Conflict Resolution

Arbitration Panel Held Insufficiently Biased

From Liz Kramer’s Arbitration Nation (via Paul Lurie) comes notice of a delightful ruling from the Texas Supreme Court vacating an arbitration award because the panel was insufficiently prejudiced.

In Americo Life, Inc. v. Myerthe Texas Supreme Court was confronted with an arbitration agreement  providing that disputes were to be brought before a three-person panel, with each party naming a panelist and the third selected by the first two.  It also provided that (with modifications irrelevant to this case) the panel was to conduct the proceeding using AAA Rules.

At the time the agreement was entered into, AAA Rules did not require that party-appointed arbitrators be neutral.  By the time the dispute arose they did.  Americo’s first choice of arbitrator was objected to as partial, and so was its second choice.  The AAA struck the appointed panelist in each case.  Myer didn’t challenge Americo’s third choice and the case went forward. But when Myer tried to confirm the final award, Americo successfully argued that the AAA’s striking its choice of panelist was in derogation of the parties’ arbitration agreement.  The trial court vacated the award, the appellate court reversed the trial court, the Supreme Court reversed the appellate court and remanded, the trial court again vacated, the appellate court again reversed, and the Supreme Court again reversed and confirmed the vacating of the award — almost 10 years after the arbitration had begun.

The Supreme Court observed that an arbitration panel derives its authority from the agreement of the parties, and by obverse deduction an arbitration panel that was selected by a method in derogation of the agreement lacks jurisdiction.  The practice of party-appointed arbitrators’ advocating with a neutral chair was “commonplace” when the parties agreed to this process, held the court.

(Indeed, I remember that when I joined CPR in 1998, one of the distinctions in its Arbitration Rules was a requirement that all arbitrators be neutral.  It even had a provision by which a party could appoint an arbitrator without the arbitrator knowing which party appointed her.)

And, held the court, where the arbitration agreement indicates a term at variance with the AAA Rules, then the terms of the agreement must prevail.  In light of the contemporaneous provisions of the Rules — allowing party-appointed arbitrators to be advocates — and the absence of any requirement of neutrality in the agreement, the refusal to allow Americo to appoint an arbitrator of its choice robbed it of the benefit of its agreement, and robbed the panel of its jurisdiction.

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