Justice Ken Wise
In a case that offers an excellent review of Texas law governing vacatur of an arbitration award based on “the evident partiality of an arbitrator appointed as a neutral arbitrator,” the Houston [14th] Court of Appeals has upheld a Harris County district court’s refusal to set aside an arbitration award.
Dr. Nestor Martinez; NM Health Services-North, P.A.; Pain & Recovery Clinic of North Houston; and Caguas Casualty Corp. v. Capstone Associated Services, Ltd.; Capstone Associated Services (Wyoming), Limited Partnership; and Capstone Insurance Management, Ltd. (No. 14-21-00560-CV) arose from a business dispute between a physician’s clinic and captive insurance company and a group of affiliated entities that provide administrative services to captive insurers. Also involved, though not a party to the lawsuit, was a law firm that provided services to plaintiffs between 2005 and 2015. The original contract and a subsequent amendment to the contract referred to an addendum that included an arbitration provision under which either party could initiate arbitration and select a neutral arbitrator. When the law firm withdrew from representation in 2015, it sought arbitration and selected an arbitration firm pursuant to the contract.
During the arbitration the arbitrator disclosed to the parties, as required by Rule 17 of the AAA Commercial Rules, that the arbitrator assigned to the matter knew Captsone’s lead counsel and has previously arbitrated a case involving a Captsone Company. Dr. Martinez objected that the arbitrator did not disclose a number previous arbitrations his firm had conducted with Captsone’s counsel or that counsel had once made a campaign contribution to the arbitrator and held a fundraiser for him. The arbitrator denied Martinez’s motion to disqualify and subsequently entered an award in favor of Captsone. When Captsone sought confirmation of the award by the district court, Martinez moved to vacate the award based on the “evident partiality” of the arbitrator. The court denied the motion and confirmed the award. Martinez appealed.
In an opinion by Justice Wise, the court of appeals affirmed. SCOTX has held that “a prospective neutral arbitrator . . . exhibits evident partiality if he or she does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality” (citing Burlington N. R. Co. v. TUCO, Inc., 960 S.W.2d 629, 636 (Tex. 1997)). Evident partiality “is established by the nondisclosure itself, regardless of whether the nondisclosed information necessarily establishes partiality or bias,” and “a party who could have vetoed the arbitrator at the time of selection may disqualify the arbitrator during the course of the proceedings based on a new conflict which might reasonably affect the arbitrator’s partiality.”
Distinguishing a prior precedent, Builders First Source-South Texas, LP v. Ortiz, 515 S.W.3d 451 (Tex. App.—Houston [14th Dist.] 2017, pet. denied), in which the court found evident partiality based on the arbitrator’s failure to disclose prior arbitrations with a party when directly asked about it, the court here focused on Martinez’s failure to show that the arbitrator had any knowledge of nondisclosed proceedings, since he was only one of many arbitrators in the firm and had in fact only arbitrated the specific case he did disclose. Unlike in Builders First-Source, Martinez did not request any further disclosures from the arbitrator and presented no evidence that he even knew which entities Captsone’s lead counsel actually owned. And although members of the arbitrator’s firm had conducted arbitration proceedings in the prior seven years involving Captsone entities, there was no evidence regarding how arbitrators were assigned by the firm or whether the arbitrator in question here received any financial incentive when Capstone entities used the firm’s services. Captsone’s counsel further disclosed that he had been involved in prior arbitrations with the firm, as well as a prior proceeding with the arbitrator in question, but Martinez did not object. Finally, the fact that Captsone’s counsel had once made a campaign contribution to the arbitrator was trivial and not required to be disclosed.
This case demonstrates how difficult it is to convince a court to vacate an arbitration award on the basis of the arbitrator’s partiality, especially when the proper predicate has not been established by the objecting party during the arbitration proceeding itself. Since the law provides that partiality is “established by the nondisclosure itself,” the objecting party had better get the arbitrator on record intentionally denying failing to disclose something the party already knows. Short of that, or evidence showing some direct business interest between the arbitrator and one of the parties or its counsel, a partiality challenge probably won’t fly.
