ARBITRATION AWARD VACATED—INCOMPLETE DISCLOSURE ESTABLISHED EVIDENT PARTIALITY

Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC
Texas Supreme Court, No.12-0789 (May 23, 2014)
Justice Guzman (Opinion)
Reversing the Dallas Court of Appeals, the Texas Supreme Court reinstated a trial court’s order vacating an arbitration award on grounds of evident partiality of one of the arbitrators. Although the arbitrator had disclosed some business dealings with a party’s lawyers, he did not reveal much more extensive dealings, which continued during the proceeding. The opposing party’s signed waiver of all conflicts was not effective, because it was predicated on the arbitrator’s representation of full disclosure.

Tenaska sold its interests in a Cleburne, Texas power plant to Ponderosa. The purchase agreement required all disputes to be arbitrated under AAA rules by three neutral arbitrators—one each selected by the parties and the third selected by the first two. A dispute arose concerning Tenaska’s representations and warranties, and after initiating arbitration, Ponderosa named Samuel Stern as its arbitrator. Tenaska selected Thomas Fraser; he and Stern then selected former Justice James Baker to complete the panel. Each of the arbitrators was required by the AAA rules to disclose at the outset, and throughout the proceeding, “any circumstance likely to give rise to justifiable doubt as the arbitrator’s impartiality or independence, including . . . any past or present relationship with the parties or their representatives.” Stern disclosed that Nixon Peabody, which represented Ponderosa, had named him as an arbitrator in three previous arbitrations. He also disclosed that he was a director of LexSite, a legal outsourcing company, and on behalf of that company had discussed doing business with Nixon Peabody, but that business had not materialized. The parties and the arbitrators signed an agreed scheduling order, which confirmed that each arbitrator had “fully disclosed all conflicts of interest and potential conflicts of interest” and that the parties “knowingly waived any and all conflicts of interest and/or potential conflicts of interest.”

A divided panel consisting of Stern and Baker awarded $125 million to Ponderosa, which asked a state court to confirm the award. Tenaska moved to vacate the award on the grounds that Stern was neither impartial nor free from bias. After extensive discovery, including depositions of Stern and Ponderosa’s lawyers, the trial court granted the motion to vacate, finding that Stern’s disclosures were “intentionally incomplete and inaccurate.” Specifically, the court found that Stern had not fully reported his investment in LexSite or the number and substance of meetings with the two Nixon Peabody lawyers representing Ponderosa, which continued throughout the proceeding. Holding that Stern’s disclosures were sufficient to require Tenaska either to object or to seek additional information, the Dallas Court of Appeals reversed.

The Texas Supreme Court reiterated its 1997 holding in Burlington National RR v. TUCO, Inc. that “evident partiality is established from the nondisclosure itself, regardless of whether the undisclosed information necessarily establishes partiality or bias.” The standard is whether the information, if not trivial, “might, to an objective observer, create a reasonable impression of the arbitrator’s partiality.” The Court held that standard was satisfied here, and rejected Poderosa’s argument that Tenaska had waived its complaint by its written waiver of conflicts because that waiver was predicated on the representation of full disclosure.

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