Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC
437 S.W.3d 518 (2014)
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Rule of Law:
A neutral arbitrator exhibits evident partiality, warranting vacatur of an arbitration award, when they fail to disclose facts that might, to an objective observer, create a reasonable impression of partiality. A partial disclosure of a relationship does not excuse the failure to disclose the full extent of a non-trivial relationship.
Facts:
- Tenaska Energy, Inc. (Tenaska) sold a power plant to Ponderosa Pine Energy, LLC (Ponderosa), leading to a subsequent dispute over an indemnity clause in the purchase agreement.
- The parties proceeded to arbitration, with a three-arbitrator panel that included Samuel A. Stern as the neutral third arbitrator.
- Stern disclosed that Ponderosa's law firm, Nixon Peabody, had recommended him for other arbitrations and that he had one meeting with the firm on behalf of his company, LexSite, regarding potential business.
- Stern did not disclose that he was a shareholder in LexSite, president of its U.S. subsidiary, and was actively soliciting business from the specific Nixon Peabody lawyers representing Ponderosa.
- Stern also failed to disclose that he had additional contacts with these lawyers and that one of them, Constance Boland, edited his disclosure statement, adding a disclaimer that minimized the business prospect.
- During the arbitration, LexSite's CEO continued to communicate with Boland about potential business opportunities with Nixon Peabody.
- A divided arbitration panel, with Stern in the majority, ultimately selected Ponderosa’s proposed $125 million award over Tenaska's $1.25 million proposal.
Procedural Posture:
- After a divided arbitration panel issued a $125 million award for Ponderosa, Ponderosa filed a motion to confirm the award in a Texas state district court (trial court).
- Tenaska filed a motion to vacate the award in the same court, arguing the neutral arbitrator, Stern, exhibited evident partiality.
- The trial court, after a hearing, granted Tenaska's motion and vacated the arbitration award.
- Ponderosa, as appellant, appealed the trial court's order to the Texas Court of Appeals (intermediate appellate court).
- The Court of Appeals reversed the trial court's judgment, finding that Tenaska had waived its partiality claim.
- Tenaska, as petitioner, then sought review of the Court of Appeals' decision from the Supreme Court of Texas.
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Issue:
Does a neutral arbitrator's failure to disclose the full extent of his ongoing business and financial relationships with a party's counsel constitute evident partiality sufficient to vacate an arbitration award, even when some aspects of the relationship were partially disclosed?
Opinions:
Majority - Justice Guzman
Yes. An arbitrator's failure to disclose the full extent of a non-trivial relationship constitutes evident partiality if the undisclosed information might create a reasonable impression of bias to an objective observer. The standard for evident partiality requires vacating an award if an arbitrator fails to disclose facts that might convey such an impression. In this case, Stern disclosed some basic connections to Nixon Peabody but failed to disclose his significant financial stake in LexSite, his leadership role, his active and ongoing solicitation of business from the specific attorneys representing Ponderosa, and the fact that those attorneys edited his disclosure. This undisclosed information, which is not trivial, might cause a reasonable person to believe Stern was partial toward Ponderosa to curry favor for his company, LexSite. Therefore, his failure to make a full disclosure constitutes evident partiality, and the arbitration award must be vacated.
Analysis:
This case reinforces the stringent disclosure standard for arbitrators in Texas, emphasizing that partial or misleading disclosures are insufficient to meet an arbitrator's duty of transparency. By rejecting a more deferential standard, the court affirmed that the burden is on the arbitrator to disclose any non-trivial facts that could create an impression of bias, rather than on the parties to investigate from incomplete information. This decision solidifies the principle that the integrity of the arbitration process depends on full, upfront disclosure, thereby allowing parties to intelligently assess an arbitrator's impartiality from the outset. It sends a clear message that courts will prioritize the perception of fairness and will vacate awards tainted by significant non-disclosures.
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