A Bonanza for Ponderosa

Being on the wrong end of a $125 million arbitration award might cause anyone to investigate whether any of the arbitrators had any evident partiality in favor of the other side.  Unfortunately for the sellers of an electric power plant in Cleburne, the proper time for that investigation was when the arbitrator made his allegedly inadequate disclosures, not after the panel had already announced its award.

The buyer of the power plant, Ponderosa Pine Energy, invoked arbitration in order to resolve a dispute over the sellers’ alleged breaches of representations and warranties in the purchase agreement.  As the pick for its party-appointed (but neutral) arbitrator, Ponderosa selected a Washington , D.C. attorney named Samuel Stern.  Stern subsequently disclosed that he had been appointed as an arbitrator on several other occasions by Ponderosa’s law firm, Nixon Peabody.  Stern also disclosed that he sat on the advisory board of a company that had pitched its legal outsourcing services to Nixon Peabody.  But Stern only listed those contacts as being with the law firm of Nixon Peabody — he did not disclose that they were all with the two attorneys who were representing Ponderosa in the arbitration.  The sellers subsequently demanded to know whether Stern had ties to any of the financial institutions that owned Ponderosa, but failed to follow up on any of the items Stern had actually disclosed.

The arbitration panel — chaired by former Dallas Court of Appeals and Texas Supreme Court Justice James Baker — eventually split 2-1 in favor of Ponderosa’s demand for $125 million.  Ponderosa filed suit to confirm the award, while the sellers moved to have it set aside.  After post-arbitration discovery, the trial court ruled that Stern showed “evident partiality” by failing to disclose (1) the identities of the Nixon Peabody attorneys he had dealt with, (2) the full extent of his role with the legal outsourcing firm, and (3) that the claimant in one of the arbitration cases on which he had been selected by Nixon Peabody was owned by Ponderosa’s original owner.  The court of appeals reversed, holding that the sellers had waived those challenges.  While Stern’s disclosures had not identified all of the facts that the sellers might have wanted to know about those matters, there was enough information to put them on notice that the relationships and dealings existed.  By electing not to investigate the details and to wait until after the arbitration award had already been issued, the sellers waived their ability to challenge Stern’s impartiality at all.   As a result, the court of appeals reinstated Ponderosa’s arbitration award.

Ponderosa Pine Energy, LLC v. Tenaska Energy, Inc., No. 05-10-00516-CV