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. 

   
 

* Attorney at Law, Washington, DC.

 

** Partner, Slover & Loftus, Washington, DC.

 

*** Partner, Steptoe & Johnson LLP, Washington, DC.

 

[1] In the view of one practitioner, the tripartite panel represents the second most commonly employed commercial arbitration format, after agreements to arbitrate under the rules of the American Arbitration Association.  Pantle, The Duty of an Attorney as Arbitrator to Disclose Possible Bias, 18 Colo. Lawyer 859, 864 (1989).  See also Burlington Northern R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 630 n.2 (Texas 1997) and cases cited therein; III I. Macneil, R. Speidel, T. Stipanovich, Federal Arbitration Law § 27.3.4, at 27:18 (1999 Supp.) (hereafter “Macneil Treatise”).  See generally Note, The Use of Tripartite Boards in Labor, Commercial, and International Arbitration, 68 Harv. L. Rev. 293 (1954), which, though dated in some respects, remains a useful survey of the practical realties of the tripartite format in labor, commercial and international arbitrations.

 

[2] Arbitration agreements are frequently silent on the parties’ intentions about the neutrality of their appointed arbitrators.  In those circumstances, courts usually infer that the absence of any restriction on who may be appointed permits the appointment of partisans.  See, e.g., Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 760 (11th Cir. 1993), cert. denied, 513 U.S. 869 (1994); Burlington Northern R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 630 (Texas 1997); Astoria Medical Group v. Health Ins. Plan, 182 N.E.2d 85, 87 (N.Y. 1962); Meehan v. Nassau Community College, 676 N.Y.S.2d 178, 181-82 (App. Div. 1998);  Crim v. Pepperidge Farm, Inc., 32 F.Supp.2d 326, 327, 330 (D. Md. 1999); Metropolitan Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co., 780 F. Supp. 885, 891 (D.Conn. 1991); In re Dover Steamship Co., 143 F. Supp. 738, 740-41 (S.D.N.Y. 1956).  But see Florasynth, Inc. v. Pickholz, 750 F.2d 171, 173 (2d Cir. 1984); Petrol Corp. v. Groupement D’Achat des Carburants, 84 F. Supp. 446 (S.D.N.Y. 1949).  Similarly, under the AAA’s Commercial Rules and the AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes,  party arbitrators are assumed not to be neutral unless the parties otherwise agree.  AAA Commercial Rule § R-12(b); AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes, Canon VII, Introductory Note.

 

[3] Stef Shipping Corp. v. Norris Grain Co., 209 F. Supp. 249, 253 (S.D.N.Y. 1962).  See, e.g., Lozano v. Maryland Cas. Co., 850 F.2d 1470, 1472 (11th Cir. 1988) (applying Florida law); Burlington Northern R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 638 (Texas 1997); 4 Am. Jur.2d, Alternative Dispute Resolution § 156 (1995) .

 

[4] Astoria Medical Group v. Health Ins. Plan, 182 N.E.2d 85, 90 (N.Y. 1962).

 

[5] See Premo v. Martin, 119 F.3d 764, 771 (9th Cir. 1997), cert. denied, 522 U.S. 1147 (1998).  Indeed, one court has referred to the arbitrator selected by the party arbitrators as the “real” arbitrator on a tripartite panel.  Sam Kane Packing Co. v. Amalgamated Meat Cutters & Butcher Workmen, 477 F.2d 1128, 1135 (5th Cir.), cert. denied, 414 U.S. 1001 (1973).  

 

[6] See, e.g., Astoria Medical Group v. Health Ins. Plan, 182 N.E.2d 85, 87-88 (N.Y. 1962); Yorkaire, Inc. v. Sheet Metal Workers Int’l Ass’n, 758 F. Supp. 248, 257 (E.D. Pa. 1990), aff’d without opinion, 931 F.2d 53 (3d Cir. 1991).  See generally III Macneil Treatise § 28.4.8, at 28:100 (1999 Supp.).

 

[7] E.g., Astoria Medical Group v. Health Ins. Plan, 182 N.E.2d 85, 89 (N.Y. 1962), where the court said:

 

“Our decision that an arbitrator may not be disqualified solely because

of a relationship to his nominator . . . does not, however, mean that he may be deaf to the testimony or blind to the evidence presented.  Partisan he may be, but not dishonest.”

 

[8] Metropolitan Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co., 780 F. Supp. 885, 891 (D.Conn. 1991), quoting Astoria Medical Group v. Health Ins. Plan, 182 N.E.2d 85, 87 (N.Y. 1962).

 

[9] This paper does not address analogous issues that may arise in international or labor arbitrations.

 

[10] Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270-71 (1995).

 

[11] Id.  Accord, Mastrobuono v. Sherman Lehman Hutton, Inc., 514 U.S. 52, 53-54 (1995).

 

[12] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985).

 

[13] 9 U.S.C. § 2.  In the Act, Congress meant to exercise its Commerce Clause powers to the full.  Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273-77 (1995).

 

[14] Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 479 (1989).

 

[15] Id., quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985); see Perry v. Thomas, 482 U.S. 483, 490 (1987); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967).  Although the federal statute expresses a public policy in favor of arbitration, it is ultimately the intention of the parties, as expressed in their agreement, that determines the issues to be arbitrated, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985) and the remedies available.  Mastrobuono v. Shearson Lehman Hutton, Inc. 514 U.S. 52, 58 (1995) (punitive damages).

 

[16] The federal act expresses a national policy favoring arbitration, Southland Corp. v. Keating, 465 U.S. 1, 10 (1984), applies in both federal and state courts where a transaction involves interstate or foreign commerce, Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 272 (1995), and pre-empts state law that might otherwise invalidate an arbitration agreement in such a transaction.  Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 686-88 (1996).  But, even in a transaction in interstate commerce, parties to an arbitration agreement may, through choice-of-law provisions, make state law procedures applicable to their arbitration so long as those procedures are not inconsistent with the basic federal policy favoring arbitration.  Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468 (1989). 

 

[17] Section 1 of the widely enacted Uniform Arbitration Act of the National Conference of Commissioners on Uniform State Laws echoes Section 2 of the federal statute in making written arbitration agreements “valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  This principle was carried forward in Section 6(a) of the Revised Uniform Arbitration Act (“RUAA”) adopted by the Conference last year.   In the Prefatory Note to the RUAA, the drafters  emphasized the importance of the principle that “arbitration is a consensual process in which autonomy of the parties . . . should be given primary consideration so long as their agreements conform to notions of fundamental fairness.”  The RUAA is further discussed below.

 

[18] 9 U.S.C. § 5; Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 225-27 (4th Cir. 1994).  If for any reason there is a lapse in the naming of the arbitrator(s), a court on motion may then intervene, and “unless otherwise provided in the agreement” may require arbitration by a single arbitrator.  Id.  Section 3 of the Uniform Act and Section 11(a) of the RUAA are to the same effect.   

 

[19] ATSA of California, Inc. v. Continental Ins. Co., 754 F.2d 1394, 1395 (9th Cir. 1985).  See, e.g., Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994); Orion Shipping & Trading Co. v. Eastern States Pet. Corp., 284 F.2d 419, 421 (2d Cir. 1960).

 

[20] Florasynth, Inc. v. Pickholz, 750 F.2d 171, 175 (2d Cir. 1984).

 

[21] Astoria Medical Group v. Health Ins. Plan, 182 N.E.2d 85, 88 (1962) (citation omitted).

 

[22] 9 U.S.C. § 10(a)(2).  The corresponding provision of the Uniform Arbitration Act applies to “evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct prejudicing the rights of any party.”  Uniform Arbitration Act § 12(a)(2) (emphasis added).  The limitation of the italicized phrase has been carried forward by § 23(a)(2)(A) of the RUAA.  See the discussion below.  

 

[23] III Macneil Treatise § 28.2.2 (1999 Supp.)  In Erving v. Virginia Squires Basketball Club, 468 F.2d 1064 (2d Cir. 1972), the parties had expressly agreed to arbitration before the Commissioner of the American Basketball Association, or his appointee, but the Commissioner had joined the law firm representing the party seeking to compel arbitration.  The court compelled arbitration before a substitute arbitrator, though the parties’ agreement did not provide for that outcome.  Id. at 1067-68 & n.2.  See also McConnell v. Howard University, 818 F.2d 58, 68 n.12 (D.C. Cir. 1987), in which the court said in dictum that the very theory of arbitration does not allow one of the parties to act as the judge of his own case.

 

[24] 393 U.S. 145 (1968).

 

[25] Id. at 146 (plurality opinion).

 

[26] Id. at 147 (plurality opinion), 152 (dissenting opinion).

 

[27] In separate opinions, Justices Black and Stewart, though agreeing in the result, argued for different disclosure principles, stimulating a spirited and still unresolved debate in the lower courts over which opinion should be followed and over what interests or relationships a neutral must disclose.  Compare, e.g., Morelite Constr. Corp. v. New York City Dist. Council, 748 F.2d 79 (2d Cir. 1984), with, e.g., Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994).  See generally Burlington Northern R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 632-35 (Texas 1997).

 

[28] III Macneil Treatise § 28.4 (1999 Supp.)  But see Standard Tankers (Bahamas) Co. v. Motor Tank Vessel, AKTI, 438 F. Supp. 153, 159-60 (E.D.N.C. 1977).

 

[29] The Code is available in pamphlet form from the AAA.

 

[30] Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 680 (7th Cir.), cert. denied, 464 U.S. 1009 (1983); see, e.g., ANR Coal Co. v. Cogentrix of North Carolina, Inc., 173 F.3d 493, 497 n.2 (4th Cir.), cert. denied, 120 S.Ct. 186 (1999).   The preamble to the Code states:

 

“Various aspects of the conduct of arbitrators, including some matters covered by this code, may be governed by agreements of the parties, by arbitration rules to which the parties have agreed, or by applicable law.  This code does not take the place of or supersede such agreements, rules, or laws and does not establish new or additional grounds for judicial review of arbitration awards.”  (Emphasis added.)

 

[31] See, e.g., Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753 (11th Cir. 1993), cert. denied, 513 U.S. 869 (1994); Aetna Cas. & Sur. Co. v. Grabbert, 590 A.2d 88 (R.I. 1991); Barcon Associates, Inc. v. Tri-County Asphalt Corp., 430 A.2d 214, 219-20 (N.J. 1981); Safeco Ins. Co. v. Stariha, 346 N.W.2d 663, 667 (Minn. Ct. App. 1984); Metropolitan Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co., 780 F. Supp. 885, 892-93 (D. Conn. 1991).  However, the Fourth Circuit recently pointed to the portion of the preamble italicized in note 30, above, in holding that by itself, violation of the Code would not support vacating an award.  ANR Coal Co. v. Cogentrix of North Carolina, Inc., 173 F.3d 493, 497 n.2, 499 n.4 (4th Cir.), cert. denied, 120 S.Ct. 186 (1999).  See also D.C. Bar Ethics Opinion No. 276, adopted Nov. 19, 1997, stating, at footnote 4, that rules like the Code should be consulted by attorneys who are acting as arbitrators, but “we decline to find embedded in our Rules of Professional Conduct any blanket ethical obligations to comply with” them.

 

[32]   As explained in the Introductory Note to the Canon VII, “nonneutral” is the term used by the Code to describe party-appointed arbitrators who are not expected to observe all the same standards as the third arbitrator.

 

[33] Canon VII.A.

 

[34] Canon VII.B.  Canon VII.F relaxes as to nonneutrals the rules concerning compensation of neutral arbitrators in Canon VI.D.

 

[35]   In an effort to curtail ex parte communication with party-appointed arbitrators, the AAA adopted Commercial Rule § R-20(b), expressly authorizing agreements by the parties or arbitrators to cease unilateral communication with party-appointed arbitrators once the panel has been constituted.

 

[36] Canon VII.C(2).  Under Canon VI.C, nonneutrals, like neutrals, may not inform anyone of the arbitration decision before it has been given to all parties or inform anyone concerning the deliberations of the arbitrators. 

 

[37] The Code has been under review by a team consisting of representatives of the Arbitration Committee of the ABA’s Dispute Resolution Section, the AAA and the CPR Institute for Dispute Resolution since 1997.  Kelly, “ABA Convenes Task Force to Rework Commercial Arbitration Code,” ADRWorld.com (Oct. 11, 2000).  (ADRWorld.com is an on-line subscription service at www.adrworld.com that covers developments in the field of alternative dispute resolution.)  Last fall, the ABA established a task force that is attempting to forge a consensus within the ABA on a single document that addresses both domestic and international proceedings, in which different practices concerning party-appointed arbitrators are followed.  See id.

 

[38] Canon V.B, as qualified for nonneutrals by Canon VII.E.

 

[39]   Canon VII.A(1) states that apart from the predisposition it permits, nonneutrals “in all other respects are obligated to act in good faith and with integrity and fairness.”  In illustrating these concepts, however, Canon VII.A(1) sets a notably low bar.  It says: 

 

“For example, nonneutral arbitrators should not engage in delaying tactics or harassment of any party or witness and should not knowingly make untrue or misleading statements to the other arbitrators.”

 

An ethical standard pitched to prohibiting dilatory conduct, harassment or lying to the other arbitrators is not a helpful guide for resolving the tensions in the Code described in the text.                                                                                               

 

[40] Burlington Northern R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 639 (Texas 1997).

 

[41] 10 F.3d 753 (11th Cir. 1993), cert. denied, 513 U.S. 869 (1994).  The decision is discussed in, among other places,  III Macneil Treatise § 28.4.2.2, at 28:89-28:91 (1999 Supp.); McMahon, The Role of Party-Appointed Arbitrators—The Sunkist Case, Dispute Res. J., Sept. 1994, at 66.

 

[42] 10 F.3d at 755.

 

[43] Id. at 758, 759-60.

 

[44] Id. at 756, 759.

 

[45] Id. at 760.  Meyers made a disclosure, but it consisted only of conclusory statements that he had communicated with the party nominating him in the past and intended to continue to do so.  Id. at 756 n.1.

 

[46] Id. at 760.

 

[47] Id., citing Morelite Constr. Corp. v. New York City Dist. Council, 748 F.2d 79, 83 (2d Cir. 1984).

 

[48] 10 F.3d at 760.

 

[49] Id. at 759 (emphasis added).  The court quoted from Stef Shipping Corp. v. Norris Grain Co., 209 F. Supp. 249, 251 (S.D.N.Y. 1962), in part, as follows:

 

                                “The fact that [a party-appointed arbitrator] consulted with his nominator       

                                prior to the arbitration hearing is not shocking.  It would be unrealistic to

                                expect a party engaged in an arbitration dispute to nominate an arbitrator

                                without telling him what the dispute is about.”  10 F.3d at 759.

 

[50] 10 F.3d at 760.

 

[51] Id.

 

[52] 780 F. Supp. 885 (D. Conn. 1991).

 

[53] Id. at 890, 893.

 

[54] Id. at 893.

 

[55] Id.  It is tempting to try to explain the Metropolitan decision in terms of the procedural posture of the case, which was on a motion to remand to a state court that required the District Court to resolve all legal and factual doubts in favor of the party seeking remand, which in this case was also the party challenging the arbitrator’s conduct.  Id. at 887, 889.  But, it is not clear that the court’s discussion of the arbitrator’s conduct was influenced by the procedural posture of the case.

 

[56] 933 F.2d 1481 (9th Cir. 1991).

 

[57] Id. at 1489.

 

[58] It emphasized that the arbitrator had simply surveyed the relevant issues and formulated no “fixed opinions or definite conclusions” about them.  Id. at 1489.  “Nothing in the record,” the court said, “indicates that [the arbitrator] . . . came to the arbitration hearings with a closed mind or a predilection to rule for” his party.  Id. at 1490.  The court also attached significance to the fact that all documents supplied to the arbitrator were also given to the other party and other panel members and that therefore the arbitrator enjoyed no “proven informational advantage” over his colleagues.  Id. at 1489, 1490.

 

[59] Id. at 1490.  It is impossible to know whether this narrow holding masks some unspoken discomfort about conduct that seems unexceptionable under the AAA/ABA Code of Ethics.

 

[60] 933 F.2d at 1490-91.

 

[61] The opinion of the District Court was filed in Consolidated Docket Nos. 98MC239 and 98MC277 on September 28, 2000.  In the Eighth Circuit, the case is styled Delta Mine Holding Co. v. AFC Coal Prop., Inc., 00-3646EMSL (filed Nov. 3, 2000).

 

[62] Slip Op. at 2.

 

[63] Id. at 27-28.

 

[64] Id. at 2-3.  The court found that before the hearings, the arbitrator was involved in pre-arbitration strategy sessions, witness and exhibit preparation, and a mock arbitration and that once deliberations began, he provided detailed descriptions of the discussions to counsel for the appointing party, sent a draft of the neutral’s decision to counsel and followed counsel’s suggestions in commenting on the draft to the neutral.   E.g., id. at 2, 8-9, 10-14.

 

[65] 430 A.2d 214 (N.J. 1981) (4 to 3 decision).

 

[66] 430 A.2d at 215.

 

[67] Id. at 215-16.

 

[68] Canon VII.B, discussed above.  See 430 A.2d at 218.  Like the Federal Arbitration Act but unlike the Uniform Act, the New Jersey arbitration statute “draws no distinction between neutral and party-designated arbitrators,” providing for vacation of arbitration awards in the event of “evident partiality or corruption in the arbitrators, or any thereof  . . . .”  Id. at 219 (emphasis in original) (citation omitted).  See also id. at 224.

 

[69] 430 A.2d at 222-23 (emphasis in original).  In Donegal Ins. Co. v. Longo, 610 A.2d 466 (Pa. Super. Ct. 1992), the court held that a lawyer could not serve as a party arbitrator on a tripartite panel while simultaneously representing the appointing party in an unrelated matter.  “The existence of such a relationship . . .,” the court said, “creates too great a likelihood that the arbitrator will be incapable of rendering a fair judgment” and “conflicts with basic standards of due process.”  Id. at 469. 

 

[70] Id. at 224.

 

[71] Astoria Medical Group v. Health Ins. Plan, 182 N.E.2d 85, 88 (N.Y. 1962).  As the court in Astoria noted,

 

“The right to appoint one’s own arbitrator, which is of the essence of tripartite arbitration . . . would be of little moment were it to comprehend solely the choice of a ‘neutral.’  It becomes a valued right, which parties will bargain for and litigate over, only if it involves a choice of one believed to be sympathetic to his position or favorably disposed to him.”  Id.

 

[72] This is a particularly serious problem since the concept of “evident partiality” is subjective to begin with.  For example, the “standard” in Barcon Associates appears to be whether an arbitrator looks “too partial.”  430 A.2d at 221; see Arista Marketing Associates, Inc. v. The Peer Group, Inc., 720 A.2d 659, 667 (N.J. App. Div. 1998); Allwood Plumbing & Heating Co. v. Local Union 274, 489 A.2d 1243 (N.J. App. Div. 1985).

 

[73] 960 S.W.2d 629 (Texas 1997).

 

[74] At the same time, the party arbitrator’s partner had no knowledge of the pending arbitration or that the neutral was serving on an arbitration panel with a member of his firm.  Id. at 631.

 

[75] Id. at 637.

 

[76] Id. at 639.  See also Ad-Med, Inc. v. Iteld, 728 So.2d 556, 559 (La. Ct. App. 1999).

 

[77] Id. at 630.  The court noted that this is “an often-used arbitration format.”  Id. at 630 n.2.

 

[78] 590 A.2d 88 (R.I. 1991).

 

[79] Id. at 92.

 

[80] III Macneil Treatise § 28.4.2 at 28:87 (1999 Supp.).

 

[81] Kelly, “Revised Arbitration Act Approved by State Law Commissioners,” ADRWorld.com (Aug. 4, 2000).  The final version the RUAA, dated December 13, 2000, with Prefatory Note and Comments, is easily accessed through the link from the Conference’s website, www.nccusl.org., to the website of the University of Pennsylvania Law School, www.law.upenn.edu.  Revision of the Uniform Arbitration Act began in 1997, and drafts and other material relevant to the development of the RUAA are available at the same site.

   

[82] Kelly, “ABA House of Delegates Adopts Revised Uniform Arbitration Act,” ADRWorld.com (Feb. 23, 2001).

 

[83] Kelly, “AAA Urges Adoption of Revised Arbitration Act in Current Form,” ADRWorld.com (July 12, 2000).  See also Staff Reporters, “NAF Endorses Revised Arbitration Act, Plans Lobbying Effort,” ADRWorld.com (March 1, 2001); Kelly, “Revised Arbitration Act Approved by State Law Commissioners,” ADRWorld.com (Aug. 4, 2000).

 

[84] Kelly, “RUAA Seen As Model for Amendments to Federal Arbitration Act,” ADRWorld.com (July 27, 2000).

 

[85] RUAA § 23, Comment A.1.

 

[86] RUAA § 12, Comment 2.

 

[87] RUAA § 12(a).  Section 12(b) makes the disclosure obligation a continuing one as to facts an arbitrator learns after accepting appointment that a reasonable person would consider likely to affect the arbitrator’s impartiality.

 

[88] RUAA § 12(c).

 

[89] RUAA § 12(d).

 

[90] Kelly, “Final Arbitration Act Allows for Waiver of Arbitrator Disclosure,” ADRWorld.com (May 2, 2000).  AAA Commercial Rule § R-19 requires disclosures by, and permits challenges to neutral arbitrators only.  Commercial Rule § R-12(b) exempts party arbitrators from disqualification pursuant to § R-19.

 

[91] RUAA § 4(b)(3).

 

[92] RUAA § 4, Comment 4.b, citing AAA Commercial Rules §§ 12(b), 19, discussed in note 90, above.

 

[93] Kelly, “AAA Urges Adoption of Revised Arbitration Act in Current Form,” ADRWorld.com (July 12, 2000); AAA, “UAA Drafters Respond to AAA Comments,” ADR Currents (June-Aug. 2000), at 4.

 

[94] E.g., Barcon Associates, Inc., v. Tri-County Asphalt Corp., 430 A.2d 214 (N.J. 1981); Metropolitan Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co., 780 F. Supp. 885 (D.Conn. 1991).

 

[95] Kennedy, Predisposed With Integrity:  The Elusive Quest for Justice in Tripartite Arbitrations, 8 Geo. L.J. Ethics 749, 781 (1995).  The author elaborates:

 

“Permitting arbitrations to be conducted by arbitrators who are allowed to meet with witnesses, prepare exhibits, and assist in case preparation ‘ghettoizes’ arbitration, thereby maintaining a tiered system of dispute resolution that resigns [sic] arbitration to an inferior status when compared to litigation.”  Id. at 782.

 

[96] See Preamble to the AAA/ABA Code.  Last year, the CPR Institute for Dispute Resolution introduced an innovative “screened” procedure in § 5.4 of its Rules for Non-Administered Arbitrations, which gives parties the option of appointing arbitrators to tripartite panels who are not told which party appointed them.  Kelly, “CPR Institute for Dispute Resolution Offers New Arbitration Rules,” ADRWorld.com (Aug. 18, 2000).  The rules and explanatory commentary are available on the CPR Institute’s website, www.cpradr.org.

 

[97] See Pantle, The Duty of an Attorney as Arbitrator to Disclose Possible Bias, 18 Colo. Lawyer 859, 864-65 (1989), noting that neutral arbitrators neither trust nor speak openly with party arbitrators.  If they want to, the parties or the arbitration panel can mitigate this problem by agreeing to cut off ex parte communications with the party arbitrators, as, for example, under § R-20(b) of the AAA’s Commercial Arbitration Rules.  For discussion of the pros and cons of the tripartite format in commercial arbitrations, see III Macneil Treatise § 27.3.4 (1999 Supp.); Note, The Use of Tripartite Boards in Labor, Commercial, and International Arbitration, 68 Harv. L. Rev. 293, 318-23 (1954).
   
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