No Breach by Arbitrator Who Declines to Arbitrate

Some time ago I brought to readers’ attention a case holding that an attorney who was alleged to have committed malpractice during a mediation could not be sued because confidentiality barred the introduction of evidence of the attorney’s behavior during the mediation. 

Now we have the arbitration side of the coin:  A party that engaged an arbitrator to render a final and binding award, and that participated in a series of evidentiary hearings, has no recourse when, at the end of the last hearing, the arbitrator declines to issue an award on the ground that he has become “too compassionate towards both sides.”  The full text of the January, 2010 decision of the California Court of Appeals may be found here.

In 2000, Morgan Phillips, Inc., a retailer of specialty beds, hired John Bates of JAMS to assist it in resolving a claim asserted the year before against one of its suppliers, which allegedly had sold Morgan Phillips inferior goods.  A settlement was reached that provided, in part, that any further disputes “will be submitted to [Bates] for binding resolution.”

Two years later Morgan Phillips was again dissatisfied with products provided by the supplier and invoked that provision, seeking that Bates provide a binding resolution.  Bates held hearings on September 11 and October 25, 2002, and requested neither additional evidence nor written submissions.  Morgan Phillips advised that it was in severe financial distress and would be unable to continue business if the dispute were not decided promptly.

However, according to Morgan Phillips, Mr. Bates did not render a decision.  Rather, he met ex parte with each side, shuttled back and forth between them with various settlement proposals, and then announced that he had decided to withdraw as arbitrator, and refused to issue a binding arbitration award.

(A hilarious video snippet illustrating the ludicrous nature of this situation may be found here.)

During discovery on its subsequent action against Bates and JAMS for breach of contract, Morgan Phillips learned that Bates had never conducted an arbitratrion, never made an award constituting a “binding resolution,” was not experienced in doing so, was not competent to do so, and never intended to do so.  It therefore moved to amend its complaint against Bates to include a claim of fraud.

Mr. Bates and JAMS moved for summary judgment in their favor and the trial court granted it.  The trial court reasoned that the parties’ agreement that Mr. Bates provide a “binding resolution” did not mean that he would arbitrate, but rather that he would engage in “binding ADR of a type or types to be determined by Bates in his sole discretion.”  The hearings were not arbitration hearings but rather “fact-finding sessions” or “mediations.” Nevertheless, the trial court held, Bates was arbitrator enough to avail himself of immunity from any damages flowing from his decision to withdraw because of a substantial doubt of his ability to be fair and impartial.  “The narrow exception to arbitral immunity occasioned by breach of contract by failing to make a decision does not apply here,” reasoned the trial court.  “Bates did not fail to make a decision.  Bates properly recused himself from the binding portion of his ADR effort.”

The California Court of Appeals, in a decision issued January 28, 2010 (more than a full — and expensive — decade after Morgan Phillips filed the original suit) agreed, though it seemed to concede that Mr. Bates acted as an arbitrator rather than a mediator:  “An arbitrator’s decision to withdraw based on ethical standards is integral to the arbitral function,” the Court of Appeals held; “the act itself, as well as the consequent failure to render an arbitration award, is covered by arbitral immunity.”

The same outcome would prevail if he were acting as a mediator, said the Court of Appeals, inserting for the first time uncertainty about Bates’ gender: “[I]f the undisputed facts demonstrate that Bates recused himself or withdrew from providing a binding resolution based on a doubt whether he or she [sic] could be fair and impartial, that act would be integral to his quasi-judicial function and would therefore be covered by arbitral or quasi-judicial immunity.”

(The ethical basis articulated by Bates was “that he felt he was compassionate to both sides and could not render an impartial ruling.”  That quandary would seem to present an ethical obstacle to a lot of arbitrators.)

Nor did it trouble the Court of Appeals that Bates presented himself as too compassionate to arbitrate impartially, but not too compassionate to mediate impartially.  “All functions integral to the dispute resolution process are shielded by absolute immunity,” at least in California.    

According to an article published a month after the Court of Appeals decision, Mr. Bates charges $6,000 a day for his services.   I don’t know whether Morgan Phillips paid his invoice for his services in this case. 

Whatever the justification, the end result seems to be that you can sue a car manufacturer who takes your money and the car won’t work, and you can sue a broker who takes your money and doesn’t make the trade, but you can’t sue an arbitrator who takes your money and then won’t arbitrate.  I’d like a piece of that pie if it gets passed around again!

And I think I’ll leave to others the task of counselling Morgan Phillips, Inc., about whether to insert an ADR clause in its next vendor contract.

1 Comment
  1. When asked to conduct a “med-arb” as Judge Bates apparently agreed to do, I use this language in my Agreement for Mediation and Arbitration Services to protect the process: “In agreeing to retain Sands both to mediate and arbitrate their dispute, Disputing Parties waive any objections they may have that, in mediation, Sands may receive ex parte communications and learn factual matters that will not be part of the record of their arbitration proceeding and assert their acceptance of Sands’ ability, should mediation fail to settle any or all of the issues before him, to arbitrate and decide the remaining issues based exclusively on evidence in the record.” It puts the parties on express notice of the nature of the process and gives me a modicum of comfort going into what can be a touchy situation. Of course, I don’t accept med-arb cases unless I know the parties’ counsel and trust both their professionalism and control over their clients.

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