US Federal Courts take limited review of parties’ challenges to arbitrators

Challenges to arbitrator appointments have become a hot topic in international arbitration, having arisen in several high-profile international arbitrations this year.

Mimicking some of the cases arising in the international arena, two recent cases in the United States provide some new insight as to how the US courts might approach claims of arbitrator bias. In each case, the court considered its review of the issue to be limited, either holding that the question should be arbitrated or applying a high threshold for establishing arbitrator bias.

Recent arbitrator challenges

In May, India challenged two appointments in an investment treaty dispute with CC/Devas and other entities, alleging that the arbitrators’ public statements indicated predetermined views on a legal issue central to the case. Argentina is also currently challenging two arbitrators in a different case involving Repsol, on the basis that Professor Francisco Orrego Vicuña is biased against the country because it has successfully sought annulment of awards rendered by tribunals he has chaired and that another member of the panel, Claus von Wobeser, is likewise biased because the law firm representing the claimant has retained him as co-counsel or has appointed him as arbitrator in previous disputes.

In November, ICSID upheld a similar challenge by Venezuela against arbitrator José Maria Alonso, partner at a law firm that was representing another claimant against Venezuela in a separate ICSID dispute. The decision was significant in that it marked only the second time in history that ICSID has accepted such a challenge, perhaps serving as a harbinger of things to come.

Adam Technologies S.A. v. Sutherland Global Services

Adam Technologies S.A. de C.V. v. Sutherland Global Services, Inc [1] involved an arbitration administered by the International Center for Dispute Resolution (ICDR) and arose out of a breach of contract claim by Sutherland against ATI. For its party-appointed arbitrator, ATI selected an individual who had served as a mediator when the parties sought (unsuccessfully) to amicably resolve their dispute.

Sutherland objected, arguing that arbitrators must be “impartial and independent.” The ICDR sustained Sutherland’s objection and ATI filed a notice to arbitrate the ICDR’s decision. The ICDR responded that the decision was not arbitrable, because it was administrative in nature. The ICDR then gave ATI an extension to appoint a new arbitrator, and when ATI did not do so, made the selection in ATI’s place. ATI then filed an action in federal court seeking to re-institute its party-appointed arbitrator (the former mediator) and otherwise challenge the appointment and procedure adopted by ICDR to appoint a substitute.

On appeal, ATI argued that the arbitration agreement permitted the parties to select their own arbitrators without a time limit. ATI further argued that Sutherland’s challenge to their original appointment was untimely and without a proper basis.

The Fifth Circuit rejected ATI’s position, finding that the challenge to the ICDR’s rules was a procedural question left for the arbitrators to decide under the Supreme Court’s decision in Howsam. The court found that the parties had agreed to submit such disputes to arbitration by incorporating the rules of the American Arbitration Association and, by implication, the ICDR Rules, which address challenges to arbitrator appointments. Finally, the court found that ATI’s challenge to the ICDR's appointment was premature because it was filed before a final award had been rendered.

Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust

The arbitration in Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust arose out of a contract in which the parties agreed to share the benefits of a life insurance policy.[2] Kolel claimed that YLL had breached their contract by not paying premiums on the policy and allowing it to lapse.

Each party designated one arbitrator and together the parties agreed on a third arbitrator. The tribunal then issued an award in favor of Kolel, although YLL’s party-appointed arbitrator did not sign the award. YLL filed an action seeking to vacate the award, alleging (in part) that Kolel’s designated arbitrator told a third party that Kolel’s president “has to give me another week and he will receive a [ruling or decision] in his favor.” YLL further alleged that its party-appointed arbitrator had been purposely excluded from deliberations and that the other panel members had intentionally scheduled deliberations on dates on which they were aware it would be difficult for YLL’s appointee to participate.

On appeal, the Second Circuit noted that the Federal Arbitration Act (FAA) gives the courts a narrow scope of review and that enforcement is proper if there is a “barely colorable justification for the outcome reached.” Although the FAA allows awards to be vacated for “evident partiality or corruption in the arbitrators,” the court held in Kolel that the standard for corruption was met only where “it is made abundantly clear that [the award] was obtained through corruption, fraud, or undue means.” The court held that in this case, the arbitrator’s alleged statement amounted “simply [to] the arbitrator’s statement of his opinion after several arbitration proceedings.” It did not amount to “‘abundantly clear’ evidence of corruption.” The court likewise viewed the various affidavits submitted by YLL, including various affidavits concerning the relationships between Kolel’s party-appointed arbitrator and certain non-parties, his reputation in the community and threats made after the arbitration had completed, as insufficient to support a claim of bias.

Re-affirming the limited approach

BothKolel and Adam Technologies reaffirm the US federal courts’ limited approach to the review of arbitral awards and procedures, including arbitrator appointments. Parties challenging appointments or awards for bias could be referred to arbitration or held to a high evidentiary standard in court.