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A recent ruling from a California appellate court has upheld a party’s right to disqualify an arbitrator, despite an American Arbitration Association rule that said the group maintained “conclusive” authority over the disqualification process. The decision is the first to reinforce a party’s right to disqualify since California revised its arbitration laws in 2001 to require stricter disclosure from arbitrators. California has led the nation in the use of alternative dispute resolution (ADR) and its Legislature has been at the forefront in passing strict disclosure rules to ensure the neutrality of arbitrators, said Cliff Palefsky of San Francisco’s McGuinn, Hillsman & Palefsky. “There is clearly a trend across the country and courts are taking a heightened interest in the fairness of the rules and in the neutrality of the provider,” said Palefsky, who has been an outspoken critic of mandatory arbitration. Legislatures in California, New York, Texas, New Jersey and Alabama are all considering or have already passed similar disclosure obligations, Palefsky noted. Reinforces California law The appellate court’s decision in Azteca Construction v. ADR Consulting No. C045316 (Cal. Ct. App., 3rd Dist.) is important because it reinforces that the stricter provisions passed by the California Legislature cannot be waived or superseded by a private contract. The case involved a dispute between Azteca Construction and ADR Consulting arising out of a contract where ADR would provide consulting services to Azteca. The contract contained a clause that any disputes would be arbitrated pursuant to the rules of AAA. A payment dispute ensued and ADR served a demand on Azteca for arbitration in October 2002. Azteca Construction moved to disqualify the arbitrator after his disclosure statement, which is required under state law, showed that he and ADR’s counsel had both been lawyers at the same construction company 15 years before. AAA refused to disqualify him. Azteca sued in the Superior Court of Sacramento County to enforce its right under state law. The trial court sided with AAA, saying that Azteca had waived its rights by agreeing to AAA arbitration, and more specifically, the rule giving the AAA “conclusive” authority over challenges to the arbitrator’s neutrality. The appellate court said the trial court erred and vacated the judgment against Azteca. “As long as the objection is based on a required disclosure, a party’s right to remove the proposed neutral by giving timely notice is absolute,” wrote the court. Azteca’s counsel, Alan Martini of Sheuerman, Martini and Tabari in San Jose, Calif., noted that before 2001, the standard in California-that still exists in many states-would have required Azteca to show cause, or a “reasonable perception of bias,” to remove the arbitrator. But the court made it clear that Azteca could remove the arbitrator once he made disclosures required under California law. The impetus of the court’s decision is to promote public confidence in arbitration, said Martini. “The court said it’s against public policy to let AAA have entire control over the arbitration proceeding from cradle to grave,” Martini said. Eric Tuchmann, general counsel of the AAA, said the group knows the importance of arbitrator disclosure and does everything to promote it. AAA provides arbitrators a seven-page disclosure worksheet, and part of their training includes disclosure. “It would be inaccurate to state or imply that AAA tried to run around California standards,” Tuchmann said. “This is the first time a court has spoken on this issue and we’ll modify our provisions.” However, AAA may not drop the “conclusive” authority rule, Tuchmann noted. AAA’s rules are written for national and international application, and unlike California, most states still require a party to show evidence of the arbitrator’s bias to vacate an award. ADR’s counsel George R. Gore, a solo practitioner in El Dorado Hills, Calif., noted that the Azteca decision could have a negative effect on arbitration if it means that the court will get involved every time the parties cannot agree on a neutral. One party can continually frustrate the process by disqualifying arbitrator after arbitrator, he said. McAree’s e-mail address is [email protected].

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