Wednesday, December 3, 2008
Page 3
Court Clarifies Arbitrators’ Duty to Disclose Relationships
By STEVEN M. ELLIS, Staff Writer
The Fifth District Court of Appeal yesterday rejected a general contractor’s attempt to set aside an award by an arbitrator who did not disclose that his law firm previously represented a debtor whose bankruptcy proceedings led to substantial, ongoing litigation against the contractor.
Opining that proposed neutrals who have previously represented a third party with an adversarial relationship to a party to arbitration need only disclose matters that could cause a reasonable person to doubt their ability to be impartial, and noting that the firm had withdrawn as counsel before the litigation began, and a year and a half before the arbitrator’s appointment, the court ruled that substantial evidence supported a finding that disclosure was not required.
Poultry producer Foster Poultry Farms sought the arbitration when Billings, Mont.-based contractor Agri-Systems Inc. filed suit in the Tulare Superior Court in 2003 after Foster withheld 10 percent of the contract price on a grain facility Foster had contracted Agri-Systems to build in Traver, on the western side of the county.
The poultry producer claimed poor design and construction impeded grain flow leading to system failures, but Agri-Systems countered with a $2.7 million breach of contract suit alleging Foster poorly maintained the facility and caused the impediment by using overly moist grain.
Foster invoked a provision in the construction agreement providing for decision under the Construction Industry Arbitration Rules of the American Arbitration Association, and the parties agreed that Robert Hillison of the Fresno law firm Caswell Bell & Hillison LLP would act as sole arbitrator.
Hillison conducted the arbitration in 2005 and issued a net $178,000 award for Foster, but Agri-Systems challenged confirmation of the award, contending that Hillison had violated a duty to disclose that a partner in his firm, Hagop Bedoyan, had represented Coast Grain Company in a 2001 involuntary chapter 11 bankruptcy proceeding.
Citing Code of Civil Procedure Sec. 1281.9’s general requirement that a proposed neutral “disclose all matters that could cause a person aware of the facts to reasonably entertain a doubt” on ability to be impartial, including a relationship with parties or counsel, the contractor argued that Hillison should have disclosed the representation because Coast Grain’s bankruptcy led to significant litigation against Agri-Systems in both federal district and bankruptcy courts, and played a part in the contractor’s own voluntary chapter 11 filing in 2004.
Agri-Systems similarly pointed to Standard 7(d)(7) of the California Rules of Court’s Ethics Standards for Neutral Arbitrators in Contractual Arbitration, which requires disclosure of any current or past attorney-client relationship with a party or counsel, and accused Coast Grain and Foster of colluding to prevent confirmation of its chapter 11 reorganization plan.
Foster responded that Hillison’s firm had only represented Coast Grain in the initial stages of its bankruptcy, had withdrawn from the case before any litigation with Agri-Systems commenced and had ceased all representation of Coast Grain over a year and a half before Hillison’s appointment as arbitrator, and Tulare Superior Court Judge Melinda Myrle Reed, finding no duty to disclose, confirmed the award.
Agri-Systems appealed, but Justice Betty L. Dawson rejected the contractor’s assertion that Standard 7 required disclosure of legal representation of a third party with interests adverse to a party to arbitration, concluding that its reference to an “attorney-client” relationship and use of the prepositional phrase “with a party” meant the arbitrator must have acted as an attorney for a party to the arbitration.
Instead, she said, the applicable rule of law was Sec. 1281.9’s general requirement, and wrote that substantial evidence supported Reed’s finding that an objective person would not reasonably doubt Hillison’s ability to be impartial given the amount of time since his firm had held a relationship with Coast Grain, and Hillison’s only indirect connection to the company.
Justices Rebecca A. Wiseman and Brad R. Hill joined Dawson in her opinion.
The case is Agri-Systems, Inc. v. Foster Poultry Farms, 08 S.O.S. 6498.
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