Texas Court of Appeals Vacates Arbitration Award Based on Evident Partiality

The Texas Fourteenth Court of Appeals affirmed the trial court’s denial of confirmation of an arbitral award.

In AMOCO D.T. Co.v. Occidental Petroleum Corp., NO. 14-09-00651-CV, (Tex. App.–Houston [14th Dist.] May 17, 2011, Amoco D.T. Company (“Amoco”) and Shell Land & Energy Company (“Shell”) entered into a purchase-and-sale agreement with Occidental Petroleum Corporation (“Oxy”). Pursuant to the agreement, Oxy made a demand for arbitration to resolve a contract dispute, and the case was submitted to arbitration under the Federal Arbitration Act (“FAA”). The arbitration panel was comprised of Shannon Ratliff (selected by Oxy), Thomas McDade (selected by Shell), and George Chapman (selected by Ratliff and McDade). During the course of the pre-arbitration proceedings, McDade left his law firm, McDade & Fogler, and became “of counsel” with the firm of Beck, Redden, & Secrest, L.L.P. (“Beck Redden”). In a two-to-one decision, the arbitration panel ruled for Shell. Subsequently, Oxy discovered undisclosed information pertaining McDade’s and Beck Redden’s relationships with Shell.

Shell filed suit in district court to confirm the arbitral award. On the other hand, Oxy moved to vacate the award based on the arbitrator’s evident partiality. The trial court determined the evidence established evident partiality and vacated the arbitration award. Shell now appeals.

The court of appeals first cited the U.S. Supreme Court’s evident-partiality decision, Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968). In Commonwealth Coatings, the court said, a supposedly neutral arbitrator failed to disclose that one of the parties to the arbitration was a regular customer of his engineering-consulting services, including on the projects underlying the parties’ dispute. The court then cited Justice Black:

It is true that arbitrators cannot sever all their ties with the business world, since they are not expected to get all their income from their work deciding cases, but we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review. We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias.

Next, the court mentioned Burlington N. R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 632 (Tex.1997) decided by Texas Supreme Court. Tuco dealt with an arbitration award for evident partiality under the Texas General Arbitration Act (“TAA”). In Tuco, the Texas Supreme Court clarified that standard for evident partiality should be the same under the FAA and the TAA. Thus, the court of appeals concluded that Tuco should be the standard under both, the FAA or TAA.

Then, the court outlined the facts argued by Oxy in its motion for vacatur:

(1) during the course of the arbitration, Beck Redden attorney David Gunn represented BP Products North America, Inc. (“BP Products”), a BP Amoco p.l.c. subsidiary, in mandamus proceedings in Texas;(2) during the course of the arbitration, a Beck Redden attorney began representing several BP Amoco p.l.c. subsidiaries;(3) Beck Redden represented Shell Oil Company from 1994 to 1999; and (4) after the arbitration panel issued its award, Shell designated McDade as an arbitrator in unrelated matter.

Finally, the court concluded that:

McDade’s failure to disclose Beck Redden’s BP Products representation might, to an objective observer, create a reasonable impression of his partiality. See TUCO, 960 S.W.2d at 636. We recognize that evident partiality is generally proved by an arbitrator’s nondisclosure of his own potential conflicts, whereas here, McDade’s evident partiality was proved by his nondisclosure of his firm’s potential conflicts. Nevertheless, the fact that a reasonable person could conclude the circumstances might have affected McDade’s impartiality triggered his duty to disclose. See id. at 639. Thus, the fact that McDade failed to disclose non-trivial information was sufficient to establish evident partiality. Id. at 636.

[Hat tip to our blog contributor Jim Gaitis.]

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