Petitioner, a subcontractor, sued the sureties on the prime
contractor's bond to recover money allegedly due for a painting
job. Pursuant to the arbitration provision in the contract,
petitioner appointed an arbitrator, the prime contractor appointed
another, and these two appointed a third. The third arbitrator was
an engineering consultant whose services were used sporadically by
the prime contractor, resulting in fees of about $12,000 over a
period of four to five years. Petitioner challenges the arbitration
award on the ground that this close business connection was not
revealed until after the award was made. The Court of Appeals
affirmed the District Court's refusal to set aside the award.
Held: Arbitrators should disclose to the parties any
dealings which might create an impression of possible bias, and
since the business connection between the arbitrator and the prime
contractor was not disclosed here, the award can be vacated under §
10 of the United States Arbitration Act, which authorizes vacation
of an award "procured by . . . undue means" or "where there was
evident partiality . . . in the arbitrators." Pp.
393 U. S.
146-150.
382 F.2d 1010, reversed.
MR. JUSTICE BLACK delivered the opinion of the Court.
At issue in this case is the question whether elementary
requirements of impartiality taken for granted in every judicial
proceeding are suspended when the parties agree to resolve a
dispute through arbitration.
Page 393 U. S. 146
The petitioner, Commonwealth Coatings Corporation, a
subcontractor, sued the sureties on the prime contractor's bond to
recover money alleged to be due for a painting job. The contract
for painting contained an agreement to arbitrate such
controversies. Pursuant to this agreement, petitioner appointed one
arbitrator, the prime contractor appointed a second, and these two
together selected the third arbitrator. This third arbitrator, the
supposedly neutral member of the panel, conducted a large business
in Puerto Rico in which he served as an engineering consultant for
various people in connection with building construction projects.
One of his regular customers in this business was the prime
contractor that petitioner sued in this case. This relationship
with the prime contractor was, in a sense, sporadic, in that the
arbitrator's services were used only from time to time at irregular
intervals, and there had been no dealings between them for about a
year immediately preceding the arbitration. Nevertheless, the prime
contractor's patronage was repeated and significant, involving fees
of about $12,000 over a period of four or five years, and the
relationship even went so far as to include the rendering of
services on the very projects involved in this lawsuit. An
arbitration was held, but the facts concerning the close business
connections between the third arbitrator and the prime contractor
were unknown to petitioner and were never revealed to it by this
arbitrator, by the prime contractor, or by anyone else until after
an award had been made. Petitioner challenged the award on this
ground, among others, but the District Court refused to set aside
the award. The Court of Appeals affirmed, 382 F.2d 1010 (C.A. 1st
Cir.1967), and we granted certiorari, 390 U.S. 979 (1968).
In 1925 Congress enacted the United States Arbitration Act, 9
U.S.C. §§ 1-14, which sets out a comprehensive
Page 393 U. S. 147
plan for arbitration of controversies coming under its terms,
and both sides here assume that this Federal Act governs this case.
Section 10, quoted below, sets out the conditions upon which awards
can be vacated. [
Footnote 1]
The two courts below held, however, that § 10 could not be
construed in such a way as to justify vacating the award in this
case. We disagree, and reverse. Section 10 does authorize vacation
of an award where it was "procured by corruption, fraud, or undue
means" or "[w]here there was evident partiality . . . in the
arbitrators." These provisions show a desire of Congress to provide
not merely for any arbitration, but for an impartial one. It is
true that petitioner does not charge before us that the third
arbitrator was actually guilty of fraud or bias in deciding this
case, and we have no reason, apart from the undisclosed business
relationship, to suspect him of any improper motives. But neither
this arbitrator nor the prime contractor gave to petitioner even
an
Page 393 U. S. 148
intimation of the close financial relations that had existed
between them for a period of years. We have no doubt that, if a
litigant could show that a foreman of a jury or a judge in a court
of justice had, unknown to the litigant, any such relationship, the
judgment would be subject to challenge. This is shown beyond doubt
by
Tumey v. Ohio, 273 U. S. 510
(1927), where this Court held that a conviction could not stand
because a small part of the judge's income consisted of court fees
collected from convicted defendants. Although, in
Tumey,
it appeared the amount of the judge's compensation actually
depended on whether he decided for one side or the other, that is
too small a distinction to allow this manifest violation of the
strict morality and fairness Congress would have expected on the
part of the arbitrator and the other party in this case. Nor should
it be at all relevant, as the Court of Appeals apparently thought
it was here, that "[t]he payments received were a very small part
of [the arbitrator's] income. . . ." [
Footnote 2] For, in
Tumey, the Court held that a
decision should be set aside where there is "the slightest
pecuniary interest" on the part of the judge, and specifically
rejected the State's contention that the compensation involved
there was "so small that it is not to be regarded as likely to
influence improperly a judicial officer in the discharge of his
duty. . . ." [
Footnote 3]
Since, in the case of courts, this is a constitutional principle,
we can see no basis for refusing to find the same concept in the
broad statutory language that governs arbitration proceedings and
provides that an award can be set aside on the basis of "evident
partiality" or the use of "undue means."
See also Rogers v.
Schering Corp., 165 F.
Supp. 295, 301 (D.C. N.J.1958). It is true that arbitrators
cannot sever all their ties with the business world, since
Page 393 U. S. 149
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 simple requirement that arbitrators disclose to the
parties any dealings that might create an impression of possible
bias.
While not controlling in this case, § 18 of the Rules of the
American Arbitration Association, in effect at the time of this
arbitration, is highly significant. It provided as follows:
"Section 18. Disclosure by Arbitrator of Disqualification -- At
the time of receiving his notice of appointment, the prospective
Arbitrator is requested to disclose any circumstances likely to
create a presumption of bias or which he believes might disqualify
him as an impartial Arbitrator. Upon receipt of such information,
the Tribunal Clerk shall immediately disclose it to the parties,
who if willing to proceed under the circumstances disclosed, shall,
in writing, so advise the Tribunal Clerk. If either party declines
to waive the presumptive disqualification, the vacancy thus created
shall be filled in accordance with the applicable provisions of
this Rule."
And based on the same principle as this Arbitration Association
rule is that part of the 33d Canon of Judicial Ethics which
provides:
"33. Social Relations."
". . . [A judge] should, however, in pending or prospective
litigation before him, be particularly
Page 393 U. S. 150
careful to avoid such action as may reasonably tend to awaken
the suspicion that his social or business relations or friendships
constitute an element in influencing his judicial conduct."
This rule of arbitration and this canon of judicial ethics rest
on the premise that any tribunal permitted by law to try cases and
controversies not only must be unbiased, but also must avoid even
the appearance of bias. We cannot believe that it was the purpose
of Congress to authorize litigants to submit their cases and
controversies to arbitration boards that might reasonably be
thought biased against one litigant and favorable to another.
Reversed.
[
Footnote 1]
"In either of the following cases the United States court in and
for the district wherein the award was made may make an order
vacating the award upon the application of any party to the
arbitration --"
"(a) Where the award was procured by corruption, fraud, or undue
means."
"(b) Where there was evident partiality or corruption in the
arbitrators, or either of them."
"(c) Where the arbitrators were guilty of misconduct in refusing
to postpone the hearing, upon sufficient cause shown, or in
refusing to hear evidence pertinent and material to the
controversy; or of any other misbehavior by which the rights of any
party have been prejudiced."
"(d) Where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and definite award
upon the subject matter submitted was not made."
"(e) Where an award is vacated and the time within which the
agreement required the award to be made has not expired the court
may, in its discretion, direct a rehearing by the arbitrators."
[
Footnote 2]
382 F.2d at 1011.
[
Footnote 3]
273 U.S. at
273 U. S.
524.
MR. JUSTICE WHITE, with whom MR. JUSTICE MARSHALL joins,
concurring.
While I am glad to join my Brother BLACK's opinion in this case,
I desire to make these additional remarks. The Court does not
decide today that arbitrators are to be held to the standards of
judicial decorum of Article III judges, or indeed of any judges. It
is often because they are men of affairs, not apart from, but of,
the marketplace that they are effective in their adjudicatory
function.
Cf. United Steelworkers v. Warrior & Gulf
Navigation Co., 363 U. S. 574
(1960). This does not mean the judiciary must overlook outright
chicanery in giving effect to their awards; that would be an
abdication of our responsibility. But it does mean that arbitrators
are not automatically disqualified by a business relationship with
the parties before them if both parties are informed of the
relationship in advance, or if they are unaware of the facts but
the relationship is trivial. I see no reason automatically to
disqualify the best informed and most capable potential
arbitrators.
Page 393 U. S. 151
The arbitration process functions best when an amicable and
trusting atmosphere is preserved and there is voluntary compliance
with the decree, without need for judicial enforcement. This end is
best served by establishing an atmosphere of frankness at the
outset, through disclosure by the arbitrator of any financial
transactions which he has had or is negotiating with either of the
parties. In many cases, the arbitrator might believe the business
relationship to be so insubstantial that to make a point of
revealing it would suggest he is indeed easily swayed, and perhaps
a partisan of that party.
* But if the law
requires the disclosure, no such imputation can arise. And it is
far better that the relationship be disclosed at the outset, when
the parties are free to reject the arbitrator or accept him with
knowledge of the relationship and continuing faith in his
objectivity, than to have the relationship come to light after the
arbitration, when a suspicious or disgruntled party can seize on it
as a pretext for invalidating the award. The judiciary should
minimize its role in arbitration as judge of the arbitrator's
impartiality. That role is best consigned to the parties, who are
the architects of their own arbitration process and are far better
informed of the prevailing ethical standards and reputations within
their business.
Of course, an arbitrator's business relationships may be diverse
indeed, involving more or less remote commercial connections with
great numbers of people. He cannot be expected to provide the
parties with his complete and unexpurgated business biography. But
it is enough for present purposes to hold, as the Court does, that,
where the arbitrator has a substantial interest in a firm
Page 393 U. S. 152
which has done more than trivial business with a party, that
fact must be disclosed. If arbitrators err on the side of
disclosure, as they should, it will not be difficult for courts to
identify those undisclosed relationships which are too
insubstantial to warrant vacating an award.
* In fact, the District Court found -- on the basis of the
record and petitioner's admissions -- that the arbitrator in this
case was entirely fair and impartial. I do not read the majority
opinion as questioning this finding in any way.
MR. JUSTICE FORTAS, with whom MR. JUSTICE HARLAN and MR. JUSTICE
STEWART join, dissenting.
I dissent, and would affirm the judgment.
The facts in this case do not lend themselves to the Court's
ruling. The Court sets aside the arbitration award despite the fact
that the award is unanimous and no claim is made of actual
partiality, unfairness, bias, or fraud.
The arbitration was held pursuant to provisions in the contracts
between the parties. It is not subject to the rules of the American
Arbitration Association. It is governed by the United States
Arbitration Act, 9 U.S.C. §§ 1-14.
Each party appointed an arbitrator, and the third arbitrator was
chosen by those two. The controversy relates to the third
arbitrator.
The third arbitrator was not asked about business connections
with either party. Petitioner's complaint is that he failed to
volunteer information about professional services rendered by him
to the other party to the contract, the most recent of which were
performed over a year before the arbitration. Both courts below
held, and petitioner concedes, that the third arbitrator was
innocent of any actual partiality, or bias, or improper motive.
There is no suggestion of concealment as distinguished from the
innocent failure to volunteer information.
The third arbitrator is a leading and respected consulting
engineer who has performed services for "most
Page 393 U. S. 153
of the contractors in Puerto Rico." He was well known to
petitioner's counsel, and they were personal friends. Petitioner's
counsel candidly admitted that, if he had been told about the
arbitrator's prior relationship "I don't think I would have
objected, because I know Mr. Capacete [the arbitrator]."
Clearly, the District Judge's conclusion, affirmed by the Court
of Appeals for the First Circuit, was correct, that
"the arbitrators conducted fair, impartial hearings; that they
reached a proper determination of the issues before them, and that
plaintiff's objections represent a 'situation where the losing
party to an arbitration is now clutching at straws in an attempt to
avoid the results of the arbitration to which it became a
party.'"
The Court nevertheless orders that the arbitration award be set
aside. It uses this singularly inappropriate case to announce a
per se rule that, in my judgment, has no basis in the
applicable statute or jurisprudential principles: that, regardless
of the agreement between the parties, if an arbitrator has any
prior business relationship with one of the parties of which he
fails to inform the other party, however innocently, the
arbitration award is always subject to being set aside. This is so
even where the award is unanimous; where there is no suggestion
that the nondisclosure indicates partiality or bias, and where it
is conceded that there was, in fact, no irregularity, unfairness,
bias, or partiality. Until the decision today, it has not been the
law that an arbitrator's failure to disclose a prior business
relationship with one of the parties will compel the setting aside
of an arbitration award regardless of the circumstances. [
Footnote 2/1]
Page 393 U. S. 154
I agree that failure of an arbitrator to volunteer information
about business dealings with one party will,
prima facie,
support a claim of partiality or bias. But where there is no
suggestion that the nondisclosure was calculated, and where the
complaining party disclaims any imputation of partiality, bias, or
misconduct, the presumption clearly is overcome. [
Footnote 2/2]
I do not believe that it is either necessary, appropriate, or
permissible to rule, as the Court does, that, regardless of the
facts, innocent failure to volunteer information constitutes the
"evident partiality" necessary under § 10(b) of the Arbitration Act
to set aside an award. "Evident partiality" means what it says:
conduct -- or at least an attitude or disposition -- by the
arbitrator favoring one party rather than the other. This case
demonstrates that to rule otherwise may be a palpable injustice,
since all agree that the arbitrator was innocent of either "evident
partiality" or anything approaching it.
Arbitration is essentially consensual and practical. The United
States Arbitration Act is obviously designed to protect the
integrity of the process with a minimum
Page 393 U. S. 155
of insistence upon set formulae and rules. [
Footnote 2/3] The Court applies to this process
rules applicable to judges and not to a system characterized by
dealing on faith and reputation for reliability. Such formalism is
not contemplated by the Act nor is it warranted in a case where no
claim is made of partiality, of unfairness, or of misconduct in any
degree.
[
Footnote 2/1]
See Firemen's Fund Ins. Co. v. Flint Hosiery Mills, 74
F.2d 533 (C.A.4th Cir.1935);
Texas Eastern Transmission Corp.
v. Barnard, 177 F.
Supp. 123, 128-129 (D.C.E.D.Ky.1959),
rev'd on other
grounds, 285 F.2d 536 (C.A. 6th Cir.1960);
Ilios Shipping
& Trading Corp. v. American Anthracite & Bituminous Coal
Corp., 148 F.
Supp. 698, 700 (D.C.S.D.N.Y.),
aff'd, 245 F.2d 873
(1957);
Cross Properties, Inc. v. Gimbel Bros., 15
App.Div.2d 913, 225 N.Y.S.2d 1014,
aff'd, 12
N.Y.2d 806, 187 N.E.2d 129 (1962).
Cf. Isbrandtsen Tankers,
Inc. v. National Marine Engineers' Beneficial Assn., 236
N.Y.S.2d 808, 811 (1962).
[
Footnote 2/2]
At the time of the contract and the arbitration herein, § 18 of
the Rule of the American Arbitration Association, which the Court
quotes, was phrased merely in terms of a "request" that the
arbitrator "disclose any circumstances likely to create a
presumption of bias or which he believes might disqualify him as an
impartial Arbitrator." In 1964, the rule was changed to provide
that
"the prospective neutral Arbitrator
shall disclose any
circumstances likely to create a presumption of bias or which he
believes might disqualify him as an impartial Arbitrator."
[
Footnote 2/3]
The reports on the Act make this purpose clear. H.R.Rep. No. 96,
68th Cong., 1st Sess., 1-2; S.Rep. No. 536, 68th Cong., 1st Sess.,
3.
Cf. Wilko v. Swan, 346 U. S. 427,
346 U. S. 431
(1953).