The pitfalls of arbitrator qualification clauses.
Arbitration clauses are common in commercial agreements. One of the primary values of arbitration is the expertise and experience of arbitrators in resolving disputes in a particular industry. However, parties often underestimate the difficulties that arise in finding and agreeing upon an arbitrator who has the requisite qualifications.
For example, the authors were recently involved in an arbitration concerning the termination of a hotel management agreement. The arbitration clause provided for arbitration under American Arbitration Association (AAA) rules and required that the arbitrator have at least ten years of experience in the luxury hotel industry. After arbitration was commenced, the parties could not agree on an arbitrator. The AAA had no one on its roster that had the requisite experience. Litigation then ensured over the arbitrator selection.
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Both the Federal Arbitration Act and certain states' procedural rules contain provisions concerning arbitrator selection. Sections 5 and 206 of the Federal Arbitration Act, which apply to domestic and international arbitrations, respectively, require a court to appoint an arbitrator where the parties' agreement does not contain a method for appointing an arbitrator or the agreed fails for any reason. Similarly, in New York State, CPLR A* 7504 provides, "[i]f the arbitration agreement does not provide for a method of appointment of an arbitrator, or if the agreed method fails or for any reason is not followed . . . the court, on application of a party, shall appoint an arbitrator."
When parties ask a court to appoint an arbitrator, each party typically provides a list proposed arbitrators to the court with their respective qualifications. Each party then explains why one of its candidates should be selected and why the opposing party's candidates should not. Accordingly, before commencing litigation over arbitrator selection, the parties should first contact the proposed arbitrators to ascertain whether each one will agree to serve if selected and can render a decision within the time period defined in the arbitration agreement, if any. If the arbitrator's industry-specific qualifications are not clear from his or her resume, the parties should also ask the arbitrator about his/her prior experience (a) in the relevant industry; (b) with the relevant law to be applied; and (c) arbitrating or litigating similar disputes.
These questions are important because, when appointing an arbitrator, "the court must provide for arbitration approximating the agreement as closely as possible." )Options on Shares, Inc. v. Edwards & Hanly, 347 N.Y.S.2d 715, 716 (1st Dep't 1973).) In applying provisions for the appointment of a neutral arbitrator, such as a sole arbitrator, "the court must select the most qualified candidate." (In re Travelers Indemnity Co. v. Everest Reins, Co., No. Civ. 3:04 MC 196(TPS), 2004 WL 2297860, at *2 (D. Conn. Oct. 8, 2004).( The qualifications provided in the arbitration agreement must be considered and followed. (Id. at *3; Employers Ins. Co. v. Certain Underwriters at Lloyds of London, No. 09-cv-201-bbc, 2009 WL 3245562, at *5 (W.D. Wis. Sept. 29, 2009).)
When the arbitration agreement provides for application of particular rules of arbitration, those rules may supply additional required qualifications. (In re RLI Ins. Co. v. Kansa Reins. Co., No. 91 Civ. 4319 (MBM), 1991 WL 243425, at *3-4 (S.D.N.Y. Nov. 14, 1991) (holding that the applicable AAA Commercial Rules supplied additional requirements).) Finally, courts will also typically select an arbitrator who has "the necessary experience in managing arbitrations from the organizational hearing, through discovery, to the final hearing, deliberations, and rendition of a ruling." (Travelers, 2004 WL 2297860, at *3.)
The foregoing all begs the question: How can a dispute over arbitrator selection be avoided? Naming an arbitrator in the agreement itself is likely impractical. For example, is the arbitrator supposed to steer clear of conflicting assignments on the off chance that the parties may one day call upon him/her to arbitrate a dispute? An expert in a small industry is also likely to have numerous contacts in the industry, and perhaps hopes to receive future business from them, giving rise to more potential conflicts.
At least one obvious lesson is clear. If the parties want to require that the arbitrator have certain experience, they should first ensure that the AAA or whatever arbitration association they select actually has someone on its roster with the requisite qualifications. Indeed, the roster should have several qualified arbitrators so that the parties have choices and are less likely to be derailed by conflicts or other issues that may eliminate otherwise qualified arbitrators.
If there is any question as to whether a qualified arbitrator will be readily available, consider whether requiring industry expertise is really necessary. Most arbitrators are experienced lawyers or former judges. They typically have experience in disputes spanning disparate industries. Throughout their careers, they have had to learn about new subject matters and often in short time periods.
As in regular litigation, the industry expertise necessary to adjudicate the dispute can come from the parties, their experts, and their lawyers. A smart and experienced arbitrator should be able to learn all he/she needs to decide the case equitably. Accordingly, before inserting an arbitrator qualification clause in any agreement, consider whether the parties really require such experience. They may be unpleasantly surprised later when their goal of a quick and efficient arbitration is thwarted by a detour to court over arbitrator selection.
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