Conflicts of interest and disclosure statements

MANY years ago, a number of visitors from London attended an initial hearing in a New York arbitration. As is customary, the arbitrators rendered their disclosure statements, placing into the record the extent of their respective relationships with the parties, counsel and each other. At the conclusion of the hearing, one of the observers said it was just awful that the arbitrators had to bare their souls and make such declarations as to their business and private lives. He also remarked that, when selected as an arbitrator in London, there was no such inquiry (he might even have used - and maybe quite correctly so - the word 'inquisition').

The process seems to be peculiar to the US. The generally accepted standard for an arbitrator's disposition has been described in Astoria Medical Group v Health Insurance Plan of Greater New York (11 NY 2d 128, 227 NYS2d 401, 182 NE2d 85 (1962)], where it was held that party-appointed arbitrators may not be disqualified solely because of an existing relationship between the appointor and arbitrator. An arbitrator may be partisan, but not dishonest, and "he may not be deaf to the testimony or blind to the evidence presented."

Thereafter, the case of Commonwealth Coatings Corp v Continental Casualty Co [393 US 145 (1968)] became the accepted standard covering the requirements as to an arbitrator's duty to disclose information which might create an impression of bias. Similarly, Sanko Steamship Co Ltd v Cook Industries Inc [495 F 2d 1260 (2d Cir 1973)] addressed the issue of the arbitrators' duties to disclose.

In Commonwealth, the Supreme Court reversed the confirmation of an arbitration award on the grounds that one of the arbitrators had omitted to state his "close financial relationship"with one of the parties. Justices White and Marshall stated in their concurring opinion: [A]n arbitrator's business relationships may be diverse indeed, involving more or less remote commercial connections with great numbers of people. He cannot be expected to provide the parties with his complete and unexpurgated business biography. But it is enough for present purposes to hold, as the court does, that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed.

In the case of Sanko, the contention was that allegedly "large scale dealings"existed between one of the arbitrators and a party. The court held that it was "better practice"for "arbitrators to disclose fully all their relationship with the parties, whether these ties be of a direct or indirect nature."

The facts of Brennan v Stewart's Pharmacies [59 Haw 207, 579 P2d 673 (1978)] leave no doubt about any subtleties, stating, "Where an arbitrator, though appointed by the party, identifies himself personally with his party's prejudices and needs, the conclusion is unavoidable to act as an arbitrator.

"Under the established principles, the disclosure standards and expectations apply to party-appointed arbitrators. With respect to the third arbitrator, a different standard must be met, which, when using a Shakespearean phrase, must be "as chaste as ice, as pure as snow." The Society of Maritime Arbitrator's view on partiality is more comprehensive and covers all the arbitrators.

When doing some research for this article, I came across a case of personal interest. It involved Andros Compania Maritima v Marc Rich & Co, where I served as third arbitrator and chairman. Although it happened twenty years ago, some days I still wonder about the turn the case took.

The majority of the panel (Mr B dissenting), found in owners' favour. Subsequently, owners moved to confirm the award and charterers petitioned the court for vacatur, arguing that "the arbitrators failed to disclose circumstances that might create an impression of possible bias."The basis for this allegation was said to be "the personal relationship"or "friendship"between one of the arbitrators (Mr A) and Mr N, the president of the company which represents Andros in the Western Hemisphere. Mr N also was and is one of the most active arbitrators in New York. Marc Rich did not assert actual bias or interest. In fact it specifically disclaimed such actuality, relying only on appearance.

In his decision, Judge Charles L Brieant coined a few phrases which, over the years, have been quoted many times as being descriptive of our industry. He said: ". . . relationships in the maritime community in the port of New York tend to be somewhat incestuous."

(He referred to the fact that in a different case, Mr N was appointed by the owners, Mr A was appointed by Marc Rich as charterers, and the two selected Mr B as third arbitrator.)

". . . the number of commercial men skilled in such matters, and willing to undertake arbitration of maritime disputes has become small. These leaders meet and confer regularly in the course of their mutual activities and trade associations . . ."

". . . the friendship of these men is no more than that which exists among the bar, or between bench and bar in the smaller shire towns. These commercial men earn their livelihood within a ten-block enclave in downtown Manhattan within the sight of the Statue of Liberty."

Charterers appealed the decision. The court unanimously confirmed the lower court's decision [579 F 2d 691 (2 Cir 1978)] and pointed out that the line of decisions on disclosure and/or partiality show that the courts have viewed the teachings of Commonwealth Coatings pragmatically, employing a case-by-case approach in preference to dogmatic rigidity.

There is nothing wrong with existing business or arbitration relationships as long as they are disclosed up front

The message for arbitrators is that there is nothing wrong with existing business or arbitration relationships as long as they are disclosed up front and as long as they do not blind the arbitrator to evidence and/or deafen him to the testimony presented.

Full disclosure should be made so that the parties can assess the full extent of the relationship and the possible effect upon the pending arbitration.

This sentiment was also reflected in the concurring opinion of Chief Justice White in Commonwealth Coatings when he stated, ". . . it does mean that arbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial. I see no reason automatically to disqualify the best informed and most capable potential arbitrators."New York arbitrators - SMA members in particular - have practised this custom, and for all practical purposes, it has worked well. Over the last few years, however, I have noted that the disclosure statements have taken a bit of an odd turn - in many instances, they have become somewhat self-serving. The statements contain more information than necessary, exceeding the requirement to describe any potential conflict between the arbitrator and the principals, the law firms and the other panel members. Some arbitrators now preface the actual disclosure with a biography or cv, details which are not really called for in the disclosure requirement.

Attorneys or principals are quite sophisticated when selecting arbitrators. Why should it be necessary to state that in the 70s I was a vice-president of National Bank of North America/NatWest, in the 80s I worked for Cargill and now I am the president of Westmarine, when this background information is readily available from the SMA roster book. Why state the obvious, published data unless one wants to promote oneself. It is safe to assume that counsel wanting to appoint me know what I did in my business career.

This very point was also addressed in the Andros Court of Appeals decision, pointing out that Marc Rich could have done a review of arbitrators' records "just as easily before or during the arbitration rather than after it lost its case. Indeed, it is not at all uncommon for parties to check the past decisions of arbitrators before an arbitration begins."The very intimacy of the group from which the arbitrators are chosen suggests that the parties can justifiably be held to know at least some kind of basic information about an arbitrator's personal or business contacts. Are disclosure statements really necessary? In my opinion, they are. But disclosures should not be abused, they should not be the premise to attack an arbitrator's standing in an attempt to create the opportunity for challenges by a disgruntled loser to get a second bite of the apple. Disclosures are a matter of honesty and ethics - and arbitrators either possess those traits or they don't. Disclosures are meant to clarify and assist. Disclosures are the checks and balances for the integrity of the arbitral process.