Lead Opinion
delivered the opinion of the Court,
Under section 171.014 of the Texas Civil Practice and Remedies Code, a court shall vacate an arbitration award if there has been
I
TUCO, Inc., an Amarillo-based company, purchases coal from mines in Wyoming for resale to Southwestern Public Service Company to fuel its electric generating plants in the Texas Panhandle. In 1984, TUCO entered into two 18-year contracts with Burlington Northern Railroad Company and the Atchison, Topeka & Santa Fe Railway Company (collectively, the “Carriers”) for transporting coal from Wyoming to Texas. These contracts, which generally contain the same terms, provide for periodic rate adjustments based on changes in the Carriers’ “productivity,” a measure which is tied to operating costs but which is not precisely defined in the contracts. During a 1990 contractual rate review, the parties disputed the meaning and scope of thе term “productivity,” and thus could not agree on the proper rate adjustment. TUCO asserts that the difference in the parties’ positions amounted to more than $150 million. Under the contracts, TUCO submitted the dispute to arbitration under the Texas General Arbitration Act. See Tex. Civ. Prac. & Rem.Code § 171.001 et seq.
The contracts required each side to select one arbitrator, who in turn would mutually select the third arbitrator.
As party arbitrators, TUCO appointed Richard Hardy, a retired transportation attorney, while the Carriers selected Emried Cole, an attorney with the Baltimore firm of Venable, Baetjer and Howard (“Venable-Ba-etjer”). When the parties exchanged lists of potential neutral arbitrators, George Beall, a Baltimore attorney, appeared on both lists. When the party arbitrators interviewed Beall to determine whether he had any potential conflicts, Beall disclosed that Cole’s law firm, Venable-Baetjer, had twice previously retained him as an expert witness. TUCO’s investigation of these occurrences revealed that they involved a relatively small amount of time and fees and were no longer ongoing.
After conducting discovery, TUCO and the Carriers submitted exhibits and sworn witness statements to the arbitrators in January and February 1992. A live hearing was then scheduled for March 23, 1992, solely for the purpose of cross-examining the witnesses based on their written testimony.
The referral which lies at the heart of the present dispute occurred about three weeks before the March arbitration hearing. The Resolution Trust Corporation had asserted a substantial damage claim against Thomas Mullan, Jr., a former director of a failed savings and loan institution. James Wright, a partner at Venable-Baetjer who regularly represented Mullan, could not handle the RTC claim because of a conflict of interest. Wright did, however, meet with Gail Stern, the general counsel of Mullan’s family business, to discuss who might serve as litigation counsel. During this meeting, either Wright or Stern suggested Beall.
The Mullan case was a substantial piece of federal litigation involving claims in excess of $1 million. Even though his co-arbitrator’s law firm was directly involved in the referral, Beall testified that he concluded that the matter was not material to the arbitration proceedings. Therefore, he continued serving on the panel without disclosing the referral to TUGO or Hardy. It is undisputed that Cole also did not know about the referral, and that he had no involvement in its procurement. Similarly, when Wright referred the Mullan case to Beall, he had no knowledge of the arbitration proceedings or that Beall was serving on an arbitration panel with another Venable-Baetjer partner.
At the conclusion of the arbitration hearing on March 27,1992, Beall ruled for the Carriers. Siding with Cole, he disposed of the major issues in their favor, including the productivity rate adjustments.
About a month later, on April 21, the arbitrators met to decide several lesser issues which were still pending. During the course of this meeting, Hardy overheard Beall remark to Cole that “we’ve already begun work on the matter you folks were so kind to send over.” The record does not disclose Cole’s response, if any, to this remark. As noted previously, TUCO does not contend that Cole knew of the Mullan referral prior to this time.
The panel issued its written decision on May 12,1992. In his dissent, Hardy accused Beall of bias, contending that Beall made up his mind on key issues before hearing or reviewing the relevant evidence. Hardy cited the comment he had overheard regarding the referral, speculating that the referral could have been the source of the alleged bias. While it is not clear whether Hardy told TUCO about the referral prior to issuing his written dissent, it is undisputed that TUCO knew nothing of the referral until after the panel had decided the remaining issues discussed at the April 21 meeting.
TUCO appealed to the court of appeals, arguing that Beall was under a duty to disclose the referral and that his failure to do so was “evident partiality” under section 171.014 of the Texas Civil Practice and Remedies Code as a matter of law. That section provides in relevant part:
(a) Upon application of a party, the court shall vacate an award where:
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(2) there was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct or wilful misbehavior of any of the arbitrators prejudicing the rights of any party.
Tex. Civ. PRAC. & Rem.Code § 171.014(a)(2) (emphasis added). Alternatively, TUCO argued that the arbitrators exceeded their authority in deciding the dispute. Thus, TUCO contended, the trial court erred in granting the Carriers’ motion for summary judgment and in not granting TUCO’s.
The court of appeals concluded that an arbitrator exhibits evident partiality under the statute when the arbitrator fails to disclose any relationship which might reasonably create an appearance of partiality or bias.
II
A
The parties’ contracts provide that disputes “shall be arbitrated pursuant to the provisions of the Texas General Arbitration Act,” and neither party disputes that the Texas Act is controlling. TUCO argues that Beall exhibited “evident partiality” under section 171.014 of the Texas Act by accepting the Mullan ease during the course of the arbitration proceedings without disclosing that fact to TUCO. While this Court has not previously determined the scope of this standard, numerous courts in other jurisdictions have done so, as “evident partiality” is also a basis for vacating awards under the Federal Arbitration Act, see 9 U.S.C. § 10, as well as the arbitration statutes of many sister states.
The seminal “evident partiality” case is Commonwealth Coatings Corporation v. Continental Casualty Company,
Justice Black, in delivering the Court’s opinion, concluded that the “evident partiality” standard reflects Congress’ efforts to ensure that arbitration be impartial. Id. at 147,
In a concurring opinion, Justice White stated that he joined the Court’s opinion, but he emphasized that the Court was not subjecting arbitrators to the “same standards of judicial decorum” as judges. Id. at 150,
[I]t is far better that the relationship bе disclosed at the outset, when the parties are free to reject the arbitrator or accept him with knowledge of the relationship and continuing faith in his objectivity, than to have the relationship come to light after the arbitration, when a suspicious or disgruntled party can seize on it as a pretext for invalidating the award.
Id. at 151,
Although Justices White and Marshall joined fully in Justice Black’s opinion for the Court, some lower federal courts have purported to see a conflict between the two writings. By treating Justice Black’s opinion as a mere plurality, they have felt free to reject the suggestion that “evident partiality” is met by an “appearance of bias,” and to apply a much narrower standard.
For example, in Morelite Construction Corporation v. New York City District Council Carpenters Benefit Funds,
At least three other federal circuits have also adopted an “evident partiality” standard. See Peoples Security Life Ins. Co. v. Monumental Life Ins. Co.,
In contrast, other federal courts, focusing on the need for full disclosure to parties who are choosing their own arbitrators, have adopted a broader standard. For example, in Schmitz v. Zilveti,
State courts, interpreting the scope of “evident partiality” under their respective arbitration statutes, are also divided between the broader view reflected by Schmitz and the narrower view of Morelite. See Wheeler v. St. Joseph Hosp.,
There appear to be only two other Texas courts of appeals cases interpreting the statutory “evident partiality” standard. See Babcock & Wilcox Co. v. PMAC, Ltd.,
Further, at least one Texas court reviewing arbitration awards under common law standards has relied on Commonwealth Coatings to hold that arbitrators must disclose to the parties any dealings that might create an impression of possible bias. See House Grain Co. v. Obst,
B
As Justice White noted in Commonwealth Coatings, the most capable arbitrators are often those persons with extensive experience in the industry, who may naturally have had past dealings with the parties. Thus, arbitrators should not be per se disqualified because of a business relationship with a party. See
The judiciary should minimize its role in arbitration as judge of the arbitrator’s impartiality. That role is best consigned tothe 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.
Of course, not all arbitration procedures grant the parties veto power ovеr particular arbitrators. See, e.g., Apperson,
We agree that the standards may differ depending on the nature of the arbitration. This case, however, requires us only to settle on a standard for those categories where the parties select their arbitrators. Because we agree with the policy arguments advanced in Commonwealth Coatings and Schmitz, we hold that a prospective neutral arbitrator selected by the parties or their representatives 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. We emphasize that this evident partiality is established from the nondisclosure itself, regardless of whether the nondiselosed information necessarily establishes partiality or bias. See Commonwealth Coatings,
This standard accords with Canon II of the Code of Ethics FOR ARBITRATORS in Commercial Disputes, which provides:
A. Persons who are requested to serve as arbitrators should, before accepting, disclose:
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(2) Any existing or past financial, business, professional, family or social relationships which are likely to affect impartiality or which might reasonably create any appearance of partiality or bias....
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C. The obligation to disclose interests or relationships described in the preceding paragraph A is a continuing duty which requires a person who accepts appointment as an arbitrator to disclose, at any stage of the arbitration, any such interests or relationships which may arise, or which are recalled or discovered.
This Code has been adopted jointly by the American Bar Association and the American Arbitration Association. Because the statu
The Carriers argue that an arbitrator is evidently partial in a nondisclosure ease only if he or she fails to disclose “a direct financial or business relationship with a party or its agent.” We disаgree with such a restrictive standard. As discussed, the parties should have access to all information that might reasonably affect the potential arbitrator’s impartiality. This could obviously include, for example, a familial or close social relationship.
While a neutral arbitrator need not disclose relationships or connections that are trivial, the conscientious arbitrator should err in favor of disclosure. The rule of full disclosure minimizes the role of the judiciary, vesting greater control in the parties who have chosen the arbitration process. If faithfully adhered to, it will ultimately lead to fewer post-decision challenges to awards based on bias or prejudice.
C
Finally, we apply this standard to the facts of this case. The present circumstances are somewhat unique in that the suspect relationship (the referral) arose after the parties selected Beall as the neutral arbitrator. Beall thus could not have disclosed the potential conflict during the pre-selection interviews. Nonetheless, because the parties agreed to select their own arbitrators, this case is properly analyzed under the standard we have articulated above. Before agreeing to select Beall as the neutral arbitrator, TUCO and Hardy sought to learn of any relationship that might reasonably affect his impartiality. In basing their decision on this information, TUCO and Hardy were entitled to assume that Beall would not enter into any new such relationship during the course of the arbitration proceedings without disclosing it.
Upon reviewing the undisputed facts, we hold that, because of Venable-Baetjer’s involvement, the referral to Beall might have conveyed an impression of Beall’s partiality to a reasonable person. The Mullan ease was a major piece of litigation, expected to generate substantial fees for Beall. While Wright (the Venable-Baetjer partner involved in the referral) did not have the authority to hire Beall, and might not have been the one to initially raise Bead’s name, he nonetheless initiated the contact with Bеall on Mullan’s behalf, arranging the meeting leading to Beall’s hiring.
Further, the fact that neither Wright nor Cole was aware of the other’s relationship with Beall does not negate the impression of partiality. An objective observer could still reasonably believe that a person in Beall’s position, grateful for the referral, may have been inclined to favor Venable-Baetjer as an entity (and thus Wright indirectly) in the arbitration proceedings by siding with Cole. After all, Beall himself was moved to thank Cole during the arbitration proceedings for the “matter you folks were so kind to send over.”
The Carriers also argue that this relationship is too indirect because Venable-Baetjer was neither a party in the arbitration proceedings nor counsel for a party. This argument ignores the arbitration format chosen by the parties, in which the party arbitrators acted as advocates for the party appointing them. As one court has recognized, “[a]n arbitrator appointed by a party is a partisan only one step removed from the controversy....” Lozano v. Maryland Cas. Co.,
The Carriers cite numerous cases where courts have refused to find evident partiality on facts which, according to the Carriers, are more egregious than ours. See International Produce, Inc. v. A/S Rosshavet,
Peoples Security Life and Consolidation Coal follow the narrower standard of Morel-ite, which, for reasons we have already explained, we reject as the controlling standard in nondisclosure cases. In International Produce, a Second Circuit decision preceding Morelite, the court employed a similarly strict standard approaching actual bias. See
The other cases cited by the Carriers are also factually or proeedurally distinguishable. In United States Wrestling Federation, the neutral arbitrator failed to disclose that his law firm represented Northwestern University, which was a member of the NCAA, which in turn was affiliated with one of the parties to the arbitration. The neutral arbitrator’s firm had no direct relationship with either the NCAA or the parties. The court held that this “tenuous chain” was too “remote, uncertain, and speculative to require the arbitration award to be set aside.”
While we need not and do not intimate how we would decide the above cases, it is sufficient to note that, in our view, they do not persuade us that either our test or its application to the facts before us is incorrect.
The dissent apparently would hold that a business relationship between a party arbitrator and a neutral arbitrator can never cause evident partiality, because the party arbitrator is not an agent for the appointing party. While we need not and do not decide whether a party arbitrator serves as an “agent,” it is undisputed that the party arbitrators in this case were not neutral, but were open advocates for their respective appointing parties. Under these circumstances, it would ignore reality to hold that a business relationship between a party and a neutral arbitrator cannot render the neutral arbitrator evidently partial. Because of the policy reasons favoring full disclosure, we disagree with San Luis Obispo Bay Properties v. Pacific Gas & Electric Company,
Nothing in our opinion should be taken as a conclusion that Beall, a highly respected member of the Maryland bar with a distinguished record of public service,
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For the foregoing reasons, we modify the judgment of the court of appeals and remand this cause to the trial court with instructions to vacate the arbitration award and to refer
Notes
. If the arbitrators appointed by the parties could not agree on the third arbitrator, the contracts allowed either party to apply to the Chief Judge of the United States District Court for the Northern District of Texas for appointment of the third arbitrator.
. This is an often-used arbitration format. See, e.g., Commonwealth Coatings Corp. v. Continental Cos. Co.,
.Hardy’s summary judgment affidavit, which is not disputed, states that "[tjhese matters were in the past, i.e., they had been completed, and they involved a relatively little effort and a small amount of fees.” Samuel Sipe, the Carriers’ lead arbitration counsel, testified in his deposition that on one of the occasions, Venable-Baetjer
.Wright states in his affidavit that he could not recall whether he or Stem first raised Beall’s name. Stem’s affidavit does not address the issue, although she does state that another attorney, not associated with Venable-Baetjer, had earlier recommended Beall to her.
. Mullan at the time was in his eighties and retired from his family’s cоnstruction and real estate development business.
. The court of appeals stated that TUCO’s attorney became aware of the referral "shortly before the closing presentations" and "made no objec
. Southwestern Public Service Company intervened in the proceedings, aligning itself with TUCO in the trial court and on appeal. In characterizing the parties’ arguments, we refer to TUCO and Southwestern Public Service Company collectively as TUCO.
. The letter from the parties confirming Beall’s selection stated that he was being hired based on his assurance, subject to a conflicts review, that he knew of no condition "that would in any way detract from [his] ability to render a truly impartial decision.”
. Of course, a party who learns of a conflict before the arbitrator issues his or her decision must promptly object to avoid waiving the complaint. Here, it is undisputed that TUCO did not leant of the referral until after the panel had decided the issues before it.
. Beall formerly served as United States Attorney for the District of Maryland.
Dissenting Opinion
dissenting.
In enacting a statute intended to make arbitration agreements and awards enforceable, the Legislature provided that arbitration awards could be vacated if a neutral arbitrator showed “evident partiality5’ toward one party. Tex. Civ. PRAC. & Rem.Code § 171.014(a)(2). Today, the Court strips the word “evident” from that statute.
“Evident” means “clear to the understanding; manifest; obvious; conclusive.” Web-STER’S THIRD NEW Int’L DICTIONARY 789 (1961); Black’s Law Dictionary 557(6th ed. 1990). Unlike the Court’s “impression” of partiality standard, the Morelite standard is consistent with the plain meaning of “evident” partiality. As the Seventh Circuit has held, the alleged conflict must be “so intimate ... as to cast serious doubt on the arbitrator’s impartiality” and must be “direct, definite and capable of demonstration rather than remote, uncertain or speculative.” Health Services Management Corp. v. Hughes,
In this case, TUCO’s only evidence of “impression” of partiality is Beall’s failure to disclose a referral, made during the arbitration proceedings, from his co-arbitrator’s law firm. There is no evidence at all that Cole, the co-arbitrator, knew of the referral. In fact, the evidence is just the opposite. Further, Beall had already disclosed his historical business relationship with Cole’s law firm. Finally, it is undisputed that Beall had no relationship whatsoever with the carriers. The Court’s conclusion of partiality is premised on nothing but pure speculation of partiality by Beall toward one of the carriers.
A major flaw in the Court’s reasoning is that it requires one to assume Cоle is essentially an agent for the party that appointed him. Although Cole was chosen by the carriers, he is not their agent. While a party arbitrator may be generally favorable to that party’s position, he or she may not abandon all semblance of the independence befitting a quasi-judicial position. See American Arbitration Ass’n., Code of Ethics for Arbitrators in Commercial Disputes (1977, 1993)(A1-though Canon VII-E permits a party-appointed arbitrator “to be predisposed toward deciding in favor of the party who appointed [him or her],” Canon V provides that “[a]n arbitrator should decide all matters justly, exercising independent judgment, and should not permit outside pressure to affect the decision.”); Deseriee A. Kennedy, Predisposed With Integrity: The Elusive Quest for Justice in Tripartite Arbitrations, 8 Geo. J. Legal Ethics 749, 768 (1995) (“party arbitrators should be required to abide by the same level of ethical standards required of any other decisionmaker of a quasi-judicial capacity.”)
Moreover, that the Court accepts the idea that a party-appointed arbitrator is the agent of the party that appointed him or her condones a violation of Canon V. This is so because an agent has a fiduciary obligation to look out for his principal’s interests. Not even the parties contemplated such a role for party arbitrators. Their agreement specifically states that neither party may appoint its own direct agent (i.e. employee) as an arbitrator. No reason would exist for such a provision if the parties viewed party arbitrators as mere agents with no vestige of independence. Far from “undisputed” as the Court insists, only Hardy, TUCO’s arbitrator, openly advocated violation of Canon V. No party went so far, and certainly not Cole or Beall. A referral among arbitrators simply cannot lead a reasonable person to conclude there is evident partiality. Thus, the award should not be vacated, and certainly not on the ground that Beall merely failed to disclose the referral.
It is telling that virtually all the cases cited by the Court to support its approach deal with relationships between an arbitrator and a party or its counsel. The Court cites no case which vacates an arbitration award due to a business relationship between arbitrators. Significantly, the Court cites one case
The Court questions my reliance on San Luis Obispo, but the line drawn in that case is far clearer than the line drawn by the Court today. The Court purports to hold that the mere failure to disclose a relationship that arises after the arbitration begins is evident partiality as a matter of law.
The “impression” of partiality standard adopted today will not, as the Court hopes, decrease judicial interference in arbitration. Instead, the focus of litigation will shift from asking courts to review arbitration proceedings for actual bias to arguing over the nuances of relationships between arbitrators.
As a matter of law, the referral from Cole’s law firm to Beall created no evident partiality. Accordingly, I would reverse the judgment of the court of appeals and remand the case to that court to consider TUCO’s remaining points of error.