In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 02-2458

SPHERE DRAKE INSURANCE LIMITED,

Plaintiff-Appellant,

v.

ALL AMERICAN LIFE INSURANCE COMPANY,

Defendant-Appellee.

____________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 01 C 5226—Rebecca R. Pallmeyer, Judge.

____________

ARGUED SEPTEMBER 9, 2002—DECIDED OCTOBER 9, 2002

____________

Before EASTERBROOK, KANNE, and EVANS, Circuit Judges.

EASTERBROOK, Circuit Judge. Two underwriters cannot

agree about whether seven policies of reinsurance are

valid—or for that matter about who decides whether they

are valid. All American, which contends that the contracts

are effective, says that the dispute should be arbitrated.

Sphere Drake, which denies the documents’ binding quality, believes that a court should resolve the question. Last

year we concluded that disputes about one of the seven

contracts should be handled by a judge. Euro International

Underwriting (“EIU”), which wrote the policies on Sphere

Drake’s behalf, was subject to a cap on the risks to which
2 No. 02-2458

it could expose Sphere Drake. According to Sphere Drake,

EIU exceeded this limit when agreeing to reinsure All

American’s policies. If that is so true, and All American

(or its agent) knew it, then EIU had neither actual nor

apparent authority to bind Sphere Drake, which would

not be obliged either to arbitrate or to indemnify. See

Sphere Drake Insurance Ltd. v. All American Insurance Co.,

256 F.3d 587 (7th Cir. 2001).

While litigating with respect to one of the seven policies,

Sphere Drake submitted the other six to arbitration at

All American’s insistence. The arbitration was conducted

under the auspices of the Association Internationale de

Droits des Assurances (“AIDA”) and its U.S. affiliate, the

AIDA Reinsurance and Insurance Arbitration Society

(“ARIAS•U.S.”), which uses tripartite panels. Each insurer

names one member of the panel, and these two choose a

neutral (called the “umpire”) to break ties. All American

designated Robert M. Mangino, and Sphere Drake named

Ronald A. Jacks. They chose Robert M. Huggins as the

umpire. All three have considerable experience in international reinsurance arbitration, having served on at least

35 panels. Mangino and Jacks are founding directors of

ARIAS•U.S.; Jacks is a former president of the U.S. chapter of AIDA. All three have served as umpires; Jacks has

been chosen for that duty more than 25 times by partynamed arbitrators who relied on his reputation for legal

acumen and impartiality. Huggins decided that Sphere

Drake was entitled to victory on the ground that All

American had disavowed Stirling Cooke Brown Reinsurance Brokers as its agent (a tactic apparently designed

to avoid any risk that Stirling Cooke, which placed the

reinsurance through EIU, would be found to know about

EIU’s limited authority). But Huggins concluded that if

All American was not bound (because Stirling Cooke

lacked authority to act on its behalf) then Sphere Drake

could not be bound either. Jacks joined him to make a
No. 02-2458 3

majority; Mangino dissented. Having demanded arbitration,

All American decided that it did not like the result and

asked a court to set aside the award—which it did, on the

ground that Jacks displayed “evident partiality,” one

of the few grounds for refusing to enforce an award. 9

U.S.C. §10(a)(2). See 2002 U.S. Dist. LEXIS 8876 (N.D. Ill.

May 17, 2002).

As far as we can see, this is the first time since the

Federal Arbitration Act was enacted in 1925 that a federal court has set aside an award because a party-appointed arbitrator on a tripartite panel, as opposed to a

neutral, displayed “evident partiality.” The lack of precedent is unsurprising, because in the main party-appointed arbitrators are supposed to be advocates. In labor

arbitration a union may name as its arbitrator the business manager of the local union, and the employer its vicepresident for labor relations. Yet no one believes that the

predictable loyalty of these designees spoils the award. See

Astoria Medical Group v. Health Insurance Plan of Greater

New York, 227 N.Y.S.2d 401, 182 N.E.2d 85 (1962). Cf.

United Transportation Union v. Gateway Western Ry., 284

F.3d 710 (7th Cir. 2002) (discussing the difference between party-appointed and neutral arbitrators). This is

so because the parties are entitled to waive the protection of §10(a)(2), as they can waive almost any other

statutory entitlement. See Evans v. Jeff D., 475 U.S. 717

(1986); United States v. Krilich, 159 F.3d 1020 (7th Cir.

1998) (collecting authority). The Federal Arbitration Act

makes arbitration agreements enforceable to the same

extent as other contracts, so courts must “enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.” Volt Information

Sciences, Inc. v. Stanford University, 489 U.S. 468, 478

(1989).

Parties are free to choose for themselves to what lengths

they will go in quest of impartiality. Section 10(a)(2) just
4 No. 02-2458

states the presumptive rule, subject to variation by mutual consent. Industry arbitration, the modern law merchant, often uses panels composed of industry insiders, the

better to understand the trade’s norms of doing business and the consequences of proposed lines of decision.

See Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms,

and Institutions, 99 Mich. L. Rev. 1724, 1728 (2001). The

more experience the panel has, and the smaller the number of repeat players, the more likely it is that the panel will contain some actual or potential friends, counselors, or business rivals of the parties. Yet all participants

may think the expertise-impartiality tradeoff worthwhile;

the Arbitration Act does not fasten on every industry

the model of the disinterested generalist judge. See Merit

Insurance Co. v. Leatherby Insurance Co., 714 F.2d 673, 679

(7th Cir. 1983); Nagel v. ADM Investor Services, Inc., 65 F.

Supp. 2d 740, 744-45 (N.D. Ill. 1999), affirmed, 217 F.3d

436 (7th Cir. 2000). To the extent that an agreement

entitles parties to select interested (even beholden) arbitrators, §10(a)(2) has no role to play.

There remains the question whether this was such an

agreement, to which the answer is yes and no. Partyappointed arbitrators are entitled under the ARIAS•U.S.

rules to engage in ex parte discussions with their principals until the case is taken under advisement, but they

are supposed thereafter to be impartial adjudicators. The

parties assume that as a result Sphere Drake could not

have appointed one of its current employees as its arbitrator. (Whether that assumption is correct depends on

ARIAS•U.S. rules and practices; we need not pursue the

issue.) Still, Jacks was not, and never has been, one of

Sphere Drake’s employees. He is a retired lawyer, until

recently a partner of Mayer, Brown & Platt (now Mayer,

Brown, Rowe & Maw). The district court deemed Jacks

“evidently partial” because four years before the arbitra-
No. 02-2458 5

tion, while still at Mayer Brown, Jacks had been engaged

by the Bermuda subsidiary of Sphere Drake (a United

Kingdom company) as counsel on an unrelated matter that

landed in arbitration but was settled before decision. It

emerged in discovery compelled by the district court that

Jacks had billed about 380 hours for that matter. The judge

deemed Sphere Drake (U.K.) his real client because its

financial interests were at stake, even though the Bermuda subsidiary signed the engagement letter and paid

the fees, and even though Jacks himself thought that

most of his billable time related to corporate counseling

rather than to the arbitration.

Let us suppose that the district judge’s inferences are

sound—that Jacks spent two months of equivalent fulltime service as counsel for Sphere Drake in an international insurance arbitration, four years before the unrelated

arbitration with All American. Even if Jacks had been

the umpire, this would not have implied “evident partiality.” Indeed, Jacks could have served as a federal judge in

this case without challenge on grounds of partiality, and

the scope of disqualification under §10(a)(2) is considerably more confined than the rule applicable to judges. See

Health Services Management Corp. v. Hughes, 975 F.2d

1253 (7th Cir. 1992); Delta Mine Holding Co. v. AFC Coal

Properties, Inc., 280 F.3d 815 (8th Cir. 2001); International

Produce Co. v. A/S Rosshavet, 638 F.2d 548 (2d Cir. 1981).

“Evident partiality” under §10(a)(2) is a subset of the

conditions that disqualify a federal judge under 28 U.S.C.

§455(b). A judge can’t hold even a single share of a party’s stock, but this would not imply “evident partiality” for

purposes of §10(a)(2). The parties themselves evinced

this understanding. Before the arbitration began, umpire

Huggins revealed that he was an investor in American

International Group, which recently had made a bid to

acquire All American—yet neither side thought that this

imperiled Huggins’ ability to serve as the neutral.
6 No. 02-2458

A federal judge would be disqualified on account of prior

legal work “[w]here in private practice he served as lawyer

in the matter in controversy, or a lawyer with whom he

previously practiced law served during such association as a

lawyer concerning the matter, or the judge or such lawyer

has been a material witness concerning it”. 28 U.S.C.

§455(b)(2). Jacks fits none of these categories. The work he

did for Sphere Drake was unrelated to the controversy

with All American; no partner of Mayer Brown served

“during such association” (that is, while Jacks also was

a partner) as a lawyer in this dispute between Sphere

Drake and All American (indeed, Sphere Drake has been

represented throughout by a firm other than Mayer Brown);

and neither Jacks nor any lawyer at Mayer Brown is a

“material witness” in this case. Arbitration differs from

adjudication, among many other ways, because the “appearance of partiality” ground of disqualification for

judges does not apply to arbitrators; only evident partiality,

not appearances or risks, spoils an award. Still, a judge’s

former representation of a litigant does not imply any

need to disqualify under §455(a) because “his impartiality

might reasonably be questioned.” See National Auto Brokers

Corp. v. General Motors Corp., 572 F.2d 953 (2d Cir. 1978);

cf. Chitimacha Tribe v. Harry L. Laws Co., 690 F.2d

1157 (5th Cir. 1982). Nothing in the Code of Conduct for

federal judges makes prior representation of a litigant a

disqualifying event. The norm among new appointees to

the bench is that once two years pass, perhaps even earlier,

a judge is free to sit in controversies involving former

clients. See Committee on Codes of Conduct, Judicial

Ethics Compendium §3.6-5.

If Jacks could have served as a federal judge in this

case, it is impossible to see how his background could

demonstrate “evident partiality” within the meaning of

§10(a)(2). See, e.g., Gianelli Money Purchase Plan & Trust

v. ADM Investor Services, Inc., 146 F.3d 1309 (11th Cir.
No. 02-2458 7

1998) (past business dealings between arbitrator and

party do not demonstrate evident partiality). “Evident

partiality” for a party-appointed arbitrator must be limited to conduct in transgression of contractual limitations.

No claim is made, however, that Jacks’ past violated the

contractual restrictions for ARIAS•U.S. arbitration. Nonetheless, All American insists that all of this is irrelevant.

The problem as All American sees it is not that Jacks

was partial, but that he did not disclose before the arbitration the extent of his involvement in the unrelated

proceedings four years earlier. All American attributes

this rule to Commonwealth Coatings Corp. v. Continental

Casualty Co., 393 U.S. 145 (1968).

At the arbitrators’ initial meeting, where Huggins

disclosed that he had a potential financial interest in

All American, Jacks said only that he had “known of

Sphere Drake over the years”. Before the arbitration got

under way, Jacks sent a letter stating that he had neglected a more concrete connection. He wrote:

Several years ago I provided limited corporate

advice to Jonathan Crawley, then President of

Sphere Drake’s Bermuda subsidiary. In that capacity I recommended that my former law firm, Mayer,

Brown, & Platt, be retained to represent Sphere

Drake (Bermuda) Ltd. in an arbitration . . . involving a set of wholly unrelated issues which were

settled shortly after the initial meeting of the Panel

and Counsel.

The district judge faulted this on several counts. First,

the word “former” could be read to mean that Mayer Brown

was Jacks’ “former” firm at the time he made the recommendation, rather than (as was correct) at the time he

wrote the letter. Second, Jacks did not reveal that when

the firm took him up on the recommendation, he personally rendered legal services in the arbitration. Third, the
8 No. 02-2458

letter did not reveal that Sphere Drake (U.K.), the parent

corporation, was the real party in interest in the arbitration. Finally, the letter did not reveal the number of hours

Jacks devoted to the case and left the impression that

his involvement had been negligible.

Once again, let us suppose that the letter was deficient

in all of these respects. How do these shortcomings demonstrate “evident partiality” when, as we have observed already, the full truth would not have disclosed even a risk

of partiality? The district court treated candid and complete disclosure as a requirement in addition to disinterest.

Yet that position has no purchase in the language of

§10(a)(2)—or for that matter in judicial practice. A federal

judge is not required to disclose his role as counsel to one

litigant in an unrelated matter many years ago. Since

disclosure, though often prudent, is not thought essential to

impartial judicial service, it is hard to see how a disclosure

requirement could be deemed implicit in §10(a)(2), which,

to repeat, addresses only a subset of the circumstances

that would disqualify a judge.

Commonwealth Coatings observes that disclosure at

the outset often avoids later controversies—as Huggins’s

disclosure did. One can only imagine what Sphere Drake

would be saying now had Huggins kept his mouth shut

and then supported All American’s position. Disclosure

in Commonwealth Coatings itself would have averted a

problem that spoiled an award. The neutral in a tripartite

arbitration was engaged in ongoing business relations

with one of the parties, “and the relationship even went

so far as to include the rendering of services on the very

projects involved in this lawsuit.” 393 U.S. at 146. The

Court held that being on one side’s payroll is a form of

partiality condemned by §10(a)(2), by analogy to Tumey

v. Ohio, 273 U.S. 510 (1927). The Justices urged arbitrators to disclose their business dealings so that similar problems would not recur.
No. 02-2458 9

Commonwealth Coatings did not hold, as All American

would have it, that disclosure is compulsory for its own

sake, and its absence fatal even if the arbitrator meets

judicial standards of impartiality. See United States

Wrestling Federation v. Wrestling Division of AAU, Inc., 605

F.2d 313 (7th Cir. 1979) (holding an award valid even

though the neutral failed to disclose that his law firm had

represented one of the parties on a regular basis); Merit,

supra (failure to disclose business relation many years

before the arbitration does not compel vacatur of award).

Nor did Commonwealth Coatings so much as hint that

party-appointed arbitrators are governed by the norms

under which neutrals operate. The point of Commonwealth

Coatings is that the sort of financial entanglements that

would disqualify a judge will cause problems for a neutral

under §10(a)(2) unless disclosure is made and the parties’

consent obtained.

Disclosure by a neutral may serve purposes other than

flagging potential conflicts. One gets to be a neutral only

by agreement of the party-appointed arbitrators. A potential neutral may have contractual obligations to reveal

information to those who select him. Failure to comply

with a contractual requirement designed to facilitate the

search for an acceptable neutral might imply that the

neutral exceeded his authority, spoiling the award under

9 U.S.C. §10(a)(4). But Mangino had no power to remove

Jacks, and we have not been given any reason to think

that umpire Huggins wanted more information from Jacks

in order to know what to make of Jacks’ arguments during the panel’s deliberations. For someone in Jacks’ position—a party-appointed arbitrator, and one who could

have presided in court under the standards of §455—failure to make a full disclosure may sully his reputation

for candor but does not demonstrate “evident partiality”

and thus does not spoil the award.

REVERSED
10 No. 02-2458

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—10-9-02