BARCON ASSOCIATES, INC., PLAINTIFF-APPELLANT, v. TRI-COUNTY ASPHALT CORPORATION, DEFENDANT-RESPONDENT.
Supreme Court of New Jersey
Argued November 18, 1980—Decided May 28, 1981.
For affirmance—Chief Justice WILENTZ and Justices SULLIVAN, PASHMAN, CLIFFORD, SCHREIBER, HANDLER and POLLOCK—7.
For reversal—none.
BARCON ASSOCIATES, INC., PLAINTIFF-APPELLANT, v. TRI-COUNTY ASPHALT CORPORATION, DEFENDANT-RESPONDENT.
Argued November 18, 1980—Decided May 28, 1981.
Irwin I. Kimmelman argued the cause for respondent (Kimmelman, Wolff & Samson, attorneys; Mr. Kimmelman and Ronald E. Wiss, on the brief).
The opinion of the Court was delivered by
PASHMAN, J.
In this case we are called upon to decide whether the existence of an undisclosed, substantial business relationship between a party-designated arbitrator in tri-partite arbitration and the party designating that arbitrator constitutes “evident partiality” under
Both the trial court and the Appellate Division held that it did constitute partiality. We granted Barcon‘s petition for certification, 84 N.J. 422 (1980). Because we share the Appellate
In addition, we establish prospectively the requirement that every arbitrator, whether party-designated or “neutral,” disclose to the parties, prior to the commencement of arbitration proceedings, any relationship or transaction that he has had with the parties or their representatives. This disclosure should also include any other fact which would suggest to a reasonable person that the arbitrator is interested in the outcome of the arbitration or which might reasonably support an inference of partiality.
I
In 1974 plaintiff, Barcon Associates, Inc. (Barcon), a general contractor, entered into a construction subcontract with defendant Tri-County Asphalt Corporation (Tri-County). Disagreements arose under the subcontract which led Barcon to institute a suit against Tri-County in September 1975.
In December 1975, on Tri-County‘s motion, the trial court stayed the suit pending arbitration pursuant to terms of the parties’ subcontract. That subcontract provided that any disagreement
shall, upon written notice of either to the other party, be submitted to three arbitrators for decision. Each party shall choose one arbitrator . . . , the third to be chosen . . . by the two thus selected.
Tri-County designated as its arbitrator Gareld R. Gray, an officer of an international contracting firm.1 Barcon chose
Arbitration hearings were held in January and March 1977. Several months later the arbitration panel informed the parties that by a two-to-one vote the panel had decided in favor of Barcon, and that Tri-County should pay Barcon $29,500 “in settlement of all claims” between the parties.
In December 1977, Barcon sought confirmation of the award in the Superior Court pursuant to
The basis of Tri-County‘s counterclaim was the business dealings that Spatz had with Barcon in 1977 throughout the pendency of the arbitration proceedings. Tri-County contended that Spatz “transgressed into the realm of ‘evident partiality’ when he failed to disclose” these dealings. In fact, Spatz had done business with Barcon for approximately twenty years by the time of his designation as Barcon‘s arbitrator in this case. Two transactions between Spatz‘s construction company and Barcon were ongoing during the arbitration proceedings in 1977.
One involved paving work completed by Spatz‘s firm in August 1976.3 Spatz‘s firm billed Barcon $25,215.84 for this work
The second ongoing transaction involved paving work done by the Spatz firm for Quail Ridge Corporation, a wholly-owned subsidiary of Barcon. This was part of a long-term project that commenced before the arbitration and continued after. Payments received on this account included one of $43,005.78 made in July 1977 while the arbitration panel was still deliberating.
In April 1978 the trial court, in a decision from the bench, vacated the arbitration award because of Arbitrator Spatz‘s “evident partiality within the meaning of
On appeal, the Appellate Division affirmed, expressing its strong disapproval of “any appearance of bias sufficient to discredit this useful adjudicatory tool.” 172 N.J. Super. at 190. In addition, the court adopted a requirement, based on Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 89 S. Ct. 337, 21 L. Ed. 2d 301 (1968), that “arbitrators disclose to the parties any dealings that might create an impression of possible bias.”
II
Commercial arbitration is a long-established practice in New Jersey consistently encouraged by the Legislature. Even under seventeenth century colonial rule, arbitration was fostered by statute, Boskey, A History of Commercial Arbitration in New Jersey (pt. 1), 8 Rut.-Cam.L.J. 1, 5 (1976), reflecting a public policy unchanged to the present day and embodied in the current arbitration act,
The courts of this State have also favored arbitration. E. g., Kearny PBA Local # 21 v. Town of Kearny, 81 N.J. 208, 221 (1979); Daly v. Komline-Sanderson Engineering Corp., 40 N.J. 175, 177 (1963); Ukrainian National Urban Renewal Corp. v. Muscarelle, Inc., 151 N.J. Super. 386, 396-97 (App. Div. 1977), certif. denied, 75 N.J. 529 (1977); Public Utility Construction and Gas Appliance Workers, Local 274 v. Public Service Elec. & Gas Co., 35 N.J. Super. 414, 419 (App. Div. 1955), certif. denied, 19 N.J. 333 (1955); Eastern Engineering Co. v. City of Ocean City, 11 N.J. Misc. 508, 510 (Sup. Ct. 1933); Fennimore v. Childs, 6 N.J.L. 386, 388 (Sup. Ct. 1797). Because it has retained this status in the law and because it offers significant advantages to the parties, arbitration is a widely-used means of resolving commercial disputes. See Boskey, supra (pt. 2), 8 Rut.-Cam.L.J. 284, 309-10 (1977).
These principles are incorporated in the arbitration act,
A necessary corollary of the fact that arbitrators function with the support, encouragement and enforcement power of the state is the requirement that they adhere to high standards of honesty, fairness and impartiality. “An arbitrator acts in a quasi-judicial capacity and must render a faithful, honest and disinterested opinion upon the testimony submitted to him.” Brotherton, Inc. v. Kreielsheimer, 8 N.J. 66, 70 (1951); see also Carpenter v. Bloomer, supra, 54 N.J. Super. at 162; Eastern Engineering, supra, 11 N.J. Misc. at 511; Leslie v. Leslie, supra, 50 N.J. Eq. at 107; Kearny PBA Local # 21, supra, 81 N.J. at 226 (Pashman, J., concurring); Commonwealth Coatings Corp. v. Continental Casualty Co., supra, 393 U.S. at 148-49; American Eagle Fire Ins. Co. v. New Jersey Ins. Co., 240 N.Y. 398, 405, 148 N.E. 562, 564 (1925); J. P. Stevens & Co. v. Rytex Corp., 34 N.Y.2d 123, 129, 312 N.E.2d 466, 469, 356 N.Y.S.2d 278, 282 (1974).
We emphasize that these standards must govern the conduct of all arbitrators in whose hands the dispute resolution process is entrusted—not only so-called “neutral” arbitrators but party-designated arbitrators as well.
In American Eagle Fire Ins. Co. v. New Jersey Ins. Co., supra, Judge Pound of the New York Court of Appeals made several accurate observations about party-designated arbitrators.
[The practice of arbitrators of conducting themselves as champions of their nominators is to be condemned as contrary to the purpose of arbitrations, and as calculated to bring the system of enforced arbitrations into disrepute. . . . [A party-designated arbitrator] is not an advocate whose function is to convince the umpire or third arbitrator. . . . He must lay aside all bias, and approach the cause with a mind open to conviction and without regard to his previously formed opinions as to the merits of the party or the cause. He should sedulously refrain from any conduct which might justify even the inference that either party is the special recipient of his solicitude or favor. [240 N.Y. at 405, 148 N.E. at 564]
[w]here there was either evident partiality or corruption in the arbitrators, or any thereof . . . [emphasis added]
Although arbitration originates in the contract of the parties and is a process which may operate without any court involvement, we reject the notion, repeatedly asserted by the dissent, that the parties’ contract should prevail over all other considerations. In particular, we give priority to the need to maintain the integrity of arbitration and public faith in the process. The dissent objects that our holding today disregards “the paramount public policy consideration” of encouraging “voluntary arbitration as a means of resolving commercial disputes informally, expeditiously, relatively inexpensively, and in a manner that relieves our overburdened judicial resources,” post at 210. However, it is our strongly held view that honest, fair and impartial arbitration is as important as the finality of arbitration. See Moshier v. Shear, 102 Ill. 169, 174 (1881) (commenting, in regard to commercial arbitration, that “however desirable it may be to terminate protracted contention, it is more desirable that justice shall be administered, free from all improper or corrupting influences.“). Cf. Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807, 823, 623 P.2d 165, 171 Cal. Rptr. 604, 613, 615 (1981) (disapproving “complete contractual autonomy in the choice of an arbitrator,” which must give way to “the common law requirement of fair procedure“). Because of the confidentiality in which arbitrators conduct their deliberations, the goal of ensuring that they will adhere to high standards will best be attained by requiring them to avoid not only actual partiality but also the appearance of partiality.5 Commonwealth Coatings
Notes
A party to the arbitration may, within 3 months after the award is delivered to him, unless the parties shall extend the time in writing, commence a summary action in the court . . . for the confirmation of the award or for its vacation, modification or correction. Such confirmation shall be granted unless the award is vacated, modified or corrected.
The court shall vacate the award in any of the following cases: . . .
b. Where there was either evident partiality or corruption in the arbitrators, or any thereof . . . .
Although standards pertaining to the requisite impartiality of party-designated arbitrators are not susceptible to precise formulation in the abstract, some general observations can be made. As a starting point, we register our agreement with the following principle which appears in the Code of Ethics for Arbitrators in Commercial Disputes jointly drafted by the American Arbitration Association and the American Bar Association. Party-designated arbitrators, according to the Code,
may be predisposed toward the party who appointed them but in all other respects are obligated to act in good faith and with integrity and fairness. [Holtzmann, The First Code of Ethics for Arbitrators in Commercial Disputes, 33 The Business Lawyer 309, 319 (1977)]
While a party-designated arbitrator may approach the arbitration proceedings with some sympathy for the position of the party designating him, such an arbitrator must remain faithful to the obligation which rests upon him to maintain “broad public confidence in the integrity and fairness of the [arbitration] process.” Id. at 312. Thus, all arbitrators should “conduct the proceedings in an evenhanded manner and treat all parties with equality and fairness at all stages of the proceedings.” Id. at 318. Most important, arbitrators “should decide all matters justly, exercising independent judgment, and should not permit outside pressure to affect the decision.” Id. at 317. All arbitrators, party-designated and neutral, must exercise their responsi-
Whether a particular party-designated arbitrator has run afoul of these precepts and shown evident partiality can be decided only on the facts of each case. To illustrate, if it were shown that there existed a possible conflict of financial interest on the part of the arbitrator; or that the arbitrator prejudged the dispute because of bias or partisanship; or that there was animus on the part of the arbitrator against the other side, such a showing would demonstrate evident partiality. The party alleging that an arbitrator was impermissibly biased has the burden of proving that allegation by a preponderance of the evidence introduced concerning these or any other relevant factors.
III
Applying the above principles to the facts of this case, the judgment of the Appellate Division vacating the arbitration award must be affirmed. No actual bias or partiality on the part of Arbitrator Spatz has been alleged. Nevertheless, throughout the pendency of the arbitration proceedings, Spatz was engaged in business dealings with and was owed substantial sums by the party which designated him. This relationship creates too great an appearance of partiality to be permitted. An arbitrator cannot, if challenged by the other side, be allowed to participate in the resolution of a dispute when such a manifest conflict of interest exists. As the trial court concluded,
the line between the acceptable general predisposition of attitude permitted in the case of a party-designated arbitrator and impermissible bias or partisanship (or the appearance thereof) is crossed when the arbitrator is involved in active and significant business dealings with a party during the pendency of the arbitration proceedings. The idea of biased or partisan arbitration is conceptually inadmissible, and the law simply cannot allow any judicially enforceable arbitration proceeding to be anything other than an impartial proceeding which has appropriate appearances of impartiality. [160 N.J. Super. at 570-71, 390 A.2d 684]
We recognize that considerable waste results when an award is vacated after the proceedings have run their full course with the consequent investment of time and money by the parties. It is necessary to reduce the risk that such waste will occur and to remain faithful to the goals of minimizing judicial involvement and leaving the arbitration process in the hands of the parties, as well as to effectuate the intent of the Legislature that all arbitrators be impartial. Accordingly, we adopt the requirement that every arbitrator, neutral or party-designated, make full disclosure of possible conflicts of interest to the parties, prior to commencement of arbitration proceedings.6 This disclosure should reveal any relationship or transaction that he has had with the parties or their representatives as well as any other fact which would suggest to a reasonable person that the arbitrator is interested in the outcome of the arbitration or which might reasonably support an inference of partiality. See Richeo Structures v. Parkside Village, Inc., 82 Wis. 2d 547, 557, 263 N.W.2d 204, 211 (1978) (applying a similar disclosure requirement to neutral arbitrators); accord, Commonwealth Coatings Corp. v. Continental Casualty Co., supra, 393 U.S. at 149 (Arbitrators must disclose “any dealings that might create an impression of possible bias.“); Sanko S.S. Co., Ltd. v. Cook Industries, Inc., 495 F.2d 1260, 1264 (2d Cir. 1973) (“[A]rbitrators should disclose fully all their relationships with the parties, whether these ties be of a direct or indirect nature.“); J. P. Stevens & Co. v. Rytex Corp., supra, 34 N.Y.2d at 129-30 (“[A]ll arbitrators before entering upon their duties should make known any relationship direct or indirect that they have with any party to the arbitration, and disclose all facts known to
Such a pre-arbitration disclosure requirement has several advantages. It will, as suggested above, reduce the likelihood of potentially wasteful post-arbitration challenges, which may well be brought by “a suspicious or disgruntled party . . . as a pretext for invalidating the award,” Commonwealth Coatings, supra, 393 U.S. at 151 (White,
Disclosure will leave to the parties themselves the initial decision as to whether to object to an arbitrator designated by the other side and, if necessary, to seek judicial determination of whether that arbitrator appears to be too partial to be permitted to participate in the arbitration. This procedure is thus consistent with the goal of minimizing judicial interference in the arbitration process, and recognizes that the parties, as active participants in their respective industries, are well situated to decide when to object because contacts between an arbitrator and the party designating him create too great a likelihood of bias.
We recognize that arbitrators are often chosen precisely because they are experienced in the industry in which the dispute has arisen. When an industry is small, the possibility that potential arbitrators have had some prior contact with one or both of the parties is considerable. See G. Goldberg, A Lawyer‘s Guide to Commercial Arbitration, supra, at 39. We fully agree with Justice White‘s observations that
[a]rbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial. I see no reason automatically to disqualify the best and most capable potential arbitrators.
The judiciary should minimize its role in arbitration as judge of the arbitrator‘s impartiality. That role is best consigned to the parties, who are the architects of their own arbitration process, and are far better informed of the prevailing ethical standards and reputations within their business.
If arbitrators err on the side of disclosure, as they should, it will not be difficult for courts to identify those undisclosed relationships which are too insubstantial
As the Wisconsin Supreme Court said in Richeo Structures, supra,
A rule of full disclosure strikes the proper balance between ensuring finality of arbitration awards and ensuring justice and fairness (and the appearance of justice and fairness) in arbitration proceedings. It permits the fully informed parties to balance the need for impartial arbitrators and the need for experienced, knowledgeable arbitrators when they select the arbitration panel. [82 Wis. 2d at 560, 263 N.W.2d at 212]
At the same time, we emphasize that the arbitrators must make full disclosure prior to the commencement of proceedings and also inform the parties of any pertinent facts that arise once proceedings have begun. A party can make a sound judgment as to an arbitrator‘s possible partiality only if the arbitrator discloses all relevant information. When a relevant fact is not disclosed at the outset of the proceedings and the award is later challenged, the reviewing court may vacate the award if it concludes that the undisclosed fact would have been such as to lead a reasonable person to object to the designation of the arbitrator in question. There need not be evidence that the arbitrator was actually biased. See Richeo Structures, supra, 82 Wis. 2d at 562, 263 N.W.2d at 213.
However, should an arbitrator make full disclosure and the other party fail to object at that time, that party will be held to have waived any right later to object to the designation of the arbitrator on the grounds so revealed. This is in accordance with settled law. International Brotherhood of Teamsters, Local 560 v. Bergen-Hudson Roofing Supply Co., supra, 159 N.J. Super. at 316; Hartwyk v. Monroe Calculating Machine Co., 13 N.J. Super. 160, 164-65 (Ch. Div. 1951); Milliken Woolens, Inc. v. Weber Knit Sportswear, Inc., 11 App. Div. 2d 166, 168, 202 N.Y.S.2d 431, 434 (1960).
Parties should, if they approach the matter in good faith, have no problem agreeing on arbitration panels prior to the commencement of proceedings. Furthermore, as a result of the full disclosure rule which we adopt today, post-award challenges in
V
With all due deference to the dissent‘s knowledge of the field of commercial arbitration, we think it appropriate to emphasize that it is the judicial enforceability of an arbitration award that is at issue here, not just the state of commercial practice in the field of arbitration. The parties may agree to any form of dispute resolution that they wish, but they may not seek the backing of the courts for private actions that, while substituting for the judicial function, are fraught with the appearance of bias. Notwithstanding commercial practice, however prevalent, the Court must examine independently the propriety of allowing arbitrators, although designated by the parties, to act as advocates in the arbitration proceedings, since by law the results of these proceedings are enforceable by the courts.
As regards the present state of the practice of commercial arbitration, the dissent apparently assumes that all parties to commercial arbitration agreements are equally sophisticated and experienced. But not all parties to commercial arbitration agreements enjoy the advantage of a battery of legal advisors at every step of the process. Consequently, we should not hesitate to resist a commercial practice that, if as prevalent as the dissent contends, taints the very process which allows the parties to resolve disputes without recourse to the courts. We wonder as well why the dissent believes that all parties to tri-partite arbitration agreements actually intend to allow an advocate for the opposing side to have the ear of the one neutral arbitrator throughout the panel‘s private deliberations.
The dissent‘s criticisms of our position indicate an unwillingness to read this opinion as written. Nowhere do we suggest that an arbitrator “would have been qualified to sit on the panel
The dissent also places undue emphasis on the rule of waiver we have adopted for these arbitration proceedings. The rule that a party waives a ground for challenging an adverse disposition when it fails to note a timely objection is simply a procedural rule of litigation necessary to avoid unfairness to the other party and waste of adjudicatory resources. Cf. R., 1:7-2, 1:7-5, and 2:10-2 (time for objections and notice of errors on appellate review). Courts can only rule on the apparent partiality of an arbitrator if one of the parties objects and brings the matter before the courts. It would be inequitable and wasteful to allow a party to withhold its objections until after the panel has rendered an unfavorable decision. While we do not condone arbitration awards made by a panel whose members are not impartial, we see a greater evil in permitting parties that are aware of grounds for objection to put the other party and the panel through the time and expense of arbitration proceedings before challenging the proceedings.
Contrary to the dissent‘s assertion, what we find “most objectionable” is not “arbitrator Spatz‘s failure to disclose his substantial business relationship with Barcon at the outset of the arbitration proceedings.” Post at 203. What we find most objectionable is the existence of these relationships where the opposing party has raised a timely objection. Since there was no disclosure in this case, Tri-County‘s objection after the ad-
The dissent also assumes that including a waiver of the disclosure requirement in the arbitration agreement will have the same effect as failing to object after disclosure. This opinion does not address that question, nor do we see the dissent‘s assumption as necessarily following from our procedural waiver rule.
Nevertheless, this assumption leads the dissent to state, “The worst possible bias in fact is to be permitted, if waived, and the forbidden appearances are equally permitted.” Post at 209. A careful reading of our opinion belies this statement. Since “bias in fact” could normally be demonstrated only by reference to actions of the arbitrator after proceedings have begun, failure to object at the time of disclosure could not constitute waiver of objection to actual bias which becomes known only later. If the dissent‘s point, however, is that the parties could knowingly allow a biased arbitrator to sit on the panel, our response is that the same could happen if after the arbitration award a party fails to object although it is aware of actual bias in the panel. We repeat that a court can act only when the parties ask it to act and when they comply with its procedural rules.
The dissent notes that an arbitrator‘s “interest in the proceedings” which existed at the outset of arbitration “would not dissipate upon the disclosure of the relationship,” and therefore wonders how disclosure maintains the integrity of arbitration. Post at 208. The purpose of disclosure, of course, is to provide parties to arbitration with the information necessary to object to the designation of a particular arbitrator. The disclosure ameliorates to some extent any appearances of bias for it places the relationships of the parties and the arbitrators out in the open and allows the parties to determine knowledgeably what degree
The existing relationships in this case were not placed out in the open. Since arbitrator Spatz was owed such a substantial sum by one of the parties and received payments throughout the pendency of the arbitration, it is difficult to understand how the dissent can claim that the “appearance of bias” created by these substantial business dealings was “at best . . . speculation without substance,” post at 203, quoting International Produce, Inc. v. A/S Rosshavet, 638 F.2d 548, 551 (2d Cir. 1981).9
Finally, we note the inability of the dissent to state affirmatively why the practice of designating a biased arbitrator does not amount to “evident partiality . . . in the arbitrators, or any thereof.”
If the dissent‘s views were the law, each party could designate its own president as its chosen arbitrator. But not even the parties in this case would suggest that such was their intent. After all, neither nominated one of its own officers or employees. Perhaps they recognized, unlike our dissenting brethren, that arbitration should be conducted by arbitrators, not by the parties themselves or their legal advocates.
VI
In accordance with the foregoing, we affirm the judgment of the Appellate Division vacating the arbitration award.
Presented with the opportunity to fuse the applicable law with the real world of long-standing, successful commercial practice, the Court has chosen instead to “throw a monkey wrench into the gears” of tripartite commercial arbitration. See Kearny PBA Local # 21 v. Town of Kearny, 81 N.J. 208, 227 (1979) (Pashman, J., concurring). The majority‘s panegyric on impartiality overrules our settled case law going back at least three score years and eight, reformulates our arbitration statute and judicial interpretation thereof, takes liberties with decisional authority from other jurisdictions, brushes aside the contract of the parties, invites pre-arbitration disputes and post-arbitral award challenges, and jeopardizes the efficiency that has hitherto characterized the private resolution of commercial disputes. In sum, the Court “not only departs radically from existing caselaw dealing with the nature of judicial review of arbitrators’ awards but more importantly, strips commercial arbitration of its basic value.” In re Arbitration Between Grover and Universal Underwriters Ins. Co., 80 N.J. 221, 233 (1979) (Pashman, J., dissenting). Because the record before us does not warrant intrusion into a practice that is getting along nicely without our judicial intervention, I am constrained to dissent.
I
Barcon‘s contract with Tri-County anticipated the possibility of a disagreement under the contract. It addressed the issue of dispute resolution by providing for arbitration, with one arbitrator to be chosen by each party and those two to select the third. In the event of a party‘s failure to appoint an arbitrator, the contract created the machinery for appointment of “an arbitrator to represent the party in default” (emphasis added). Although neither party had to resort to this appointment device in the case before us, the contract language of an arbitrator acting as a party‘s “representative” was neither inadvertent nor without significance.
In approving this result the Court holds that a tri-partite commercial arbitration award may be vacated under
II
Until today the law in New Jersey has been that an arbitral award will not be vacated for the “evident partiality” of a party-designated arbitrator unless there is a showing of actual bias or partiality in the course of the arbitrator‘s conduct in the hearing, deliberation, decision or award. See Central Union Stock Yards Co. v. Uvalde Asphalt Paving Co., 82 N.J.Eq. 246, 260-61 (Ch.1913). The burden of proof has been on the party seeking to upset the award to demonstrate actual partiality in
As stated by Judge Fuld for the New York Court of Appeals in Astoria Medical Group v. Health Ins. Plan, 11 N.Y.2d 128, 227 N.Y.S.2d 401, 182 N.E.2d 85 (Ct.App.1962), an attack on an arbitral award based on the “evident partiality” of a party-appointed arbitrator “must be based on something overt, some misconduct on the part of [the] arbitrator, and not simply on his interest in the subject matter of the controversy or his relationship to the party who selected him.” 11 N.Y.2d at 137, 227 N.Y.S.2d at 407, 182 N.E.2d at 89. The reasoning of Astoria is in conformity with a proper reading of the statutory expression “evident” partiality. It also accords with the generally recognized view that in order to justify the setting aside of a commercial arbitration award, the arbitrator‘s bias or prejudice arising out of a special relationship with one of the parties “must be direct, definite and capable of demonstration, rather than remote, uncertain or speculative.” M. Domke, The Law and Practice of Commercial Arbitration § 21.02 (1968). Previous business relationships, friendship, or even the status of being a creditor of one of the parties should not justify the setting aside of an arbitral award, provided there is no showing of fraud, misconduct, or actual bias or partiality evidenced during the course of the proceedings. See C. Updegraff & W. McCoy, Arbitration of Labor Disputes 71 (2d ed. 1961).
The Court relies on Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.Ed.2d 301 (1968), as support for the proposition that all arbitrators, whether neutral or party-designated, are required “to avoid not only actual partiality but also the appearance of partiality.” Ante at 189. That case, however, does not lend support to the majority‘s equation of the “appearance” of partiality with “evident partiality” under the applicable provision of the arbitration
III
That which the Court finds most objectionable is arbitrator Spatz‘s failure to disclose his substantial business relationship with Barcon at the outset of the arbitration proceedings. Accordingly, it imposes upon all arbitrators, whether neutral or party-appointed, the requirement of full disclosure of any business relationships with the parties that might “suggest to a reasonable person that the arbitrator is interested in the outcome of the arbitration or which might reasonably support an inference of partiality.” Ante at 192. Perhaps the weakness in the Court‘s chain of analysis is most graphically illustrated by the fact that every authority the majority cites for the imposition of this disclosure requirement is concerned with business relationships involving arbitrators intended by the parties to be neutral. See Commonwealth Coatings, supra, 393 U.S. at 146, 89 S.Ct. at 338, 21 L.Ed.2d at 303 (“the third arbitrator, the supposedly neutral member of the panel“); Sanko S. S. Co., Ltd. v. Cook Industries, Inc., 495 F.2d 1260, 1261 (2d Cir. 1973)
The disclosure requirement imposed by § 19 of the American Arbitration Association (AAA) Commercial Arbitration Rules (1980 ed.) is likewise inapposite. The agreement between the parties in the instant case does not provide that arbitration of contract disputes be conducted in accordance with the Commercial Arbitration Rules of the AAA. More importantly, even had the agreement contained such a provision, § 19 of the AAA rules would not have imposed upon arbitrator Spatz the duty to disclose his business relationships with Barcon. The requirements of § 19 are expressly limited to apply only to “person[s] appointed as neutral Arbitrator[s].” The AAA disclosure requirement of § 19 is therefore of no relevance to the situation at hand.
IV
Today‘s decision results in an indiscriminate muddling of the heretofore dissimilar expectations of impartiality with respect to
The Court‘s error in this regard results both from a misguided sense of commercial morality and a mistaken notion of sound public policy. Its morality consists of the proposition that there is something inherently evil in allowing party-designated arbitrators to participate in the resolution of disputes when they may be partial to the party that selected them. The truth is that there is nothing wrong with it at all. The parties specifically intend and expect it and are sophisticated enough to know
If some dilution of public confidence in the integrity of arbitration results from this practice, it is insignificant compared to the loss of value that would result if the practice were deprecated in New Jersey, where it is well-entrenched and totally accepted in the commercial world. Moreover, were the practice to be deprecated substantially, a much more significant dilution of public confidence in this Court would result from its misguided decision than the insignificant diminishment of public confidence in the commercial arbitration procedure. Finally, because the Court‘s result condemns but does not effectively prohibit the very thing that is alleged to affect the public‘s confidence, namely the appearance of partiality, no benefit is achieved in terms of maintaining the integrity of commercial arbitration proceedings.
Although the Court says it understands that the party-designated arbitrator is not expected to be entirely neutral, it proceeds nevertheless to draw a line between “acceptable general predisposition of attitude” on the one hand and “impermissible bias or partisanship (or the appearance thereof)” on the other. Ante at 191. Invoking the language of the trial court below, it suggests that this line is crossed when the arbitrator maintains
The drawing of any such “line” is an ill-advised and unnecessary labor. The arbitration statute does not forbid “the appearance of partisanship” as may be suggested by the mere status or relations of the arbitrators and parties. Rather, it forbids the arbitrator‘s “evident partiality.”
Even if it were necessary to draw such a line, which it is not, it should not be drawn in an artificial and meaningless way. The Court‘s approach creates a presumption that all arbitrators with undisclosed, substantial and ongoing business relationships with a party are impermissibly biased or partial, regardless of the absence from the record of any indication that the proceedings were in fact tainted by actual or demonstrable partiality. This presumption is both irrational and unworkable. It disqualifies an arbitrator of totally impartial character and disposition on the speculative ground that his business relationships suggest a relatively high risk of bias and impartiality. The Second Circuit in Rosshavet, supra, has recognized that
[t]he most sought-after arbitrators are those who are prominent and experienced members of the specific business community in which the dispute to be arbitrated arose. Since they are chosen precisely because of their involvement in that community, some degree of overlapping representation and interest inevitably results. * * * To vacate an arbitration award where nothing more than an appearance of bias is alleged would be “automatically to disqualify the best informed and most capable potential arbitrators.” [638 F.2d at 552 (quoting Commonwealth Coatings, supra, 393 U.S. at 150, 89 S.Ct. at 340, 21 L.Ed.2d at 306 (White, J., concurring)).]
On the other hand, the majority‘s approach would not reach the arbitrator who has no substantial, ongoing business relationship with the party that designated him, but who may in fact feel a greater degree of “impermissible bias or partisanship” toward a party than any arbitrator who maintains the suspect relationship. Those arbitrators having no active or significant
There is no magical quality to ongoing business relationships that triggers the fact of bias. Presumably the majority, as well as the trial court below, would hold that arbitrator Spatz would have been qualified to sit on the panel even though his prior business dealings had rendered him totally dependent on the party selecting him, and his future business life similarly dependent, just so long as there were no present, ongoing business dealings between them. The position is most untenable.
Moreover, that the parties can waive objection to selection of the other‘s designated arbitrator if his business relationships are fully disclosed bespeaks the artificiality of the disclosure requirement. If the existence of too substantial a business relationship between arbitrator and a party creates a presumption that the arbitrator cannot render an impartial decision and award, how is that bias or partiality transformed into impartiality by the other party‘s failure to object after being told the score? According to the majority‘s analysis, that which might cause an arbitrator to conduct himself with partiality is his having an interest in the proceedings because of a close relationship with the party that appointed him to the panel. If such an interest did in fact exist at the outset of the proceedings, it would not dissipate upon disclosure of the relationship.
In addition to this confusion born of trying to distinguish degrees of partiality and disqualify for one degree but not the other, the greater confusion results when a court condemning partiality in this connection proclaims the virtuous result that it has achieved. The majority‘s whole game in this instance is directed at eliminating the appearance of bias; yet, when it comes to the end, it throws in the towel. The worst possible bias in fact is to be permitted, if waived, and the forbidden appearances are equally permitted. Hence one must wonder how the majority‘s solution serves its declared purpose of maintaining “the integrity of arbitration and public faith in the process.” Ante at 189.
In seeking to fulfill that purpose at the expense of the contractual considerations that should control the result in this case, the majority dismisses well-settled decisional law that the submission of a dispute to arbitration is essentially a matter of contract between the parties. See e. g., Kearny PBA, supra, 81 N.J. at 217; In re Arbitration Between Grover, supra, 80 N.J. at 230-31 (1979); Clifton Bd. of Educ. v. Clifton Teachers Ass‘n, 154 N.J.Super. 500, 503 (App.Div.1977); Moreia Constr. Co., Inc. v. Wayne Tp., 98 N.J.Super. 570, 575-76 (App.Div.) certif. den., 51 N.J. 467 (1968); Wm. J. Burns, Inc. v. N.J. Guards Union, 64 N.J.Super. 301, 307 (App.Div.1960); Mitchell v. Alfred Hofmann, Inc., 48 N.J.Super. 396, 405-06 (App.Div.1958); Harsen v. Bd. of Educ. of West Milford Tp., 132 N.J.Super. 365, 370-71 (Law Div. 1975). The commercial arbitration process is a private one agreed upon by the contracting parties for the vindication of
The only practical advantage in applying the disclosure requirement to party-designated arbitrators is that full disclosure of all business relationships between arbitrator and party would better enable the neutral arbitrator to evaluate the degree of bias or partisanship of the other two arbitrators in making his deliberations and decision. The avowed purpose of full disclosure is that it puts the neutral arbitrator on notice that the party-designated arbitrators might possibly be partisan. However, in tripartite commercial arbitration the neutral arbitrator is already aware at the outset of the proceedings that the party-designated arbitrators are designedly partisan. See Note, supra, 68 Harv.L.Rev. at 296. The neutral arbitrator automatically assumes that the party-designated arbitrators have been chosen to represent the respective sides by whom they were selected, and he knows that it is his responsibility to temper
V
The Court‘s approach not only affects the restatement of prior decisional law and the reformulation of the arbitration statute, but also rewrites the contract between the parties. “Arbitration is essentially a creature of contract, a contract in which the parties themselves charter a private tribunal for the resolution of their disputes. The law does no more than lend its sanction to the agreement of the parties, the court‘s role being limited to the enforcement of the terms of the contract.” Astoria, supra, 11 N.Y.2d at 132-33, 227 N.Y.S.2d at 404, 182 N.E.2d at 87. If the parties to the instant case wanted an all-neutral board of arbitrators, they would have so provided in their contract. But they did not. Their agreement expressly provides that each party shall designate a single arbitrator “to represent the party” and that the two party-designated arbitrators shall select the third or “neutral” arbitrator. They agreed to no words of limitation on the identity, status or relationships of the party-designated arbitrators, as they clearly could have if they so intended.
I would not deny the parties the right to have their dispute settled by the type of arbitration panel for which they have contracted. Nor would I require an affidavit from an arbitrator stating that despite his general predisposition of attitude, he went in to the arbitration objectively and free from actual partiality. To do so would be as unrealistic as the approach taken by the majority. The parties expect the designated arbitrators to continue their partisanship during the proceedings, and they expect them to present and advance the position of the party that selected them. Recognition of the inherent partisanship of party-designated arbitrators is the only intellectually honest approach to the situation. Their precise disposi-
The method of selecting arbitrators established by the agreement of the parties must be complied with by the parties and followed by the courts. Astoria, supra, 11 N.Y.2d at 133, 227 N.Y.S.2d at 404, 182 N.E.2d at 404; M. Domke, supra at § 20.04. This Court may not rewrite their contract. See LaStella v. Garcia Estates, 66 N.J. 297, 304 (1975); Astoria, supra, 11 N.Y.2d at 136, 227 N.Y.S.2d at 406, 182 N.E.2d at 89. The Court should enforce, not rescind, Barcon‘s unqualified contractual right to designate an arbitrator of its own choice, which right has been recognized as “the essence of tripartite arbitration.” Id. at 135, 227 N.Y.S.2d at 405, 182 N.E.2d at 88. See Note, supra, 68 Harv.L.Rev. at 297. Contrary to the observation of the Appellate Division below, the New York Court of Appeals’ decision in Astoria is not inconsistent with the subsequent decision of the same court in J. P. Stevens & Co., Inc. v. Rytex Corp., supra. The reason that J. P. Stevens was decided “without even mentioning” Astoria, see 172 N.J.Super. at 188, is because the two cases dealt with entirely different factual situations. The J. P. Stevens case concerned the alleged bias or partiality of a designedly neutral arbitrator. See 34 N.Y.2d at 129-30, 312 N.E.2d at 467, 356 N.Y.S.2d at 283. Astoria, which thoroughly discussed the applicable standards of impartiality of party-designated arbitrators, is still recognized as controlling law in New York. See, e.g., In re Local 964, United Bhd. of Carpenters, 73 A.D.2d 968, 424 N.Y.S.2d 253, 254 (App.Div.1980).
The court has rewritten the agreement between the parties in yet another fundamental respect. As a corollary of the arbitrator‘s responsibility to make full disclosure of all prior business relationships with a party to the arbitration, the majority grants
since both parties, by agreeing upon tripartite arbitration, have necessarily accepted the idea of “partisan” appointees, neither may object to the other‘s designation of someone associated with his interest or related to him. [11 N.Y.2d at 138, 227 N.Y.S.2d at 408, 182 N.E.2d at 90.]
The completed arbitral award in this case should not be vacated for failure of Barcon‘s designated arbitrator to make full disclosure of his prior business relationships at the outset of the proceedings when the contract gave Tri-County no right to object to that selection in any event, even if full disclosure had been made.
VI
The majority‘s pre-arbitration disclosure requirement now confers upon parties the pre-hearing right to object to the other party‘s selection of a representative arbitrator. However, it “leave[s] to the parties themselves” decisions as to the permissible degree of association between arbitrators and the parties. Ante at 194. In other words, the parties themselves are to determine what relationships are “substantial” enough to warrant the disqualification of an arbitrator initially selected by a party. That this procedure will lead to greatly increased pre-arbitration dispute is obvious. The majority opinion provides little or no useful guidance as to how the parties, once all relevant business relationships are disclosed, are to draw the line between relationships that evince an “acceptable general predisposition of attitude” and those that manifest “impermissible bias or partisanship or the appearance thereof.” Ante at 191. Not only is it a distinction that cannot be drawn with any meaningful degree of certainty, but it is one that need not be discussed
Notwithstanding its assurances to the contrary, the Court has also made available an entirely new avenue for post-arbitral award challenge. The majority‘s decision will encourage parties dissatisfied with the award to delve deeply into each arbitrator‘s history in search of substantial business relationships with his appointor that the arbitrator may have failed to disclose at the outset of the proceedings. This approach encourages post-award litigation and invites uncertainty in the finality of a completed award, thereby eviscerating the arbitration process.
Before the Court so drastically changes the interpretation of “evident partiality” under
There is, of course, another possibility, and it is a real one—that the practical effect of today‘s decision will be nil. Since the parties are not at all interested in raising claims of bias or partiality against party-designated arbitrators, and since the Court‘s ruling allows them to waive such claims, in the future
Because the practice works, parties to tripartite commercial arbitration do not want or need a judicially-imposed requirement that the party-designated arbitrators disclose such prior dealings or relationships as would demonstrate the specific degree of their possible bias. The parties are not the least bit interested in that, for it is a given. The parties to the contract understand it, the party-designated arbitrators understand it, and the neutral arbitrator understands it. It is the unvarying expectation of everyone involved in the process.
Therefore, other than the unwarranted result in this particular case, the decision is likely to accomplish nothing. That is unfortunate in the sense that the Court identifies evil but does nothing to prohibit it. The only morally defensible conclusion to be derived from the premise that the appearance of partiality in party-designated arbitrators is evil is the prohibition of this form of tripartite commercial arbitration. There is no middle ground. I would disagree with such a result but would have to respect it. It would represent a balancing of the advantages of an efficient system of arbitration that is desired by the parties against the disadvantages of the appearance of partiality in any court-sanctioned resolution mechanism. Since I would disagree with a value judgment concluding that the possible disadvan-
Chief Justice WILENTZ and Justice SCHREIBER join in this opinion.
For affirmance—Justices SULLIVAN, PASHMAN, HANDLER and POLLOCK—4.
For reversal—Chief Justice WILENTZ and Justices CLIFFORD and SCHREIBER—3.
Not only is this objection inaccurate, but even if true, it would in no way detract from our analysis. The issue here is not, as the dissent suggests, “standards of impartiality,” but rather the best way to assure adherence to those standards. These authorities are cited as support for our decision to apply a disclosure requirement to arbitrators and, appropriately enough, each authority supports imposition of such a requirement. That some involve the application of this requirement to neutral arbitrators is irrelevant; the point is that many other courts believe, as do we, that the best way to ensure that appropriate standards of impartiality will be maintained in arbitration proceedings, while minimizing disruption of the arbitration process, is to require arbitrators to make full disclosure to the parties at the outset.
Thus, the dissent‘s lengthy disquisition on why our citation of the AAA Commercial Arbitration Rules § 19 is “inapposite” and “of no relevance,” post at 204, is simply incorrect.