Originally from Dispute Resolution Journal

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STOCK EXCHANGE — ARBITRATION RULES — DISCLOSURE REQUIREMENT — "ORDINARY DEALINGS"

Where dispute was submitted to Board of Arbitrators as required by the New York Stock Exchange constitution and rules, court refused to vacate award under Commonwealth Coatings disclosure rule notwithstanding the probability that the arbitrators had some business dealings with the former chairman of the Exchange's board of governors, presently a member of the respondent's firm. The facts showed that at the opening of the arbitration hearing, the petitioner firm made a motion to have the arbitrators dismiss the proceedings and remit the parties to their remedies at law, as provided by Exchange's constitution, on the grounds that the arbitrators might be embarrassed in deciding a case involving the respondent firm, a firm with which the arbitrators presumably did substantial business. After the motion was denied and the hearings had begun, the Supreme Court ruled, in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968) that an arbitration award must be vacated where a "neutral" arbitrator had failed to disclose substantial dealings with one of the parties. In affirming the District Court's confirmation of the award in favor of the respondent, the Second Circuit differentiated the case before it from the factual situation before the Supreme Court in Commonwealth Coatings and found that the Commonwealth ruling on disclosure did not require that the present award be vacated. The court found that in the Commonwealth Coatings case, the parties agreed to the selection of a neutral third arbitrator, one without any non-trivial connections with either party; in the case before it, the petitioner, when becoming a member of the Exchange, agreed to arbitration before a panel of arbitrators who almost necessarily would have had dealings in the ordinary course of Exchange business with any potential opposing party who was also a member of the Exchange.

Thus, stated the court, "it would appear that any objections to arbitrators based upon their dealings through specialists are waived by member firms when they agree to Exchange arbitration; such dealings are contemplated by the parties when they join the Exchange." And, inasmuch as the petitioner made no claim that there were dealings between the arbitrators and the respondent firm other than in the ordinary course of Exchange business, the court concluded that Commonwealth Coatings does not require the vacation of the award. "However, we wish to emphasize that we do not hold that Exchange arbitration is exempt from the holding in Commonwealth Coatings insofar as an arbitrator is required to disclose any dealings he may have had with a party which were dealings not in the ordinary course of Exchange business. Under section 28 (b) of the Securities Exchange Act of 1984 (15 U.S.C, sec. 78bb(b) the arbitration procedures of the Exchange are subject to existing law, which, of course, includes the provisions of the Arbitration Act and, in particular, section 10 of that act as interpreted by the Supreme Court. In this opinion we are only holding that, when parties have agreed to arbitration with full awareness that there will have been certain, almost necessary, dealings between a potential arbitrator and one of the opposing parties, disclosure of these dealings is not required by Commonwealth Coatings inasmuch as the parties are deemed to have waived any objections based on these dealings."