May 23, 2014

May 23, 2014:
Texas Supreme Court vacates a $125 million arbitration award for evident partiality. 
Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 437 S.W.3d 518 (Tex. 2014).

Tenaska sold a power plant to Ponderosa.  Following the sale, Ponderosa claimed that Tenaska had breached certain representations and warranties and began an arbitration proceeding.  Pursuant to the arbitration provision in the purchase agreement, Ponderosa and Tenaska each designated an arbitrator, required to be neutral, and the two party appointed arbitrators then appointed a third arbitrator, who served as the panel chair.  Ponderosa’s designated arbitrator, Samuel A. Stern, disclosed certain contacts with Ponderosa’s counsel, the law firm Nixon Peabody.  Tenaska did not ask any follow up questions concerning Mr. Stern’s relationship with Nixon Peabody and did not object to his appointment.

Following an evidentiary hearing, the panel chair and Mr. Stern, with the Tenaska appointed arbitrator dissenting, rendered a $125 million award in favor of Ponderosa.  Tenaska hired a private investigation firm to investigate Mr. Stern and learned significant additional details concerning Mr. Stern’s relationship with Nixon Peabody.  The trial court vacated the award for evident partiality after determining that Mr. Stern had failed to disclose eleven significant details concerning his relationship with Nixon Peabody.  The Dallas Court of Appeals reversed, reasoning that in light of the disclosures that Mr. Stern made concerning his relationship with Nixon Peabody, Tenaska waived its complaint by neither objecting to Mr. Stern nor asking follow up questions concerning his relationship with Nixon Peabody.  376 S.W.3d at 372-73, 375.  The Texas Supreme Court reversed the Dallas court and reinstated the trial court vacatur for evident partiality.

In Burlington N. R.R. v. TUCO Inc., 960 S.W.2d 629 (Tex. 1997), the Texas Supreme Court held that evident partiality is established when “the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality.”  Id. at 630.  “[I]nformation that is trivial will not rise to this level and need not be disclosed.”  Id. at 637.  The TUCO standard is an objective one:  “[E]vident partiality is established from the nondisclosure itself,” and actual partiality or bias need not be shown.  Id. at 636 (emphasis in original).

Comparing the information that Mr. Stern disclosed concerning his relationship with Nixon Peabody to the eleven details concerning that relationship that he failed to disclose, the Texas Supreme Court concluded that the withheld “information is not trivial and might have conveyed an impression of Stern’s partiality . . . to a reasonable person.”  437 S.W.3d at 526.  Accordingly, the TUCO standard was met, and evident partiality was established.  Whether Mr. Stern was “actually biased” was irrelevant under TUCO, and the court made no finding in that regard.  Id. at 529.

On the waiver issue, the court said that “a party may waive . . . a challenge by proceeding to arbitrate based on information it knows.”  Id. at 528.  In this case, there was no waiver because Tenasco’s challenge was “based upon information it was unaware of at that time.”  Id.

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