Case Information
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Electronically Filed Supreme Court SCWC-11-0000350 12-AUG-2015 08:20 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI'I ---oOo---
In the Matter of the Arbitration of NORDIC PCL CONSTRUCTION, INC., fka NORDIC CONSTRUCTION, LTD., Respondent/Claimant/Counterclaim Respondent-Appellant, vs. LPIHGC, LLC, Petitioner/Respondent/Counterclaimant-Appellee.
SCWC-11-0000350 CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-11-0000350; S.P. NO. 10-1-0346)
AUGUST 12, 2015 NAKAYAMA, ACTING C.J., McKENNA, AND POLLACK, JJ., CIRCUIT JUDGE ALM, IN PLACE OF RECKTENWALD, C.J., RECUSED, AND CIRCUIT JUDGE SAKAMOTO, IN PLACE OF WILSON, J., RECUSED
AMENDED OPINION OF THE COURT BY McKENNA, J.
I. Introduction
Petitioner/Counterclaimant-Appellee LPIHGC, LLC ("LPIHGC") seeks review of the April 4, 2014 Judgment on Appeal of the Intermediate Court of Appeals ("ICA"), entered pursuant to its
*2 February 14, 2014 Memorandum Opinion, which vacated and remanded the March 24, 2011 Final Judgment ("judgment") of the Circuit Court of the First Circuit ("circuit court") in favor of LPIHGC and against Respondent/Claimant-Appellee Nordic PCL Construction, Inc. fka Nordic Construction Ltd. ("Nordic").
The circuit court's judgment was based on its grant of LPIHGC's motion to confirm, and denial of Nordic's motion to vacate, the Partial Final Award of Arbitrator dated October 15, 2010 ("the Partial Award") and the Final Award of Arbitrator dated December 15, 2010 ("the Final Award") (the Partial Award and the Final Award are sometimes collectively referred to as "the Arbitration Award"). The Arbitration Award was issued by the arbitrator selected by the parties, retired circuit court judge Patrick K.S.L. Yim ("the Arbitrator"). On appeal, the ICA ruled that the Arbitrator's failure to disclose various relationships with the law firms of LPIHGC's attorneys established a reasonable impression of partiality requiring vacatur of the Arbitration Award.
The "evident partiality" bases for vacatur alleged by Nordic present various questions of disputed material facts. The circuit court denied Nordic's motion without orally stating its reasoning on the record or entering any findings of fact and conclusions of law. As this court ruled in Clawson v. Habilitat,
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Inc.,
In this case, although neither party requested an evidentiary hearing to address disputed issues of material fact, because the circuit court did not explain the basis of its rulings on the record or enter findings of fact or conclusions of law, this court is unable to determine whether the circuit court erred in denying Nordic's motion to vacate. Specifically, with respect to the "evident partiality" bases of Nordic's motion, it is unclear whether the circuit court found no violation of the Arbitrator's duties of reasonable inquiry, disclosure, or continuing duty to disclose; found that despite a violation, the objection was not timely or had been waived; or found that despite a showing of evident partiality and timely objection without waiver, it exercised its discretion not to vacate the award. Thus, the factual and/or legal bases upon which the circuit court denied the motion to vacate are unascertainable. Because we are unable to determine the grounds on which the circuit court based its decision, we are unable to appropriately
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review its ruling. [1] Accordingly, we vacate the ICA's April 4, 2014 Judgment on Appeal, and the circuit court's March 24, 2011 Final Judgment, thereby vacating the associated orders (1) granting LPIHGC's motion to confirm the Arbitration Award, and (2) denying Nordic's motion to vacate the Arbitration Award, and remand this case to the circuit court for an evidentiary hearing and entry of findings of fact and conclusions of law on Nordic's motion to vacate. [2]
II. Background
A. Facts
This case arises from a dispute over the adequacy of concrete work Nordic performed on a Maui condominium construction project [3] as a subcontractor to LPIHGC. The owner of the project, Maui Beach Resort Limited Partnership ("Owner"), [4] incorporated
1 At oral argument, counsel for both parties encouraged this court to rule without a remand. Even if it was appropriate for this court to render findings of fact, which it is not, the record presents too many unaddressed disputed material issues of fact, as discussed below.
2 Neither the circuit court nor the ICA addressed whether there are disputed material issues of fact regarding the other bases on which Nordic moved to vacate the Arbitration Award, which are briefly discussed in this opinion. If there are, the circuit court must also address those issues.
3 The project is the Honua Kai South Enclave in Lähainä, Maui. 4 The Owner "consist[ed] of a consortium of different entities including JP Morgan, Intrawest Placemaking and Ledcor Properties, Inc., a Canadian real estate subsidiary of the Ledcor group of companies." The Owner also hired Ledcor Construction Inc. ("Ledcor") to be the project construction manager.
*5 LPIHGC to be its general contractor and executed a prime contract between them. Thereafter, LPIHGC and Nordic executed a written subcontract, which provided for a contract price of 39,2689,396$ (as amended) to perform the concrete work for the project. The parties subsequently disputed whether Nordic's concrete work was adequately flat and level, and LPIHGC made only partial payment to Nordic under the subcontract.
The subcontract contained a binding arbitration clause, which provided for the arbitration to be governed by Hawai'i Revised Statutes ("HRS") chapter 658A (Supp. 2010) and conducted by Dispute Prevention &; Resolution, Inc. ("DPR"). In addition, it provided for the arbitration to be conducted "by a single arbitrator, who shall either be a former judge with substantial experience in residential real estate litigation matters or a licensed attorney with at least ten (10) years experience in residential real estate transactions and/or litigation involving residential real estate."
In the arbitration hearings, Nordic was represented by attorneys Anna H. Oshiro ("Oshiro"), Mark M. Murakami, and Noelle B. Catalan of Damon Key Leong Kupchak Hastert ("Damon Key"). Although he did not appear at the hearings, the name of attorney Kenneth R. Kupchak ("Kupchak") of Damon Key also began appearing on Damon Key's correspondence and pleadings after the issuance of
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the Arbitrator's October 15, 2010 Partial Award. LPIHGC was represented by Terence J. O'Toole ("O'Toole") and Judith Ann Pavey ("Pavey") of Starn O'Toole Marcus &; Fisher ("Starn O'Toole") and John P. Manaut ("Manaut") of Carlsmith Ball LLP ("Carlsmith Ball").
B. Arbitration
1. Initial Disclosures and Arbitration Proceeding
After his selection by the parties, on March 17, 2009, the Arbitrator, through DPR, provided the following disclosures by email:
[The Arbitrator] is willing and able to serve as Arbitrator
in this matter and thanks the parties for his selection.
[The Arbitrator] provides the following disclosures for your
review:
- While serving on the bench, counsel and members of their law firms appeared before me;
- Since retirement, I have served as a neutral for counsel and members of their law firms;
- To the best of my knowledge, I do not know anyone involved with LPIHGC, LLC;
- I served as a neutral in a matter where Nordic was a party. That matter was concluded at least five years ago;
- I will provide additional disclosures as necessary throughout this proceeding;
- These disclosure will not prevent me from serving as a neutral and unbiased Arbitrator.
Any comments regarding this disclosure should be filed in writing with DPR by March 20, 2009.
On October 7, 2009, the Arbitrator, through DPR, provided an additional disclosure pertaining to the inclusion of an individual on the expert witness lists submitted by the parties who had appeared before the Arbitrator on matters completed prior
*7 to the arbitration proceeding. [5] The parties did not respond to the Arbitrator regarding either disclosure.
Arbitration hearings were held intermittently on thirty-one days from January 25, 2010 to April 29, 2010. In general, the parties contested which of two concrete flatness and levelness standards [6] applied to Nordic's work and whether Nordic had proven its satisfaction of the applicable standard by providing quantitatively sufficient F-meter data to establish its statistical validity. [7]
On October 15, 2010, the Arbitrator issued the Partial Award, ruling in favor of LPIHGC for 9,804,108.27$.
5 The October 7, 2009 disclosure provided: [The Arbitrator] has reviewed the Expert Witness Lists submitted by the parties and provides the following supplemental disclosure:
- Richard Kozuma has appeared before me in prior matters. To the best of my knowledge, I do not have any matters with him at this time.
- This disclosure will not prevent me from serving as a neutral and unbiased Arbitrator.
Any comments regarding this disclosure should be filed in writing with DPR by October 12, 2009.
6 Nordic argued that the applicable standard was floor flatness (FF) 18 and floor levelness (FL) 15, while LPIHGC argued that it was FF 30 and FL 20 .
7 The F-Meter is a floor profiling instrument that is manually pulled across the floor to get an F-Number measurement on the finished floor flatness and levelness. F-Meter: Rolling Floor Profiler, Allen Fack, http://www.allenface.com/F-Meter.html (last visited April 27, 2015).
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2. Post-Award Demand Letters and Supplemental Disclosures
Two weeks after the Partial Award was issued, Damon Key sent a letter to DPR dated October 29, 2010 requesting updated disclosure details . . . including, but not limited to, any and all arbitration or mediation matters involving attorneys from the law firms of either [Carlsmith Ball] or [Starn O'Toole] . . . which [the Arbitrator] has presided over since January 1, 2009 . . . as well as any matter for which [the Arbitrator] is currently being considered or has been contacted to serve as a potential arbitrator or mediator.
Four days later, Oshiro and Kupchak of Damon Key sent another letter to DPR, demanding the Arbitrator's immediate disqualification on the basis of Carlsmith Ball's alleged representation of the Arbitrator and his nondisclosure of that representation. The letter asserted that:
It has just come to our attention that [the Arbitrator] has had an undisclosed, long standing professional relationship with opposing counsel . . . . We have reason to understand that [the Arbitrator] was represented by Carlsmith Ball, including an attorney working on this case, on at least seven separate occasions over the last ten years. One of these cases was a matter that was ongoing . . . during the term of the parties' recent arbitration proceedings.
This allegation related to Carlsmith Ball's representation of the QLT on unrelated real estate and lease matters on the island of Hawai'i. The Arbitrator has served as one of three trustees of the QLT since 2002, and along with the other two trustees, the Arbitrator's name appears as trustee on lawsuits involving the QLT.
On November 4, 2010, Manaut of Carlsmith Ball sent a letter to DPR that characterized Nordic's request for updated disclosure
*9 details as "an improper fishing expedition[,]" and asserted that Nordic "never once raised an issue or questioned anything about the sufficiency of any disclosures" prior to the issuance of the Partial Award. Damon Key sent a responsive letter to DPR on the same day, stating neither the Arbitrator nor Manaut had disclosed seven cases in which Carlsmith Ball allegedly represented the Arbitrator, and demanding the Arbitrator's immediate disqualification.
On November 9, 2010, Pavey of Starn O'Toole sent a letter to DPR challenging Nordic counsel's demand for disqualification. On the same day, Pavey also sent a letter to Oshiro requesting information on the timing and circumstances surrounding discovery of the facts underlying Nordic's claim for disqualification.
On November 11, 2010, the Arbitrator provided a post-award supplemental disclosure that detailed his professional and volunteer activities:
As previously disclosed, I have served as a mediator and an arbitrator in matters in which parties therein were represented by the firms appearing in this arbitration. Though I cannot recall any matter involving [Owner] or LPIHGC, LLC, I do recall serving as an arbitrator in a matter in which I determined that Nordic was the prevailing party. Further, at the time when I was informed that I was selected as an arbitrator in this matter, I was serving as a neutral in cases in which the Damon Key firm, Carlsmith Ball, and the Starn O'Toole firm represented certain parties therein. During the year and a half course of this arbitration, I served in an additional matter in which Lane Hornfeck of the Starn O'Toole firm represented a party. Sometime during this period, Robert Triantos of Carlsmith Ball entered an appearance on behalf of an additional party in an
*10 arbitration which commenced in 2008. I also, during this period, served as a mediator in a matter in which Carlsmith Ball was a party.
As one of the three Trustees for the [QLT], I hereby disclose that the following are lawyers and law firms retained by the Trust since 2002, when I commenced to serve as a Trustee. The list is as follows: Ashford &; Wriston, Cades Schutte Fleming &; Wright, Case Bigelow &; Lombardi, Carlsmith Ball, Dean Nagamine, Glenn Kimura, John J. Baker, Lloyd Van De Car, Patricia Brady, Imanaka Kudo &; Fujimoto, Leighton Wong, Lori M. Ohinata, Suemori &; Aipa, Pitluck Kido Stone &; Aipa, Watanabe Ing Kawashima &; Komeiji, Wesley K.C. Lau, Robert F. Miller, Susan Ichinose, Dwyer Schraff Meyer et al., Jewell &; Krueger, Matsubara Lee &; Kotake, Rinesmith &; Sekeguchi [sic], Torkildson, Katz Fonseca, Godbey Griffiths Reiss Chong, Moseley Biehl Tsugawa et al., Patricia Brady, Tsukazaki Yeh &; Moore, O'Conner Playdon &; Guben, Paul Johnson Park &; Niles, and Raymond Zeason. As a Trustee, I have no personal role in the selection or appointment of attorneys that perform legal services for the [QLT].
As one of the three trustees for the [A] Trusts, I represent that the [A] Trusts have retained legal services from the firm of [B], and attorneys [D], and [E].
I also disclose that I believe Mr. Michael Walsh, Vice President of the [QLT's] Endowment Group, is []Kupchak's brother-in-law.
As a member of [F]'s Board of [G], I have been informed and been permitted to disclose that our institution, at various times in the past, has retained the legal services of [I], [J], and [K].
As a member of the Board of [L] and [M], . . ., I have recently been informed that [N] have been referred to the following attorneys for services: [O], [P], [Q], [R], and [S].
I have been informed by management of the [QLT] that in recent matters, members of Carlsmith Ball and the Bays Deaver firm have represented parties who have opposed the interests of the [QLT].
On November 15, 2010, Damon Key sent a letter to DPR to request further clarification on the matters listed in the supplemental disclosure.
On November 18, 2010, Pavey, O'Toole, and Manaut sent a
*11 letter to DPR opposing Nordic's disqualification demand and objecting to a stay of the arbitration, alleging that the "demand for disqualification is insufficient on its face because [Nordic] failed to even allege, let alone prove, evident partiality on the part of [the Arbitrator]" and the Arbitrator had no conflict based upon Carlsmith Ball's representation of the QLT. Appended to the letter were declarations of Manaut and Edmund W.K. Haitsuka, the Carlsmith Ball attorney handling the Kona land matters for the QLT.
Haitsuka declared that he had not had any ex parte communications with the Arbitrator about any matter prior to, during, or after the arbitration. He also stated that Carlsmith Ball had not represented the Arbitrator in his individual capacity, and that he had never communicated with the Arbitrator on any trustee issues or anything related to the arbitration, and that he had only spoken to the QLT's executive officers and managers. Manaut declared that he had never had any communication with the Arbitrator concerning the QLT, ex parte or otherwise, and that he was not aware that the Arbitrator was a QLT trustee who Carlsmith Ball represented on land matters in Kona in his representative capacity.
By email dated November 18, 2010, DPR further disclosed that the Arbitrator:
*12 served as a Mediator in a case where the Damon Key firm represented a party. Counsel for Damon Key was Mark Murakami, Esq. Counsel for the parties mutually selected [the Arbitrator] in 2008, the mediation was held in February, 2009. DPR charged its standard hourly rate of 350 /$ hour. This matter was included in the [initial] disclosure since the final invoice was issued to counsel on March 17,2009 . . . . served as an Arbitrator in a case where John Sopuch, Esq. of the Starn O'Toole firm represented a party. Counsel for the parties mutually selected [the Arbitrator] in 2008. The Award was issued in February, 2009, and the final invoice was issued on March 13, 2009. DPR charged its standard hourly rate of 350 /$ hour. . . . served as a Mediator in a matter where Lane Hornfeck of the Starn O'Toole firm represented a party. Counsel for the parties mutually selected [the Arbitrator] in June 2009, and the matter closed in August 2009. DPR charged its standard hourly rate of 350 /$ hour. . . . served as a Mediator in a matter where Carlsmith Ball was a party. Counsel for the parties mutually selected [the Arbitrator] as Mediator in January 2009. The initial mediation session was held on March 6, 2009, and the matter closed in October, 2009. DPR charged its standard hourly rate of 350 /$ hour. . . . is serving as an Arbitrator in a case where Robert Triantos, Esq. at Carlsmith [Ball] represented a party for a portion of the arbitration proceeding. The case was opened with DPR in 2008 and counsel participating at that time mutually selected [the Arbitrator] as Arbitrator. In July 2009, Mr. Triantos' client was brought into the case via Court Order, Mr. Triantos' client settled out of the case in July, 2010 ([the Arbitrator] was not involved in the settlement discussions), DPR is charging its standard hourly rate of 350 /$ hour.
On December 1, 2010, DPR declined to grant Nordic's request to disqualify the Arbitrator on the grounds it no longer had jurisdiction once the substantive claims were resolved. On the same day, the QLT sent a letter to DPR providing the following information regarding Carlsmith Ball's representation of the QLT since March 2009:
- That Carlsmith [Ball] has and continues to represent the Trust from time to time on land management and
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commercial leasehold collection and summary possession matters, including commercial leaseholds in the Kona Industrial Subdivision, Kuakini Center, and the Kona Commons projects of the Trust; 2. That Carlsmith [Ball] does not represent any single member of the Board; 3. That the selection and retention of law firms, including Carlsmith[ Ball], is customarily done at the operation levels within the Trust and not by the Board; and 4. That day-to-day communications between law firms, review of legal work, and review and payment of law firm invoices are handled at the operational levels of the Trust and not by the Board.
Thereafter, on December 15, 2010, the Arbitrator issued the Final Award, which awarded LPIHGC attorneys' fees of \ 121,997.94 for a total of \$1,439,802.27.
C. Circuit Court Proceedings
1. The Motions to Confirm and to Vacate the Arbitration Award
a. LPIHGC's Motion to Confirm Award
On November 22, 2010, LPIHGC filed a motion to confirm the Partial Award ("motion to confirm"), which was supplemented on December 16, 2010 to include the Final Award. In its motion to confirm and reply to Nordic's opposition to said motion, LPIHGC argued that Nordic failed to allege an undisclosed relationship because there was none, and failed to meet its burden of proving evident partiality. In addition, LPIHGC alleged that Nordic waived or is estopped from overturning the Arbitration Award because it "knew or should have known of the potential partiality
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of an arbitrator but failed to raise an objection . . . prior to the arbitration decision", to the extent that (1) Carlsmith Ball's representation of the QLT as well as the Arbitrator's status as trustee were public knowledge; and (2) Nordic's counsel had actual knowledge of the Arbitrator's trusteeship and chose not to further inquire after the initial, general disclosure. Lastly, LPIHGC contended that the undisputed evidence against Nordic was overwhelming as the specifications for Nordic's work never changed, and various follow-on tradesmen, independent inspectors, and the project structural engineer and architect testified at the arbitration that Nordic's work was substandard.
b. Nordic's Motion to Vacate Award
On December 21, 2010 Nordic filed a motion to vacate award of arbitrator ("motion to vacate") on the grounds that (1) the Arbitrator acted with evident partiality by failing to disclose his relationship with Carlsmith Ball and of his receipt of payment for neutral services provided to Carlsmith Ball and Starn O'Toole during the pendency of the arbitration; (2) the award was "procured by corruption, fraud and other undue means" and violates "public policy against the destruction and suppression of evidence"; [8] and (3) the award exceeds the arbitrator's
*15 authority. [9]
With regard to alleged nondisclosures that form the basis of this appeal, Nordic argued the Arbitrator did not fulfill his initial obligation under HRS 658 \mathrm{~A}-12$ (Supp. 2010) to make a reasonable inquiry and disclose to all parties any facts that a reasonable person would consider likely to affect the
Arbitrator's impartiality, including (1) the long-standing and substantial attorney-client relationship between him, as a QLT trustee, and Carlsmith Ball that "included representation in at least seven, undisclosed lawsuits, two of which were actively (...continued) destroyed." Nordic alleged that (1) the Arbitrator refused to hear Nordic's spoliation motion regarding LPIHGC's loss of F-meter data and concealment of an expert report procured early in the project that indicated that Nordic's data may be qualitatively deficient; (2) the Arbitrator refused to recognize Nordic's F-meter test results, which he said were based on insufficient data, because he believed LPIHGC witnesses who testified that LPIHGC "lost all of its F-data in a computer crash, so that the remedy prescribed . . . was no longer possible[;]" and (3) the award omitted references to a taped recording that allegedly contained a conversation recorded at an LPIHGC/Ownership meeting of LPIHGC "representatives strategizing about how to keep sensitive documents out of Nordic's hands by erasing tapes, shredding meeting minutes, or copying counsel on every sensitive document" that it wanted withheld, and found no spoliation of the data because "there could be no spoliation unless [Nordic] proved the loss was intentional. Therefore, Nordic argued, the Arbitrator "failed to apply Hawaii's law against spoliation of documents[]" to LPIHGC witnesses' alleged perjury regarding the loss of computer data, which was "critical to [prove] Nordic's concrete compliance - the main issue in the case."
9 Nordic argued that the Arbitrator exceeded his powers by awarding damages to a non-party to the arbitration to the extent that the award grants damages to LPIHGC/Owner even though LPIHGC and Nordic were the only two parties to the arbitration, and the Owner is not entitled to any damages in the arbitration proceeding as it contracted only with LPIHGC, not Nordic. The Arbitrator found that the subcontract incorporated the prime contract between the Owner and LPIHGC as part of Nordic's subcontract documents. Nordic also argued that the Arbitrator erred in awarding expert fees and other damages that a trial court could not award, thereby disregarding established law on payment for expert testimony, and warranting vacatur under HRS 658 \mathrm{~A}-$ 23 (a) (4) .
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- FOR PUBLICATION IN WEST'S HAWAI'I REPORTS AND PACIFIC REPORTER * * * being litigated during the pendency of this case[,]" and (2) three instances during the pendency of the arbitration in which he provided neutral services to other attorneys in Carlsmith Ball and Starn O'Toole, consisting of work (a) as a mediator for Carlsmith; (b) as a mediator in a case involving Starn O'Toole; and (c) as an arbitrator in a matter in which Carlsmith Ball entered an appearance and represented a party. Nordic further argued that the "existence of this special relationship between [the Arbitrator] and [LPIHGC's] counsel creates an irrefutable presumption of bias and partiality."
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The only declaration under oath submitted regarding the alleged nondisclosure was that of Oshiro. Oshiro declared that an attached "table of cases filed or defended by the Carlsmith law firm on behalf of the Arbitrator in his capacity as trustee of the [QLT]" "was discovered by [Nordic] in late October, 2010, after which additional inquiry and requests for disqualification were issued." She also declared that "[t]he supplemental information regarding the Arbitrator's ongoing paid services as a neutral for opposing counsel, was a complete surprise - as [Nordic]'s firm had refrained from such solicitation with the expectation that any such solicitation and service would and must be disclosed in the arbitration proceeding, and as the Arbitrator's prior disclosure of neutral services for counsel was
*17 **** FOR PUBLICATION IN WEST'S HAWAI'I REPORTS AND PACIFIC REPORTER *** plainly couched in the past tense." On January 14, 2011, LPIHGC filed its memorandum in opposition to the motion to vacate. With regard to the evident partiality claim, LPIHGC argued that "Nordic is asking this Court to make new law by creating a presumption of evident partiality based solely on an alleged nondisclosure, without any specific facts of improper motives or conduct."10 LPIHGC also argued that Nordic mischaracterizes the relationship between the Arbitrator and Carlsmith Ball by alleging that "the Arbitrator (as trustee) and Carlsmith (as outside counsel) each owe duties to the QLT, therefore the Arbitrator and Carlsmith must owe duties to each other." (emphasis omitted). Moreover, LPIHGC argued that the Arbitrator's initial disclosure ("Since retirement, I have served as a neutral . . . .") is in present-perfect tense and "denotes that [the Arbitrator's] work as a neutral began in the past, continued thereafter, and may still be continuing." Thus, LPIHGC argued that Nordic is the only party with whom the Arbitrator had any prior relationship and highlighted that Nordic failed to
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disclose that (1) the Arbitrator provided third-party neutral services in a matter involving Damon Key at the time the arbitration commenced, (2) Kupchak and the Arbitrator serve on DPR's arbitrators' panel together, and (3) Kupchak's brother-inlaw is a Vice President of the QLT and is one of two executives in charge of the QLT's real estate litigation in which Haitsuka of Carlsmith Ball represented the QLT.
c. Hearing on the Motions to Confirm and Vacate
On January 25, 2011, the circuit court held a hearing on LPIHGC's motion to confirm and Nordic's motion to vacate. [11] In addition to its written arguments, Nordic orally argued that LPIHGC was attempting to confuse the issue of evident partiality by arguing the standard applicable to cases where full disclosure had been made, i.e., actual bias. Nordic further argued that waiver cannot occur when disclosures are insufficient because (1) neutral, as opposed to non-neutral, arbitrators have a higher duty to disclose; and (2) the original disclosure did not provide (a) notice of present and future relationships, and (b) "actual information that would impart actual knowledge."
In response, LPIHGC argued [12] that Daiichi Hawaii Real Estate
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Corp. v. Lichter,
In addition, LPIHGC argued that Nordic and its counsel had more "socially, personally intimate" relationships with the Arbitrator than LPIHGC's counsel to the extent that the Arbitrator did not have (1) ex parte communications with LPIHGC counsel, (2) contact with Carlsmith Ball on the QLT matters, or (3) any previous connection or contact with Manaut on this matter.
Neither party, in its briefs or at the hearing, requested an evidentiary hearing so that the circuit court could address disputed issues of fact. At the close of the hearing, the
exhibit to LPIHGC's reply brief in the arbitration proceeding. With regard to the taped recording, LPIHGC admitted that the tape discussed shredding the meeting minutes, however, "nothing was shredded [and] [a]ll the tapes and the written minutes were actually turned over to Nordic and to [] [the Arbitrator]."
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circuit court took the matters under advisement. On March 24, 2011, the circuit court granted LPIHGC's motion to confirm and denied Nordic's motion to vacate without providing its reasoning or entering findings of fact and conclusions of law, then entered judgment accordingly.
D. Appeal to the Intermediate Court of Appeals
On appeal, Nordic relied heavily on Kay v. Kaiser Foundation Health Plan, Inc.,
13 Rule 42(a) of the Hawai'i Probate Rules provides: An attorney employed by a fiduciary for an estate, (continued...)
*21 representation of the Arbitrator in his trustee capacity does not "excuse his nondisclosure, because in addition to his personal financial interest in the [QLT's] continued success, trustees are the legal owners of the trust, and as such they are the named parties to every legal action, and every claim against the QLT is by law a personal action against the trustee." Lastly, Nordic argued that the Arbitrator's initial statement that "I have served" does not "sufficiently disclose that he was presently serving and may serve in the future" in order to put Nordic on notice that it must object.
In its answering brief, LPINGC argued that Nordic failed to meet its burden to prove specific facts of improper motives, and instead asked for a presumption of evident partiality in contravention of the Hawai'i Supreme Court's requirements in Daiichi: that the "contacts be 'intimate' rather than tenuous or remote, that they cast 'serious doubt' on the arbitrator's impartiality, and that the movant prove 'specific facts' of improper motives or conduct."
In reply, Nordic argued that it did not have a duty to
guardianship, or trust represents the fiduciary as client as defined in Rule 503(a) of the Hawai'i Rules of Evidence and shall have all the rights, privileges, and obligations of the attorney-client relationship with the fiduciary insofar as the fiduciary is acting in a fiduciary role for the benefit of one or more beneficiaries or a ward.
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- FOR PUBLICATION IN WEST'S HAWAI'I REPORTS AND PACIFIC REPORTER * * investigate potential conflicts when neither it nor LPIHGC knew of the Arbitrator's ties to Carlsmith Ball, and thus, could not have waived the claim.
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Applying a de novo standard of review, the ICA concluded that the circuit court erred in granting LPIHGC's motion to confirm and denying Nordic's motion to vacate because "[the Arbitrator's] nondisclosures constitute 'evident partiality' requiring vacatur of the Award under HRS
658 \mathrm{~A}-23$ (a) (2)." Nordic, mem. op. at 8 (quoting Kay,
The ICA rejected LPIHGC's waiver argument and concluded that "[t]o the extent that there is no showing that Nordic was aware
*23 of [the Arbitrator's] contemporaneous work as a neutral with Carlsmith Ball and Starn O'Toole prior to issuance of the Award, Nordic has not waived its right to claim evident partiality." Nordic, mem. op. at 17. According to the ICA, although the initial disclosure provided some notice of the Arbitrator's role as neutral, it failed to raise the issue of the Arbitrator's role as QLT trustee and Carlsmith's representation of the QLT. Id.
Therefore, the ICA held that the Arbitrator's cumulative failure to "disclose his contemporaneous work as neutral in three separate matters for [LPIHGC's] law firms[]" and "that, in the course of his service as a QLT trustee, the QLT was represented by Carlsmith Ball in several litigation matters, including some that were contemporaneous with the arbitration proceeding" sufficiently established a reasonable impression of partiality, warranting vacatur of the award. Nordic, mem. op. at 14, 15; accord id. at 18. Accordingly, the ICA vacated the circuit court's confirmation of the award and judgment, and remanded for further proceedings consistent with its Memorandum Opinion. Nordic, mem. op. at 18.
Because the award was vacated solely on the issue of nondisclosure, the ICA did not address Nordic's claims that the Arbitration Award was procured by fraud or undue means, or that the Arbitrator exceeded his powers. Id.
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E. Certiorari Proceedings
1. LPIHGC's Application
LPIHGC presents the following questions in its application
for writ of certiorari:
A. Did the ICA err by creating and retroactively applying a new standard for finding evident partiality under HRS
Moreover, construing "counsel" to include all attorneys within a law firm would contravene "the effectiveness of arbitration as a vehicle for the resolution of disputes[,]" which
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"depends in part upon the predictability of its efficiency." Daiichi,
Thus, as a matter of law, "counsel" under HRS § 658A-12 does not include all attorneys in the law firm of an attorney representing a party to an arbitration.
b. Pursuant to HRS § 658A-12(a), an Arbitrator Must Still Disclose Any Relationships that a Reasonable Person Would Consider Likely to Affect the Arbitrator's Impartiality
Although "counsel" refers only to the attorneys representing parties to an arbitration and not all attorneys in their firms, HRS § 658A-12(a) requires that an arbitrator disclose facts that a reasonable person would consider likely to affect the arbitrator's impartiality. Depending on the circumstances, such facts could include an arbitrator's relationships with other attorneys within a law firm of counsel representing a party to
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the arbitration. As the ICA stated in Kay, an "arbitrator's failure to disclose to the parties any dealings that might create 'an impression of possible bias' is sufficient to support vacatur."
In this regard, the Texas Supreme Court held "that a neutral arbitrator selected by the parties or their representatives exhibits evident partiality . . . if the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator's partiality." Burlington Northern R. Co. v. TUCO Inc.,
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Even though the co-arbitrator whose firm referred the matter to the arbitrator did not know about the referral and had no involvement in procuring it, and despite the argument that the relationship was "too indirect" because the law firm was neither a party to the arbitration nor counsel for a party, the Texas Supreme Court held "that 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 impartiality."
Supreme Court found evident partiality, effectively acting as factfinder, a procedure we decline to adopt. 960 S.W.2d at 639 . In addition, although Burlington is factually distinguishable, we refer to it to outline possible facts to consider.
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triggers the duty of disclosure[]" such that his failure to disclose the referral constitutes evident partiality.
2. Application to This Case
a. The Arbitrator's Retention as a Neutral By Attorneys of Law Firms Representing LPIHGC
The Arbitrator knew of his retention as a neutral by attorneys of law firms representing LPIHGC. Applying the law outlined above, on remand, the circuit court must address whether a reasonable person would view the three referrals for contemporaneous work as neutral by members of LPIHGC's law firms likely to affect the Arbitrator's impartiality. If so, the Arbitrator had a duty to disclose this information.
b. Carlsmith Ball's Representation of the Arbitrator as Trustee of QLT
LPIHGC asserts that the Arbitrator did not know of Carlsmith Ball's representation of him in his capacity as trustee of the QLT. In order to satisfy the duty of disclosure, however, HRS 658A-12(a) requires that an arbitrator "mak[e] a reasonable inquiry." Thus, if the circuit court finds that this relationship is of the nature that a reasonable person would consider likely to affect the Arbitrator's impartiality, the Arbitrator had a duty of reasonable inquiry to ascertain and
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-
With respect to whether there was a duty of disclosure, the ICA stated that "it was incumbent upon [the Arbitrator] to disclose this relationship with Carlsmith" because "[o]nly then could Nordic have evaluated whether Carlsmith's representation of the QLT would affect Nordic's decision on whether to select [the Arbitrator] . . . or sought further information . . . ." Nordic, mem. op. at 15 (citing Schmitz v. Zilveti,
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Nordic raises questions, however, regarding the extent of the Arbitrator's role and involvement in the QLT-Carlsmith litigation matters.
[21]
In general, a trustee does not have any personal financial gain from trust litigation and has no personal liability when sued as a trustee.
[22]
Nordic asserts, however, that in determining whether an impression of partiality exists, a reasonable person might also consider the impact of a law firm's representation of the trust in assuring continuation of the Arbitrator's compensation as trustee. See Beebe Med. Ctr., Inc. v. InSight Health Servs. Corp.,
21 For example, Nordic cites to Hawai'i Probate Rule 42(a) as the type of information it might have considered in its evaluation, which provides:
An attorney employed by a fiduciary for an estate, guardianship, or trust represents the fiduciary as client as defined in Rule 503(a) of the Hawai'i Rules of Evidence and shall have all the rights, privileges, and obligations of the attorney-client relationship with the fiduciary insofar as the fiduciary is acting in a fiduciary role for the benefit of one or more beneficiaries or a ward.
22 Restatement (Third) of Trusts 106$ (2012) provides: A trustee is personally liable: (1) on a contract entered into in the course of trust administration only if: (a) in so doing, the trustee committed a breach of trust; or (b) the trustee's representative capacity was undisclosed and unknown to the third party; or (c) the contract so provides; (2) for a tort committed in the course of trust administration, or for an obligation arising from the trustee's ownership or control of trust property, only if the trustee is personally at fault.
*51 1999) (holding that an arbitrator's failure to disclose that the same attorneys who were representing the arbitrator in unrelated litigation, which "he had over \$100,000 riding on," were also representing a party to the arbitration "is, in itself, sufficient to constitute evident partiality"). [23]
The Arbitrator had a duty to disclose Carlsmith Ball's representation of him as a QLT trustee if a reasonable person would consider the actual relationship between the Arbitrator and Carlsmith Ball likely to affect his impartiality. In other words, it is possible that facts discovered after an inquiry would not trigger the duty of disclosure, if a reasonable person would not consider such facts likely to affect an arbitrator's impartiality. Thus, upon remand, the circuit court must determine whether the Arbitrator's duty of reasonable inquiry included a duty to ascertain the identities of attorneys and/or law firms representing the QLT. If so, the circuit court must also determine whether a reasonable person would consider the actual relationship between the Arbitrator and Carlsmith Ball likely to affect his impartiality such that the Arbitrator violated his duty of disclosure by not disclosing Carlsmith Ball's representation of him as trustee.
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D. Effect of an Arbitrator's Failure to Disclose
1. In General
If an arbitrator fails to disclose facts that a reasonable person would consider likely to affect his impartiality, pursuant to HRS 658 \mathrm{~A}-12$ (d), "upon timely objection by a party, the court under section 658A-23(a)(2) may vacate an award."24
HRS provides in relevant part as follows: (a) Upon motion to the court by a party to an arbitration proceeding, the court shall vacate an award made in the arbitration proceeding if: (1) The award was procured by corruption, fraud, or other undue means; (2) There was: (A) Evident partiality by an arbitrator appointed as a neutral arbitrator; (B) Corruption by an arbitrator; or (C) Misconduct by an arbitrator prejudicing the rights of a party to the arbitration proceeding (4) An arbitrator exceeded the arbitrator's powers;
As noted in Daiichi, HRS
(a) (2) (A) now limits the ground for vacating an award on the basis of "evident partiality" to the "arbitrator appointed as a neutral arbitrator."
At first glance, it may seem that after a determination that an arbitrator failed to disclose a fact a reasonable person would consider likely to affect his impartiality, there must also be a separate finding that the arbitrator acted with "evident
*53 partiality" or bias before an award can be vacated. As explained below, however, a failure to meet disclosure requirements under HRS 658 \mathrm{~A}-12$ (a) or (b) is equivalent to, or constitutes, "evident partiality" as a matter of law.
The Commentary to UAA Section 23 merely states that "Section 23(a) (2) is based on UAA Section 12(a) (2). The reason 'evident partiality' is a grounds for vacatur only for a neutral arbitrator is because non-neutral arbitrators, unless otherwise agreed, serve as representatives of the parties appointing them." Commentary, supra, at 79. The Commentary's discussion of what constitutes "evident partiality" occurs entirely in the comments regarding disclosure requirements under Section 12(a). As reflected in the Commentary, quoted above in Part III.C.1, the differing views on the standards of disclosure parallel the differing views on what constitutes "evident partiality."
This correlation between the standards of disclosure and "evident partiality" is also reflected in our case law. As this court stated in Daiichi:
Insofar as section 10(b) of the Federal Arbitration Act (9 U.S.C. 1 \ \ (2).
What constitutes "evident partiality" sufficient to vacate an arbitration award is a difficult question. Under Hawai'i law, "evident partiality" sufficient to vacate an arbitration award may be demonstrated when a conflict of interest exists with the arbitrator. That is, when an arbitrator has a personal, professional, or business relationship with a party, its counsel,
*54 principal, or agent, a conflict of interest may arise sufficient to justify vacating that arbitration award. Hawai'i courts have explained that evident partiality not only exists when there is actual bias on the part of the arbitrator, but also when undisclosed facts demonstrate a "reasonable impression of partiality."
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part: An arbitrator appointed as a neutral arbitrator who does not disclose a known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party is presumed to act with evident partiality under section 658A-23(a)(2).
Finally, HRS 658 \mathrm{~A}-14(\mathrm{~d})(2)$ (Supp. 2010) provides, in pertinent part:
In a judicial, administrative, or similar proceeding, an arbitrator or representative of an arbitration organization is not competent to testify, and shall not be required to produce records as to any statement, conduct, decision, or ruling occurring during the arbitration proceeding, to the same extent as a judge of a court of this State acting in a judicial capacity. This subsection does not apply: (2) To a hearing on a motion to vacate an award under section 658A-23(a) (1) or (2) if the movant establishes prima facie that a ground for vacating the award exists.
Thus, an arbitrator can be called to testify at an evidentiary hearing only if a party establishes prima facie that a ground for vacatur exists.
2. Application to This Case
LPIHGC repeatedly cites to the following excerpt from
Daiichi:
[t]he mere fact of a prior relationship is not in and of itself sufficient to disqualify arbitrators. The relationship between the arbitrator and the party's principal must be so intimate-personally, socially, professionally, or financially-as to cast serious doubt on the arbitrator's impartiality. If all arbitrators' relationships came into question, finding qualified arbitrators would be a difficult, sometimes impossible, task.
(quoting
*56 This principle is, however, inapplicable to this case as Daiichi addressed non-neutral arbitrators under a statutory scheme that contained no explicit disclosure requirements. Although non-neutral arbitrators are now held to the same standard of disclosure as neutral arbitrators, vacatur for evident partiality under HRS 658 \mathrm{~A}-23$ (a) (2) (C) applies only when a neutral arbitrator fails to make the required disclosures. [25]
Thus, upon remand, Nordic bears the burden of proving evident partiality, i.e., the failure to disclose facts that a reasonable person would consider likely to have affected the Arbitrator's impartiality.
We note that LPIHGC's assertion that the ICA improperly applied the presumption under HRS 658 \mathrm{~A}-12$ (e) in vacating the award lacks merit. Contrary to LIPHGC's assertion, the ICA's Memorandum Opinion expressly states that "[t]his presumption . . . does not apply where the failure to make required disclosures concerns the arbitrator's relationship to a party's counsel."
Nordic, mem. op. at 10 n. 4 (citing HRS \ (d), .
25 According to the Commentary to UAA Section 12, "[a] partyappointed, non-neutral arbitrator's failure to disclose would be covered under the corruption and misconduct provisions of Section 23(a) (2) because in most cases it is presumed that a party arbitrator is intended to be partial to the side which appointed that person." Commentary, supra, at 49.
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E. Timeliness and Waiver of Objections
1. In General
As noted earlier, HRS
658 \mathrm{~A}-12$ (d) provides "[i]f the arbitrator did not disclose a fact as required by subsection (a) or (b), upon timely objection by a party, the court under section 658A-23(a)(2) may vacate an award." In addition, a party who has actual or constructive knowledge of a relationship of the arbitrator requiring disclosure but "fails to raise a claim of partiality . . . prior to or during the arbitration proceeding is deemed to have waived the right to challenge the decision based on 'evident partiality.'" Daiichi,
As noted in Daiichi at footnote 17, "the question [of] whether a valid waiver exists is generally a question of fact, [however] 'when the facts are undisputed it may become a question of law.'"
2. Application to This Case
To determine whether the initial disclosure put the parties
*58 on notice of the relationships, the ICA analyzed the Arbitrator's use of the present perfect tense in his disclosure, in which he stated, "[s]ince retirement, I have served as a neutral for counsel and members of their law firms[,]" and found that it referred only to "engagements completed in the past." Nordic, mem. op. at 17. The ICA also found the following: [W]hile [the Arbitrator's] initial disclosure provided some notice of his role as a neutral arbitrator in cases involving the parties' counsel, it failed to make any reference, or provide any notice, of his role as a trustee of the QLT and Carlsmith Ball's representation of the QLT. Thus, unlike the issue of [the Arbitrator's] work as an arbitrator in unrelated arbitrations involving the Carlsmith Ball and Starn O'Toole firms, the issue of [the Arbitrator's] role as a trustee of the QLT and Carlsmith Ball's representation of the QLT was not raised at all in [the Arbitrator's] initial disclosure.
LPIHGC argued, however, that the Arbitrator's initial disclosure ("Since retirement, I have served as a neutral . . . .")"is in present-perfect tense []" and "denotes that the Arbitrator's work as a neutral began in the past, continued thereafter, and may still be continuing." (emphasis omitted). The ICA concluded that "[t]o the extent that there is no showing that Nordic was aware of [the Arbitrator's] contemporaneous work as a neutral with Carlsmith Ball and Starn O'Toole prior to issuance of the Award, Nordic has not waived its right to claim evident partiality." Nordic, mem. op. at 17. The meaning of the initial disclosure is a disputed question of fact that can be addressed by the circuit court on remand if appropriate.
In addition, this court has recognized that "[a] respectable
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number of federal jurisdictions have invoked the waiver principle under circumstances in which the complaining party knew or should have known of the potential partiality of an arbitrator but failed to raise an objection to the arbitrator's appointment prior to the arbitration decision."
Nordic never responded to LPIHGC's questions regarding when its representatives or its attorneys discovered Carlsmith Ball's representation of the Arbitrator as trustee of the QLT. Notably, only Oshiro's declaration asserting lack of knowledge was submitted with Nordic's motion to vacate; declarations were not submitted by Nordic's other counsel in the arbitration hearings.
Due to the lack of an evidentiary hearing, there are no
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findings regarding the actual or constructive knowledge of Nordic's representatives or counsel, including when Nordic's representatives or other counsel actually discovered the Arbitrator's position as a trustee of the QLT, and Carlsmith Ball's representation of him in that capacity, assuming the Arbitrator's duty of reasonable inquiry required disclosure of such facts, as discussed previously. There are also no findings as to when Nordic or its other attorneys learned of the Arbitrator's additional retention as a neutral by other attorneys in LPIHGC's counsel's law firms. Therefore, on remand, if necessary, the circuit court can determine the sufficiency of the initial disclosure, Nordic's actual or constructive knowledge, and the timeliness of Nordic's objection to determine whether Nordic waived its right to claim evident partiality.
F. Circuit Court Discretion Under HRS 658 \mathrm{~A}-12$ (d)
1. In General
Finally, HRS 658 \mathrm{~A}-12 { }^{[26]}$ and
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(d) that is permissive in nature (an award "may" be vacated) rather than Section 23(a) which is mandatory (a court "shall" vacate an award)." Commentary, supra, at 50.
2. Application to This Case
Nordic brought its motion to vacate under HRS 658 \mathrm{~A}-23 \ (d) to decide whether or not to grant the motion to vacate. Any such ruling of the circuit court under HRS 658A-12(d) will be reviewed under an abuse of discretion standard.
IV. Conclusion
This court stated in Daiichi:
It is generally considered that parties resort to
arbitration to settle disputes more expeditiously and
inexpensively than by a court action; and also that the
objective is to have disputes considered by arbitrators, who
are familiar with the problem, in a less formal and
combative environment. Thus, it must be deemed that the
primary purpose of arbitration is to avoid litigation.
26(...continued) If an arbitrator discloses a fact required by subsection (a) or (b) to be disclosed and a party timely objects to the appointment or continued service of the arbitrator based upon the fact disclosed, the objection may be a ground under section 658A-23(a) (2) for vacating an award made by the arbitrator.
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trusting atmosphere is preserved and there is voluntary
compliance with the decree, without need for judicial
enforcement. This end is best served by establishing an
atmosphere of frankness at the outset, through disclosure by
the arbitrator of any financial transactions which he has
had or is negotiating with either of the parties. In many
cases the arbitrator might believe the business relationship
to be so insubstantial that to make a point of revealing it
would suggest he is indeed easily swayed, and perhaps a
partisan of that party. But if the law requires the
disclosure, no such imputation can arise. And it is far
better that the relationship be 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.
HRS chapter 658A now imposes clear standards for disclosure. Prompt and continuous disclosures, whether or not required, will better serve the efficiency goals of arbitration by helping to avoid motions to vacate and lengthy judicial review, as in this case.
In the instant case, however, it is for the circuit court as factfinder, not an appellate court, to determine whether reasonable inquiry and disclosure standards were met, and if not, whether the Arbitration Award should be vacated for this or any other reason alleged. Although entry of findings of fact and conclusions of law are not required on all motions to vacate as long as the circuit court's reasoning is clearly stated on the record, due to the numerous issues in this case, to allow appropriate appellate review, the circuit court is to conduct an
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evidentiary hearing and render findings of fact and conclusions of law.
Accordingly, we vacate the ICA's Judgment on Appeal, and the circuit court's March 24, 2011 Final Judgment, thereby vacating the associated orders (1) granting LPIHGC's motion to confirm the Arbitration Award, and (2) denying Nordic's motion to vacate the Arbitration Award, and remand this case to the circuit court for further proceedings consistent with this opinion.
Terence J. O'Toole, Judith Ann Pavey, and John P. Manaut for petitioner
Kenneth R. Kupchak, Anna H. Oshiro, Robert H. Thomas, and Mark M. Murakami for respondent /s/ Paula A. Nakayama /s/ Sabrina S. McKenna /s/ Richard W. Pollack /s/ Steven S. Alm
/s/ Karl K. Sakamoto
NOTES
Notes
8 As to the claims of fraud and spoliation of evidence, Nordic argued that the award warranted vacatur under HRS (a) (1) (Supp. 2010) because it was "procured by lies about crucial evidence [LPIHGC] suppressed or (continued...)
10 LPIHGC and Nordic appear to disagree as to whether this is an actual bias or evident partiality case and the burden of proof required. Citing Kay v. Kaiser Foundation Health Plan, Inc.,
11 The Honorable Patrick W. Border presided 12 As to the other bases Nordic raised in its motion to vacate, LPIHGC argued that Nordic misrepresented to the court that none of the F-meter data was produced during the arbitration because the data was attached as an (continued...)
16 In Daiichi, a non-neutral arbitrator acted in a manner that did not portray his close personal, professional, and financial relationships with a party and its counsel. See generally
20 The trial court had denied the motion to vacate.
23 There is no admissible evidence to substantiate Nordic's allegation that the Arbitrator receives a six figure annual compensation as trustee of the QLT trust.
24 The issue of whether "may" actually gives the circuit court discretion to deny vacatur after finding evident partiality is addressed in Part III.F, below.