On certification to the Superior Court, Appellate Division, whose opinion is reported at 172 N.J. Super. 186 (1980).
For affirmance -- Justices Sullivan, Pashman, Handler and Pollock. For reversal -- Chief Justice Wilentz and Justices Clifford and Schreiber. The opinion of the Court was delivered by Pashman, J. Clifford, J., dissenting. Chief Justice Wilentz and Justice Schreiber join in this opinion.
In this case we are called upon to decide whether the existence of an undisclosed, substantial business relationship between a party-designated arbitrator in tri-partite arbitration and the party designating that arbitrator constitutes "evident partiality" under N.J.S.A. 2A:24-8(b) and is therefore grounds for vacating the arbitration award.
Both the trial court and the Appellate Division held that it did constitute partiality. We granted Barcon's petition for certification, 84 N.J. 422 (1980). Because we share the Appellate
Division's concern "for the rightness in this way of doing business, open, aboveboard and candid," 172 N.J. Super. 186, 189, and for the need to prohibit "any appearance of bias sufficient to discredit this useful adjudicatory tool sanctioned in the law and controlled by its statutes," id. at 190, we now affirm its judgment to vacate the arbitration award.
In addition, we establish prospectively the requirement that every arbitrator, whether party-designated or "neutral," disclose to the parties, prior to the commencement of arbitration proceedings, any relationship or transaction that he has had with the parties or their representatives. This disclosure should also include any other fact which would suggest to a reasonable person that the arbitrator is interested in the outcome of the arbitration or which might reasonably support an inference of partiality.
In 1974 plaintiff, Barcon Associates, Inc. (Barcon), a general contractor, entered into a construction subcontract with defendant Tri-County Asphalt Corporation (Tri-County). Disagreements arose under the subcontract which led Barcon to institute a suit against Tri-County in September 1975.
In December 1975, on Tri-County's motion, the trial court stayed the suit pending arbitration pursuant to terms of the parties' subcontract. That subcontract provided that any disagreement
shall, upon written notice of either to the other party, be submitted to three arbitrators for decision. Each party shall choose one arbitrator . . ., the third to be chosen . . . by the two thus selected.
Tri-County designated as its arbitrator Gareld R. Gray, an officer of an international contracting firm.*fn1 Barcon chose
Vincent Spatz, a New Jersey general contractor, as its arbitrator. Gray and Spatz agreed upon Allen Arnowitz, a New Jersey consulting engineer, as the neutral arbitrator and chairman of the panel.
Arbitration hearings were held in January and March 1977. Several months later the arbitration panel informed the parties that by a two-to-one vote the panel had decided in favor of Barcon, and that Tri-County should pay Barcon $29,500 "in settlement of all claims" between the parties.
In December 1977, Barcon sought confirmation of the award in the Superior Court pursuant to N.J.S.A. 2A:24-7.*fn2 Tri-County counterclaimed that the award should be vacated on grounds of the "evident partiality and misconduct" of Spatz, the arbitrator designated by Barcon.
The basis of Tri-County's counterclaim was the business dealings that Spatz had with Barcon in 1977 throughout the pendency of the arbitration proceedings. Tri-County contended that Spatz "transgressed into the realm of 'evident partiality' when he failed to disclose" these dealings. In fact, Spatz had done business with Barcon for approximately twenty years by the time of his designation as Barcon's arbitrator in this case. Two transactions between Spatz's construction company and Barcon were ongoing during the arbitration proceedings in 1977.
One involved paving work completed by Spatz's firm in August 1976.*fn3 Spatz's firm billed Barcon $25,215.84 for this work
on August 31, but by the time arbitration hearings began in January 1977 Barcon had made no payments on this account and owed Spatz $26,763.15, the original balance due plus interest, against this bill. In February 1977 Barcon paid $3,000 and on March 1 Spatz sent to the president of Barcon a bill showing a balance due of $24,527.05, on which Spatz wrote "Joe -- Since August!!! Please. Vin." Barcon made further payments of $3,000 in March and $10,000 in April, but at the time the arbitration panel rendered its award on December 9, 1977, Barcon still owed Spatz over $13,000 on this account.
The second ongoing transaction involved paving work done by the Spatz firm for Quail Ridge Corporation, a wholly-owned subsidiary of Barcon. This was part of a long-term project that commenced before the arbitration and continued after. Payments received on this account included one of $43,005.78 made in July 1977 while the arbitration panel was still deliberating.
In April 1978 the trial court, in a decision from the bench, vacated the arbitration award because of Arbitrator Spatz's "evident partiality within the meaning of N.J.S.A. 2A:24-8(b)."*fn4 However, in response to Barcon's subsequent motion to settle the form of judgment, R. 4:42-1, the court held further evidentiary hearings to determine whether Tri-County had knowledge, before or during the arbitration proceedings, of Spatz's dealings with Barcon and thereby waived its right to object after the proceedings had ended. Following these hearings, Judge Stanton rendered a thorough written opinion supporting his decision to vacate the award. The trial court said that although "reasonable men would expect a party-designated arbitrator to have a general cast of mind broadly favorable to the position of the designating party," such a "broadly favorable predisposition of mind . . . cannot be permitted to become bias or to degenerate
into partisanship, nor can objective appearances of bias or partisanship be permitted." 160 N.J. Super. 559, 570.
On appeal, the Appellate Division affirmed, expressing its strong disapproval of "any appearance of bias sufficient to discredit this useful adjudicatory tool." 172 N.J. Super. at 190. In addition, the court adopted a requirement, based on Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 149, 89 S. Ct. 337, 339, 21 L. Ed. 301, 305 (1968), that "arbitrators disclose to the parties any dealings that might create an impression of possible bias."
Commercial arbitration is a long-established practice in New Jersey consistently encouraged by the Legislature. Even under seventeenth century colonial rule, arbitration was fostered by statute, Boskey, A History of Commercial Arbitration in New Jersey (pt. 1), 8 Rut. -- Cam.L.J. 1, 5 (1976), reflecting a public policy unchanged to the present day and embodied in the current arbitration act, N.J.S.A. 2A:24-1 to -11, Hudik-Ross, Inc. v. 1530 Palisade Ave. Corp., 131 N.J. Super. 159, 166 (App.Div.1974).
The courts of this State have also favored arbitration. E.g., Kearny PBA Local # 21 v. Town of Kearny, 81 N.J. 208, 221 (1979); Daly v. Komline-Sanderson Engineering Corp., 40 N.J. 175, 177 (1963); Ukrainian National Urban Renewal Corp. v. Muscarelle, Inc., 151 N.J. Super. 386, 396-97 (App.Div.1977), certif. denied, 75 N.J. 529 (1977); Public Utility Construction and Gas Appliance Workers, Local 274 v. Public Service Elec. & Gas Co., 35 N.J. Super. 414, 419 (App.Div.1955), certif. denied, 19 N.J. 333 (1955); Eastern Engineering Co. v. City of Ocean City, 11 N.J.Misc. 508, 510 (Sup.Ct.1933); Fennimore v. Childs, 6 N.J.L. 386, 388 (Sup.Ct.1797). Because it has retained this status in the law and because it offers significant advantages to the parties, arbitration is a widely-used means of resolving commercial disputes. See Boskey, supra (pt. 2), 8 Rut.-Cam.L.J. 284, 309-10 (1977).
Arbitration is "a substitution, by consent of the parties, of another tribunal for the tribunal provided by the ordinary processes of law," and its object is "the final disposition, in a speedy, inexpensive, expeditious and perhaps less formal manner, of the controversial differences between the parties." Eastern Engineering, supra, 11 N.J.Misc. at 510-11, quoted in Carpenter v. Bloomer, 54 N.J. Super. 157, 162 (App.Div.1959). Arbitration can attain its goal of providing final, speedy and inexpensive settlement of disputes only if judicial interference with the process is minimized; it is, after all, "meant to be a substitute for and not a springboard for litigation." Korshalla v. Liberty Mutual Ins. Co., 154 N.J. Super. 235, 240 (Law Div.1977). Consequently, "every intendment is indulged in favor of the award and it is subject to impeachment only in a clear case." Carpenter v. Bloomer, supra, 54 N.J. Super. at 168; accord, Kearny PBA Local # 21, supra, 81 N.J. at 221 ("An arbitrator's award is not to be cast aside lightly."); Eastern Engineering, supra, 11 N.J.Misc. at 511; International Brotherhood of Teamsters, Local 560 v. Bergen-Hudson Roofing Supply Co., 159 N.J. Super. 313, 315 (Ch.Div.1978); Leslie v. Leslie, 50 N.J. Eq. 103, 108 (Ch.1892), aff'd, 52 N.J. Eq. 332 (E & A 1894).
These principles are incorporated in the arbitration act, N.J.S.A. 2A:24-1 to -11. The act grants arbitrators extremely broad powers and extends judicial support to the arbitration process subject only to limited review. A court may compel an uncooperative party to arbitrate, N.J.S.A. 2A:24-3, and may stay litigation pending arbitration, N.J.S.A. 2A:24-4. Arbitrators are empowered to subpoena witnesses and evidence, and such subpoenas will be enforced by the courts, N.J.S.A. 2A:24-6. "[A]rbitrators decide both the facts and the law," Daly v. Komline-Sanderson, supra, 40 N.J. at 178, and the determinations of arbitrators are given collateral estoppel effect by reviewing courts, Ukrainian National Urban Renewal Corp. v. Muscarelle, supra, 151 N.J. Super. at 398. Courts are available to confirm arbitration awards, N.J.S.A. 2A:24-7. Arbitrators are given these extensive powers subject to judicial review limited
to the narrow grounds of arbitrator partiality or corruption, fraud, undue means, conduct prejudicial to the rights of a party or failure to make a "mutual, final and definite award," N.J.S.A. 2A:24-8, or "evident" mistakes by the arbitrators, N.J.S.A. 2A:24-9.
A necessary corollary of the fact that arbitrators function with the support, encouragement and enforcement power of the state is the requirement that they adhere to high standards of honesty, fairness and impartiality. "An arbitrator acts in a quasi -judicial capacity and must render a faithful, honest and disinterested opinion upon the testimony submitted to him." Brotherton, Inc. v. Kreielsheimer, 8 N.J. 66, 70 (1951); see also Carpenter v. Bloomer, supra, 54 N.J. Super. at 162; Eastern Engineering, supra, 11 N.J.Misc. at 511; Leslie v. Leslie, supra, 50 N.J. Eq. at 107; Kearny PBA Local # 21, supra, 81 N.J. at 226 (Pashman, J., concurring); Commonwealth Coatings Corp. v. Continental Casualty Co., supra, 393 U.S. at 148-49, 89 S. Ct. at 339, 21 L. Ed. 2d at 304-05; American Eagle Fire Ins. Co. v. New Jersey Ins. Co., 240 N.Y. 398, 405, 148 N.E. 562, 564 (1925); J.P. Stevens & Co. v. Rytex Corp., 34 N.Y. 2d 123, 129, 312 N.E. 2d 466, 469, 356 N.Y.S. 2d 278, 282 (1974).
We emphasize that these standards must govern the conduct of all arbitrators in whose hands the dispute resolution process is entrusted -- not only so-called "neutral" arbitrators but party-designated arbitrators as well.
In American Eagle Fire Ins. Co. v. New Jersey Ins. Co., supra, Judge Pound of the New York Court of Appeals made several accurate observations about party-designated arbitrators.
[T]he practice of arbitrators of conducting themselves as champions of their nominators is to be condemned as contrary to the purpose of arbitrations, and as calculated to bring the system of enforced arbitrations into disrepute. . . . [A party-designated arbitrator] is not an advocate whose function is to convince the umpire or third arbitrator. . . . He must lay aside all bias, and approach the cause with a mind open to conviction and without regard to his previously formed opinions as to the merits of the party or the cause. He should sedulously refrain from any conduct which might justify even the inference that either party is the special recipient of his solicitude or favor. [240 N.Y. at 405, 148 N.E. at 564]
Our Legislature shares this view. The statute governing the vacation of awards for arbitrator partiality or corruption draws no distinction between neutral and party-designated arbitrators. N.J.S.A. 2A:24-8(b) provides that a court shall vacate arbitration awards,
[w]here there was either evident partiality or corruption in the arbitrators, or any thereof. . . . [emphasis added]
Although arbitration originates in the contract of the parties and is a process which may operate without any court involvement, we reject the notion, repeatedly asserted by the dissent, that the parties' contract should prevail over all other considerations. In particular, we give priority to the need to maintain the integrity of arbitration and public faith in the process. The dissent objects that our holding today disregards "the paramount public policy consideration" of encouraging "voluntary arbitration as a means of resolving commercial disputes informally, expeditiously, relatively inexpensively, and in a manner that relieves our overburdened judicial resources," post at 210. However, it is our strongly held view that honest, fair and impartial arbitration is as important as the finality of arbitration. See Moshier v. Shear, 102 Ill. 169, 174 (1881) (commenting, in regard to commercial arbitration, that "however desirable it may be to terminate protracted contention, it is more desirable that justice shall be administered, free from all improper or corrupting influences."). Cf. Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807, 623 P. 2d 165, 171 Cal.Rptr. 604, 613, 615 (1981) (disapproving "complete contractual autonomy in the choice of an arbitrator," which must give way to "the common law requirement of fair procedure"). Because of the confidentiality in which arbitrators conduct their deliberations, the goal of ensuring that they will adhere to high standards will best be attained by requiring them to avoid not only actual partiality but also the appearance of partiality.*fn5 Commonwealth Coatings
Corp. v. Continental Casualty Co., supra, 393 U.S. at 150, 89 S. Ct. at 340, 21 L. Ed. 2d at 305 ("[A]ny tribunal permitted by law to try cases and controversies not only must be unbiased but must also avoid even the appearance of bias."); Northwest Mechanical, Inc. v. Public Utilities Comm'n of City of Virginia, Minn., 283 N.W. 2d 522, 524 (1979); Moshier v. Shear, supra, 102 Ill. at 174-75; see J.P. Stevens & Co. v. Rytex Corp., supra, 34 N.Y. 2d at 126-27, 312 N.E. 2d at 467-68, 356 N.Y.S. 2d at 280.
Although standards pertaining to the requisite impartiality of party-designated arbitrators are not susceptible to precise formulation in the abstract, some general observations can be made. As a starting point, we register our agreement with the following principle which appears in the Code of Ethics for Arbitrators in Commercial Disputes jointly drafted by the American Arbitration Association and the American Bar Association. Party-designated arbitrators, according to the Code,
may be predisposed toward the party who appointed them but in all other respects are obligated to act in good faith and with integrity and fairness. [Holtzmann, The First Code of Ethics for Arbitrators in Commercial Disputes, 33 The Business Lawyer 309, 319 (1977)]
While a party-designated arbitrator may approach the arbitration proceedings with some sympathy for the position of the party designating him, such an arbitrator must remain faithful to the obligation which rests upon him to maintain "broad public confidence in the integrity and fairness of the [arbitration] process." Id. at 312. Thus, all arbitrators should "conduct the proceedings in an evenhanded manner and treat all parties with equality and fairness at all stages of the proceedings." Id. at 316. Most important, arbitrators "should decide all matters justly, exercising independent judgment, and should not permit outside pressure to affect the decision." Id. at 317. All arbitrators, party-designated and neutral, must exercise their responsibilities
in a manner worthy of the great trust and power placed in them by the Legislature and courts of this State.
Whether a particular party-designated arbitrator has run afoul of these precepts and shown evident partiality can be decided only on the facts of each case. To illustrate, if it were shown that there existed a possible conflict of financial interest on the part of the arbitrator; or that the arbitrator prejudged the dispute because of bias or partisanship; or that there was animus on the part of the arbitrator against the other side, such a showing would demonstrate evident partiality. The party alleging that an arbitrator was impermissibly ...