LAWFUEL – The Legal Newswire – New York, July 9, 2007 – The U.S. Court of Appeals for the Second Circuit today issued a new standard for determining issues of arbitrator bias, in Applied Industrial Materials Corp. v. Ovalar Makine Ticaret ve Sanayi, A.S., No. 06-3297-cv (decision attached hereto and available at http://www.ca2.uscourts.gov:8080/isysnative/RDpcT3BpbnNcT1BOXDA2LTMyOTctY3Zfb3BuLnBkZg==/06-3297-cv_opn.pdf#xml=http://10.213.23.111:8080/isysquery/irl1541/1/hilite ). The decision breaks new ground on how arbitrators and parties must deal with issues of potential conflicts of interest.
Specifically, the Court held that “where an arbitrator has reason to believe that a nontrivial conflict of interest might exist, he must (1) investigate the conflict (which may reveal information that must be disclosed . . . ) or (2) disclose his reasons for believing there might be a conflict and his intention not to investigate.” The Court emphasized that “when an arbitrator knows of a potential conflict, a failure to either investigate or disclose an intention not to investigate is indicative of evident partiality.”
In the case, a Turkish Corporation, Ovalar Makine Ticaret ve Sanayi, A.S. (“Ovalar”), and its Chairman, Ural Ataman, were parties to an arbitration with Applied Industrial Materials Corporation (“Aimcor”). The two companies had entered into a joint venture agreement relating to the sale in Turkey of petroleum coke, and a dispute arose concerning the distribution of profits under the venture. The arbitration panel consisted of two arbitrators appointed by the parties, and a third arbitrator, Charles Fabrikant. Fabrikant is the Chairman, President and CEO of Seacor Holdings, a multi-billion dollar company.
In April 2005, after the arbitration hearings commenced, Fabrikant advised the parties that his company was in negotiations with Oxbow Industries (“Oxbow”), the parent of Aimcor, about a barge contract. As the trial court later found, based on this disclosure, Ovalar had a reasonable expectation that it would be notified of any actual contracts between Fabrikant’s company and Oxbow. However, Fabrikant decided not to inquire further about the extent of the dealings between his company and Oxbow, and did not advise the parties that he would make no further inquiries. If Fabrikant had conducted an investigation, it would have revealed that his company and Oxbow were not just in negotiations, but had entered into barge contracts after the arbitration had commenced, which generated $275,000 in revenue.
In September 2005, the arbitration panel issued a 2-1 decision against Ovalar, with Fabrikant writing the decision and supplying the decisive vote. Several months later, Ovalar discovered the contracts that had not been disclosed, and asked Fabrikant to withdraw from the arbitration. Fabrikant refused. Ovalar then challenged the validity of the decision in New York federal court, on the ground that Fabrikant’s actions showed “evident partiality.” In June 2006, Judge Robert Patterson issued a decision in favor of Ovalar and Mr. Ataman, vacating the arbitration award.
Today a three judge panel of the U.S. Court of Appeals for the Second Circuit, in an opinion written by Judge Barrington Parker, joined by Judges John Walker and Chester Straub, issued a unanimous decision affirming the decision below. In doing so, the Court held that “arbitrators must take steps to ensure that the parties are not misled into believing that no nontrivial conflict exists.”
The scope of an arbitrator’s duty to investigate and/or disclose potential conflicts of interest is an issue that has generated much debate in the arbitration community, especially since companies have increasingly used arbitrations to decide commercial disputes. The Second Circuit is based in New York City, a center of international arbitration. Its new Ovalar standard strongly supports the importance of arbitrator impartiality and the benefits of disclosure when a conflict may exist.
Dewey Ballantine LLP represented Ovalar before Judge Patterson and the Second Circuit, with a team comprised of Jeffrey L. Kessler, David G. Feher, Kelly Librera and Michael Thelen, in consultation with Robert de By, the head of the Firm’s International Arbitration Group.
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