Archive for August, 2013

The Arbitrator’s Power of Suggestion

Wednesday, August 28th, 2013

One of the least discussed powers of the Arbitral Tribunal is the power of suggestion.

Professor Piero Bernardini, a well-reputed continental arbitrator and scholar, has described the arbitrator’s task in achieving an efficient process as “a balance between ‘proactive and judicious efforts’ to move proceedings forward in an efficient manner while at the same time ensuring respect for party autonomy and equality.” Volumes have been written about arbitral efficiency and party autonomy but rather little about how these themes are harmonized in the day-by-day practice of the craft of arbitrating.

One of the presumed character differences between the judge and the arbitrator is that the former as an officer of the state may carry on imperiously while the latter as an agent of the parties should proceed collaboratively whenever possible. V.V. (“Johnny”) Veeder has summarized this distinction with the observation that the arbitrator “is the master of the arbitration but not the parties’ master.”

And yet surveys of corporate users of arbitration report widespread dissatisfaction with the arbitral process and a shift in preference toward the courts (at least where the courts are familiar and close to home). And US parties and counsel are not alone in clamoring for the appointment of ex-judges as arbitrators.

Does this mean the arbitration users would actually prefer more imperium from their arbitrators? Perhaps not precisely so. But it may very well be the case that what parties to complex, contentious, and high-value disputes really want (not to mention need) most of all are innovative procedural solutions, that they are encouraged to adopt, that invite efficiency gains without material sacrifice in the scope of evidence-gathering or the presentation of legal positions.

And that is where the arbitrator’s power of suggestion can and in appropriate circumstances should come into play. One of the heralded virtues of arbitration is the supposed flexibility of the procedure. But the source of that flexibility will rarely be the parties. Often the parties have counsel more accustomed to judicial proceedings and predisposed toward importing judicial notions of orderly procedure into the arbitral process (and not only in regard to pre-hearing discovery, although this import receives the most attention).

And yet if those court-oriented litigators, acting with the presumed consent of their clients, have selected vastly-experienced specialists in arbitration to preside over their case, there must be a reason that they have done so. And a good candidate for that reason is that the parties actually want guidance through the arbitral process from experts in arbitral procedure whose specialty is harmonizing efficiency, fairness, and party autonomy.

Arbitrators are not the masters of the parties but the parties are the masters of the procedure only to the extent that they are clearly (and resolutely) in agreement. But the arbitral tribunal wielding the power of suggestion may lay the foundation for party agreement on a variety of issues, steering away from poorly conceived agreed solutions, and providing a rallying point toward which the parties might migrate when the chances of their reaching an agreed solution without arbitral input are not great.  In other circumstances, the tribunal detecting an intractable difference might invite the parties to reach agreement on a matter or else submit their respective proposed solutions within a finite time frame. This is the exercise of the power of suggestion in another form: to hasten (but not “rush”) the parties toward agreement or at least constructive solution-driven, thinking.

In some cases the advocates are accomplished and reputed arbitration specialists who can be relied upon to advance effective solutions that the client is willing to accept. And where that is so the arbitrator’s power of suggestion should be invoked more reluctantly. But even then, the role of advocate has a curious tendency to channel the thinking of experienced hybrid arbitrator-advocates toward zero-sum solutions.

So, if the question “Whose Arbitration Is It Anyway?” must inevitably be answered “Yes, it is the parties’ arbitration,” still each arbitrator might usefully consider from the outset “What is the Arbitration the parties want?” The prudent exercise of the power of suggestion will often be a valuable way to have that question answered, and perhaps answered in a fashion that draws in the parties to an efficient procedure they would not achieve on their own.

Guidance for Inexperienced Arbitrators: Should Providers Do More?

Wednesday, August 21st, 2013

You may not recall the last time a hearsay objection was sustained by an arbitral tribunal. And understandably so. Arbitrators “take [the hearsay evidence] for what it’s worth,” and steer clear of challenges to their awards on grounds (FAA Section 10 (a)(3)) that they committed “misconduct” by “refusing to hear evidence.”

But just suppose: In a real estate arbitration to determine fair value for purposes of a partner buy-out, all of Respondent’s written evidence of fair value is excluded as hearsay by the arbitrator. For example, a written offer to purchase the property was excluded as hearsay, on the theory that without the offeror as a witness, the written offer was not subject to cross-examination. Respondent evidently does not offer as witnesses the authors of the excluded hearsay documents. The facts relied on by Respondent’s expert for her opinion on fair value having been excluded, her opinion now carries no weight. Claimant wins.

Consider now two judicial review scenarios, in each of which the Respondent moves to vacate the award on the basis of the arbitrator’s misconduct in refusing to hear evidence.

In scenario one, the Court is persuaded to vacate the award. While recognizing that the arbitrator had wide discretion in regard to admissibility of evidence, the Court concludes that the arbitrator excluded what amounted to the entirety of Respondent’s factual case. The Court notes that such “technical” objections as hearsay need not be and generally are not obstacles to admitting evidence in arbitration, and that the categories of exclusion mentioned expressly in the AAA Commercial Arbitration Rules are irrelevance and redundancy (cumulative evidence). And the Court bemoans the fact that the arbitrator did not provide a statement of the reasons for the exclusion of evidence. In this context, the Court concludes, exclusion of essentially all of one party’s fact evidence on the ultimate (and only) issue, the value of the property, was clearly prejudicial and amounted to arbitral misconduct. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2012 WL 613498 (S.D.N.Y. Feb. 15, 2012)).

Now consider how another court viewed the same issue:  An arbitrator need not apply technical evidence rules, such as the common law rule against hearsay that in the US is widely codified at the state and federal level. But certainly it is well within the discretion given the arbitrator under rules like the AAA Commercial Rules to decide, with regard to particular evidence, that the hearsay rule will be applied.  The arbitrator’s decision to apply the hearsay rule cannot be said to be misconduct, where the party whose evidence is excluded has other non-hearsay means to prove the facts. Where the hearsay declarants could have been witnesses but the Respondent elected not to call them, the prejudice from exclusion of the hearsay evidence is self-inflicted by the Respondent. The arbitrator’s evidence ruling thus does not furnish a basis to vacate the award. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2013 WL 3927615 (2d Cir. July 31, 2013)).

Which result is more persuasive? I have juxtaposed the decision of the District Court and US Second Circuit Court of Appeals, in the same case, and I obscured that fact to invite the reader to give equal consideration to the district court and appellate court opinions (each penned by a judge among those most expert on arbitration law issues). One can readily agree with both decisions. The solution seems to lie in details of the arbitration proceedings that are not fully explained in the decisions and may not have been clear in the record in either court. One cannot tell from the reading whether Respondent had adequate opportunity after learning of the arbitrator’s ruling excluding the hearsay evidence to seek leave to present witness testimony from the authors of the hearsay documents. The Second Circuit seems to assume, but does not demonstrate with reference to the Record on Appeal, that there was indeed such an opportunity.

Is there a lesson in this beyond yet another judicial vindication of poorly-exercised arbitral discretion? May I be so bold as to suggest that the American Arbitration Association would do well to implement some form of advisory system for arbitrators in need of guidance? Let us assume that the parties in this case thought that the credentials required for the arbitrator in this case were mainly those of a Manhattan commercial real estate lawyer, perhaps a litigator in that field, and that they selected accordingly. Let us further assume that the arbitrator had little to no experience as an arbitrator, and followed her instincts as a trial lawyer donning a judge’s robe.

In this case, the arbitrator probably was motivated to exclude the hearsay, rather than have the lack of testimony from the authors of the documents affect the probative value, because the arbitrator was required to appoint a valuation expert and turn over the fact evidence to her. The arbitrator could understandably have been concerned that the non-lawyer valuation expert would not exercise the proper judgment about the weight of the hearsay evidence.  A proper course of action would have been to admit the hearsay evidence upon the condition that the authors be made available for cross-examination, and to record that course of action in a clearly-worded procedural order. This may seem obvious to experienced arbitrators. But the question here that I pose is how shall this approach be made obvious to inexperienced arbitrators, in time for them to make better decisions in handling their cases? We should look to the AAA to harness the wealth of human resources at its disposal among the most experienced and skilled arbitrators to establish a confidential consultation system for arbitrators facing difficult issues.