With its May 23, 2014 orders list, the Texas Supreme Court issued one opinion. It did not grant any new cases for review.

“Evident partiality” when an arbitrator fails to fully disclose the nature of his conflict

After the purchase of a power plant, Ponderosa (the buyer) sued Tenaska (the seller) to indemnify it for some liabilities that came with the property. The purchase agreement had an arbitration clause, and the parties went forward with a three-member, neutral arbitration panel in which each side would designate one of the arbitrators and the two would then choose a third.1

Tenaska was represented by Nixon Peabody, which designated Samuel Stern as its arbitrator. It made at least a partial disclosure that Stern and the law firm had previous involvement, noting that one of Stern’s ventures (Lexsite) had tried to sell it litigation-discovery services. The disclosure also stated “Nixon-Peabody and Lexsite have done no business.”

The arbitration was structured as a “baseball arbitration,” and the two sides’ proposals were two orders of magnitude apart: Tenaka proposed $1.25 million and Ponderosa proposed $125,000,000. The panel chose Ponderosa’s figure.

Subsequently, Tenaska uncovered more details of the relationship between Nixon Peabody and the arbitrator, which suggested a much deeper relationship than had been revealed. The trial court vacated the award, but the court of appeals reversed on the ground that the initial disclosure was enough to put Tenaska on notice to investigate.

The Texas Supreme Court reversed again, holding that the award should be vacated for what the statute calls evident partiality. The test asks if “the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality.” Burlington Northern R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 630 (Tex. 1997)

As the opinion summarizes the situation here:

the arbitrator failed to disclose that all of his contacts at the 700-lawyer firm were with the two lawyers that represented the party to the arbitration at issue; he owned stock in the litigation services company that was
pursuing business opportunities with the firm; he served as the president of the company’s United States subsidiary; he conducted significant marketing in the United States for the company; he had additional meetings or contacts with the two lawyers in question to solicit business from the firm
for the company; and he allowed one of the two lawyers to edit his disclosures to minimize the contact.

The Court found that this met the standard. It rejected the argument that merely disclosing the existence of some relationship was enough, instead looking at the significance of the undisclosed portion of the information.

However, proving that the Court is not engaged in baseball arbitration, the Court rejected both sides’ framing of the standard of proof. Tenaska contended that all it needed to do was establish that the disclosure was intentionally misleading and then, as a matter of law, the inquiry ends. Ponderosa contended (based on some other States’ standards) that the Court should require heightened proof such that a “reasonable person would have to conclude” that there was partiality. The Court rejected both extremes, instead adhering to the framing of TUCO that the disclosures “might, to an objective observer, create a reasonable impression” of partiality.

  1. Here, the third arbitrator was actually James A. Baker, former Justice of the Texas Supreme Court.