Arbitrations are creatures of contract.
This can be a benefit: The parties to an agreement to arbitrate have significant choice and control over how the arbitration will be conducted. This includes choice in confidentiality, choice in who will decide the dispute, and choice in what rules apply.
This can also be a risk: While arbitration procedures come to the forefront once a dispute arises, they are usually decided much earlier, when a contract is initially drafted and negotiated. Arbitration agreements that are vague or overly complicated may lead to disputes about the dispute resolution process. These can cause delays in resolving the dispute, force procedures that later seem unfair or untenable, or lead to an arbitration agreement being found altogether unenforceable. For these reasons, it is important to involve counsel and think through considerations of how, where, and who will officiate dispute resolution long before there is a dispute.
THE NATURE OF ARBITRATION
As a refresher, arbitration is a form of alternative dispute resolution (ADR) where the parties’ dispute is resolved by a neutral third party. Arbitrations differ from other forms of ADR, like mediation, because the officiating neutral will hear evidence, make rulings, and decide the ultimate outcome by issuing an “award.”
Arbitration is considered a formal dispute resolution process. Arbitration awards are typically final, binding, and can be confirmed by a court with the same force and effect as any other judgment. Generally, arbitration awards cannot be appealed barring exceptional circumstances.
Arbitrations differ from litigation in a court because arbitrations are typically private and confidential, and the parties have more control over the processes and procedures. For example, the parties might select a particular set of rules put forward by an administering group such as the American Arbitration Association (AAA) or JAMS. Those rules might even be further customized to identify procedural or evidentiary rules that will (or will not) apply. The parties can also select where an arbitration should be held, whether attorneys’ fees may be awarded, what law will apply to the dispute, and more.
While this contractual nature promotes flexibility, it can also be a constraint. The arbitration proceedings are ultimately limited by the parties’ mutual agreement—in their contract or otherwise. This is important as some of the most important choices the parties will face in an arbitration come very early, with identifying how an arbitrator or panel of arbitrators will be selected, and who will officiate the arbitration.
SELECTION CRITERIA
These choices in arbitrator selection are extraordinarily significant because, in addition to issuing the final, binding award, the arbitrator will officiate and manage a case throughout the arbitration process. Complex arbitrations can take months to years with document requests and production, motion practice, depositions, and other discovery and litigation activities that rival (or even exceed) the complexity of procedures in a court.
Typically, the parties will identify how an arbitrator is selected in one of two ways in their contract: They might expressly identify a particular process in their contract, or they might specify a set of rules for the administration of the arbitration with those rules further specifying the process. Some common methods for arbitration selection include:
Mutual Agreement: The parties discuss and agree on an arbitrator. While hypothetically ideal, this method can prove difficult to impossible in practice given the reality that the parties are now in a dispute.
Strike Method: The administering group (e.g., AAA or JAMS) will provide a list of qualified candidates, and the parties then exchange strikes to the list, narrowing the list of candidates to a single chosen arbitrator.
Rank Method: This is similar to the strike method, except that the parties rank their preferences from the list, with the highest mutually ranked candidate then appointed by the administering group.
Organizational or Institutional Appointment: The arbitrator is appointed by the administering group, sometimes with the parties having limited input beyond the basic qualifications identified in their contract. While this limits the control the parties have in arbitrator selection, it can be an important stopgap if the parties cannot agree on an arbitrator or if one of the parties is refusing to participate in the arbitration process.
Just as important as determining how an arbitrator is selected is determining who the arbitrator will be—which, before a contract is finalized, might include identifying what qualifications the parties agree are necessary.
It likely goes without saying that impartiality and neutrality are critical for an arbitrator, and likely much of the actual decision will hinge on identifying potential biases among candidates based upon review of their biographies, resumes, publication history, and litigation history (especially for former judges). Some other important factors to consider, and potentially identify in the contract:
Relevant Legal Expertise and Experience: Choosing an arbitrator already experienced with jurisdiction-specific law that will govern the dispute, particularly the types of legal and factual issues in dispute, can greatly improve the efficiency and fairness of the arbitration process.
Factual Expertise and Experience: Particularly for construction disputes, the arbitration may benefit from an arbitrator with a specific non-legal technical specialization, like a background in engineering, project management, or system-specific experience.
Case Management Expertise and Experience: An arbitrator’s case management style can set the tone for every aspect of the arbitration.
A note of caution is appropriate. Arbitrator selection procedures that are too vague or too complex can be rife with issues and lead to significant delays in arbitrator appointment and ultimately moving forward in dispute resolution. And since many administering group’s rules place authority with the arbitrator, rather than the group itself, there may be little to no recourse until an arbitrator has been officially appointed.
For complex matters, the parties might instead choose a tribunal panel, rather than a single arbitrator. Typically, with a three-member panel, each of the parties selects one of the panel members. The two party-selected panel members then select the third member—who will also typically chair the panel. The parties should further specify whether the panel requires a majority or unanimous agreement to render a decision.
Because arbitration is a creature of contract, it is critical to consider how and who will conduct it while the contract is being drafted and negotiated long before a dispute arises. Waiting until the dispute arises will likely prove far too late, particularly if it is important that an arbitrator be licensed in a particular jurisdiction, have specific experiences (i.e., former judge), or possess a certain qualification like an engineering degree or specific certification. Time spent before the contract is finalized to identify such issues contributes to the efficient resolution of the dispute.
about the authors
Dixie T. Wells is a partner in the Greensboro, North Carolina, office of Ellis & Winters LLP. She represents clients in lawsuits involving engineering issues, higher education law, complex commercial transactions, and products liability. She is a member of the Construction Law and Litigation Committee of the International Association of Defense Counsel. She can be reached at dixie.wells@elliswinters.com. Chris Flurry is an attorney in the Raleigh, North Carolina, office of Ellis & Winters LLP. He focuses his practice on construction law and commercial contract disputes. A Marine Corps veteran and son of a brick mason, he is a member of the Associated Builders and Contractors of the Carolinas. He can be reached at chris.flurry@elliswinters.com.