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Disclosure Rules May Apply to Party-Appointed Arbitrators

Disclosure Rules May Apply to Party-Appointed Arbitrators

Source: Los Angeles Daily Journal (Focus)
Date: February 12, 2003

A well-drafted arbitration clause will specify the number of arbitrators and designate a selection process. Reference in the clause to an arbitral institution or its rules is sufficient to adopt that institution's selection process.

The rules of most institutions assume that there shall be a sole arbitrator unless the parties expressly provide for three. See American Arbitration Association Commercial Arbitration Rules, Rule R-17 (sole arbitrator unless AAA in its discretion directs appointment of three arbitrators); JAMS Comprehensive Arbitration Rules and Procedures, Rule 7(a).

Other institutions take the opposite approach. See, for example, CPR Institute for Dispute Resolution Rules for Non-Administered Arbitration of Business Disputes, Rule 5.1 (two party-appointed arbitrators and presiding arbitrator unless parties have agreed to sole arbitrator); International Chamber of Commerce, Rules of Conciliation and Arbitration, Article 2, Section 5.

In domestic arbitrations, it is common for tripartite panels to be formed by the designation of party arbitrators by each party and the selection of the presiding arbitrator jointly by the party arbitrators or the administering institution. Such a clause might read: "Each side shall select an arbitrator and they shall select the third arbitrator."

Such a clause usually assumes that the party arbitrators will be non-neutral. Courts infer from such clauses that the absence of any restriction on who may be appointed permits the appointment of non-neutral arbitrators. Sunkist Soft Drinks Inc. v. Sunkist Growers Inc., 10 F.3d 753 (11th Cir. 1993), cert. denied, 513 U.S. 869 (1994). The same assumption is made by the AAA's Commercial Arbitration Rules (Rule R-12(b)) and by the introductory note to the Code of Ethics for Arbitrators in Commercial Disputes, Canon VII.

The principle of party autonomy in arbitration prevents a court from overriding the terms of the parties' agreement. Federal Arbitration Act, 9 U.S.C. Section 5. California law is in accord. Code of Civil Procedure Section 1281.6. Thus, the parties may agree in the clause or after a dispute arises that the party-appointed arbitrators shall be neutral and that all rules applicable to neutral arbitrators, including disclosure obligations, shall apply to them.

Are there any limitations on who may be appointed as a party arbitrator? More precisely, what obligations of disclosure and what rights of disqualification apply to party-appointed arbitrators?

Before the development of statutory disqualification standards in California, disclosures were required only of the neutral arbitrator, because the party-appointed arbitrator was expected to be biased. Tate v. Saratoga Savings & Loan Assn., 216 Cal. App.3d 843 (1989). However, the conduct of a party-appointed arbitrator could give rise to the vacatur of an award for "corruption" (Tate).

Only the neutral arbitrator needs to make disclosures of prior service as an arbitrator. Code of Civil Procedure Section 1281.9(a), (b), (c), (d). The new Ethics Standards for Neutral Arbitrators in Contractual Arbitration promulgated by the California Judicial Council, California Rules of Court, Appendix, Division VI, expressly do not apply to non-neutral arbitrators. Standards 2 (a), (q), 3 (b) (1).

However, where the parties, the clause or the rules intend or require a party-appointed arbitrator to be neutral, disclosure is required, and the disqualification process applies. For example, Insurance Code Section 2071 requires the appointment of "disinterested appraisers" by each side, who then select a disinterested umpire. The California Arbitration Act governs the appraisal process of Section 2071. Louise Gardens of Encino HOA v. Truck Ins. Exch. Inc., 82 Cal. App.4th 648 (2000).

In Michael v. Aetna Life & Casualty Ins. Co., 88 Cal. App.4th 925 (2001), the court held that a challenge to a party-appointed appraiser who had some limited business connection with the party appointing him, which was not disclosed, did not provide a basis for vacating the award.

Dictum in Michael suggests that all party-appointed arbitrators are subject to the disclosure and disqualification process. That case was decided before the adoption of the arbitrator ethics standards and is therefore not reliable on this issue.

Disclosure by a party-appointed arbitrator is not required in AAA arbitrations (see AAA Commercial Rule R-19(a)); however, the Code of Ethics for Arbitrators in Commercial Disputes (adopted by the AAA in 1977) suggests that disclosures ought to be made, although the disclosure "need not include as detailed information as is expected from persons appointed as neutral arbitrators" (Canon VII.B).

JAMS has no express rule regarding disclosure, but JAMS arbitrators follow applicable law regarding disclosure and, therefore, under the arbitrator ethics standards, would not be required to make disclosures in a California arbitration.

There is no express provision regarding disclosure as to neutral or non-neutral arbitrators in the Federal Arbitration Act. Case law suggests that arbitrators must disclose to the parties "any dealings that might create an impression of possible bias." Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968).

The requirement of disclosure is probably applicable to party-appointed arbitrators as well. See Sphere Drake Ins. Ltd. v. All Am. Life Ins. Co., 307 F.3d 617 (7th Cir. 2002) (party arbitrator's failure to disclose full extent of prior unrelated representation of party that appointed him did not establish evident partiality because arbitrator met judicial standards for impartiality); Employer's Ins. of Wausau v. National Union Fire Ins. Co., 933 F.2d 1481 (9th Cir. 1991).

The Revised Uniform Arbitration Act maintains the distinction between neutral and party-appointed arbitrators. See Section 23(a) (vacatur). But disclosures are required of all arbitrators (Section 12), subject to the party's waiver of that obligation directly or as a result of the selection of rules of an administering body.

What limitations are there on the conduct of the party-appointed arbitrator? Non-neutral arbitrators must comply with Canon I of the Code of Ethics for Arbitrators in Commercial Disputes and uphold the integrity and fairness of the arbitration process.

It commonly is accepted, however, that party-appointed arbitrators are not and cannot be neutral in the sense that an independent arbitrator or judge is. Stef Shipping Corp. v. Norris Grain Co., 209 F.Supp. 249 (S.D.N.Y. 1962); Astoria Med. Group v. Health Ins. Plan, 182 N.E.2d 85, 87 (N.Y. 1962).

Courts usually permit party-appointed arbitrators to have ex parte communications with parties, counsel and witnesses on matters of substance and permit conduct that clearly reveals a predisposition to the position of the party that appointed him or her.

In Employer's Insurance of Wausau, the 9th U.S. Circuit Court of Appeals rejected a challenge to an award where a party-appointed arbitrator had performed consulting services with counsel on the issues in dispute and where ex parte communications had occurred throughout the matter (by both party-appointed arbitrators). See also Delta Mine Holding Co. v. AFC Coal Props. Inc., 280 F.3d 815 (8th Cir. 2001); Sphere Drake Ins. (accord).

The best way to be sure that the parties agree about the role and status of their party arbitrators is by reference to the Code of Ethics for Arbitrators in Commercial Disputes. Canon VII of the code sets out specific standards for party arbitrators ("nonneutral arbitrators") and deals with such issues as ex parte contacts before and after appointment, disclosure of party arbitrators' interests and relationships, conduct of the hearing and, importantly, the decision-making process.

It is the responsibility of the neutral arbitrator to be sure that the parties have a common understanding of the roles of their respective appointed arbitrators, preferably early in the process and preferably documented in a writing.

In international arbitrations, party arbitrators must be independent and not engage in ex parte communications with their appointing party after their appointment. See International Bar Association, Rules of Ethics for International Arbitrators (reflecting the continental view that every arbitrator, whatever the method of appointment, should be impartial and independent); ICC Rules of Arbitration, Article 7(1); see also AAA International Arbitration Rules, Article 7.

Failure to adhere to this practice may jeopardize enforcement of the award outside the United States. Because of the extremely broad definition of "international" arbitrations contained in California's International Arbitration Act, Code of Civil Procedure Section 1297.13, this issue is of particular concern in this state. The arbitrator ethics standards are not applicable to international matters. See Standard 3(b)(2)(A).


Richard Chernick, Esq. is an arbitrator and mediator and is managing director of the JAMS arbitration practice. He is a co-author of The Rutter Group's "California Practice Guide - Alternative Dispute Resolution."

Copyright 2003 Daily Journal Corporation. Reprinted with permission.