Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC
437 S.W.3d 518
| Tex. | 2014Background
- Tenaska and Ponderosa disputed indemnity obligations under their purchase agreement; the agreement required a three-arbitrator neutral panel and arbitration under AAA rules (without AAA administration).
- Ponderosa was represented by Nixon Peabody lawyers Penski and Boland, who recommended Samuel Stern as a neutral arbitrator; Stern’s CV disclosed he was a director/advisor to LexSite (later Exactas).
- Stern disclosed that Nixon Peabody had recommended him in other matters and that he attended at least one meeting between LexSite and Nixon Peabody, adding that "Nixon-Peabody and LexSite have done no business…"
- After the panel awarded Ponderosa $125 million under the baseball-arbitration provision, Tenaska moved to vacate, arguing Stern was evidently partial due to undisclosed ties.
- The trial court, after extensive discovery and findings, vacated the award, concluding Stern failed to disclose material facts (share ownership, US corporate role, frequent marketing contacts, repeated meetings with Penski/Boland, edits to his disclosures) that might create a reasonable impression of partiality; the court of appeals reversed.
- The Texas Supreme Court reversed the court of appeals, holding the nondisclosures could create an objective impression of partiality and Tenaska did not waive the claim because it lacked knowledge of the undisclosed facts.
Issues
| Issue | Tenaska's Argument | Ponderosa's Argument | Held |
|---|---|---|---|
| Whether Stern's partial disclosures gave rise to "evident partiality" requiring vacatur | Stern failed to disclose material facts (stock, paid services, marketing, repeated contacts with counsel, edited disclosures) that might lead an objective observer to infer partiality | Stern disclosed the relationships (recommendations, meeting) and partial disclosure was sufficient; no evident partiality | Held for Tenaska: nondisclosed information was nontrivial and might create a reasonable impression of partiality; vacatur appropriate under the Commonwealth Coatings/TUCO standard |
| Whether Tenaska waived its evident-partiality challenge by proceeding with arbitration and signing a waiver clause | No waiver: Tenaska lacked knowledge of undisclosed facts; waiver requires knowledge | Yes waiver: Tenaska had enough disclosure to inquire or object and thus waived challenge | Held for Tenaska: a party cannot waive a claim based on facts it did not know; the waiver clause was conditioned on full disclosure which did not occur |
| Proper standard for evident partiality (objective test v. heightened/intent-based test) | Maintain objective test: nondisclosure itself can establish evident partiality; intent not required | Adopt a more deferential standard ("reasonable person would have to conclude" arbitrator was partial) or require proof of intent/actual bias | Held: Court adheres to Commonwealth Coatings/TUCO objective standard; declines intent-based or heightened test |
| Effect of partial disclosures — must courts consider disclosed information as well as withheld information? | Compare disclosed and undisclosed facts; trivial withheld information need not vacate award | Disclosure of relationships suffices; withheld details immaterial when main relationships were disclosed | Held: Court will compare disclosures to withheld facts; here withheld details were more than trivial and relevant to the objective impression of bias |
Key Cases Cited
- Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968) (arbitrator must disclose dealings that might create an impression of possible bias)
- Burlington N. R.R. Co. v. TUCO Inc., 960 S.W.2d 629 (Tex. 1997) (adopts Commonwealth Coatings: nondisclosure that might create a reasonable impression of partiality warrants vacatur)
- Mariner Financial Group, Inc. v. Bossley, 79 S.W.3d 30 (Tex. 2002) (a party cannot waive an evident-partiality objection based on facts it did not know)
- Morelite Construction Corp. v. N.Y.C. District Council Carpenters Benefit Funds, 748 F.2d 79 (2d Cir. 1984) (advocates a stricter standard for vacatur requiring a reasonable person to conclude arbitrator was partial)