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Due to an error by senior reporter John Council, Mike Hatchell’s client was misidentified. Hatchell represented Illinova Generating Company on appeal and filed the petitioners’ brief before the Texas Supreme Court.

The Texas Supreme Court recently vacated a $125 million award after holding that a trial court was correct in tossing the large judgment aside because an arbitrator showed “evident partiality” in failing to disclose business contacts he had with a party’s law firm.

The decision is significant because, even though Texas public policy favors allowing parties to resolve their disputes without court intervention, such alternative dispute resolutions cannot stand if a so-called neutral arbitrator fails to disclose information that would cause the casual observer to question his or her partiality, according to the high court’s May 23 ruling in Tenaska Energy Inc. v. Ponderosa Pine Energy. [See "5th Court Reverses $125 Million Arbitration Vacatur," Texas Lawyer, Sept. 17, 2012, page 1.]

The background to the decision, according to the opinion, is as follows.

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 and Tenaska Energy. Nixon Peabody partners Frank Penski and Constance Boland represented Ponderosa 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 LexSite, an Indian company that provides support to law firms, but Nixon Peabody and LexSite did not do business.

When opposing counsel for Tenaska 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 challenged the award, alleging, among other things, that Stern didn’t disclose that his contacts with Nixon Peabody were with Penski and Boland, failed to disclose additional meetings about LexSite with Ponderosa’s counsel, didn’t disclose the true nature of his contacts and didn’t disclose “that he allowed Ponderosa’s counsel to modify his disclosure in a way that minimized the contact.”

The trial court vacated the arbitration award, finding that Stern exhibited “evident partiality” in the contract dispute case by “failing to fully disclose the LexSite and Nixon Peabody relationships,” among other things.

Ponderosa appealed the decision to the Fifth Court, which reversed the trial court ruling after determining that Tenaska had waived its evident-partiality challenge by failing to object to Stern at the time of disclosure. The Fifth Court rendered judgment confirming the arbitration award, a decision Tenaska appealed to the high court.

In its decision reversing the Fifth Court’s judgment and reinstating the trial court’s order vacating the $125 million award, the Texas Supreme Court found that Tenaska had not waived its complaint about Stern’s disclosures. The high court also concluded that it has required “full disclosure” by arbitrators in previous decisions.

“We have long held that an arbitrator is evidently partial, and an award may be vacated, if the arbitrator fails to disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality,” wrote Justice Eva Guzman in a unanimous opinion. “As we have observed, the most capable arbitrators often have ties to the business community.

“Regardless of whether such ties demonstrate actual bias here, Stern’s failure to disclose the extent of his relationship with LexSite and the two lawyers who represented Ponderosa in this arbitration might yield a reasonable impression of the arbitrator’s partiality to an objective observer,” Guzman wrote. “Thus, Stern had a duty to disclose the additional information, and his failure to do so constitutes evident partiality.”

Mike Hatchell, of counsel at Locke Lord in Austin, who represents Tenaska on appeal, did not return a call for comment. Neither did Reagan Simpson, a partner in YetterColeman in Houston, who represents Ponderosa on appeal.

Stern did not return a call for comment.

Penski said he’s disappointed in the ruling.

“I can’t think of anything else I would say about it,” Penski said. “I do think the decision is wrong.”

Boland declined to comment.