Southern District of New York reiterates high standard for arbitrator removal on bias grounds

Applications to disqualify arbitrators or vacate arbitration awards due to the alleged bias of a panel member made in United States courts are often met with significant resistance.  Courts have long recognized that arbitrators, who are generally “knowledgeable individuals in a given field,” often have “interests and relationships that overlap with the matter they are considering as arbitrators.” Florasynth, Inc. v. Pickholz, 750 F.2d 171, 173 (2d Cir. 1984). As a result, “[t]he mere appearance of bias that might disqualify a judge will not disqualify an arbitrator.”  Id.; accord Health Servs. Mgmt. Corp. v. Hughes, 975 F.2d 1253, 1264 (7th Cir. 1992) (“[T]the mere fact that there was some prior business relationship between [a party and two arbitrators] is not in and of itself sufficient to disqualify [the] arbitrators.”).

On July 5, 2023, the United States District Court of the Southern District of New York decided Endurance Specialty Insurance Limited v. Horseshoe Re Limited (Case No. 23-cv-1831) ( “Horseshoe”), where the Court dismissed a petition by a party to an arbitration to remove the umpire on bias grounds, based on issues that arose between the umpire and the party’s counsel in the current arbitration, and in a prior unrelated arbitration. In doing so, the Court reaffirmed the high burden that must be met in order to seek disqualification on the grounds of arbitrator bias. 

The Dispute Between The Parties

The parties involved in Horseshoe were Endurance Specialty Insurance Limited (“Endurance”) and its reinsurer, Horseshoe Re Limited (“Horseshoe Re”). Endurance and Horseshoe Re had engaged in an arbitration in Bermuda to resolve a dispute that had arisen under two reinsurance contracts. The party-appointed arbitrators selected by Endurance and Horseshoe Re could not reach an agreement on the appointment of an umpire, and the matter was therefore referred to the Secretary General of the Court of Arbitration of the International Chamber of Commerce (the “ICC Court”). The ICC Court ultimately selected Sir Bernard Eder, a London-based Queen’s Counsel (“QC”) to act as the umpire.

Sir Eder’s appointment was contested by Endurance on at least two grounds. First, during the appointment process, Horseshoe Re specifically requested the appointment of a QC to serve as an umpire. Endurance objected to such an appointment, requesting instead the appointment of an active or retired officer of an insurance or reinsurance company.  Endurance argued in its objection that, based on Horseshoe Re’s counsel’s advertised experience with Bermuda Form arbitrations, they “no doubt rub[]elbows with QC’s . . . on a regular basis,” and that the appointment of a QC would provide Horseshoe Re with an “unfair advantage.” Sir Eder was ultimately provided with copies of Endurance’s objections to the use of a QC, and therefore Endurance argued that Sir Eder’s awareness of Endurance’s “aggressive oppos[ition]” to the use of a QC in and of itself raised an issue of impartiality.

Second, Endurance argued that its lead counsel recently had negative interactions with Sir Eder in a prior unrelated arbitration involving different parties. In that prior arbitration, counsel’s adversary reportedly informed him that they had ex parte contacts with “unnamed potential umpires for the purpose of assessing their potential availability and interest in serving.” After he was appointed in that case, counsel was constrained to question directly whether Sir Eder was one of those umpires, which he denied. Thereafter, as stated by Endurance, Sir Eder ultimately “issued preliminary scheduling rulings unfavorable to and over the objection of [counsel’s] client.” Moreover, he allegedly denied a request in that prior case to consolidate the arbitration with another related arbitration pending in the United States. Ultimately, counsel was able to convince the United States arbitration panel to order consolidation, “which had the effect of terminating his role as Umpire and depriving him of additional revenue emanating from an engagement of potentially protracted duration.”

These arguments were initially raised to the ICC Court. The ICC Court concluded however, that party preferences relating to an arbitrator’s background are ultimately non-binding on the appointing authority, and “cannot serve as basis to disqualify an arbitrator subsequently appointed, even if the appointed arbitrator is made aware of such comments.” And, regarding the prior unrelated arbitration, the ICC Court noted the “high threshold to find bias against a party (or counsel) resulting merely from procedural decisions taken by arbitral tribunals,” and concluded that his decisions in the prior action simply did “not reach the level of enmity or animosity . . . so as to suggest a risk that Sir Bernard lacks impartiality.” 

Relatedly, the ICC Court also noted that Sir Eder was not required to disclose his interactions with counsel in the prior arbitration, holding that “it is not unusual in the specialized reinsurance sector that counsel and arbitrators may be involved together in multiple cases.” And, the ICC Court found that a denial of the bias allegations made directly by Sir Eder in the current arbitration was not improper, as “an arbitrator is entitled to comment on an allegation of bias against him or her.” 

The Petition In The United States District Court

After the ICC Court’s decision, Endurance brought a petition in the Supreme Court of the State of New York, seeking to remove Sir Eder from serving on the panel. Horseshoe Re removed the matter to the United States District Court of the Southern District of New York pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, 21 U.S.T. 2517. Horseshoe Re moved to dismiss the petition, on the grounds that it was improperly before the Southern District, and that it failed to allege bias sufficient to remove Sir Eder from the panel.

The Court granted the motion. At the outset, the Court concluded that the issue was governed by Bermuda procedural law, which states in relevant part that “[w]here an arbitrator or umpire has misconducted himself or the proceedings, the Court may remove him.” Recognizing that the “Court” referred to was the Supreme Court of Bermuda, the Southern District held that it “is without authority to grant Endurance’s requested relief.”

Nonetheless, the Southern District went on to conclude that, both under Bermuda law (which requires a showing of a “real danger of bias”) and New York law (which requires a showing of “actual bias or the appearance of bias”), the allegations of bias against Sir Eder were insufficient to warrant his removal. The Southern District essentially adopted the holding of the ICC Court’s “sound and well-reasoned decision” with respect to the prior arbitration, the submissions made available to Sir Eder, and Sir Eder’s alleged failure to disclose his prior interactions with counsel, and ruled that the petition did not “alleg[e] any ‘real danger’ of bias” warranting Sir Eder’s removal.

Moving Forward After Horseshoe

Horseshoe does not necessarily announce a new or unfamiliar proposition of law for those engaged in the practice of insurance or reinsurance arbitrations. Instead, it demonstrates the Courts’ adherence to the principle that, absent a very clear and succinct showing of bias, the selection and appointment of arbitrators, by parties or by an appointed authority, will be difficult to disturb. 

Horseshoe does perhaps uniquely affirm that prior relationships between arbitrators and a party’s counsel, even if they manifested in seemingly negative interactions, may be insufficient to warrant disqualification. This is particularly important to note in a practice where familiar faces, both in terms of counsel and panel members, are exceedingly common, and where tensions may be high during the course of any given arbitration. 

Consequently, parties engaging in insurance or reinsurance arbitrations following Horseshoe, and their counsel, should be prepared to temper their expectations as to the anticipated success of a removal petition based on their prior interactions with panel members.