February 1, 2011
Should an arbitrator be prevented from acting as an arbitrator in a particular case if he has knowledge about the dispute? Yesterday, in
Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), 631 F.3d 869 (7th Cir. 2011), Case No. 09-3682, the Seventh Circuit answered, "No."
less..
Two insurance companies entered into a contract containing a broad arbitration clause. These companies disagreed about the meaning of one of the terms of that contract and submitted the matter to arbitration. The arbitrators entered an award for Hancock, which was confirmed by a district court.
Trustmark was dissatisfied and refused to pay the bills that Hancock sent on the view that the confirmed award governed all of the parties' dealings. This led Hancock to commence a new arbitration, in which it named one of the arbitrators from the first arbitration as its arbitrator. Before that arbitration could commence, Trustmark sued Hancock in federal court, seeking to enjoin the arbitration as long as Hancock's arbitrator remained a member of the new panel. The district court issued that injunction and Hancock appealed.
On appeal, the Court addressed Trustmark's claim that the arbitrator selected by Hancock was not "disinterested." It noted that all arbitrators have a reputational interest in an arbitration:
[I]f his decision disappoints the person who put him on the panel, he is less likely to be selected as an arbitrator in the future. ... But the interest in potential future employment is endemic to arbitration that permits parties to choose who will decide. Sometimes parties agree that arbitrators will be named by independent entities, such as the American Arbitration Association, but Trustmark and Hancock reserved the power of appointment. A court cannot properly deem the interest in reemployment created by this arrangement a disqualifying event.
It also held that this arbitrator's knowledge about the prior arbitration should not disqualify him from acting as an arbitrator in this arbitration.
[P]rivate parties often select arbitrators precisely because they know something about the controversy. Arbitration need not follow the pattern of jury trials, in which a factfinder's ignorance is a prime desideratum. Nothing in the parties' contract requires arbitrators to arrive with empty heads. Federal judges, of all people, should not confuse knowledge with a disqualifying "interest." For judges regularly hear multiple suits arising from the same controversy. The district judge who resolved this very dispute also entered the order enforcing the 2004 award. If knowing about what happened in 2004 is an impermissible "interest," or makes the person a "fact witness" about what had occurred in 2004, then the district judge should have stepped aside from the current suit. Yet that was not required. Knowledge acquired in a judicial capacity does not require disqualification. Likewise with knowledge acquired in arbitration.
Lessons:
- An arbitrator is not "disinterested" merely because he has knowledge of the underlying facts.
- An arbitrator is not "disinterested" merely because he has a reputational interest in the outcome of the arbitration.
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