Tenaska Energy v. Ponderosa Pine Energy, Opinion delivered on May 23, 2014 by Justice Guzman, Docket No. 12-0789, from Dallas County; 5th Court of Appeals District (05-10-00516-CV, 376 S.W.3d 358, 08-20-2012).
FACTS: Tenaska Energy, Inc., Tenaska Energy Holdings, LLC, Tenaska Cleburne, LLC, Continental Energy Services, and Illinova Generating Co. (collectively Tenaska) sold their interests in a power plant in Cleburne, Texas to Ponderosa Pine Energy, LLC (Ponderosa). The purchase agreement contained a broad arbitration clause requiring the parties to arbitrate any dispute arising from or related to the agreement. The clause provided for a three-arbitrator panel, with each party selecting one arbitrator and those two arbitrators selecting the third.
After the transaction closed, the parties disputed whether the agreement required Tenaska to indemnify Ponderosa. Ponderosa demanded arbitration and sought more than $200 million in indemnity rights. Lawyers from Nixon Peabody LLP’s New York office represented Ponderosa, which designated Samuel Stern as its arbitrator. Stern made a partial disclosure, but not a full disclosure of facts regarding his business interest in a company named LexSite that was seeking business from Nixon Peabody. The arbitration panel awarded Ponderosa a $125 million settlement amount. The trial court vacated the award because of Stern’s failure to fully disclose. The 5th Court of Appeals reversed the trial court, after which the case came to the Texas Supreme Court on a Petition for Review.
HOLDING: Evident partiality of an arbitrator is a ground for vacation an arbitration award under both the Federal Arbitration Act and the Texas Arbitration Act. A party does not waive an evident partiality challenge if it proceeds to arbitrate without knowledge of the undisclosed facts. What did Stern disclose? That Ponderosa’s law firm, Nixon Peabody, recommended Stern as an arbitrator in three other arbitrations. He also disclosed that he was a director in LexSite, a litigation services company and attended a meeting at Nixon Peabody, but there was no indication that LexSite would ever do business with the law firm. What did Stern fail to disclose? That of all of his contacts at the 700-lawyer firm were with the two lawyers that represented Ponderosa in the litigation; he owned stock in LexSite and that LexSite was pursuing business opportunities with Nixon Peabody; he served as president of LexSite’s United States subsidiary; he conducted significant marketing in the US for the company; he had additional meeting or contacts with the two lawyers in question to solicit business from the law firm for LexSite; and he allowed one of the two lawyers to edit his disclosures to minimize the contact.
The Texas Supreme Court stated, “We hold the failure to disclose this additional information might yield a reasonable impression of the arbitrator’s partiality to an objective observer. We further hold that because the party making the evident partiality challenge was unaware of the undisclosed information, it did not waive the claim. Accordingly, we reverse the court of appeals’ judgment and reinstate the trial court’s order vacating the award and requiring a new arbitration.”