Sun Refining & Marketing Co. v. Statheros Shipping Corp.

Citations: 761 F. Supp. 293; 1991 A.M.C. 1874; 1991 U.S. Dist. LEXIS 4431; 1991 WL 53866Docket: 90 Civ. 8192 (MBM)

Court: District Court, S.D. New York; April 8, 1991; Federal District Court

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Sun Refining and Marketing Company filed a motion to vacate an arbitration award made by a panel concerning an alleged shortage of fuel oil loaded onto a tanker owned by Statheros Shipping Corporation. The claim arose from a charter party agreement, where Sun accused Statheros of a shortage of 2,397 barrels of fuel oil. The arbitration panel was established by each party appointing one arbitrator, who then selected a third arbitrator. Sun appointed Vincent E. Dour, while Statheros appointed Manfred Arnold. Dour and Arnold informally agreed to appoint Hans Proeller as the third arbitrator without consulting Sun. Proeller had connections to the maritime industry and was affiliated with a company that owned oil tankers. Following the selection, there was uncertainty regarding whether potential conflicts of interest were disclosed to the parties. Dour indicated that information about the parties and the dispute might have been shared with Proeller, but no claims of actual conflict were made by Sun. The court found that the chairman's actions constituted "evident partiality," leading to the decision to grant Sun's motion to vacate the arbitration award.

Proeller did not disclose any potential conflicts of interest prior to his appointment as Chairman of the panel for the Sun-Statheros dispute. Dour confirmed Proeller's appointment in a letter dated January 19, 1985, which was also sent to Thomas Murphy, Esq., Sun's in-house counsel handling international and maritime matters, including the dispute with Statheros. After receiving the letter, Murphy inquired about Proeller's involvement in a separate arbitration between Sun and Fritzen Group, to which Dour admitted he was unaware and stated he would not have chosen Proeller had he known of this involvement.

Proeller, as president of Fritzen-Halcyon Lijn, Inc., acted as the agent for Fritzen Group in a contract with Sun, which was later disputed over alleged breach. The arbitration related to this dispute lasted from March 1982 to October 1987, during which Proeller participated both as an agent and a witness. He testified extensively about the charter agreement and the reasons for its clauses. Notably, Proeller informed Sun in a letter dated March 5, 1985, that Fritzen Group would seek nearly $6.95 million in damages, less than two months after accepting the panel chair position.

Proeller claimed he had no personal financial interest in the outcome of the arbitration and did not benefit financially from Sun's dealings. Sun acknowledged Proeller's lack of a direct financial stake but suggested his involvement was broader than he indicated. Ultimately, the arbitration panel awarded Fritzen Group approximately $2.67 million in damages. After learning of Proeller's appointment to the Sun-Statheros panel, Murphy asked him to withdraw due to the conflict, but Proeller refused, believing he could fairly adjudicate the case.

On March 13, 1985, Murphy requested Proeller to withdraw from the Sun-Statheros arbitration panel, citing Proeller's involvement in the concurrent Sun-Fritzen Group arbitration and recent communication regarding significant damages sought against Sun. Proeller responded on March 22, asserting his commitment to impartiality despite his prior involvement. The first hearing for Sun-Statheros occurred on July 12, 1985, where all arbitrators disclosed their relationships with the parties. Despite Murphy's ongoing objections and a reservation of rights to challenge any future award, the hearing was suspended for judicial resolution of Proeller's participation. Statheros filed a motion to compel arbitration on July 25, 1985, which was later withdrawn as premature.

The Sun-Statheros arbitration proceeded with Proeller as Chairman, following fluctuations in Sun's claimed damages—initially $211,000, later adjusted to $66,183. The Sun-Fritzen Group arbitration concluded on October 2, 1987, with a ruling against Sun for approximately $2.7 million. Proeller reiterated his impartiality in correspondence after the completion of the Sun-Fritzen arbitration, while Murphy continued his objections. The Sun-Statheros panel deliberated in April 1990 and issued its award on September 28, 1990, awarding Sun $20,022 in damages and $8,901 in interest, while disallowing part of the claim related to lost crude oil and finding no unseaworthiness of the tanker. Dour dissented, arguing that Sun had proven its claims and suggested possible bias from Proeller and Arnold, though he did not directly accuse Proeller of bias against Sun.

The final arbitration award included a majority and dissenting opinion, along with an appendix detailing the panel's fees totaling $19,950. Arbitrators Arnold and Proeller were each awarded $7,625, while dissenter Dour received $4,700. The appendix mandated that Sun pay 60% of the total fees and Statheros 40%. Sun argued that these fee allocations deviated from typical arbitration practices. Dour was aware of the panel's damage findings and had previously agreed to a fee estimate of $4,000 to $5,000 per arbitrator, but was not informed about the fee allocation or its increase to $7,650 for Arnold and Proeller. Dour expressed surprise upon receiving the full decision, stating he would have opposed the unequal fee allocation had he been consulted. Proeller asserted that the unequal fees were warranted due to Sun's actions prolonging the proceedings. Proeller did not clarify whether the decision regarding fee allocation was made before or after Dour's dissent. Arnold corroborated that no bias was observed and noted that unequal fee assessments among arbitrators have become more accepted in recent years. Sun paid the fees as directed by the majority and filed a motion to vacate the damage award on December 21, 1990, citing Proeller's "evident partiality" as the sole ground for vacatur.

When parties opt for arbitration, courts have a limited role, primarily to determine if specific grounds for vacating an arbitration award exist under § 10 of the Arbitration Act. The burden of proof to demonstrate these grounds lies with the party challenging the award. Notably, § 10(b) allows for vacating an award due to "evident partiality" of the arbitrators. Courts assess "evident partiality" through a case-by-case approach, emphasizing that a mere claim of bias is insufficient; there must be direct and definite evidence of bias. The expertise of arbitrators, which is often a reason for choosing arbitration, can sometimes lead to perceived bias due to their familiarity with specific fields, which may foster tightly-knit professional communities. To vacate an award for "evident partiality," the challenging party must demonstrate that a reasonable person would conclude that the arbitrator was biased. Importantly, it is not necessary to prove actual bias, but rather to show a reasonable perception of partiality. An example highlighted is the Second Circuit's decision in Morelite, where an award was vacated due to a familial relationship between an arbitrator and a party’s officer, which was deemed to create unfairness.

Morelite did not specify what constitutes clear examples of evident partiality but emphasized the need for courts to adopt a pragmatic approach that considers specific commercial practices and factual differences. When assessing an arbitrator's alleged bias, courts consider: 1) the arbitrator's financial interest in the case; 2) the nature of the relationship between the arbitrator and the involved parties; and 3) whether this relationship existed concurrently with the arbitration. Evidence of evident partiality is more likely found in business relationships than in professional ones. 

Sun and Statheros contested whether Proeller was obligated to disclose his business ties with them prior to his appointment as an arbitrator in their case. Proeller disclosed his relationship at the first hearing and claimed he could remain unbiased, despite his ongoing arbitration involvement between Sun and Fritzen Group. Sun contended that Proeller's lack of prior disclosure warranted automatic vacating of the award since it denied them the opportunity to select a different arbitrator. Federal common law mandates that arbitrators reveal any significant business relationships with parties before finalizing their appointment. While a complete business biography isn't required, any dealings that could suggest bias must be disclosed. It is considered best practice for arbitrators to fully disclose their relationships, allowing parties to make informed decisions about accepting or rejecting an arbitrator. Failure to disclose could lead to a federal court vacating an award under § 10 of the Arbitration Act, as it allows parties to voice concerns about potential bias before the arbitration begins. Proper disclosure helps mitigate the risk of later claims of bias and ensures fairness in the arbitration process.

A failure to disclose material facts by an arbitrator does not automatically lead to vacatur of an arbitration award. Courts typically consider the entire record to assess if there is a valid basis for vacating the award, such as "evident partiality." In previous cases, courts have denied motions to vacate based on non-disclosure of relationships that did not suggest bias. In the current case, the focus is on Proeller's refusal to resign from the arbitration panel after Sun objected to his presence due to an undisclosed relationship. Although Proeller's disclosure timing is questioned, the critical issue is his decision to remain on the panel despite Sun's timely objection. This situation raised concerns about the risk of vacatur under § 10 of the Act due to potential "evident partiality." The court ultimately found that Proeller exhibited partiality against Sun, particularly evident in the decision to unevenly allocate arbitration fees and increase their own fees without consulting the arbitrator selected by Sun. Consequently, the award was vacated.

An arbitrator is not bound by the formal procedures of federal courts but must ensure a fundamentally fair hearing for all parties. In this case, Proeller failed to inform Dour about the fee allocation (60% to Sun and 40% to Statheros), which deprived Dour of the chance to object prior to the final award. While unequal fee allocations are permissible, the lack of notice is concerning as it hindered Dour's ability to challenge the decision. Proeller and Arnold did not justify the decision to increase their own fees without notice to Dour, raising suspicions of vindictiveness, particularly because Proeller, as the chairman and a non-party-appointed arbitrator, had a more significant role in the panel's actions. Despite Arnold's participation, the law does not require evident partiality from a majority of the panel, only from any arbitrator. The situation surrounding the fee allocation could warrant an evidentiary hearing to consider vacating the award due to potential prejudice. The fee decision, although separate from the damage award, casts doubt on Proeller's impartiality due to undisclosed involvement with Sun's adversary in another arbitration. Courts must assess the record for signs of evident partiality, and upon review, it appears reasonable to conclude that Proeller demonstrated partiality towards one party. Proeller has consistently claimed impartiality and denied any ill feelings towards Sun, asserting he could fairly arbitrate cases involving Sun despite earlier suggestions to abstain from such cases.

Judge Weinfeld's statement highlights that a mere denial of bias by an arbitrator does not resolve questions of partiality. In evaluating claims of "evident partiality," a challenging party must demonstrate that a reasonable person would perceive the arbitrator as biased. In this case, Proeller's extensive business relationship with Sun, including his significant involvement in a separate arbitration with Fritzen Group, raised concerns about his impartiality. Sun's request for Proeller to recuse himself was warranted, as his role as Fritzen Group's New York agent could influence his judgment against Sun in the ongoing arbitration with Statheros.

Unlike previous cases where allegations centered on an arbitrator's mere appearance of bias, Proeller's involvement was direct; he acted as a witness and representative for Sun's adversary, Fritzen Group, which heightened the risk of perceived bias in the Sun-Statheros arbitration. The distinction from Marc Rich II is critical: the arbitrator in that case had only an attenuated connection to the separate arbitration, whereas Proeller was deeply engaged, creating a legitimate basis for Sun's concerns about his impartiality.

Sun's challenge to Proeller's role as arbitrator is based on his adversarial relationship with the company rather than a typical professional relationship seen in maritime contexts. This distinction is pivotal, as noted in the Andros Compania case, which denied a motion to vacate due to less direct connections. Proeller was deeply involved in a business dispute with Sun, and his arbitration role coincided with participation in another proceeding involving Sun and Fritzen Group from March 1982 to October 1987, while the Sun-Statheros arbitration took place from July to September 1985. Notably, Proeller submitted a damage claim for Fritzen Group shortly after agreeing to arbitrate for Sun-Statheros, raising questions of "evident bias." Previous cases cited by Statheros involved more tenuous relationships than those in this situation, such as a lawyer's association mid-arbitration or speculative motivations that did not warrant vacating an award. Sun raised objections to Proeller's involvement early on, even seeking judicial intervention. The conclusion does not require proof of actual bias but highlights significant doubts regarding Proeller's impartiality, especially in light of the unreasonable fee incident. This scrutiny leads to a determination that reasonable people would perceive strong evidence of partiality, resulting in the vacation of the arbitration award.

Mr. Proeller played a pivotal role in representing the Fritzen Group, actively participating in their strategies and tactics. The legal precedent established in *Sanko S.S. Co. v. Cook Industries, Inc.* indicates that a district court typically reviews a panel's refusal to remove a potentially biased arbitrator only after an arbitration award has been made. Furthermore, under the Arbitration Act, parties are not permitted to seek disqualification of an arbitrator prior to the issuance of an award. Dour's dissent highlights concerns over systemic bias in arbitration outcomes, noting a historical trend where decisions favor shipowners, with only a few rulings benefiting charterers. Dour references a study by Donald Bruce, which found that out of numerous cargo loss claims, nearly all awards favored owners. This perceived bias has led larger oil companies to opt for arbitration through the American Arbitration Association instead of the Society of Marine Arbitrators, which they believe exhibits favoritism towards shipowners. Dour expresses hope for a continued shift toward more equitable arbitration processes for oil companies.