may have been influenced by the court review of the related arbitration panel decision, practitioners are compelled to take this ruling into consideration when forming arbitration panels, and when addressing proper impartiality throughout the arbitration process.