Arbitrator’s Conflict Voids Arbitration Award

We previously warned of the risk that settlements purportedly achieved at mediation may unhinge due to the failure to document the settlement terms.  Along those lines, a recent decision highlights the effect of an arbitrator’s failure to disclose his connection to a party. Many attorneys are chosen as an arbitrator due to their reputation in the community or personal/business relationships.  Accordingly, there may be some heightened risks of potential conflicts, as seen here.

That problem came to a head in Mt. Holyoke Homes, L.P. v. Jeffer Mangels Butler & Mitchell, LLP, where a judge assigned to arbitrate a proceeding failed to disclose his relationship with the defendant.  This failure voided the arbitration award and may subject the judge to disciplinary action.  In the underlying dispute, the plaintiffs engaged a California law firm to represent them in a real estate transaction. However, when the plaintiffs’ application for development was later denied, they sued the firm for legal malpractice. 

The case proceeded to arbitration before a California Superior Court judge. The judge stated that he was not aware of any relationship with any party or attorney involved in the matter that would impair his ability to act fairly and impartially. With this disclosure, the parties agreed on the judge’s appointment.  Eventually, the judge held that the plaintiffs were not entitled to relief and awarded the defendant law firm several hundred thousand dollars in unpaid legal fees and litigation expenses. 

Following the award the plaintiffs took to the internet and discovered, for the first time, the judge’s previously undisclosed resume in which he named as a reference an attorney employed by the defendant law firm – the firm entitled to recover due to the judge’s decision.  The plaintiffs filed a petition to vacate the award.  The judge countered that the disclosure was not required under California law.

On appeal, the California Court of Appeals noted that the standard for disclosure is not whether the judge was actually biased, but whether a reasonable person “could entertain a doubt that he could be impartial.”  Because the judge included one of the firm’s partners as a reference on his resume, the court determined that this standard was met.  Accordingly, the Court held that the judge had erred in failing to make the disclosure and vacated the arbitration award. 

Mt. Holyoke serves as another reminder to disclose any potential conflict.  The “reasonable person” standard is utilized in many jurisdictions and provides a sound rule of thumb when considering a potential conflict: if this relationship could objectively be perceived as a conflict, it must be disclosed.

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