Following extensive focus group and Board of Director discussions, including that of the New York case, Coty Inc. v. Anchor Const. Inc., 601499-02, 2003 WL 139551 (N.Y. Sup. Ct. Jan. 8, 2003) aff’d, 7 A.D.3d 438, 776 N.Y.S.2d 795 (N.Y. App. Div. 2004), the AAA determined its former rules failed aggrieved parties who were faced with nonpaying respondents, namely because:
Pursuant to R-54 of the Construction Rules in effect through June 1, 2010, “[I]f arbitrator compensation or administrative charges have not been paid in full, the administrator may so inform the parties in order that one of them may advance the required payment. If such payments are not made, the arbitrator may order the suspension or termination of the proceedings . . .”; and
Pursuant to R-51, paragraph 3, “[A]ny arrangement for the compensation of a neutral arbitrator shall be made through the AAA and not directly between the parties and the arbitrator.”
Essentially, the former AAA rules of arbitration forced an aggrieved party to either (a) endure the full costs of arbitration itself, or (b) potentially see its judgment delayed, or its cause of action completely dismissed, for failure to compensate the arbitration panel. There simply was no alternative. The panel in Coty drew the ire of the courts for permitting arbitration to continue for the paying petitioner. The Coty panel’s award was vacated on a finding of arbitral misconduct.
The AAA recognized the need to create an additional framework for arbitrators to follow when confronted with a Coty dilemma. The AAA adopted Construction Industry Rule 56, “Remedies for Nonpayment,” in June 2010, which permitted (“to the extent the law allows”) arbitrators to hear and decide motions for default for nonpayment:
(a) If arbitrator compensation or administrative charges have not been paid in full, the AAA may so inform the parties in order that one of them may advance the required payment.
(b) Upon receipt of information from the AAA that payment for administrative charges or deposits for arbitrator compensation have not been paid in full, to the extent the law allows, a party may request that the arbitrator issue an order directing what measures might be taken in light of a party’s nonpayment (emphasis added).
Such measures may include limiting a party’s ability to assert or pursue its claim. In no event, however, shall a party be precluded from defending a claim or counterclaim. The arbitrator must provide the party opposing a request for such measures with the opportunity to respond prior to making any such determination. In the event that the arbitrator grants any request for relief which limits any party’s participation in the arbitration, the arbitrator shall require the party that is making a claim and has made appropriate payments to submit such evidence as the arbitrator may require for the making of an award.
(c) Upon receipt of information from the AAA that full payments have not been received, the arbitrator, on the arbitrator’s own initiative, may order the suspension of the arbitration. If no arbitrator has yet been appointed, the AAA may suspend the proceedings.
(d) If arbitrator’s compensation or administrative fees remain unpaid after a determination to suspend an arbitration due to nonpayment, the arbitrator has the authority to terminate the proceedings. Such an order shall be in writing and signed by the arbitrator.
Three and a half years later, on October 1, 2013, the AAA amended its Commercial Rule to include, at R-57, a similar provision to the one above. The Commercial Rule essentially mirrors the Construction Rule in content, form, and practicality.
To the Extent the Law Allows…
Whether a panel engaging the new AAA Rules lawfully does so remains wholly dependent on the answer to the question: “What does the jurisdiction’s statute actually permit me to do with respect to hearing or deciding default motions in arbitration?”Indeed, the answer is not universal, whereas determinations regarding due process, appearances of impropriety, and jurisdictional statutory constraints may differ from one jurisdiction to another.
It follows that the concept of arbitral misconduct doesn’t lend itself to a precise definition; it’s one best illustrated by example—of which there are many.
Among the actions that have been found to constitute arbitral misconduct as would warrant vacating an arbitration award are the following: participation in ex parte communications with a party or a witness, without the knowledge or consent of the other party; Whitehair v. Kansas Flour Mills Corporation, 127 Kan. 877, 879, 275 P. 190 (1929); ex parte receipt of evidence as to a material fact, without notice to a party; Hewitt v. Village of Reed City, 124 Mich. 6, 8, 82 N.W. 616 (1900); holding hearings or conducting deliberations in the absence of a member of an arbitration panel, or rendering an award without consulting a panel member; see Continental Bank Supply Co. v. International Brotherhood of Bookbinders, 239 Mo.App. 1247, 1258, 201 S.W.2d 531 (1947); and accepting gifts or other hospitality from a party during the proceedings. See Robinson v. Shanks, 118 Ind. 125, 130, 20 N.E. 713 (1889). An award may likewise be set aside if the panel arbitrarily denies a reasonable request for postponement of a hearing; see Two Sisters, Inc. v. Gosch & Co., 171 Conn. 493, 499 n. 4, 370 A.2d 1020 (1976); or commits an egregious evidentiary error, such as refusing to hear material evidence or precluding a party’s efforts to develop a full record. Newark Stereotypers’ Union No. 18 v. Newark Morning Ledger Co., 397 F.2d 594, 599 (3d Cir.), cert. denied, 393 U.S. 954 (1968).
Though not exhaustive, these examples delineate the contours of conduct that are unacceptable and prohibited by statute. The unanswered question is how they interplay with a panel’s determination to hear and decide motions for nonpayment relief. Ultimately, the validity of arbitration awards depends on the integrity of the arbitration process. When that integrity is tainted by actual impropriety or simply “the appearance of impropriety,” the arbitration award cannot be permitted to stand. O & G/O’Connell Joint Venture v. Chase Family Ltd. P’ship No. 3, 203 Conn. 133, 146–48, 523 A.2d 1271, 1278 (1987).
A Tempest in a Teapot?
With business entities searching for faster and more efficient means of dispute resolution, and courts wallowing in unresolved cases, one would hope the universal approach by the courts will be to position the parties in the Procrustean bed that they—sophisticated business entities all—have contractually crafted. But the question lingers whether the new commercial and construction industry rules may have brewed a tempest in a teapot, creating a thin line for statutory misconduct.
When sought for comment, the AAA cited the three and a half years since the Construction Rule change as evidence of its universal assimilation with local arbitral law. At press time, no appeals have been found on awards adopted that were subject to the recent rule changes; but those will be something to keep a watchful eye on.
“Forewarned is forearmed,” as the saying goes.
Eric A. Sauter is an associate at Welby, Brady & Greenblatt, LLP, in White Plains, New York.
John J.P. Krol is counsel at Welby, Brady & Greenblatt, LLP, in White Plains, New York.