Paul Bennett Marrow ()
Arbitration is supposed to be an alternative to litigation, not a substitute. Subscribers are presumed to want to have their dispute resolved by a “private court” and a “private judge” they select and instruct to conduct the arbitration process under terms they mandate with as little judicial interference as possible. Does this mean that until an award is issued a court has no authority to supervise? Once the process is underway are the parties completely at the mercy of the arbitrator? If not, what rules govern if and when a court can be looked to for assistance?
Even though the Federal Arbitration Act (FAA) does not mention a judicial power to supervise, some courts justify intervention to overturn procedural and substantive interim arbitral decisions, claiming authority in equity, i.e. to assure the fairness and efficiency of the arbitration process. This article looks at this approach. The takeaway is that while it is possible to enlist the assistance of a court, it isn’t easy to do so. This area of arbitration law is developing and evolving and warrants a watchful eye.
FAA and Judicial Intervention
The FAA offers little justification for judicial supervision of the arbitration process. Its terms boil things down to judicial intervention in the beginning to resolve gateway and threshold issues (§§3-4), such as arbitrability and the validity of an agreement to arbitrate, and again at the end with a review of the propriety of the behavior of the arbitrator. §§9-10. (Section 2, the so called “savings clause,” sets the standards for reviewing a contract to arbitrate).
Between these goal posts, courts are given almost no authority to intervene and issue interlocutory rulings. Section 4 permits a court to determine at any time issues involving the making of the agreement, Section 5 permits a court limited involvement in arbitrator appointments, and Section 7 allows a court to compel a witness to appear before an arbitrator. Noticeably absent from the FAA is any directive allowing a court the power to critique the ongoing conduct of an arbitrator and order the arbitrator to cease and desist or if need be order a replacement.
Given this muted tone, most courts see no room for judicial intervention. As a Kansas federal district court explained in In Re Universal Serv. Fund Tel. Billing Practices Lit., 370 F.Supp.2d 1135, 1138 (D. Kan. 2005):
… the FAA does not authorize the court to interfere with ongoing arbitration proceedings by making interlocutory rulings concerning the arbitration. Under the FAA, the court’s role is limited to determining, first, the issue of whether arbitration should be compelled. Id. §§3-4. If so, then the court may next confirm, vacate, or modify the award. Id. §9-11. The court may not, however, interfere with the ongoing arbitration proceeding…. This principle is grounded in the notion that allowing such interference would frustrate the FAA’s purpose to ensure “that the arbitration procedure, when selected by the parties to a contract, [is] speedy and not subject to delay and obstruction in the courts.” Prima Paint v. Flood & Conklin Mfg., 388 U.S. 395, 404, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967).
This is the broad-spectrum sentiment of the U.S. Court of Appeals for the Second Circuit. See Duferco Int’l Steel Trading v. T. Klaveness Shipping, 333 F.3d 383, 389 (2d Cir. 2003). Compare, Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, 1067-68 (2d Cir. 1972).
A few courts see a tension between this approach and a need to uphold the bedrock principle that the arbitration process be conducted in a manner that is fair and economically efficient. If arbitral conduct is (a) offensive under any provision of FAA §10 (a) (1-4) and (b) more than likely to trigger a successful application to vacate once an award is issued, these courts intercede to avoid unfairness, inefficiency, needless expense or irreparable harm. See Aero-Jet General v. Amer. Arb. Assoc., 478 F.2d 248 (9th Cir. 1973); Metropolitan Property & Casualty v. J.C. Penney Casualty, 780 F.Supp. 885 (D. Conn. 1991); Astoria Medical Group v. Health Ins. Plan, 11 N.Y.2d 128 (1962); Gaer Brothers v. Mott, 144 Conn. 303, 309 (1957). The quantum of proof sufficient to justify intervention is the same as required for vacatur.
To date the U.S. Supreme Court hasn’t directly ruled on the existence of an equitable power justifying judicial supervision in cases arising under the FAA. But in Hall Street Associates v. Mattel, 552 U.S. 576, 590 (2008) the court noted that: “The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable…” perhaps suggesting a favorable attitude toward interlocutory appeals sounding in equity.
Where intervention has occurred, more often than not the issue has been arbitrator integrity. Consider Metropolitan Property, supra. The parties had agreed to a panel of three arbitrators, two of which were party appointed. The proceeding was ad hoc. Complainant sought an injunction barring participation of the respondent’s appointed arbitrator because the arbitrator had had numerous pre-appointment ex parte contacts with the appointing party, had accepted “hospitality” from that party, reviewed relevant evidence prior to being appointed, attempted to discuss the merits of the matter with the other party’s appointed arbitrator prior to the selection of a third arbitrator and failed to advise the other party of his ex parte activities.
The court noted that while a party-appointed arbitrator isn’t required to be neutral, an arbitrator is nevertheless “bound by ethical duties and an obligation to participate in the arbitration process in a fair, honest and good-faith manner.” (supra at 892) The court held: “The ‘just’ and ‘expeditious’ policy, therefore, would be to evaluate (complainant’s) claims on the merits of its actions for injunctive relief prior to arbitration rather than have the parties waste their time, energy, and money by participating in a potentially tainted process.” (supra at 894). In Astoria Medical Group, supra, the court held that with an agreement for a three-person panel, the mere association of an appointed arbitrator with his nominator wasn’t sufficient to establish evident partiality.
The misbehavior in Metropolitan Property was such that it irreparably destroyed the ability of the arbitrator to continue to serve. But can a court order an arbitrator to correct behavior that doesn’t involve integrity but offends FAA §10(a) (1-4) and more than likely will trigger a successful application to vacate once an award is issued? For example: In a contest involving contractual interpretation that requires the application of French law, if the arbitrator declares in good faith an intention to substitute New York law, can a court order an arbitrator to apply French law on grounds that the arbitrator’s declaration exceeds the prescribed powers of the arbitrator? This scenario frames the issue within a substantive context.
While there are no cases on point, there is at least one case where a related issue was framed within a procedural context and there the court intervened. In Belanger v. State Farm, 74 A.D.2d 938 (2d Dept. 1980) involving the interpretation of New York’s arbitration statute, CPLR §7511(1) (iii), (It is almost identical to FAA §10 (a) (4)) the court ordered the proceedings be conducted in English instead of French to “avoid the potential problems of accuracy of translations, and the costs to check and verify the translations.” (supra at 940)
The boundaries of equitable authority aren’t clear. It is hornbook law that equity will not act if a remedy at law is available. An adequate remedy at law is one that is clear, certain and complete. The ad hoc bare bone format makes no provision for supervision by a court or an administrator, so perhaps the format dictates that a remedy at law doesn’t exist where an arbitrator’s action might inflict irreparable harm. But the administered format usually allows for interlocutory appeals to an administrator with assorted powers including authority to remove an arbitrator upon a showing of misbehavior that qualifies under FAA §10 (a). For examples, see AAA Commercial Rules 2, 11 and 18, CPR Administered Rules 7.5- 7.8, JAMS Comprehensive Arbitration Rules 6 and 15 (i) and FINRA Manual §§12207, 12407 and 12408.
In addition, these rules provide that an administrator’s ruling is final and beyond review at least until after an award has been issued. At least one court has indicated a willingness to overrule an administrator’s decision notwithstanding a governing rule making that decision “final and binding” finding it likely to inflict irreparable harm. Aerojet at 251.
Does the possibility of an appeal of an award to another arbitrator constitute an adequate remedy at law? Except for FINRA, the rules of the other administrators listed above make provision for such an appeal, subject to consent by all parties. Unless parties contract to expand the scope of an appeal, the American Arbitration Association (AAA) Appellate Rule 10 frames an appeal to be on the merits. So an adequate remedy at law appears not to exist at least to review misbehavior of the type FAA §10 (a) (1-4) describes.
JAMS Optional Arbitration Procedure places no limitation on the scope of an appeal and allows the parties to define the issues that can be reviewed on appeal in the agreement to arbitrate. This appears to leave it for judicial review to determine if the arbitration agreement provides for an adequate remedy at law. CPR appellate procedure rules allow for a merits appeal or an appeal based on misbehavior of the type AAA §10 (a) (1-4) describes. See Rule 8:2 (a) and (b) leading to the conclusion these rules probably provide an adequate remedy at law.
Does intervention based on equity make sense? While there is nothing in the reported Congressional Record that suggests that Congress was concerned about the need for judicial intervention to avoid irreparable harm, see Draozal, “In Defense of Southland: Reexamining the Legislative History of the Federal Arbitration Act,” 78 Notre Dame Law Rev. 101, 122-160 (2002), there is no reason to assume that Congress wasn’t aware of the possibility that at any time an arbitrator could act so as to irrevocably harm one of the parties.
The argument that from the silence of the statute it’s safe to imply that Congress intended to leave it to the courts to supervise overlooks the specific authority Congress granted courts in FAA §§3-5 and 7. Had Congress been at all concerned it could have simply made a provision for judicial supervision of an ongoing arbitration. As was pointed out in Hall Street, supra at 587:
Instead of fighting the text, it makes more sense to see the three provisions, §§9-11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway.