Arbitrator selection represents one of the most critical acts undertaken by any party to a dispute. After all, the arbitrator is empowered to render an unassailable decision that is rarely subject to appellate review.

In recognition of this authority, both the Revised Uniform Arbitration Act (RUAA) and alternative dispute resolution organizations generally require the disclosure of potential conflicts of interest; the RUAA further notes that a party may object to the appointment of an arbitrator based upon such disclosure, and the conflict may be a ground for vacating an award.

Often, however, such concerns about conflicts appear to be of little importance as the parties elect a process in which they agree to the selection of two "non-neutral arbitrators" who together select a "neutral arbitrator."

The notion of a non-neutral arbitrator is often deemed offensive, particularly in international arbitrations. Moreover, several ethical codes specifically prohibit the appointment of a non-neutral arbitrator, and require that even party-appointed arbitrators must be independent and impartial.

Nonetheless, in the United States, it is generally understood that the non-neutral arbitrator does, to a certain extent, represent the interests of the appointing party. The non-neutral may be permitted to have conflicts and to communicate ex parte with the appointing party (often with the understanding that the other party and arbitrators be advised of such contact). For example, Canon 10 of the AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes, while expressing a preference for all neutral arbitrators, does allow the appointment of "non-neutrals" who may engage in conduct that would be incompatible with the duties of a neutral arbitrator.

An additional complication arises, however, when the arbitration agreement calls for the appointment of non-neutral arbitrators in cases where there are multiple parties. Consider, for example, a breach of contract claim brought against several defendants, each of whom is pointing an accusatory finger at the others. How is the defendants’ arbitrator to be selected when the arbitration agreement contemplates the appointment of but a single non-neutral arbitrator by a single defendant?

Recently, a federal district court was confronted with such a situation and attempted to structure a procedure addressing the interests of the parties in the selection of arbitrators. The attempt was ultimately rejected by the U.S. Court of Appeals for the Fifth Circuit in BP Exploration Libya v. ExxonMobil Libya v. Noble North Africa, 689 F. 3rd 481 (2012).

The appellate court explained that the case arose from an underlying dispute alleging the breach of an assignment agreement "implicating the interests of these three parties, under an agreement that seems designed for a two-party dispute."

The agreement among the three parties provided that for any dispute in which Noble North Africa Ltd. was a party, the matter would be arbitrated before three arbitrators appointed in accordance with the rules of the Arbitration and Conciliation Act 1990 (ACA). The ACA provided that the first party would appoint its arbitrator, the respondent party had 30 days to appoint its arbitrator, and the two appointees had 30 days to appoint the third arbitrator. In each case, if an appointment was not made within the 30-day period, application might be made to the relevant appointing authority.

In this case, ExxonMobil Libya Ltd. took the position that BP Exploration Libya Ltd. was responsible for paying Noble under an assignment agreement, and BP disclaimed any such obligation; this left Noble without any party to pay its entitled rate. Accordingly, Noble served an arbitration demand on both BP and Exxon and concurrently designated its arbitrator. In response, both BP and Exxon disavowed any idea that they should be considered as a single defendant, and each designated its own arbitrator, resulting in three party-appointed arbitrators.

The district court entered an order "that the three arbitrators previously appointed by the parties shall unanimously select two neutral arbitrators and the arbitration shall proceed with a panel of five arbitrators. If they are unable to unanimously agree within 30 days, the Secretary-General of the Permanent Court of The Hague shall appoint the two remaining arbitrators for this dispute."

The Fifth Circuit agreed that there had been a breakdown in the appointment process, and that the district court had the authority to intervene, but rejected the manner in which such authority was exercised.

The appellate court recognized that "the district court must respect the intentions of the parties as demonstrated in their arbitration agreement, while at the same time, pay heed to the principle that each party should be treated fairly, if not equally, in the appointment process."

The appellate court appreciated that the district court’s solution of expanding the arbitration panel to five arbitrators attempted to embrace the fairness of a tripartite panel employed when there are only two parties; it held, however, that even in cases like this one where there are three parties, the parties’ written arbitration agreement providing for only three arbitrators cannot be ignored. The court acknowledged that "although strict adherence to three arbitrators presents a challenge in a three-party dispute in terms of selecting the arbitrators, ‘by honoring the letter of the contract, we remain true to the [Federal] Arbitration Act as well as the parties’ intent.’"

Significantly, the court pointed out that "the situation the parties found themselves in after Noble demanded arbitration was anything but unforeseen; the parties anticipated a dispute might arise out of the assignment agreement and planned accordingly." Moreover, the court noted, this agreement was the result of arm’s-length negotiations between sophisticated parties who were careful to provide for arbitral procedures in which Noble was a party. Absent compelling circumstances, therefore, the agreement could not be rewritten and the court could not substitute its own notions of fairness, as it would deny the parties the benefit of their bargain.

In remanding, the appellate court stated that the district court should "consider" entering an order directing that Exxon and BP, as the two co-respondents, should appoint a second arbitrator who would then, together with Noble’s arbitrator, select the third arbitrator. If there was a failure with respect to either appointment, a party could resort to the courts. The appellate court further noted, however, that it was only suggesting this method, which might be revised, modified, supplemented or replaced, or otherwise resolved so long as such action was consistent with its opinion, or if the parties themselves agreed upon another manner of selection.

The import of this decision seems clear. There are many potential disputes involving multiple parties where arbitration might be preferred. In anticipating such disputes, drafters should carefully consider how the arbitrator selection procedure might proceed in such circumstances.

A further example of a hypothetical complication is presented in this case. The appellate court assumed that because Noble had initially demanded the arbitration, it was the claimant, and BP and Exxon were co-respondents who must share the selection of their arbitrator. But in many instances, the party first demanding arbitration may not necessarily be the traditional plaintiff. For example, what if BP had initially demanded arbitration so that its obligations to Noble and Exxon might be determined? Would this have meant that the co-respondents were Noble and Exxon, who would be allowed to designate only a single arbitrator between them because they had lost the race to the arbitration forum?

These issues do not lend themselves to easy answers. What should be apparent, however, is that whenever entering into a multiparty agreement where multiple conflicting claims and positions may arise among numerous parties, boilerplate arbitration agreements should be eschewed, and careful consideration should be given to the manner of arbitrator selection. •