What’s New?

Court of Appeal Vacates Arbitration Award Due to Arbitrator’s Deficient Disclosure

by D. Gregory Valenza | | August 6, 2018

In California, arbitrators must comply with certain ethical rules, which include making disclosures of their work in other cases involving the same parties or counsel. These rules help the parties decide if the arbitrator is neutral or affected by the “repeat player effect.”   When the arbitrator does not fully comply, a court may “vacate” the arbitration award, as if it never happened.  Code of Civil Procedure section 1286.2, subdivision (a)(6)(A), provides that, if the arbitrator fails “to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware,” the court “shall vacate the award.” 

The Court in Honeycutt v. JP Morgan Chase Bank (opinion here) considered the ethics standards and above quoted Civil Procedure Code section.  The factual context is that the arbitrator filled out a disclosure questionnaire, but when the parties received it, it was missing a page. And that page included prior work for defendant Chase, and the arbitrator’s assertion that he would accept additional assignments from either party during the pendency of the Honeycutt case.  In addition, a critical point here, the arbitrator did not disclose new offers and acceptances of new assignments to arbitrate cases that occurred while the Honeycutt matter was pending. 

After Honeycutt lost her case, her lawyer inquired about the missing page and about the disclosure of other cases that the arbitrator had had with Chase and/or its counsel. 

At issue were two “ethical standards” that California’s Judicial Counsel has developed to regulate arbitrators. Per the Court of Appeal: 

Ethics standard 7 requires the arbitrator to “disclose all matters that could cause a person aware of the facts to reasonably entertain a doubt that the arbitrator would be able to be impartial . . . .” (Ethics Standards, std. 7(d).) Ethics standard 7(d) lists examples of such matters, including a family, attorney-client, or “significant personal” relationship with a party or lawyer in the arbitration, a financial or other interest in the outcome of the arbitration, and knowledge of “disputed evidentiary facts concerning the proceeding.”   *****

Ethics standard 12(a) prohibits an arbitrator from entertaining or accepting “any offers of employment or new professional relationships as a lawyer, an expert witness, or a consultant from a party or a lawyer for a party in the pending arbitration.”  

Ethics standard 12(d) provides that, if the arbitrator makes the initial disclosure under Ethics standard 12(b) that the arbitrator will entertain offers to serve as an arbitrator or mediator in another case involving the same parties or lawyers, the arbitrator may entertain such offers. And in consumer arbitrations, the arbitrator must also disclose (1) the offer (within five days of the offer) and (2) any acceptance (within five days of acceptance). (Ethics Standards, std. 12(d)(1).) 

The Court first held that Honeycutt waived her right to challenge the arbitrator’s deficient response to the questionnaire.  That is because the Civil Procedure Code contains a process for objecting to or moving to disqualify an arbitrator who fails to make an adequate disclosure. 

Section 1281.91, subdivision (c), provides that the “right of a party to disqualify a proposed neutral arbitrator pursuant to this section shall be waived if the party fails to serve” a notice of disqualification within 15 days after the arbitrator fails to comply with the disclosure obligations under section 1281.9 or the Ethics Standards, “unless the proposed nominee or appointee makes a material omission or material misrepresentation in his or her disclosure.” (See United Health Centers of San Joaquin Valley, Inc. v. Superior Court, supra, 229 Cal.App.4th at p. 83 [section 1281.91, subdivision (c), “states that a party’s right to disqualify a proposed neutral arbitrator ‘shall be waived’ if the party fails to 20

serve a notice of disqualification within the period set forth therein”]; Ovitz, supra, 133 Cal.App.4th at p. 846 [“[s]ection 1281.91, subdivision (c) contains a limited provision under which a party is deemed to have waived the right to disqualify the arbitrator if the party fails to act within the 15-day time period provided in section 1281.91, subdivisions (a) or (b)”].)

The purpose of the time limit is to ensure that parties do not challenge arbitration awards based on sour grapes; i.e., because they lose the case. The Court decided Honeycutt had “sat on her rights” as they say:

Honeycutt knew in July 2014, upon learning the identity of the proposed arbitrator and receiving the incomplete disclosure worksheet, that the arbitrator had failed to send the parties the page containing Question Nos. 21-28. Honeycutt also knew that the arbitrator had answered Question No. 28 and that the answer related to a question about serving as an arbitrator or mediator in other cases. Honeycutt even knew the answer to Question No. 28 did not comply with Ethics standard 12(b)(2)(A) because the arbitrator’s answer did not state the arbitrator would inform the parties of offers and acceptances while the arbitration was pending. By failing to serve a notice of disqualification within 15 days of receiving the arbitrator’s defective disclosure, Honeycutt waived her right to disqualify the arbitrator. 

However, the Court also held that Honeycutt properly challenged the arbitrator’s failure to disclose the new engagements he accepted during the pendency of the arbitration, and the four arbitrations the arbitrator had pending with the same law firm. And, because Honeycutt did not know of that failure to disclose until after the arbitration, she did not waive the right to challenge:

Honeycutt did not waive her right to vacate the award based on the arbitrator’s failure to make required disclosures under Ethics standard 7(d). The arbitrator did not disclose the four other matters involving counsel for Chase in which the arbitrator served as a dispute resolution neutral until after the arbitrator had completed the arbitration hearing and issued an interim award (and the arbitrator never disclosed any offers of employment to serve as a neutral). A party cannot waive a right she does not know she has. 

So, the Court applied the vacatur statute because the arbitrator did not comply with the ongoing disclosure requirements.  This probably means that the arbitration will be re-tried, before a new arbitrator. But JP Morgan had paid significant sums of money in arbitration fees and attorney’s fees to win the first case.  Therefore, employment counsel should ensure the arbitrator has followed all disclosure requirements at the beginning of the case to avoid this scenario going forward.  It may also be wise to have opposing counsel confirm that s/he is satisfied with the initial disclosure and, if appropriate, to ask the arbitrator whether there are any new disclosures during the pre-hearing status conferences. 





Never Miss a Post
Please enter all required fields Click to hide
Correct invalid entries Click to hide