The Supreme Court of Hawaii ruled recently that if a neutral arbitrator fails to meet disclosure requirements, it constitutes “evident partiality” as a matter of law, and requires the vacatur of the arbitrator’s award. Furthermore, Hawaii interpreted its disclosure requirements broadly, and in this case found an arbitrator’s failure to disclose the “concrete possibility” of his attorney-client relationship with the claimant’s counsel was enough to create a reasonable impression of partiality and demand vacatur. Noel Madamba Contracting, LLC v. Romero, __ P.3d __, 2015 WL 7573420 (Haw. Nov. 25, 2015).
The underlying dispute involved homeowners who claimed their contractor had abandoned the construction of their new home. After the homeowners demanded arbitration and the parties filed their ranked lists of neutrals, a retired judge, Patrick Yim, was appointed as the arbitrator in May of 2011. The hearing took place in November of 2012, and Yim issued a partial award for the homeowners of about $155,000 on January 26, 2012. In April of 2012, Yim also awarded the homeowners $42,000 in attorneys’ fees. The homeowners were represented by lawyers from Cades Schutte LLP.
During that same time period, Yim’s retirement accounts needed some legal attention. He used a third party (PSC) to manage his retirement accounts, and PSC decided it was time for an attorney to ensure those accounts complied with ERISA (and other laws). In May of 2011, Yim was told that either Cades or another firm would be chosen to handle that review. In December of 2011, PSC told Yim the approximate cost for the review and that his file was being sent to an unspecified law firm. At the end of January, just days before the partial award was issued, PSC told Yim that Cades would likely do the work. Yim first spoke with a Cades attorney in February of 2012, but Cades had not yet done any work for him and there was no engagement letter.
Within a day or so of the February meeting, which was a month after the partial award for the homeowners, Yim first disclosed his potential client relationship with Cades to the parties in the arbitration. The contractor objected and requested more information, which resulted in two further supplemental disclosures. In those disclosures, Yim said he had not yet actually engaged Cades and instead had instructed PSC to send his file to another firm. The contractor was not satisfied, but the administrator affirmed Yim’s role. The contractor then moved to vacate the award, arguing evident partiality under the Hawaii Uniform Arbitration Act. Both the trial court and the intermediate appellate court refused to vacate the award, largely due to their analysis that arbitrators only have to disclose current or past relationships, not potential future relationships.
The Supreme Court of Hawaii remanded the case with instructions to vacate the arbitration award. It concluded that “Yim’s failure to disclose his relationship with Cades created a reasonable impression of partiality, and as such, resulted in a violation of the disclosure requirements” in the Uniform Arbitration Act, necessitating vacatur of the award. In its analysis, the court noted that while one subsection of the UAA requires disclosure of an arbitrator’s “past or present relationships,” the more general rule in the UAA is that arbitrators must disclose “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator.” The court cited to Ninth Circuit case law holding that the failure to disclose a “concrete possibility” of a connection between an arbitrator and a party or a party’s law firm can result in a reasonable impression of partiality. Therefore, Yim’s failure to disclose his anticipated relationship with Cades constituted evident partiality, even without any showing that Yim was “actually biased.” The court grounded its decision in policy: “because review of an arbitration award is limited, an arbitrator’s impartiality and appearance of impartiality is paramount.”
This is an interesting opinion for many reasons, but here are a few.
- Why is this entire case decided under the Hawaii Uniform Arbitration Act? Was that written into the parties’ contract? The arbitration agreement is not quoted and there is no analysis in this decision of whether the parties’ transaction involved interstate commerce. That could have been dispositive, as many federal cases require actual proof of bias.
- The high court did not reach the issue of whether the trial court should have allowed the contractor’s attorney to depose Yim about his contacts with the Cades firm. However, it did say that Yim was “not immune” from testifying under the UAA, because the contractor had established prima facie grounds to vacate the award. I would have liked to see the Hawaii court tackle this issue because there is little good analysis of that issue.
- Yim’s status as a 24-year member of the Hawaii state courts is likely a critical, but unaddressed, factor in how this decision came out. Did the lower courts not want to embarrass their former colleague by finding that he failed to disclose? Conversely, did the high court want to be especially firm with former judges, to avoid any allegation that it was soft on them? This is not unique to Hawaii — many retired judges become active arbitrators, making it awkward when their former judicial colleagues have to pass on the soundness of their decisions as arbitrators. Maybe the rule should be that the arbitrator is never named in motions to vacate? (Ironic…worrying about “evident partiality” by the judges who are considering whether the arbitrator showed “evident partiality.”)