BiographiesRepresentative
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For Use In Connection With
Session F-1, “Tripartite Arbitrations:
Fair Play or Foul,” April 28, 2001, 10:45 a.m. – 12:15 p.m. THE ROLE OF PARTY ARBITRATORS ON TRIPARTITE PANELS ____________________ Stephen C. Rogers*C. Michael Loftus** Samuel M. Sipe, Jr.*** ____________________ Parties
to arbitration agreements frequently specify the use of “tripartite” panels
to resolve commercial disputes.[1] Typically under this format, each
party unilaterally appoints one arbitrator, and those arbitrators or the
parties themselves either agree on the selection of the third arbitrator or
obtain his appointment through an agreed-upon independent institution such as a court or the American
Arbitration Association. It is normally assumed that party-appointed arbitrators are aligned with the parties that appointed them and lack the neutrality expected of the third member of the panel.[2] Thus, in a classic formulation, one court held that party-appointed arbitrators “are partisans once removed from the actual controversy.”[3] In this view, because each party enjoys equal appointment power[4] and because the partisanship of the two party-appointed arbitrators is neutralized by the third,[5] any biases of the party arbitrators offset each other, and the decisions of the panel as a whole are impartial.[6] There is considerable confusion in the law, however, regarding the rules that govern the conduct of party arbitrators and the activities they may undertake to advance the interests of their appointing parties. Even courts that have expressly endorsed the use of party-appointed arbitrators in the tripartite format have rejected the notion that they enjoy complete freedom to support the positions of their appointing parties or rule on issues with no regard for the merits.[7] Conversely, even courts that have enforced specific limits on the conduct of party arbitrators have acknowledged that they are “not and cannot be ‘neutral,’ . . . at least in the sense that the third arbitrator or a judge is.”[8] This paper, which focuses
primarily on commercial disputes under federal arbitration law, describes the
statutory context in which these issues arise and surveys relevant decisions
and other authority.[9] A. The Statutory Context. In 1925, Congress enacted the Federal Arbitration Act with the basic
purposes of overcoming the
historic hostility of the courts to private arbitration agreements[10]
and making such agreements enforceable according to their terms like any
other contracts.[11] Thus, Section 2, which is the Act’s
“centerpiece provision”,[12]
states that written agreements to arbitrate controversies arising out of
transactions in interstate or foreign commerce “shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.”[13] The
Act grants parties contracting for arbitration considerable freedom to
structure the proceeding in whatever way they wish. As the Supreme Court has said, they “may . . . specify by
contract the rules under which that arbitration will be conducted,”[14]
and courts must “rigorously enforce” those rules.[15] Where applicable,[16]
state law is generally to the same effect.[17]
Section
5 of the federal act applies this general principle of party autonomy specifically
to the selection of arbitrators, providing that the method for arbitrator
selection contained in the contract “shall be followed.”[18] If the contract authorizes each party
to designate one arbitrator unilaterally, the parties may appoint partisans
to the panel, and Section 5 prevents a court from overriding the terms of the
contract and requiring the parties to select neutrals.[19] In an influential decision under the New York statute on which the
federal act was based,[20]
the Court of Appeals of New York explained the rationale for this rule. It said: “It
is hardly necessary to observe that we enforce the tripartite arbitration
clause before us because it is the one chosen by the parties, not because we
favor it or regard it as ideal or even desirable. We are, in effect, mandated by the policy, no less than by
the terms, of our statute to give life to the tribunal which the parties
themselves create. . . . If they
choose to have their disputes resolved by a body consisting of two partisan
arbitrators, and a third neutral arbitrator, that is their affair. We may not rewrite their contract.” [21] But,
the rights of the parties to shape their proceeding are not absolute. Section 10 of the federal statute
sets forth the limited grounds on which parties may challenge and courts may
vacate arbitration awards. One
such ground is “evident partiality or corruption in the arbitrators, or
either of them.”[22] At least as to the neutral, Section
10 qualifies the parties’ rights
under Section 5 to choose any arbitrator they wish.[23] Moreover, in Commonwealth
Coatings Corp. v. Continental Casualty Co,[24]
the Supreme Court grafted an important disclosure requirement on to the
“evident partiality” standard in Section 10. There, the neutral
arbitrator on a tripartite panel failed to disclose that he had acted as an
engineering consultant to one of the parties on a “repeated and significant”
basis over a period of four or five years, including in connection with the
very projects involved in the arbitration.[25] There was no allegation or, apart
from the undisclosed business relationship, evidence of actual fraud or bias
in the decision of the case, which was unanimous.[26] Although no single opinion in the
case commanded a majority of the Court, six Justices agreed that the
neutral’s failure to disclose his business dealings with a party required
setting aside the award for “evident partiality.”[27] Although
for purposes of “evident partiality,” the terms of Section 10 of the federal
statute apply to “the
arbitrators, or either of them” and draw no distinction between neutral and
party-appointed arbitrators, federal courts have generally not required the
latter to adhere to the same standards of neutrality and independence that
apply to true neutrals.[28] Conversely, even in states with
statutes that expressly limit the evident partiality requirement to
arbitrators appointed as neutrals, courts have been unwilling to authorize
party-appointed arbitrators to engage in unrestrained partisan behavior. The next section of this paper discusses (a) the ethical code most
commonly applied to the conduct of commercial arbitrators, (b) relevant
decisional law and (c) relevant provisions of the Revised Uniform Arbitration
Act adopted last year by the National Conference of Commissioners on Uniform
State Laws. B. Principles Applicable to Party
Arbitrators. 1. The AAA/ABA Code of Ethics In 1977, a joint committee of the American Arbitration Association and
the American Bar Association adopted a Code
of Ethics for Arbitrators in Commercial Disputes.[29] Although the Code lacks the force of
law,[30]
it has become an important touchstone for measuring the propriety of the
conduct of arbitrators, including party-appointed arbitrators, and courts
have often used it as the standard by which they judge such conduct.[31]
The Code consists of seven canons. The first six state principles that are generally
applicable to all arbitrators appointed as neutrals. These include an arbitrator’s duties
to ·
uphold the integrity and fairness of the arbitration
process (Canon I); ·
disclose any interest or relationship that might
affect impartiality or the appearance of impartiality (Canon II); ·
avoid improper or apparently improper communications
with the parties (Canon III); ·
conduct proceedings fairly and diligently (Canon IV); ·
make decisions in a just, independent and deliberate
manner (Canon V); and ·
maintain the relationship of trust and
confidentiality inherent in the office of arbitrator (Canon VI). Canon VII states the ethical considerations applicable to “nonneutral”
party-appointed arbitrators.[32] Although nonneutrals are generally
subject to the same ethical principles in the Code as neutrals, those
principles are relaxed in three important respects. First, nonneutral arbitrators
are allowed to be “predisposed” to the positions of their appointing parties
though in all other respects they must “act in good faith and with integrity
and fairness.”[33] Second, nonneutrals may
maintain financial or other interests or relationships even though they are
either likely to affect impartiality or might reasonably create the
appearance of partiality or bias.
Although they are required to describe the general nature and scope of
such interests or relationships, they need not do so in the same detail as
would be expected of a neutral and are not required to withdraw, as a neutral might be, if challenged
by the opposing party.[34] Third, unless the parties
agree otherwise, nonneutrals may communicate ex parte with their appointing parties,[35]
provided they have first informed the other parties and arbitrators of their
intent to do so or, if the communications occur before the first meeting of
the parties with the arbitrators, provided that the fact of such
communications is disclosed at that meeting.[36] Although the Code has stood as originally written for more than two
decades,[37] its provisions applicable to
nonneutral arbitrators are difficult to harmonize. On the one hand, unless the parties agree otherwise,
nonneutrals are allowed to be “predisposed” to the positions of their
appointing parties, to accept compensation from them and to maintain ex parte communications with
them. On the other hand, despite
permitting “predisposition, ” the Code also tells nonneutral arbitrators that
otherwise they “should decide all matters justly, exercising independent
judgment, and should not permit outside pressure to affect the decision.”[38] The Code provides little guidance for
determining at what point, if ever, a nonneutral’s allowable predisposition to
a party’s position crosses the line and becomes an impermissible surrender of
independent judgment.[39] In the circumstances, it is hardly
surprising that some courts have been quick to conclude, as the Texas Supreme
Court did in Burlington Northern R.R. Co.
v. TUCO, Inc., that party arbitrators were simply “open advocates for
their respective appointing parties.”[40] 2.
Case Law a. Federal Cases Perhaps the most notable recent decision involving issues related to
the conduct of a party-appointed arbitrator was the 1993 decision of the Eleventh
Circuit in Sunkist Soft Drinks, Inc. v.
Sunkist Growers, Inc.[41]
The dispute arose out of a soft-drink trademark licensing
agreement containing an arbitration clause that provided for arbitration
before a tribunal “comprised of two party-designated arbitrators, one selected by [each
side] . . ., and a third neutral arbitrator selected by the parties in
accordance with the Rules of the American Arbitration Association.”[42] One of the parties, Del Monte, designated as its arbitrator one Mr. Meyers, the owner and publisher of a soft-drink industry newsletter. Del Monte’s adversary, Sunkist, alleged that Meyers displayed evident partiality because he prejudged issues in the dispute before his appointment by reporting in his newsletter that external market forces--not tortious conduct of Del Monte--were causing a decline in sales for the Sunkist brand involved in the case.[43] Sunkist also alleged misconduct by Meyers in meeting with counsel and other representatives of Del Monte to prepare for the hearing, attending and participating in meetings with potential Del Monte witnesses, suggesting lines or areas of testimony, helping select a consultant and advising an expert witness on how to improve a chart related to the expert’s testimony.[44] Finally, Sunkist alleged that Meyers had breached a duty of disclosure imposed by the AAA/ABA Code by failing to reveal details of his communications with Del Monte before the arbitration hearings.[45] The court made short shrift of Sunkist’s challenge. With respect to Meyers’ newsletter reports, it noted that under the Code “a party-appointed arbitrator is permitted, and should be expected, to be pre-disposed toward the nominating party’s case.”[46] It noted that industry expertise may be a desirable credential for an arbitrator even where it comes at the expense of complete impartiality.[47] It concluded: “Mr. Meyers merely published his opinions on what was taking place within the soft drink industry. Whether he was correct or not in his opinion, it is not sufficient to disqualify him as an arbitrator.”[48] As for Meyers’ prehearing contacts with Del Monte’s representatives and potential witnesses, the court rejected Sunkist’s contention that those contacts amounted to his improperly receiving evidence ex parte. It said: “[N]one of
the [potential witnesses] . . . were placed under oath before being
interviewed, and none gave testimony in any sense of the word. Sunkist has made no showing that Mr.
Meyers discussed any information that he received during the prehearing
interviews with the other arbitrators, or that any of the arbitrators,
including Mr. Meyers, based their deliberations and award on anything other
than the evidence of record. Mr. Meyers’ conduct is not only
unobjectionable, but commonplace.”[49] Finally, the court held that the requirements of the Code applicable to
ex parte communications of party
arbitrators were satisfied by Meyers’ bare announcement that he had been in contact
with his party’s experts and intended to continue to communicate with them.[50] In sum, the court acknowledged that "[a] party-appointed arbitrator must consider the evidence of record in good faith and with integrity and fairness.” But, it held that Meyers’ predisposition towards his appointing party’s case was not a basis to vacate the award and, further, that the evidence, including the evidence of Meyers’ active role in the preparation of Del Monte’s case, was insufficient to show that he acted improperly during the course of the proceeding.[51] To the contrary, the court thought that for a party arbitrator, such conduct was “commonplace.” The decision in Metropolitan Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co.[52] stands in sharp contrast to Sunkist. There, before his appointment, a party-appointed arbitrator was alleged to have traveled to his party’s corporate headquarters, met ex parte with the party, discussed the merits of the case, received documents from the party and accepted its “hospitality,” all without notice to the other side. He also attempted to discuss the case with the other party’s arbitrator before the selection of the neutral.[53] Although this activity appears no more partisan than the active hearing preparation work undertaken by the party arbitrator in Sunkist--and called “commonplace” by the court there--the Metropolitan court held that the allegations before it stated a case of “overt misconduct” by the arbitrator.[54] The alleged conduct, the court said “could be interpreted as inconsistent with the Code of Ethics and [the arbitrator’s] . . . duty to treat the parties fairly at all stages of the proceeding, exercise independent judgment throughout, and remain free from outside pressures.”[55] In Employers Ins. of Wausau v. National Union Fire Ins. Co.,[56] the Ninth Circuit rejected a challenge to a party arbitrator on a tripartite panel who, before his appointment, had performed “a couple of hours’ work” consulting with counsel for the party about issues in the dispute.[57] The court went to considerable lengths to justify its decision[58] and ruled, cautiously, that “Because the consultation relationship was brief, and because [the arbitrator] . . . had neither preconceived convictions on the merits of the case nor a proven informational advantage, we conclude that the district court’s determination that [the arbitrator] . . . was not tainted by ‘evident partiality’ was not clearly erroneous.”[59] The court also upheld the arbitration panel’s decision to allow ex parte communications between the parties and their appointed arbitrators--but not the neutral--until the conclusion of the hearing, noting that both parties had engaged in them and that “[t]here was nothing sinister or inherently one-sided about the contacts.”[60] Finally, a case that deserves close watching is the appeal currently pending in the Eight Circuit from the lengthy but, at this writing, unreported decision of the District Court for the Eastern District of Missouri in Delta Mine Holding Co. v. AFC Coal Properties, Inc.[61] There, the court concluded, one side “treated its party arbitrator as a member of its trial team” while the other treated the role of its party arbitrator “quite differently.”[62] It said: “The essence of arbitration is agreement. Arbitrations are premised upon an agreement of the parties and are accordingly limited by that agreement. . . . “Needless to say, the whole process of arbitration falls apart when parties fail to agree on its parameters. That is exactly what happened in this case. Although the parties agreed to submit their disputes to arbitration, there apparently was no meeting of the minds about how this arbitration was going to be conducted, the role of the party-appointed arbitrators and whether the Code of Ethics for Commercial Arbitrators . . . would apply to the arbitrations.”[63] The court vacated two arbitration awards on the ground that the activity of one of the arbitrators “went far beyond the parties’ agreements and the proper role of a party-appointed arbitrator” and substantially prejudiced the arbitration.[64] b. State Cases Three decisions establish that the ambivalence that characterizes federal court attitudes to tripartite arbitration is also at work in the state courts. A 1981 decision of the New Jersey Supreme Court, Barcon Associates, Inc. v. Tri-County Asphalt Corp.,[65] probably represents the high water mark of judicial hostility to the presence of partisans on tripartite arbitration panels. There, a closely divided court held that an undisclosed substantial business relationship between a party-appointed arbitrator and his appointing party constituted “evident partiality” within the meaning of the state arbitration act and required vacating the award.[66] The court prospectively established a requirement that every arbitrator, whether party-appointed or neutral, disclose “any relationship or transaction that he has had with the parties or their representatives” and “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.”[67] By emphasizing that it was promulgating the same disclosure requirement for all arbitrators, whether or not neutral, the Barcon Associates court plainly meant to deny to party-appointed arbitrators the benefit of the provision of Canon VII of the AAA/ABA Code that relaxes as to them the disclosure requirement imposed on neutrals by Canon II.[68] Barcon Associates appears to reflect the very sort of judicial hostility to privately structured arbitration arrangements that the federal arbitration act and, one suspects, the New Jersey statute as well were meant to overcome. The New Jersey court said: “The parties may agree to any form of dispute resolution that they wish, but they may not seek the backing of the courts for private actions that, while substituting for the judicial function, are fraught with the appearance of bias. . . . [T]he Court must examine independently the propriety of allowing arbitrators, although designated by the parties, to act as advocates in the arbitration proceedings, since by law the results of these proceedings are enforceable in the courts.”[69] As we saw above, however, the basic purpose of arbitration legislation is to impart judicial enforceability to the dispute resolution procedures parties have privately agreed to. Moreover, the stated purpose of the disclosure requirement adopted in Barcon Associates was “to provide parties to arbitration with the information necessary to object to the designation of a particular arbitrator.”[70] But, the right of one party to prevail on such an objection must be balanced against the right of the other “to appoint any arbitrator desired, however close his relationship to [that party] . . . or to the dispute.”[71] A broad disclosure requirement also opens the door to court challenges to the qualifications of individual arbitrators, needlessly impairing the finality of the arbitration awards.[72] In 1997, a majority of the Texas Supreme Court took a more relaxed view of the role of party arbitrators in Burlington Northern R.R. Co. v. TUCO, Inc[73] The issue there involved a challenge to the neutral, not a party arbitrator. Unknown to the Burlington’s party arbitrator, while the arbitration was pending, the neutral was introduced to a potential client by a law partner of the Burlington arbitrator, and received a substantial assignment from the client without disclosing the fact of the referral in the arbitration.[74] The court disqualified the neutral for evident partiality. It held that an objective observer could reasonably believe that gratitude for the referral would incline the neutral to side with the party arbitrator whose partner made the introduction.[75] Responding to a point in the dissent, the court’s majority said: “The dissent apparently would hold that a business relationship between a party arbitrator and a neutral arbitrator can never cause evident partiality, because the party arbitrator is not an agent for the appointing party. While we need not and do not decide whether a party arbitrator serves as an ‘agent,’ it is undisputed that the party arbitrators in this case were not neutral, but were open advocates for their respective appointing parties.”[76] Under the tripartite format chosen, the court ruled, “the party arbitrators would be aligned with, act as advocates for, and ultimately side with the appointing party. Under this scenario, the third arbitrator would act as the only neutral decisionmaker.”[77] A final decision worth noting is Aetna Cas. & Sur. Co. v. Grabbert,[78] in which the Rhode Island Supreme Court dealt with a party arbitrator whose fee was contingent on the size of the award received by his appointing party. The court agreed that the arrangement was “absolutely improper” and violated several provisions of the AAA/ABA Code applicable to nonnneutral arbitrators.[79] The court nonetheless upheld the arbitration award, which was unanimous, on the ground that no causal nexus between the improper conduct and the award had been shown. In the view of one treatise, “[t]he decision is sound only if one accepts the notion that party-arbitrators are essentially advocates.”[80] 3. The Revised Uniform Arbitration Act (“RUAA”). Last year, the National Conference of Commissioners on Uniform State Laws adopted a comprehensive revision to the original Uniform Arbitration Act.[81] In February 2001, the ABA’s House of Delegates endorsed the RUAA,[82] and the revision is also supported by the AAA and other ADR providers.[83] Its supporters predict that, like the original uniform act, the RUAA will be widely enacted into state law and that it may even serve as a model for revision of the federal statute.[84] Accordingly, although the RUAA has not been adopted by any state, comment on the way it deals with party arbitrators is appropriate here. First, the RUAA maintains the explicit distinction in the original Uniform Act between the impartiality required of a neutral arbitrator and the conduct required of party arbitrators. Thus, Section 23(a) of the RUAA provides that, on motion, “the court shall vacate an award made in the arbitration proceeding if: * * * (2) there was: (A) evident partiality by an arbitrator appointed as a neutral arbitrator; (B) corruption by an arbitrator; or (C) misconduct by an arbitrator prejudicing the rights of a party . . . .” (Emphasis added). The Drafting Committee explained: “The reason ‘evident partiality’ is grounds for vacatur only for a neutral arbitrator is because non-neutral arbitrators, unless otherwise agreed, serve as representatives of the parties appointing them. As such, these non-neutral, party-appointed arbitrators are not expected to be impartial in the same sense as neutral arbitrators. . . . However, corruption and misconduct are grounds to vacate an award by both neutral and non-neutral arbitrators appointed by the parties.[85] Second, Section 12 of the RUAA newly codifies a conflict-of-interest disclosure requirement for both neutral and party-appointed arbitrators of the kind created by the Supreme Court for neutrals in Commonwealth Coatings, discussed above. The terms of the requirement are modeled primarily on the AAA/ABA Code.[86] They require arbitrators to disclose to the parties and to any other arbitrators “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator in the arbitration proceeding, including: (1) a financial or personal interest in the outcome of the arbitration proceeding; and (2) an existing or past relationship with any of the parties . . . their counsel or representatives, a witness, or another arbitrator.”[87] If a party objects to an arbitrator on the basis of a disclosed fact, the objection may be a ground for vacating an award by the arbitrator under Section 23(a)(2), which is quoted above.[88] The failure of an arbitrator to make a required disclosure is also a ground on which a court may vacate an award under that same section.[89] In
connection with an earlier draft of the RUAA, the AAA expressed concern that
application of the disclosure requirement to party arbitrators would conflict
with rules of ADR service providers that do not require conflict-of-interest
disclosures by party arbitrators unless the parties agree to them.[90] The drafters’ response was to make
clear in Section 4 of the RUAA that although the parties may not enter a
pre-dispute agreement that would “unreasonably restrict the right under
Section 12 to disclosure of any facts by a neutral arbitrator,” they are free
to waive the disclosure requirement as to party arbitrators,[91] In a comment to Section 4, the
drafters indicated their view that if the parties had agreed to arbitrate
pursuant to the rules of an ADR service provider, those rules would control so
long as they are reasonable in what they require a neutral to disclose.[92] Although the AAA is evidently
satisfied with this response as far as proceedings under its rules are
concerned,[93] parties and party arbitrators in
cases under the RUAA that are not governed by rules like the AAA’s will need
to be careful to avoid inadvertently setting up a challenge to the award
based on the failure of a party arbitrator to comply with Section 12’s
disclosure requirement. C. Conclusion Some courts plainly are uncomfortable with the tripartite format.[94] So are some commentators. One blames the format for reducing public and judicial confidence in the fairness of arbitration and ensuring that it remains “inferior” to litigation.[95] The AAA/ABA Code disfavors the format and encourages parties seeking the decision of multiple arbitrators to agree that all arbitrators abide by the same rules of conduct.[96] Finally, in cases where the parties are represented by counsel, there is at least a question what value party arbitrators add to the decisional process.[97] However valid these concerns and questions may be as a matter of policy, they are entitled to little weight as a matter of law. Under the Federal Arbitration Act, parties have broad latitude to structure their proceedings as they wish, and courts and the public have only a limited interest in interfering with whatever private dispute resolution arrangements the parties may make. Moreover, so long as each side proceeds on essentially the same understanding of the ground rules of the proceeding, it is difficult to see why the parties’ arrangements should not be respected and enforced, as Congress plainly meant them to be. March 12, 2001 Biographies
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