Dallas Court of Appeals Vacates Arbitral Award Due to Arbitrator’s Non-Disclosure

The Dallas Court of Appeals has vacated an arbitration award because the arbitrator failed to disclose that he served as arbitrator in another case involving one party’s representative and a related company.

In Alim v. KBR (Kellogg, Brown & Root) – Halliburton, No. 05-09-00395-CV, (Tex. App. – Dallas, Jan 10, 2011), Mohammad Alim was employed by KBR (Kellogg, Brown & Root) – Halliburton (“KBR”) and filed “an arbitration claim for employment discrimination, breach of contract, and retaliation” against KBR pursuant to Halliburton’s Dispute Resolution Plan. The plan required employees of Halliburton and its subsidiaries to submit employment disputes to binding arbitration before a neutral chosen by the parties. The plan also expressly stated it was governed by the Federal Arbitration Act (“FAA”). The American Arbitration Association (“AAA”) appointed a neutral to the case who attested he performed a conflicts check, none of the party representatives appeared before him in the past and he fulfilled his duty to disclose “in accordance with the Rules of the [AAA], Code of Ethics for Commercial Arbitrators and/or all applicable statutes pertaining to arbitrator disclosures.” When arbitration began, however, the selected neutral admitted to “coming across” KBR’s party representative and attorney in the past. At the close of arbitration, the arbitrator issued an award denying all of Alim’s claims.

Alim made an objection to the AAA based on the arbitrator’s past relationship with KBR’s representatives. KBR responded the relationship “was so attenuated and immaterial that it did not give rise to an obligation to disclose,” and stated Alim waived his right to object when he failed to do so at the outset of the arbitration. Alim filed a petition before a trial court to vacate the award. KBR counterclaimed with a motion to confirm the award and raised a defense of waiver to Alim’s petition. The trial court then heard evidence in the matter. The arbitrator testified that his statement at the beginning of arbitration was not meant to amend his written disclosure, he performed his conflicts checks from memory and he had no recollection regarding how many cases he arbitrated in the past in which Halliburton was a party. The trial court denied Alim’s petition to vacate the award and signed KBR’s motion to confirm. Alim then appealed to the Fifth District of Texas Court of Appeals.

The Dallas Court began by stating,

We review the trial court’s order de novo, apply the FAA to substantive matters, and follow Texas law for procedural matters.

According to the court,

Under the FAA, evident partiality of the arbitrator is a substantive ground for vacating an arbitration award. 9 U.S.C. § 10(a)(2). A neutral arbitrator exhibits evident partiality if he does not disclose facts that might, to an objective observer, create a reasonable impression of the arbitrator’s partiality. Burlington N. R.R. v. TUCO, Inc., 960 S.W.2d 629, 636 (Tex. 1997); Thomas James Assocs., Inc. v. Owens, 1 S.W.3d 315, 321 (Tex. App.—Dallas 1999, no pet.) (extending TUCO to arbitrations under the FAA). In TUCO, the supreme court emphasized that “evident partiality is established from the nondisclosure itself, regardless of whether the nondisclosed information necessarily establishes partiality or bias.” TUCO, 960 S.W.2d at 636 (emphasis original) (citing Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 147 (1968)).

The court held that the arbitrator’s failure to disclose,

was a fact that might, to an objective observer, create a reasonable impression of partiality. The nondisclosure of that fact—and the failure to amend or correct his answer to the question specifically inquiring as to that fact—constitutes evident partiality and is grounds for vacating the arbitration award under the FAA. See TUCO, 960 S.W.2d at 636.

Next, the Dallas Court dismissed KBR’s waiver defense since the arbitrator’s comment did not establish “Alim had knowledge of the undisclosed facts sufficient to support a finding that Alim intentionally waived his right to object,” or “acted inconsistently with claiming that right.” Additionally, KBR offered no evidence to establish otherwise.

Because the arbitrator’s failure to disclose his past relationship with KBR’s representatives constituted evident partiality and there was no evidence to support a waiver defense, the Dallas Court of Appeals reversed the trial court’s order, vacated the arbitration award and remanded the case.

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