What Leasing Counsel Need to Know About Arbitration

By Charles F. Forer
February 27, 2007

Part Two of a Two-Part Series

Part One of this series analyzed the consideration that leasing counsel should give to discovery, locale selection, confidentiality, and expediting the arbitration process. This month's installment discusses issues relating to arbitrator-selection.

Good Corp. and Bad Corp. are locked in a dispute regarding a lease for medical imaging equipment. The lease agreement says that Good Corp. and Bad Corp. must arbitrate their dispute. However, the lease agreement does not provide any details about the arbitration resolution process.

After Bad Corp. stopped making monthly lease payments (because the equipment is 'no good'), Good Corp.'s general counsel ('GC') asked Good Corp.'s outside counsel ('Outside Counsel') to bring an arbitration claim against Bad Corp. and 'wrap it up quickly.'

Arbitrators: One or Three

Outside Counsel suggests having three arbitrators so that Good Corp. and Bad Corp. each can choose a 'party-arbitrator,' and so the two 'party-arbitrators' then can pick the third arbitrator who would be neutral.

GC is befuddled. 'Why three arbitrators? Isn't one arbitrator enough?' Outside Counsel's response: 'A three-arbitrator panel is better. Why not have one of the arbitrators in my back pocket? During the hearings, I can talk to 'our' arbitrator and fill in gaps in our presentation. I even can find out what is taking place while the three arbitrators deliberate and decide the case!' Good Corp.'s attorney is salivating over the prospects of discussing each day's testimony with Good Corp.'s party-arbitrator and, when the hearings are over, learning the status of deliberations.

Outside Counsel has several party-appointed arbitrators in mind. Outside Counsel hopes that 'his' arbitrator will find some way to have side conversations with the neutral arbitrator to ensure that the neutral arbitrator is 'on track.'

Outside Counsel got one thing right: Although the law varies from state to state, parties generally are permitted to select 'friendly' arbitrators, so long as the appointing parties a) disclose their past or present relationship with the selected arbitrator; and b) do not select an arbitrator who has a fiduciary relationship with the appointing party. However, a close relative, employee, or agent of one of the parties to the controversy generally may not act as a party-arbitrator.

Unfortunately, Outside Counsel's advice to GC is wide off the mark in several other respects ' practical and otherwise ' that will undermine Good Corp.'s strategy of 'wrapping it up quickly.'

To begin with, Outside Counsel neglected to tell GC that a three-arbitrator panel would complicate scheduling the four-day arbitration hearing. How easy will it be to accommodate the schedules of the attorneys, the parties, and the three arbitrators? If three arbitrators hear the dispute, the proceeding probably will take longer to complete because it will be difficult to schedule hearing dates that are acceptable to all of the parties and to all of the arbitrators. When the hearing is over, moreover, three arbitrators will take longer than one arbitrator to reach a final decision.

Outside Counsel also should have factored in the time that the two party-arbitrators spend in choosing the third neutral arbitrator. Selecting one arbitrator is time-consuming enough as the parties fight over qualifications and potential conflicts of interest. These problems only multiply if the parties, their respective counsel, and their respective party-selected arbitrators all throw in their two cents about the choice of the neutral arbitrator. Does Outside Counsel really think that the process of picking the third arbitrator will happen in the blink of an eye with all of these participants involved in the selection?

And there is the cost issue. Counting Outside Counsel, Good Corp. will have to pay two and one-half professionals during the arbitration hearing. Does the amount in controversy between Good Corp. and Bad Corp. warrant these costs?

Outside Counsel did not only miss these practical realities in his push for three arbitrators, but he also neglected to consider ethical issues. In 1977, a joint committee of the American Arbitration Association and a special committee of the American Bar Association prepared a Code of Ethics for arbitrators in commercial disputes. In 2003, an ABA task force and a special committee of the AAA revised the Code. This Code dashes several of Outside Counsel's dreams.

First, the Code requires all arbitrators ' party-appointed or not ' to disclose any financial or personal interest in the outcome of the arbitration before accepting appointment. The Code also requires potential arbitrators to disclose past or present financial, business, professional, or personal relationships that 'might reasonably affect impartiality or lack of independence in the eyes of any of the parties.' Good Corp. may well be able to select Outside Counsel's good friend as a party-arbitrator. Before appointment, however, the friend must make all appropriate disclosures. So much for 'slipping something by' Bad Corp. in the arbitrator-selection process.

Second, the Code says that party-appointed arbitrators must disclose, 'at the earliest practicable time,' whether they intend to communicate with their appointing parties. All parties then will know at the outset what is fair game in terms of arbitrator communications. This means that Outside Counsel must tell Bad Corp.'s counsel that Outside Counsel intends to communicate directly with Good Corp.'s party-appointed arbitrator.

Third, the Code says that party-appointed arbitrators may not disclose any deliberations by the arbitrators; may not communicate with the parties concerning 'any matter or issue taken under consideration by the panel after the record is closed or such matter or issue has been submitted for decision'; and may not disclose any decision before it is disclosed to all parties. So much for Outside Counsel's notion of communicating with Good Corp.'s arbitrator
during the deliberation process.

Fourth, the Code says that unless the arbitrators and the parties otherwise agree, a party-appointed arbitrator, in the absence of the other party-appointed arbitrator, may not communicate orally with the neutral arbitrator concerning anything arising or expected to arise in the arbitration. Does this mean that the charm and charisma of Good Corp.'s party-appointed arbitrator will be wasted? Not necessarily. Good Corp.'s arbitrator will be free to advance Good Corp.'s side of the case with the neutral arbitrator so long as Bad Corp's arbitrator is present. If Good Corp. wants its arbitrator to have ex parte communications with the neutral arbitrator, Outside Counsel should get Bad Corp. to agree that the arbitrators for both parties can have ex parte communications. This leveling of the playing field will defeat Outside Counsel's strategy of having secret ex parte conversations.

Investigating Arbitrators

Outside Counsel's face turned pale when GC asked him how he intends to choose Good Corp.'s 'party arbitrator.' He turned beet red when GC asked the following:

'Will you make sure that the arbitrator does not have any conflicts?' (Outside Counsel's response: 'But he will not be a lawyer for Good Corp.')

'Will you find out anything about the proposed arbitrator through word of mouth?' (Outside Counsel acknowledged that he does not intend to ask anyone about the proposed arbitrator.)

'Will you make the decision based on the proposed arbitrator's experience in arbitrating other cases?' (Outside Counsel said he did not intend to find out how many other cases, if any, the proposed arbitrator has arbitrated.)

'Will you find out whether the proposed arbitrator has subject matter expertise?' (Outside Counsel's response: 'What am I supposed to do? Do a background check on every proposed arbitrator?')

Outside Counsel dropped the ball here. Uncovering conflicts of interest is essential to picking an arbitrator. However, a party must do more than merely confirm that the potential arbitrator does not have a conflict.

A party and its counsel initially should determine the type of arbitrator best suited to hear the case. They should consider whether the arbitrator: a) should be a lawyer, a certified public accountant, an architect, an engineer, an appraiser, or other professional; and b) should have training, expertise, knowledge, or experience in the factual or legal issues in dispute. They also should find out if the prospective arbitrator has experience and training in arbitration or other types of alternative dispute resolution. An arbitrator who knows everything about the subject matter would be a disaster if he or she cannot efficiently and expeditiously conduct an arbitration proceeding.

Lawyers rarely get the chance to talk directly to proposed arbitrators. How-ever, lawyers often have the ability ' through the Internet, through word of month, or through professional publications, to name just a few sources ' to uncover all kinds of information about proposed arbitrators. Lawyers should take full advantage of this information in order to make an informed decision about the abilities in the arbitrator-selection process.

The arbitrator-selection process does not stop with conflict-checking and information-gathering. The best selection process and the most thorough background check will mean little if the arbitrator becomes unable to serve because of professional commitments, illness, or death. Accordingly, the parties should think about two other issues in connection with the proposed arbitrator.

First, particularly in an arbitration proceeding that will take several months from arbitrator selection to post-hearing briefing, the parties should consider whether to specify a procedure if one or more arbitrators becomes unable to serve. The parties should agree upon not only the process to select a replacement; they also should consider whether the arbitration proceedings would have to be repeated after the replacement steps in.

Second, to ensure that the arbitration proceeding does not languish, the parties should determine, before arbitrator-appointment, whether the proposed arbitrator has the time to adjudicate the dispute as quickly as the parties want. To assure that the selected arbitrator promptly will decide the dispute, the parties further may agree to select an arbitrator only if he or she expressly represents that he or she has the time to hear and decide the matter by a specified date.

Although Outside Counsel's face is no longer beet red, he reluctantly concludes that arbitrator selection involves more investigation than he ever dreamed. In fact, he muses to himself, the process sure sounds like jury selection.

Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, LLC, where he is engaged in all types of Alternative Dispute Resolution. He is a former co-chair of the Philadelphia Bar Association's Alternative Dispute Resolution Committee, and he is the current co-chair of the Philadelphia Bar Association's Fee Disputes Committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings and can be reached at 215-851-8406, or [email protected].