Opinion ID: 2519932
Heading Depth: 2
Heading Rank: 2

Heading: Daiichi Waived Its Right To Challenge The Arbitration Decision In The Present Matter.

Text: The trustees argue, inter alia, that the circuit court's COL No. 8 was wrong in concluding that Daiichi had not waived the right to challenge Swope's appointment as an arbitrator on the basis of evident partiality, pursuant to HRS ง 658-9(2), see supra note 1. The trustees' primary contention is that, although Swope did not disclose each specific task performed in representing Dr. Lichter, as well as persons and entities associated with him, Swope nevertheless disclosed the general nature of his attorney-client relationships to a degree sufficient to charge Daiichi with actual knowledge of Swope's prior involvement with the subject property. The trustees also maintain that neither the Lease nor the SA mandated that Swope disclose any and all minor or unrelated matters during the course of his, or CSF & W's, representation of Dr. Lichter or Lichter- or trustees-related entities or individuals. The trustees further assert that Daiichi, having in its actual possession the undisclosed documentโ i.e., the April 9, 1990 letter from Swope to KC, upon which it relied in its motion to vacate the arbitration decision โprior to the commencement of the arbitration proceeding, had, at a minimum, constructive knowledge of the nature and scope of Swope's prior legal services regarding the subject property. The trustees caution this court that [t]o vacate an award based on the `evident partiality' of a party-appointed arbitrator, when the challenging party was informed of the relationship between the arbitrator and the other party [prior to the commencement of the arbitration proceeding], will open the floodgates to arbitration challenges and completely overrun the policy of finality of arbitration decisions. Consequently, the trustees contend that Daiichi has waived its right to object to the arbitration decision on the basis of any evident partiality on Swope's part. Finally, the trustees argue that the circuit court erred in concluding that Daiichi had no duty to investigate Swope's potential bias, of which it was aware[,] prior to the arbitration[.] In substance, the trustees maintain that Daiichi cannot have it both ways by weighing the risks of Swope's attorney-client relationship with Dr. Lichter and the trustees, deciding not to object to Swope's appointment as an arbitrator at the outset of the arbitration proceeding, and thereafter challenging the unfavorable arbitration decision based on Swope's alleged failure to disclose information that Daiichi already possessed. Daiichi counters that the circuit court correctly concluded that Swope was subject to a duty to disclose the full extent of his relationship with Dr. Lichter, the trustees, and related persons and entities, as set forth in COL No. 8, and that the disclosure was insufficient to shift the burden to Daiichi to investigate Swope's disqualifying conflict of interest regarding the trustees. Daiichi contends that Swope's duty to disclose extended to a continuing obligation to investigate any conflicts of interest by making a reasonable effort to inform himself of any interests or relationships that could bias his role as an arbitrator. Daiichi asserts that only Swope and the trustees, including Dr. Lichter, knew the extent of the undisclosed relationship. Only they were in a position to preserve the integrity of the process and to protect the rights of the parties to the arbitration, including Daiichi, to make an informed decision about Arbitrator Swope's ability to serve as an arbitrator. Based on the foregoing, Daiichi maintains that Swope's failure to disclose and investigate fully the nature of his prior relationship with Dr. Lichter and persons and entities associated with him gave rise to a reasonable appearance of partiality, thereby warranting the vacating of the arbitration decision. [10] We hold that Daiichi, having had both actual and constructive knowledge of Swope's prior attorney-client relationship with Dr. Lichter et al. and having failed to object to Swope's appointment as a party-appointed arbitrator, waived its right to challenge the arbitration decision based on Swope's alleged evident partiality. It is well settled that the legislature overwhelmingly favors arbitration as a means of dispute resolution. Tatibouet v. Ellsworth, 99 Hawai'i 226, 234, 54 P.3d 397, 405 (2002). It is generally considered that parties resort to arbitration to settle disputes more expeditiously and inexpensively than by a court action; and also that the objective is to have disputes considered by arbitrators, who are familiar with the problem, in a less formal and combative environment. Thus, it must be deemed that the primary purpose of arbitration is to avoid litigation. Mars Constructors, Inc. v. Tropical Enters., Ltd., 51 Haw. 332, 334, 460 P.2d 317, 318-19 (1969). Moreover, `[t]he effectiveness of arbitration as a vehicle for the resolution of disputes depends in part upon the predictability of its efficiency.' Tatibouet, 99 Hawai'i at 234, 54 P.3d at 405 (quoting Leeward Bus Co. v. City and County of Honolulu, 58 Haw. 64, 71, 564 P.2d 445, 449 (1977)). In order to ensure the efficiency of an arbitration proceeding, judicial review of arbitration decisions is confined to the grounds set forth in HRS ง 658-9, see supra note 1. Id. ; Mars Constructors, Inc., 51 Haw. at 335, 460 P.2d at 319 (This court has decided to confine judicial review to the strictest possible limits.); Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 681 (7th Cir.), cert. denied, 464 U.S. 1009, 104 S.Ct. 529, 78 L.Ed.2d 711 (1983) (The standards for judicial intervention are narrowly ... drawn to assure the basic integrity of the arbitration process without meddling in it.). HRS ง 658-9(2), see supra note 1, provided that the court may make an order vacating the award ... [w]here there was evident partiality ... in the arbitrators.... Cf. HRS ง 658A-23(a)(2)(A) (limiting the ground for vacating an arbitration award on the basis of evident partiality to the arbitrator appointed as a neutral arbitrator). `[E]vident partiality' is present when undisclosed facts show `a reasonable impression of partiality.' Schmitz v. Zilveti, 20 F.3d 1043, 1046 (9th Cir.1994) (citations omitted). The burden of proving facts which would establish a reasonable impression of partiality rests squarely on the party challenging the award. Sheet Metal Workers Int'l Ass'n Local Union # 420 v. Kinney Air Conditioning Co., 756 F.2d 742, 745 (9th Cir.1985). Insofar as section 10(b) of the Federal Arbitration Act (9 U.S.C. ง 1 et seq. ) is the federal counterpart of HRS ง 658-9(2), this jurisdiction's appellate courts have consistently relied on federal case law in ascertaining what constitutes evident partiality under HRS ง 658-9(2). Sousaris, 92 Hawai'i at 542, 993 P.2d at 576; Salud, 7 Haw.App. at 336, 763 P.2d at 11. What constitutes evident partiality sufficient to vacate an arbitration award is a difficult question. See Salud, 7 Haw. App. at 333, 763 P.2d at 11. Under Hawai'i law, evident partiality sufficient to vacate an arbitration award may be demonstrated when a conflict of interest exists with the arbitrator. That is, when an arbitrator has a personal, professional, or business relationship with a party, its counsel, principal, or agent, a conflict of interest may arise sufficient to justify vacating that arbitration award. Salud, 7 Haw.App. at 333, 763 P.2d at 11-12. Hawai'i courts have explained that evident partiality not only exists when there is actual bias on the part of the arbitrator, but also when undisclosed facts demonstrate a reasonable impression of partiality. Sousaris v. Miller, 92 Hawai'i 534, 542, 993 P.2d 568, 576 (Haw.App.1998) (quoting Schmitz v. Zilveti, III, 20 F.3d 1043, 1046 (9th Cir.1994), after explaining that Hawai'i relies on federal case law in determining what constitutes evident partiality), aff'd, 92 Hawai'i 505, 993 P.2d 539 (2000). Valrose Maui, Inc. v. Maclyn Morris, Inc., 105 F.Supp.2d 1118, 1124 (D.Haw.2000) (footnotes omitted) (finding that the arbitrator's failure to disclose an ex parte communication with one of the parties' attorneys regarding the possibility of serving as a mediator in an unrelated action or his eventual appointment as a mediator in the action constituted evident partiality); see also Schmitz, 20 F.3d at 1048-49 (holding that an arbitrator's failure to investigate and thereafter disclose his law firm's representation of the parent company of one of the parties to the arbitration proceeding created a reasonable impression of partiality); Pitta v. Hotel Ass'n of New York City, Inc., 806 F.2d 419, 423-24 (2d Cir.1986) (concluding that an arbitrator could not preside over a grievance dispute, the subject of which was the validity of his own alleged dismissal from employment with one of the parties); HSMV Corp. v. ADI Ltd., 72 F.Supp.2d 1122, 1130 (C.D.Cal.1999) (concluding that the arbitrator's failure to disclose his law firm's contemporaneous representation of the Commonwealth of Australia, which owned one of the parties to the arbitration, constituted evident partiality); Brennan v. Stewarts' Pharmacies, Ltd., 59 Haw. 207, 223, 579 P.2d 673, 682 (1978) (holding that a party-appointed arbitrator's failure to disclose that he had been employed by the appointing party as its representative and chief negotiator to negotiate the monthly rent for the subject property with the non-appointing party constituted evident partiality); cf. Sphere Drake Ins. Ltd. v. All American Life Ins. Co., 307 F.3d 617, 623 (7th Cir.2002) (holding that the party-appointed arbitrator, who had also represented a subsidiary of the appointing party in an unrelated matter four years prior to the arbitration, was not evidently partial for failing to disclose his prior involvement with the appointing party); [11] Merit, 714 F.2d at 681-83 (holding that, although the arbitrator's failure to disclose the fact that one of the parties to the arbitration was his former employer violated governing legal and ethical standards for arbitrators, it did not constitute evident partiality); United States Wrestling Fed'n v. Wrestling Div. of AAU, Inc., 605 F.2d 313, 315-16, 322 (7th Cir.1979) (affirming an award despite the neutral-arbitrator's failure to disclose that his law firm had an ongoing attorney-client relationship with Northwestern University, which was tangentially related to one of the parties). In Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.Ed.2d 301 (1968), the United States Supreme Court addressed the circumstances under which 9 U.S.C. ง 10(b) authorizes the vacation of an arbitration award for failure to disclose the existence of a close financial relationship between a neutral arbitrator and a party to the arbitration. 393 U.S. at 146-48, 89 S.Ct. 337. The neutral member of a three-arbitrator panel failed to disclose that he had engaged in periodic and significant business relations with one of the parties to the arbitration for approximately six years prior to the arbitration. Id. at 146, 89 S.Ct. 337. The arbitrator voted with the panel for an award in favor of the party with whom he had prior business dealings. Id. The losing party thereafter challenged the award on the basis that the arbitrator's failure to disclose his prior business relationship resulted in evident partiality, thereby warranting a vacation of the award. Id. at 148-50, 89 S.Ct. 337. The United States Supreme Court reversed the decision of the United States Court of Appeals for the First Circuit, which affirmed the district court's refusal to set aside the arbitration award. Id. at 150, 89 S.Ct. 337. 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 single requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias. Id. at 149-50, 89 S.Ct. 337.