A Litigator’s Guide to Arbitration
By Jeanne Barnum, John Bulman, Neal Eiseman, Karen Layng, and Michael Powell – December 14, 2015
The Construction Litigation Committee presented a discussion panel at the April 2015 ABA Section of Litigation Annual Conference. The panel comprised committee members Jeanne Barnum, Neal Eiseman, Karen Layng, and Michael Powell. John Bulman served as the moderator/“referee.” Tom Dunn coordinated the program as chair with the assistance of liaison Alex Rothenberg.
Modeled after ESPN’s show Pardon the Interruption, the format was fast-paced, interactive, and provocative as to the pros and cons of 12 topics related to key arbitration pitfalls and ethical issues facing neutrals. In addition to their vast experience, the panel focused on guidance provided by the Code of Ethics for Arbitrators in Commercial Disputes and the American Arbitration Association (AAA) be Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes). Highlights from the point/counterpoint format for the topics are summarized below.
Topic 1: Direct Examination by Affidavit
- Pro. It saves time and expense; direct examination is usually an orchestrated “dog and pony” show anyway; sophisticated arbitrators want to get to the issues. This is a vehicle to do that; it still allows for cross-examination (where the truth comes out) for the tough questions and for the panel to assess witness credibility. The affidavits should be exchanged beforehand, and opposing counsel still may object to any portion of the affidavit or any exhibit to which it refers; it leads to a more focused presentation of evidence that is consistent with the goals of arbitration. Evidence by written statement is permitted by AAA Commercial Arbitration Rule R-35(a).
- Con. It is nothing more than a cheat sheet prepared by an attorney and often used as a crutch by the witness during cross-examination. Such statements should only be allowed for non-critical witnesses. By no means should a party ever be required to submit direct examination by affidavit. It would be unfair to prevent a good witness from telling his or her story by having it reduced to a stale affidavit. If a key witness is present, the panel should require live testimony—even if not in person. For example, Rule R-32 of the AAA Construction Industry Arbitration Rules permits presentation of evidence by video, Internet, telephone, and other means of communication.
Topic 2: Are Party-Appointed Arbitrators Neutral?
- Pro. Although there has been no shortage of criticism of “partisan” party-appointed or Canon X arbitrators, and the rules of most arbitral institutions in the United States now require all arbitrators to be neutral unless the parties agree otherwise, some argue that the partisan approach is not inherently unfair or ill-advised. David McLean, “Selecting a Party-Appointed Arbitrator in the US,” Lexis®PSL Arbitration, Nov. 3, 2014.
- Commercial arbitration is a creature of contract, and so, the argument goes, parties should be allowed to draft their agreement as they deem fit.
- Con. Depends on the parties’ arbitration agreement. If the agreement is silent on the neutrality of the party-appointed neutral, the arbitrator can assume he or she is to be an advocate of the parties’ position. The parties had the obligation, when drafting the arbitration clause in their contract, to include any limitations on the arbitration tribunal. AAA Commercial Arbitration Rule R-13 permits the direct appointment by a party, and Rule R-18 similarly discusses an arbitrator’s “neutrality.”
Topic 3: Must Counsel Disclose All Contacts with a Potential Arbitrator?
- Pro. Of course, that’s what the rules require. Rule R-17 of the Commercial Rules says just that, so there should be no debate on this issue at all. The integrity of the process is key—there is nothing worse than a party keeping secret some relationship with an arbitrator. The system works best when all participants, from counsel to parties to arbitrators, ensure that all relationships are disclosed.
- Con. It is not the law. Rather, the duty to disclose is upon the arbitrator, not counsel. The major issue with this topic is the word “all.” Does anyone really know all of the details of whomever they are connected with on their LinkedIn or other social media account? Where do you draw the line? Attorneys are advocates, not impartial neutrals.
Topic 4: Do Evidence Rules Hinder the Arbitration Process?
- Pro. If the parties desired to have the federal or state rules of evidence apply, they should not have selected arbitration. Arbitrators have discretion to admit evidence and judge its weight without having to be bogged down in minutia as to its technical admissibility. Rule R-23 of the Commercial Rules provides the arbitrator the authority to fairly, efficiently, and economically resolve the case. If the arbitrator seeks to allow for judicial (arbitral) notice or to award discovery or spoliation sanctions, the arbitrator can do so but is not bound to enforce arcane and often unfair evidence rules that do more to hide, rather than reveal, the truth.
- Con. No, evidence rules provide structure and important guidelines to achieve a fair resolution. Far from being arcane the rules are constantly under review—last amended in 2014 with new amendments proposed to be effective 2016. Evidentiary rules that can be helpful include judicial (arbitral) notice, presumptions, privileged communications, and relevancy. It is appropriate to be more lenient as to witnesses, experts, hearsay, and authentication. But if there is a valid challenge by the other side, then the evidence rules are the best guide. For example, not all hearsay is reliable and trustworthy. An arbitrator should try to get direct evidence and only use hearsay if there is no other way. Of course, an arbitrator should always be able to exclude redundant, irrelevant, and clearly suspect submissions. The goal is efficiency, but not at the cost of the truth.
Topic 5: Arbitrator Sanction Power
- Pro. Not everyone plays by the rules in arbitration. Sometimes strategy turns into gamesmanship and a party attempts to derail the arbitration process by failing to comply with discovery orders or engaging in dilatory tactics such as asking for repeated postponements. Courts are weighing in on this issue. In Seagate Technology, LLC v. Western Digital Corporation, 834 N.W.2d 555 (2013), the Court of Appeals of Minnesota affirmed an arbitrator’s award that provided for punitive sanctions that precluded the respondent from presenting any evidence or defense for allegedly fabricating evidence. In ReliaStar Life Insurance Co. v. EMC National Life Co., 564 F.3d 81, 85–87 (2d Cir. 2009), the Second Circuit upheld a $3.5 million award of costs and attorney fees to a prevailing party whose opponent “lack[ed] good faith.” Without a remedy to address such conduct, the court reasoned, “the underlying purposes of arbitration, i.e., efficient and swift resolution of disputes without protracted litigation, could not be achieved.”
- Con. Arbitrators are not judges and there is no need to award sanctions because the ultimate sanction—an unfavorable award against the party that has not played by the rules—is inherent in the arbitration process. Also, awarding sanctions might open the door to permit one party to vacate the award if the sanctions crossed the line of what appears to be reasonable. Some state laws prohibit an award of sanctions unless authorized by law or agreed to by the parties. See, e.g., N.Y. C.P.L.R. § 7513. Most of the arbitration rules allow sanctions and the parties “agreed” to use the rules in their arbitration agreement. See JAMS Rule 29, AAA Commercial Rules R-23 & R-58, ICDR International Dispute Resolution Procedures, Art. 28 & Art. 31. In CBA Industries, Inc. v. Circulation Management, Inc., 578 N.Y.S.2d 234, 235 (N.Y. App. Div. 1992), for example, the trial court was held to have properly eliminated an award of counsel fees and costs from an arbitration award where the arbitration clause provided that each party would bear its own costs and legal expenses.
Topic 6: Should Motions in Limine Be Prohibited?
- Pro. These motions are associated with litigation, not arbitration. Arbitrators are sophisticated, and it is a waste of time to argue over whether expert testimony should be precluded when the arbitrators will afford it appropriate weight. There is no jury to protect, and the arbitrators are the gatekeepers. These motions are inevitably costly and time-consuming and inconsistent with the notion of alternative dispute resolution.
- Con. Just as absolute power corrupts absolutely, absolute rules, such as prohibiting entire classes of motions, is just plain wrong. Today’s arbitrators in large complex cases are well trained and have the judgment and discretion to field such motions. There are some circumstances where a motion in limine might have a very beneficial effect—for example, a motion to preclude evidence of consequential damages when there is a full waiver of such damages in the applicable contract. It seems silly to take away discretionary options available to an arbitrator by adopting such autocratic and inflexible rules.
Topic 7: Is a Mock Arbitration Just as Important as a Mock Jury Trial?
- Pro. Of course, they’re helpful and important. What motivates fact finders, whether an arbitration panel or a jury, is extremely important to advocates. If you have large-stakes arbitration, you want to see what resonates with the panel and, of course, what falls flat. A mock arbitration panel, composed of neutral arbitrators, provides a great sounding board and is well worth the investment. In particular, it can be helpful where the mock arbitrators have a similar education and experience to the known arbitrators. This is far more effective than a mock jury, which cannot predict with such precision the specific attributes of the jurors.
- Con. Arbitrations tend to be more technical. While practice is never a bad thing, the outcome of an arbitration depends much more on the choice of arbitrator(s), and so mock arbitration may be meaningless and a waste of time and money. You are not going to learn the prejudices of a selected arbitrator, what the arbitrator is looking for, how the arbitrator is going to react to certain evidence, by practicing in front of a mock arbitrator. Mock juries usually test themes, which are not as helpful or important in arbitration.
Topic 8: Should a Client Representative Attend and Participate Throughout the Arbitration Process?
- Pro. OF COURSE! This is one of the best takeaways from the College of Commercial Arbitrators’ Protocols. The more party involvement and collaboration in the process, the more likely that the arbitration will reflect the party’s desire for a cost-efficient, fair arbitration proceeding. For example, if during a pre-hearing scheduling conference call, the party allows its counsel to proceed without his or her participation, the party risks counsel making commitments to the production of documents at the hearing that may be unduly burdensome or not even possible. Later, at the hearing, if the party fails to live up to such a commitment, it might result in an otherwise unnecessary and completely avoidable negative inference. Also, R-31 of the Commercial Rules specifically provides that the hearing can proceed without the party present. With this explicit ability of the panel, the risk to a party who chooses not to attend at the hearing can be extreme.
- Con. This is something that is up to counsel and their clients, not the arbitrators, to decide. A rule requiring clients to attend pre-hearing telephone conferences is intrusive and makes little sense. However, an attorney should want his or her client at the hearings. A general, across-the-board rule requiring the presence of a party is anathema to our system of jurisprudence—meeting your burden of proof is what matters. Arbitrators do not decide who wins and who loses based on the parties’ attendance records.
Topic 9: Arbitration Is Closed; When Can I Get Hired by the Winning Party?
- Pro. As soon as an arbitration award is final and all appeals or challenges have been exhausted. Model Rule of Professional Conduct Rule 1.12 sets the conditions. An arbitrator may not represent anyone in connection with a matter in which the arbitrator participated personally and substantially as an arbitrator unless all parties to the arbitration give informed consent in writing. An arbitrator selected as a partisan of a party in a multimember arbitration panel is not prohibited from subsequently representing that party. The rule says nothing about an arbitrator representing a winning party in an unrelated legal matter after conclusion of the arbitration. However, Canon I of the AAA Code of Ethics for Arbitrators in Commercial Disputes provides that
[f]or a reasonable period of time after the decision of a case, persons who have served as arbitrators should avoid entering into any such relationship, or acquiring any such interest, in circumstances which might reasonably create the appearance that they had been influenced in the arbitration by the anticipation or expectation of the relationship or interest.
Therefore, after the arbitration award is final and any appeals have been exhausted—and a reasonable period of time has passed—it is not improper for an arbitrator to be hired by a successful party for a wholly unrelated matter. Under these circumstances, hiring a former arbitrator should be no problem at all.
- Con. You cannot be hired as an advocate for either party after the conclusion of the arbitration and are ethically precluded from doing so. Per Rule 1.12 of the Model Rules of Professional Conduct, a lawyer shall not represent anyone in connection with a matter unless all parties to the proceeding give informed consent, confirmed in writing. Canon VI states: “An arbitrator is in a relationship of trust to the parties and should not, at any time, use confidential information acquired during the arbitration proceeding to gain personal advantage or advantage for others, or to affect adversely the interest of another.”
Topic 10: Are Chess Clocks in Arbitration Fundamentally Unfair?
- Pro. No, they are not unfair. Keeping track of the hearing in this fashion is a reasonable means of organizing and streamlining an arbitration proceeding. Federal and state courts, particularly in large complex cases, often use a chess clock system to provide a fair and efficient process, and they are not criticized for doing so. Patricia Lee Refo, Opening Statement, “The Vanishing Trial,” Litig., Vol. 30, No. 2 (Winter 2004), at 3. All chess clock arrangements come with safeguards to ensure that each party has adequate opportunity to present its case.
- Con. If both sides want to limit their time, then there are no material concerns. The problem is when an arbitrator tries to limit the time for a party to present its case over objection of one of the parties. This can possibly lead to overturning the award. Another approach is for the arbitrator to simply state, “I’ve got it.” If done in a direct manner, counsel should feel comfortable immediately moving to the next topic or line of questioning. Trained arbitrators are fully equipped to move hearings along without having a clock directing them to do so. What if the arbitrators belatedly believe that a party should be given more time than originally agreed to through the use of a chess clock? Changing the rules midstream may create a bone fide issue for the disgruntled party to raise against confirmation of the award.
Topic 11: Should an Arbitrator Allow Depositions at a Party’s Request?
- Pro. Arbitration is a creature of consent. If all counsel want to litigate in arbitration, the panel should not interfere. It is appropriate for a panel to suggest limited depositions or to explain why depositions may not be necessary, but the panel should not dictate the process chosen by the parties or their counsel. The more practical situation is when one attorney wants depositions and the other does not—that is when the panel should not allow depositions unless good cause is shown that the depositions will save time and expense or are necessary because the case is complex or involves significant sums of money.
- Con. The panel must remain in control of the process, and that includes the information exchange. Just because all counsel want depositions, it does not mean that the panel should give them that right. Rule R-24 of the AAA Construction Industry Arbitration Rules provides for production of documents and exchange of witness information, but notdepositions. No other discovery, i.e., depositions, is permitted, unlessordered by the arbitrator in exceptionalcircumstances. Unless a party can show an exigent circumstance requiring a deposition, an arbitrator should not permit them. Arbitration is meant to avoid the discovery that bogs a case down in court so that a fair decision can be reached expediently—and that means no depositions.
Topic 12: Is Nonbinding Arbitration Effective?
- Pro. Absolutely, especially when it is conducted in court after all discovery is complete. A nonbinding arbitration forces the parties to hone in on the real issues in the case, what evidence is needed to address those issues, and how a party is going to get that needed evidence introduced. Parties often hear each other side’s version of the case for the first time, which can be very enlightening in that it reveals strengths and weaknesses of each side’s case. If both sides accept an award, it becomes binding and the case is over with no appeal. If one side does not accept the award, it may still be the basis for a negotiated settlement. At the very least, it educates both sides on what each has to do better to present a convincing case to a jury.
- Con. Mediation is the appropriate context to conduct nonbinding presentations. The cost and expense of an arbitration proceeding that will not result in the finality of a ruling is not worth pursuing. In addition, the parties will likely change their presentation for a nonbinding arbitration hearing to lie in wait for the other side’s consultant or expert witness testimony. All the benefits of the arbitration process—just, speedy, and economical resolution—are lost with a nonbinding process, and it will be done all over again in a trial. Also, if one party thinks that it is able to switch the proceeding from nonbinding to binding, the “nonbinding arbitrator” is precluded from doing so. Canon IV of the AAA Code of Ethics for Arbitrators in Commercial Disputes provides that an “arbitrator should not be present or otherwise participate in settlement discussions or act as a mediator unless requested to do so by all the parties.”
Keywords: construction litigation, arbitration, examination by affidavit, party-appointed or arbitrators, disclosure, evidence rules, sanctions, motion in limine, mock arbitration, client participation, chess clock, deposition, nonbinding arbitration
Jeanne Schubert Barnum is with Schnader Harrison Segal & Lewis LLP, Cherry Hill, New Jersey.
John Bulman is with Pierce Atwood LLP, Providence, Rhode Island.
Neal Eiseman is with Goetz Fitzpatrick LLP, New York City.
Karen P. Layng is with Scheck Industries, Countryside, Illinois.
Michael R. Powell is vice president of the American Arbitration Association, Los Angeles.