Commonwealth Coatings Corp. v. Continental Casualty Co.
393 U.S. 145, 21 L. Ed. 2d 301, 1968 U.S. LEXIS 277 (1969)
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Rule of Law:
The 'evident partiality' provision of the United States Arbitration Act requires an arbitrator to disclose any significant past or present business dealings with a party that might create an impression of possible bias, even if there is no proof of actual fraud or bias.
Facts:
- Commonwealth Coatings Corporation, a subcontractor, had a contract for painting that included an agreement to arbitrate any controversies.
- Commonwealth Coatings sued the sureties on the prime contractor's bond to recover money alleged to be due for a painting job.
- For the arbitration, Commonwealth Coatings appointed one arbitrator, the prime contractor appointed a second, and these two together selected a third, supposedly neutral, arbitrator.
- The third arbitrator conducted a large engineering consulting business in Puerto Rico, serving as a consultant for various people in connection with building construction projects.
- The prime contractor was one of the third arbitrator's regular customers, with patronage involving fees of about $12,000 over a period of four or five years.
- The arbitrator's services for the prime contractor included work on the very projects involved in the lawsuit.
- The close business connections between the third arbitrator and the prime contractor were unknown to Commonwealth Coatings and were never revealed until after an arbitration award had been made.
Procedural Posture:
- Commonwealth Coatings Corporation, a subcontractor, sued the sureties on the prime contractor's bond to recover money alleged to be due for a painting job.
- An arbitration was held pursuant to an agreement in the painting contract, and an award was made.
- Commonwealth Coatings challenged the award in the District Court (the court of first instance), seeking to set it aside.
- The District Court refused to set aside the award.
- Commonwealth Coatings appealed the District Court's decision to the Court of Appeals for the First Circuit (an intermediate appellate court).
- The Court of Appeals affirmed the District Court's decision.
- The Supreme Court of the United States granted certiorari to review the case.
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Issue:
Does the United States Arbitration Act's provision allowing vacation of an arbitration award for "evident partiality" require an arbitrator to disclose significant, though sporadic, past business relationships with one of the parties, even if there is no proof of actual bias?
Opinions:
Majority - Mr. Justice Black
Yes, the United States Arbitration Act's provision for 'evident partiality' requires an arbitrator to disclose significant past business relationships with a party that might create an impression of possible bias. The Court reversed the lower courts, holding that Section 10 of the United States Arbitration Act, allowing vacation of an award for 'evident partiality' or 'undue means,' demonstrates Congress's desire for impartial arbitration. Even without proof of actual fraud or bias, the undisclosed, significant financial relationship between the third arbitrator and the prime contractor created an appearance of partiality. The Court analogized this to judicial impartiality, citing Tumey v. Ohio (1927), which established that a judge's 'slightest pecuniary interest' is grounds for disqualification. This constitutional principle for judges should be applied even more scrupulously to arbitrators, who are not subject to appellate review. The Court concluded that arbitrators, while not expected to sever all business ties, must disclose any dealings that might create an impression of bias, aligning with principles found in American Arbitration Association rules and the Canon of Judicial Ethics to avoid even the appearance of bias.
Dissenting - Mr. Justice Fortas
No, the arbitration award should not be set aside merely because an arbitrator failed to disclose a prior business relationship with one of the parties, especially when there is no claim or evidence of actual partiality, unfairness, bias, or fraud. Justice Fortas argued that the majority's ruling established an inappropriate per se rule that an arbitrator's innocent failure to volunteer information about a prior business relationship automatically compels vacation of an award, regardless of the circumstances. The dissenting justices contended that 'evident partiality' in Section 10(b) of the Arbitration Act requires actual conduct or a disposition favoring one party, which was conceded to be absent here. They emphasized that arbitration is consensual and practical, and applying strict judicial standards to arbitrators goes against the Act's purpose of minimizing formalism, especially when the complaining party disclaims any imputation of partiality.
Concurring - Mr. Justice White
Yes, an arbitrator must disclose substantial business dealings with a party to prevent the appearance of bias, but this does not mean arbitrators are held to the same standards as Article III judges, nor does it require disclosure of trivial or remote connections. Justice White agreed with the majority's outcome but clarified that arbitrators, often being 'men of affairs' from the marketplace, are not expected to meet the same strict decorum standards as judges. However, to foster an amicable and trusting arbitration atmosphere, arbitrators must disclose financial transactions that are 'substantial' rather than 'trivial.' This transparency allows parties to accept or reject an arbitrator with full knowledge, minimizing judicial intervention in assessing impartiality. He stated that the holding requires disclosure where an arbitrator has a 'substantial interest in a firm which has done more than trivial business with a party,' suggesting arbitrators should err on the side of disclosure.
Analysis:
This case significantly broadened the interpretation of 'evident partiality' under the United States Arbitration Act, moving beyond requiring proof of actual bias to include the appearance of bias stemming from undisclosed business relationships. It established a stricter disclosure standard for arbitrators, emphasizing transparency to maintain the integrity and perceived fairness of the arbitration process. While Justice White's concurrence tempered this by clarifying that arbitrators are not judges and not all trivial connections need disclosure, the decision nevertheless promotes greater caution and openness among arbitrators. This ruling helps ensure public confidence in arbitration as a fair dispute resolution mechanism, potentially increasing litigation challenging awards based on non-disclosure, but also fostering more diligent disclosure practices.
