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March 27, 2013 Articles

Court Intervention When the Parties' Arbitrator Appointment Process Fails

By Gilda R. Turitz

Most arbitration clauses are explicit about the number of arbitrators to hear a dispute. The process by which the arbitrators will be selected is usually spelled out or will be governed by the rules of the administering tribunal. But no clause can fully anticipate and address every future dispute or arbitrator selection problem that may be presented. When a dispute involves satisfaction of arbitrator qualifications or multiple parties selecting a panel, the arbitrator selection process may reach an impasse for which the parties may seek court intervention. But when can the courts exercise authority over the process? And how far can they go in shaping a remedy? May they strike an arbitrator from service, or order a panel to be chosen in a different manner or with a different number or arbitrators specified by the parties' clause?

Limited Court Power in Arbitrator Selection and Remedy for Multiple Parties
Under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., a court's jurisdiction to intervene into the arbitral process before issuance of an award is limited. Section 5 of the FAA, 9 U.S.C. § 5, provides that a district court may intervene in the arbitral process to select arbitrators on a party's application if the parties fail to avail themselves of a method for arbitrator selection set forth in their agreement or if there is a "lapse in the naming of an arbitrator or arbitrators." A recent Fifth Circuit case addressed the scope of a court's discretion to appoint arbitrators and to fashion a remedy in the context of a three-party dispute under an arbitration agreement that contemplated a two-party dispute. The court held that while the parties' impasse authorized the district court to exercise appointment power, it erred by ordering arbitration before a five-member panel when the parties' express agreement was to arbitrate before a three-member panel. BP Exploration Libya Ltd. v. ExxonMobil Libya, 689 F.3d 481 (5th Cir. July 30, 2012).

In BP v. Exxon, a contractor agreed to provide ExxonMobil Limited Libya (Exxon) with a rig for offshore drilling of deep water oil wells in Libyan waters. With the contractor's consent, Exxon assigned the drilling contract to BP Exploration Libya Limited (BP). A dispute arose among the parties as to when BP took possession of the rig and whether it met required standards. BP informed the contractor and Exxon that they had materially breached the assignment agreement and disclaimed any payment obligation to either party.

The assignment agreement's arbitration clause contemplated that three arbitrators would determine any dispute between Exxon and BP in accordance with the International Rules of the American Arbitration Association, with each party to appoint one arbitrator who would appoint the third as chair. It also contemplated that any dispute to which the contractor was a party would be governed by a provision in the drilling agreement to arbitrate under the rules of the Arbitration and Conciliation Act 1990 (ACA) (incorporated as part of the Laws of the Federation of Nigeria). The ACA rules called for the first party to appoint its arbitrator, then for the responding party to appoint its arbitrator and, finally, for the two arbitrators to appoint a presiding arbitrator.

Because neither BP nor Exxon was paying the contractor at the rate it believed it was entitled to, the contractor, as a party to a dispute arising out of the assignment agreement, served an arbitration demand on BP and Exxon and designated its arbitrator in accordance with the ACA rules. Because there would be no neutral arbitrator to preside, BP and Exxon would neither agree to a joint appointment of an arbitrator, nor to each designate an arbitrator. BP filed suit in federal district court in Houston, Texas, which determined that there was an impasse allowing it to exercise its authority under the FAA to appoint arbitrators. The court then ordered arbitration before five arbitrators, with three party-appointed arbitrators to unanimously choose two neutrals. The Fifth Circuit Court of Appeals upheld the district court's determination that the FAA allowed it to intervene to select an arbitrator because there was a "lapse" under 9 U.S.C. § 5 in naming an arbitrator. However, the Fifth Circuit held that the district court violated the FAA by appointing five arbitrators instead of three, as provided in the parties' agreement. It directed the court on remand to enter an order appointing three arbitrators; to consider entering an order that would require BP and Exxon to appoint a second arbitrator or for the court to do so absent their agreement; and further, to appoint the third arbitrator if the two appointed arbitrators could not agree on the third. The Fifth Circuit acknowledged both the court's discretion to modify or replace this proposed procedure with any method not inconsistent with its opinion as well as the parties' ability to reach agreement among themselves to appoint arbitrators.

Arbitrator Panel Expansion Permitted In Multiparty Consolidated Arbitrations
The Fifth Circuit's decision in BP stands in contrast to the Second Circuit's decision in Compania Espanola de Petroleos, S.A. v. Nereus Shipping, S.A., 527 F.2d 966 (2d Cir. 1975), overruled on other grounds byUnited Kingdom of Great Britain and Northern Ireland v. Boeing Co., 998 F.2d 68 (2d Cir. 1993),which approved a district court's remedy of appointment of a five-arbitrator panel in a three-party dispute where the arbitration clause specified three arbitrators, and the court had consolidated two arbitrations. In Compania Espanola, a maritime charter party contract was entered into between Nereus as "owner" and Hideca as "charterer." The contract provided for arbitration of disputes before three arbitrators, one each to be chosen by the parties who were to select the third. Subsequently, the parties signed an addendum that the charterer would use the tonnage contracted for under a certain contract to be signed with Compania Espanola de Petroleos (Cepsa), which obligated itself to perform in the event of Hideca's default. After Nereus claimed that Hideca was in default and commenced an arbitration, and Cepsa was ordered to arbitrate with Nereus in a separate proceeding, the court consolidated the two arbitrations. The court also ordered that the panel for the consolidated arbitration would consist of five arbitrators, one to be chosen by each of the three parties, with the three chosen to select the remaining two. On appeal, the Second Circuit, which upheld the consolidation, noted that its "essential implementation" must include "moulding the method of selection and the number of arbitrators so as to fit this new situation." The Second Circuit found that adherence to the original agreement's arbitrator selection process was "no longer possible," especially where two independent arbitrations would result in unnecessary duplication and possibly inconsistent results, and modified the district court's order. It allowed the court to appoint an arbitrator if any party failed timely to nominate its arbitrator, and it empowered the court to select the two additional arbitrators if the three party-selected arbitrators failed to appoint two additional arbitrators in a joint, unanimous, and timely fashion. The Second Circuit's rationale for this method was that it would give each party fair and reasonable treatment, and its own representative, as provided for in the contract.

No Judicial Authority to Remove Unqualified Arbitrator Before Award
While the FAA permits court intervention in an impasse over appointing arbitrators, the statute does not speak to removal of a selected arbitrator prior to award, a situation faced in Gulf Guaranty Life Insurance Company v. Connecticut General Life, 304 F.3d 476 (5th Cir. 2002). The district court granted the defendants' motion to strike from service the plaintiff's chosen arbitrator, an executive from a reinsurance company, on the ground that his qualifications did not satisfy a "condition precedent" because the agreement specified that only executives of a "life insurance company" could serve as arbitrators. The Fifth Circuit reversed, holding that under the FAA's express terms a court has no authorization to remove an arbitrator from service for any reason before an award is issued. Even where arbitrator bias is at issue, the FAA only provides for potential vacatur of any award, under 9 U.S.C. § 10.

Moreover, there may be no available post-award remedy for an arbitration conducted by an allegedly unqualified arbitrator. Vacatur for an arbitrator's alleged lack of qualifications is not automatic, as demonstrated in Bulko v.Morgan Stanley DW Inc., 450 F.3d 622 (5th Cir. 2006). Morgan Stanley sought to vacate an adverse NASD arbitration award on the ground that a retired securities lawyer who had taken inactive bar status did not meet the NASD's criteria to serve as a nonpublic arbitrator, the capacity in which she had been appointed. The NASD had continued classifying the arbitrator as nonpublic due to her employment history. The Fifth Circuit found that the arbitrator fulfilled the purpose of a nonpublic arbitrator to serve as an industry insider based on her work experience, and that assuming that her selection contradicted the parties' agreement, it was at most "a trivial departure not warranting vacatur."

Arbitrator selection issues can bog down a process that is supposed to be efficient and cost-effective, spinning into collateral litigation over arbitrator qualifications, parties' rights in multiparty situations, and the appropriate number of arbitrators and their selection process in a multiparty dispute or in consolidated proceedings. Bound by the restrictions of the FAA, the courts may, but not always, view judicial discretion and authority as tied to the parties' intent in drafting their arbitration clauses.

Keywords: ADR, litigation, arbitrators, arbitrator selection, arbitrator appointment, arbitrator removal, litigation, arbitrator qualifications