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"Disclosure Alert" - A review of the Madamba decision and its impact on arbitrator disclosure requirements.

November 25, 2015 | Share

DISPUTE RESOLUTION: Hawaii Supreme Court Expands Scope of Disclosures Required by a Neutral Arbitrator; Finds Arbitrator’s Failure to Disclose a Minimal and Indirect Prospective Relationship with Law Firm Is Grounds for Overturning Arbitration Award

Takeaways

The Madamba decision, which extended the Court’s earlier ruling in Nordic PCL Construction, Inc. v. LPIHGC, LLC, 136 Hawai`i 29, 358 P.3d 1 (2015), mandates vacatur of an arbitration award where a neutral arbitrator is found to demonstrate evident partiality.  The decision increases the burden on arbitrators by requiring disclosure of relationships that are prospective in nature.  It also underscores the importance of attorneys and parties to an arbitration running thorough internal checks for any existing or potential relationships with an appointed arbitrator, and making sure that all such relationships are disclosed. As acknowledged by the Court, the “reasonable impression of partiality” standard applicable in Hawaii and the Ninth Circuit is more expansive than the standard applied in the majority of federal jurisdictions.

In Noel Madamba Contracting LLC v. Romero, SCWC-12-0000778 & SCWC-12-0000868 (Nov. 25, 2015), the Hawaii Supreme Court found that a neutral arbitrator’s failure to disclose a minimal and indirect prospective relationship with a law firm provided grounds for overturning an arbitration award where one of the parties to the arbitration was represented by the law firm.  Significantly, the Court held that, even though Hawaii statutes regarding disclosure mention existing or past relationships only, a prospective relationship also must be disclosed under Hawaii law and the “reasonable impression of partiality” standard (articulated by the Court in Nordic PCL Construction, Inc. v. LPIHGC, LLC, 136 Hawai`i 29, 358 P.3d 1 (2015)) if a reasonable person would consider it likely to affect the arbitrator’s impartiality. 

Madamba involved a construction contract dispute between two homeowners and a contractor, in which the homeowners alleged that the contractor breached the parties’ agreement when it abandoned the job.  The dispute was submitted to arbitration, with the home owners represented by the law firm of Cades Schutte LLP.  Former Hawaii state judge Patrick Yim was appointed by the parties as a neutral arbitrator in May 2011.

In the 1990s, Judge Yim had hired Pension Services Corporation (PSC) to manage his personal retirement funds.  In the same month that Judge Yim was appointed as arbitrator, May 2011, he met with PSC and was informed that one of two law firms, Cades or Carlsmith Ball LLP, would eventually handle compliance work related to his personal retirement accounts. In connection with the arbitration, Judge Yim disclosed general relationships with both law firms in June 2011 but did not disclose at that time that either firm might represent him with respect to his personal retirement accounts.

In January 2012, after the arbitration hearing but pending an award, PSC informed Judge Yim that his retirement account files would probably be sent to Cades (PSC sent the files to Cades several days later).  Judge Yim issued a partial final arbitration award on January 26, 2012 in favor of the homeowners, who were represented by Cades.  Approximately a month later, Judge Yim learned that his retirement account files had, in fact, been sent to Cades -- and he issued a supplemental disclosure at that point regarding the work to be done by Cades.  In all, three supplemental disclosures regarding Cades were eventually made by Judge Yim. Judge Yim had had no role in the selection of Cades by PSC, Cades did not formally represent Judge Yim during the arbitration, and Cades ultimately did not work on Judge Yim’s accounts. Moreover, the attorney who would have handled Judge Yim’s retirement account work at Cades was in a separate group from the attorney representing the homeowners in the arbitration.

Nonetheless, the Court found that there was a “concrete possibility” of a connection between Judge Yim and Cades because PSC, as Judge Yim’s agent, had negotiated with Cades about prospective personal representation of Judge Yim.  The Court further found that such negotiations created a reasonable impression of partiality because they took place during the pendency of an arbitration proceeding in which Judge Yim had been appointed the neutral arbitrator and one of the parties was represented by Cades.  Accordingly, the Court held that Judge Yim’s failure to disclose the potential relationship with Cades—both prior to his appointment as arbitrator and as soon as he learned of additional information after his appointment—violated Hawaii disclosure statutes for neutral arbitrators, constituting evident partiality. As stated by the Court, “If Yim had disclosed there was a fifty percent chance Cades would be retained to review his retirement accounts prior to the arbitration, it would have been reasonable for a litigant in Madamba’s position to reject Yim as an arbitrator.” The Court ordered the lower court to vacate the arbitration award.


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