Lawyers who have even a hint that there could be a relationship between an arbitrator and opposing counsel should object loudly and long before a decision is reached; otherwise, their client may be out of luck.
That’s the takeaway from the 5th Court of Appeals’ opinion in Ponderosa Pine Energy v. Tenaska Energy Inc., et al., in which the Dallas justices reversed and rendered a trial court’s decision to vacate a $125 million arbitration award.
According to the Aug. 20 decision, Samuel A. Stern, a partner in Washington, D.C.’s Hills Stern & Morley, was selected as an arbitrator in a contract dispute case between Ponderosa Pine Energy on one side and Tenaska Energy and Illinova Generating Co. on the other. Nixon Peabody partners Frank Penski and Constance Boland represented Ponderosa Pine Energy in the case.
In a disclosure statement, Stern told the parties that he had a “general discussion” with New York’s Nixon Peabody on behalf of Lexite, an Indian company that provides support to law firms, but Nixon Peabody and Lexite did not do business. When opposing counsel for Tenaska Energy and Illinova Generating asked Stern to submit a separate “comprehensive and compliant disclosure statement” he responded that he had “no other professional or other relationship” with financial institutions and companies related to the dispute.
Stern was part of a three-member arbitration panel that awarded Ponderosa Pine $125 million. Tenaska Energy and Illinova Generating challenged the award, alleging, among other things, that “Stern failed to disclose that his contacts with Nixon Peabody, a 700-lawyer firm, were with Penski and Boland, personally, and that he permitted them to ‘direct what he did and did not disclose to the defendants. . . .’ “
The trial court vacated the arbitration award, finding that Stern exhibited “evident partiality” in the contract dispute case by “failing to fully disclose the Lexite and Nixon Peabody relationships,” among other things.
But the 5th Court reversed the trial court, finding that Tenaska and Illinova waived their evident-partiality challenge. “In this case, appellees had information regarding Stern’s relationships with both Lexite and Nixon Peabody . . .,” wrote Justice Douglas Lang in an opinion joined by Justices Molly Francis and David Bridges. Lang noted that the appellees failed to object to Stern at the time of disclosure. “That information failed to even pique appellees’ curiosity at the time the information was disclosed. After the award, however, Stern’s relationship gained significance that triggered an investigation and ultimately became the basis for an evident partiality challenge,” wrote the 5th Court, which rendered judgment confirming the arbitration award.
Stern is pleased with the 5th Court’s opinion. “I thought I had disclosed more than what was required. The issue with respect to the Indian company was pretty peripheral, and I was surprised at the trial court’s ruling,” Stern says. “And I was gratified by the appellate court’s ruling.”
Reagan Simpson, a partner in Yetter Coleman in Austin who represents Ponderosa Pine, declines comment.
Will Dibrell, a shareholder in Austin’s Graves Dougherty Hearon & Moody who represents Tenaska Energy, and Mike Hatchell, of counsel at Locke Lord in Austin who represents Illinova Generating, did not return a telephone call seeking comment. Neither did Penski and Boland.