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Lou Chang publishes a bi-monthly ADR e-newsletter with arbitration and mediation news, case notes, ADR training events and mediation information developments around the country and the world collected by Mediate.com. Here are some of the recent editions of the newsletter. If you’d like to receive future editions of Lou Chang’s e-newsletter, please send Lou an email. You can also use the “Contact Lou” form on this website.

August, 2017

Hawaii arbitration statute amended to make vacature for arbitrator non-disclosure permissive where Court finds such non-disclosure to be substantial and material.

 

On July 11, 2017, Governor Ige signed  SB 314, SD1, HD1, CD1  which became Act 187 of the 2017 Legislature. Act 187 amends HRS 658A- 12 of the RUAA to require a finding that an arbitrator’s non-disclosed relationship or dealing is substantial and material and makes it permissive (“may”) rather than mandatory (“must”) for a reviewing court to conclude that it is appropriate to vacate an arbitrator’s decision.

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July, 2017

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:

  1. 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)

 

  1. 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.

 

  1. 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.”

 

  1. 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).

 

  1. 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).”

 

  1. 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.

 

  1. 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.”

 

  1. 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.”

 

  1. 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.

 

  1. 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:

  1. An appraisal expert witness who testified in the arbitration case had previously testified before the arbitrator in prior unrelated matters;
  2. 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
  3. 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.”

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Arbitration and Mediation News & Developments.

Hawaii Supreme Court adopts strict vacature rule for arbitrator nondisclosure of possible future relationship. The Madamba case.

Dec 7, 2015
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Arbitration award vacature. The Nordic case.

Dec 7, 2015
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Potential Arbitration Time Trap

Dec 7, 2015
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Expense shifting in arbitration. Is Civil Procedure Offer of Judgment Rule 68 applicable in arbitration?

Nov 18, 2015
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Myths of Labor Arbitration

Apr 27, 2015
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Arbitrator Duty of Disclosure and Vacatur.

Feb 16, 2015
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May, 2017

U.S. Supreme Court upholds enforceability of nursing home arbitration agreement signed by a holder of a general power of attorney.

 

In Kindred Nursing Centers LP v. Clark, (U.S. Supreme Court, May 15, 2017, slip opinion), the Supreme Court overturned a Kentucky Supreme Court ruling that had nullified an agreement to arbitrate signed by a family member who held a general power of attorney which provided that the agent had “full power . . . to transact, handle, and dispose of all matters affecting me and/or my estate in any possible way,” including the power to “draw, make, and sign in my name any and all . . .contracts, deeds, or agreements.” The individual’s estate filed suit claiming that substandard care from the nursing home caused the individual’s death. The nursing home sought to compel arbitration.

 

The Kentucky court articulated and applied a “clear statement” principle holding that powers of attorney by their terms must expressly provide that the holders of the powers of attorney are empowered to enter into arbitration agreements because agreements to arbitrate obviate the “sacred” and “inviolate” rights of individuals to their access to courts and their rights to a jury trial as provided for by the Kentucky constitution.

 

The U.S. Supreme Court in a 7-1 decision (Justice Thomas dissenting) observed that:

 

         “The FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. That statutory provision establishes an equal-treatment principle: A court may invalidate an arbitration agreement based on “generally applicable contract defenses” like fraud or unconscionability, but not on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

AT&T Mobility LLC v. Concepcion, 563 U. S. 333,

339 (2011).

 

The Supreme Court explained that the FAA thus preempts any state rule that discriminates on its face against arbitration—for example, a “law prohibit[ing] outright the arbitration of a particular type of claim.” It also prohibits any rule that covertly accomplishes the same objective by disfavoring contracts that have the defining features of arbitration agreements. The Supreme Court determined that the Kentucky Supreme Court decision impeded the ability of attorneys-in-fact to enter into arbitration agreements. By doing so, the court “flouted the FAA’s command to place those agreements on an equal footing with all other contracts.” Accordingly, the U.S. Supreme Court reversed the Kentucky Supreme Court and upheld the enforceability of the agreement to arbitrate made by the holder of the general power of attorney.

 

Hawaii Legislature acts to restore practicality and efficiency to the practice of arbitration. Legislative measure awaits  decision by the Governor.

 

In two recent decisions, Nordic PCL Construction, Inc. v. LPIHGC, LLC, 136 Hawai’I 29, 358 P. 3d 1 (2015) (the “Nordic” case) and Noel Madamba Contracting LLC v. Romero, 137 Hawai‘i 1, 364 P.3d 518 (2015) (the “Madamba” case), the Hawaii Supreme Court ruled that an arbitrator’s nondisclosure of information that a “reasonable person” might find likely to affect the arbitrator’s impartiality constitutes “evident partiality” as a matter of law. Upon finding “evident partiality”, the Court ruled that a reviewing court must vacate the arbitrator’s decision and award: a) whether or not the undisclosed information is material or substantial; b) without an opportunity for rebuttal; and c) without a showing of any actual or unfair bias or impact upon the arbitration process. Those two decisions have significantly damaged the efficiency, practicality and finality of the arbitration process.

 

As a practical result, these rulings make commercial arbitration, especially the larger cases, multi-round litigations. The traditional perceived benefits of arbitration as being fast, efficient and final are lost as a consequence. Parties who lose in an arbitration are virtually encouraged to seek judicial vacature by commencing an action and conducting discovery or extensive Google searches in the hopes of finding some element of arbitrator participation or involvement in prior matters that was not disclosed, however insignificant, in order to obtain vacature of the arbitration decision.

 

In response to concerns expressed by arbitrators, advocates and arbitration practitioners, the Hawaii Legislature has passed SB 314 SD1, HD1, CD1 and sent the measure to the Governor for his review and consideration. The measure seeks to amend HRS Section 658A-12 by providing for a trial court review and decision as to whether an arbitrator failed to disclose information reflecting that the arbitrator had a direct and material personal or financial interest in the outcome of the arbitration or that the arbitrator had an existing or past substantial relationship with any of the parties to the agreement to arbitrate or the arbitration proceeding, their counsel or representatives, a witness, or another arbitrator. If the trial court determines that the non-disclosed information is material or substantial, the court may order vacature.

 

Hopefully, the measure will be approved by the Governor and the new amendment to Ch. 658A will restore practicality, efficiency and finality to and reduce the potential for game playing in the arbitration process.

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April, 2017

Two Trial Court Rulings on Arbitrator Non-disclosures and Evident Partiality

 

On March 3, 2017, Circuit Court Judge Jeannette Castagnetti issued findings of fact and conclusions of law in two cases vacating arbitration decisions due to insufficient disclosures by arbitrators. In AOAO The Palm Villas at Mauna Lani Resorts v. CONSTRX LTD et. al. (“Palm Villas”), the Court concluded that prior and undisclosed relationships between the arbitrator and a party’s counsel and law firm demonstrates a reasonable impression of partiality warranting vacatur of the arbitrator’s award.

 

         In Palm Villas, the Court concluded that the arbitrator’s failure to disclose that she had been appointed to serve as an arbitrator in a matter by one of the party’s attorney’s law firm eight days before being appointed to serve as arbitrator in the Palm Villas matter created an impression of possible bias. The Court discussed how the party’s law firm was a “frequent flyer”, “repeat player” or “steady customer” of the arbitrator and was not with the other party’s law firm and insufficient disclosure of the nature of past dealings supported the conclusion of evident partiality. Evidence of any actual bias was not necessary.

 

The Palm Villas case in now being appealed. 

 

Also on March 3, 2017, Judge Castagnetti issued findings of fact and conclusions of law in the Nordic PCL Construction, Inc.  v. LPIHGC, LLC (“Nordic”) case. In the Nordic case, the Court concluded that the arbitrator’s failure to disclose that one of the law firms involved in the arbitration case had also represented the arbitrator in his capacity as Trustee of a large local trust was a fact that a reasonable person would view as likely to affect the arbitrator’s impartiality and required vacatur of the arbitrator’s award. The fact that one of the managers of Nordic knew that the arbitrator was a trustee of the trust and one of the partners in the law firm that represented Nordic had a brother in law that worked for the local trust was not sufficient to constitute notice to Nordic of the arbitrator’s potential conflicting relationship with the trust and its attorneys.

 

The Nordic case also presented the ”repeat player”, “steady customer” dynamic. In the Nordic arbitration, three law firms were involved as attorneys for arbitration parties. During the pendency of the arbitration, attorneys from two of the law firms engaged the arbitrator to serve as mediator in three unrelated matters. The Court concluded that the arbitrator’s failure to disclose the three concurrent engagements to provide services as mediator created a reasonable impression of partiality warranting vacatur of the arbitrator’s award. Apparently, it was not consequential that during the pendency of the arbitration, the third law firm had also attempted to but did not succeed in engaging the arbitrator to serve as a mediator in an unrelated matter.

 

The Nordic case appears headed back to arbitration.

 

 

Highlights from March 29, 2017 Forum on Arbitration Vacatur Rulings: ramifications and recommendations

 

The HSBA ADR and Litigation Sections, ACR Hawaii and the Center for Alternative Dispute Resolution sponsored a forum session to discuss the ramifications and recommendations following the Hawaii Supreme Court’s rulings in the Nordic and Madamba cases concerning the vacatur of arbitration decisions where there is insufficient arbitrator disclosures of potential conflicts of interest. In the Madamba case, the Court ruled that the “failure to meet disclosure requirements under HRS § 658A-12(a) or (b) is equivalent to, or constitutes, ‘evident partiality’ as a matter of law” and that “a potential conflict of interest creates evident partiality warranting vacature even when no actual bias is present.”

Advocates, arbitrators, retired judges and mediators engaged in a thoughtful and robust discussion sharing concerns and ideas for keeping the arbitration process a useful, fair, productive efficient and economical one. It was noted that the Court’s rulings have served to make arbitrators far more deliberate and careful to make more complete disclosures of existing or past relationships, dealings and interactions that may potential be found to be suggestive of potential partiality. To that extent the case rulings have resulted in a healthy improvement of the arbitration process.

 

However, the rulings and the lack of clarity as to what kinds of “relationships” or “dealings” are sufficient to amount to “evident partiality” have also caused many damaging and troubling ramifications to the practice of arbitration. Such ramifications include the following:

 

  • Parties unhappy with the results of an arbitration decision are incentivized to engage in post-decision Google searches and private investigations to find an arbitrator’s undisclosed “relationship” or “dealing” in order to gain a judicial order of vacatur.
  • Many large arbitration cases will warrant a post-decision challenge to gain a chance for a second bite at the apple.
  • Increased appeals, delay, lack of finality and cost due to repeat arbitration processes.
  • Increased exposures to higher awards of prevailing party attorneys’ fees and costs.
  • Game playing and sand-bagging.
  • Intentional or unintentional creation of post-appointment conflicts.
  • Malpractice exposure for failure to adequately investigate arbitrator, failure to disclose prior dealing or relationship that leads to vacatur of a favorable arbitration award and failure to warn or advise client properly.
  • Exposure to claims for the disgorgement of fees.

 

 

Recommendations for what parties, advocates and arbitrators can do to mitigate some of these concerns were discussed. They included:

 

  • Creating a party drafted protocol or adopting an agency rule such as DPR Arbitration Rule 9D which creates a contractual agreement to make parties, their advocates and the arbitrator share and participate in the process of fully and  fairly identifying any pending, prior or future relationship, dealing or interaction between or involving the parties, their attorneys, arbitrators and witnesses that might give rise to concerns of possible arbitrator partiality in the matter. After an agreed time and opportunity to identify and disclose witnesses and to investigate and consider such information, the parties can agree to accept the disclosures and waive the right to challenge and seek vacatur of an arbitrator’s decision because of any item of disclosure that was disclosed or which reasonably could have been identified during the period of disclosure and investigation. Such protocols can also include the commitment that parties will not identify engage substitute counsel or additional co-counsel so as to create a potentially disqualifying conflict. Arbitrators can also conduct a pre-hearing disclosure process, possibly on the record,  to accomplish the same objectives for assuring a full and fair disclosure process.
  • Parties and their attorneys should implement procedures to protect and prevent their engagement of the arbitrator in any further contemporaneous case, matter, relationship or dealing during the pendency of the arbitration. Arbitrators should refrain from accepting contemporaneous engagements to perform services on another matter from a party or law firm involved in the pending arbitration matter.
  • A suggestion that parties and their attorneys expressly acknowledge in their arbitration agreements that any dispute arising under the contractual relationship is a matter affecting interstate commerce and expressly adopt the Federal Arbitration Act (and not the Hawaii RUAA) and the Federal Court as the designated judicial forum was met with some skepticism as to whether such an agreement would be enforceable and binding.

 

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