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Arbitrator-Neutrality Rule Reflects Change in Ethics

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Arbitrator-Neutrality Rule Reflects Change in Ethics

Source: Daily Journal
Date: April 14, 2004
A well-drafted arbitration clause specifies the number of arbitrators and designates a selection process. Reference to an arbitral institution or its rules in the clause is sufficient to adopt that institution's selection process.

Most institutions' rules assume a sole arbitrator unless the parties expressly provide for three. American Arbitration Association Commercial Arbitration Rules ("AAA 2003 Rules"), Rule R-15 (sole arbitrator unless AAA in its discretion directs appointment of three arbitrators); JAMS Comprehensive Arbitration Rules and Procedures ("JAMS Rules"), Rule 7(a).

Other institutions take the opposite approach. See, e.g., CPR Dispute Resolution Institute, "Rules for Non-Administered Arbitration of Business Disputes," Rule 5.1 (two party-appointed arbitrators and a presiding arbitrator unless the parties have agreed to a sole arbitrator); International Chamber of Commerce, "Rules of Conciliation and Arbitration," Article 2, Section 5 (International Chamber Court determines size of panel unless the parties specify it in their agreement).

Domestic arbitrations commonly involve tripartite panels 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."

In the past, that language usually was interpreted to mean that the party arbitrators will be non-neutral. See Sunkist Soft Drinks Inc. v. Sunkist Growers Inc., 10 F.3d 753 (11th Cir. 1993), certiorari denied, 513 U. S. 869 (1994). That assumption also was made by the American Arbitration Association's pre-July 2003 Commercial Arbitration Rules ("AAA former Rules") (Rule R-12(b)). Rule R-12(b) now makes the opposite assumption and refers the parties to Rule R-17(a) for the procedure by which parties may agree that their appointed arbitrators shall be non-neutral.

This change was prompted by the recent revision of the Code of Ethics for Arbitrators in Commercial Disputes. The AAA and the American Bar Association (and particularly its dispute resolution and international law and practice sections) revised and updated the Code of Ethics to address modern practice and ethical standards, effective April 1, 2004. The most important change in the Revised Code of Ethics reflects the recent trend away from non-neutral party-appointed arbitrators and the heightened expectations of independence and neutrality of commercial arbitrators.

The Code of Ethics permits parties to choose any process that they wish, including the use of tripartite panels that include non-neutral party-appointed arbitrators. This is consistent with the principle of party autonomy in arbitration, which prevents a court from overriding the terms of the parties' agreement. Federal Arbitration Act ("FAA"), 9 U.S.C. Section 5; Code of Civil Procedure Section 1281.6 ("If the arbitration agreement provides a method of appointing an arbitrator, such method shall be followed"). Thus, the parties may agree in the clause or after a dispute arises that the party-appointed arbitrators shall be non-neutral; the absence of an express agreement for non-neutrality now means that the "default" provision of the Code of Ethics treats all arbitrators as neutrals and applies to them all rules applicable to neutral arbitrators, including disclosure obligations and the right of the nonappointing party to disqualify a party-appointed arbitrator.

This development has important consequences for the ethical standards that are applied to arbitrators in California. Before the development of statutory disqualification standards in California, it was understood that disclosures are required of only the neutral arbitrator because the party-appointed arbitrator was expected to be biased. Tate v. Saratoga Savings & Loan Ass'n., 216 Cal.App.3d 843 (1989). However, the conduct of a party-appointed arbitrator might nonetheless give rise to the vacating of an award for "corruption."

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

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

Before the most recent revision to the Code of Ethics, the AAA former Rules did not require disclosure by party-appointed non-neutral arbitrators (see AAA former Rule R-19(a)), even though the original 1977 text of the Code of Ethics for Arbitrators in Commercial Disputes suggested that disclosures ought to be made (Canon VII.B). Both the Revised Code of Ethics (Canon II) and the AAA 2003 Rules (AAA 2003 Rules, Rule R-16) now require disclosure of all arbitrators regardless of their status.

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 if they were nominated as non-neutral arbitrators.

No express provision governs disclosure by neutral or non-neutral arbitrators in the Federal Arbitration Act. Case law, however, 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 probably applies to party-appointed arbitrators, as well. See Sphere Drake Insurance Ltd. v. All American Life Ins. Co., 307 F.3d 617 (7th Cir. 2002) (party arbitrator's failure to disclose the full extent of prior unrelated representation of party that appointed him did not establish evident partiality because the arbitrator met the judicial standards for impartiality); cf. Delta Mine Holding Co. v. AFC Coal Properties Inc., 280 F.3d 815 (8th Cir. 2001) (when parties have agreed to non-neutral party-appointed arbitrators, the award should not be vacated "unless the objecting party proves that the party arbitrator's partiality prejudicially affected the award"); Employer's Insurance of Wausau v. National Union Fire Insurance Co., 933 F. 2d 1481 (9th Cir. 1991).

The Revised Uniform Arbitration Act maintains the distinction between neutral and party-appointed arbitrators. See RUAA 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 that might not require disclosure.

This dichotomy between federal and state standards presents interesting issues for non-neutral arbitrators in California. They are clearly excluded from any disclosure obligation under the California Arbitration Act and the Arbitrator Ethics Standards, but there is authority that under the FAA that disclosure is required. Given the very broad reading that courts give to the jurisdictional provisions of the FAA (e.g., Allied Bruce-Terminix Cos. Inc. v. Dobson, 513 U.S. 265 (1995)), most cases large enough to warrant a tripartite panel likely will have some basis for arguing that the transaction involves an issue "in commerce" and that the FAA therefore applies.

This ambiguity can be addressed in each case by an understanding between the parties as to their appointed arbitrators' status. See Canon of Ethics, Canon IX.C (duty of arbitrator to ascertain his or her status; and Canon III re procedure for permissible ex parte communications). This determination necessarily ought to include a discussion of the obligation of the party-appointed arbitrators to make disclosures to the parties and to the neutral arbitrator (Canon II). The neutral arbitrator also is responsible for the parties having a common understanding of the roles of their respective appointed arbitrators and the procedures that shall apply to them, preferably early in the process and preferably documented in a writing.

In international arbitrations, party arbitrators are expected to be independent and not to engage in ex parte communications with their appointing party after their appointment. 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). See International Chamber Court Rules of Arbitration, Article 7(1) (every arbitrator shall be independent of the parties involved in the arbitration). 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, California Code of Civil Procedure Section 1297.13, this issue is of particular concern in this state. The Arbitrator Ethics Standards don't apply to international matters. See Standard 3(b)(2)(A).

Richard Chernick 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.

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