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July 04, 2010
Second Circuit Clarifies Principles on Replacement of Resigned Arbitrator
A new decision of the US Second Circuit Court of Appeals holds when a vacancy on an arbitral tribunal occurs due to resignation of an arbitrator,Â and the parties’ agreement does not address that situation, a district court has broad discretion under Section 5 of the Federal Arbitration Act in deciding how the arbitration shall proceed. (Insurance Co. of North America (“INA”) v. Public Service Mut. Ins. Co., No. 09-3640-cv, 2d Cir., slip opinion, June 23, 2010. The decision may be found on the Court’s website: www.ca2.uscourts.gov).
The decision affirms a ruling if the District Court that was reported upon in Arbitration Commentaries in January 2009. (You may access that Commentary by clicking on that month in the “archive”
column along the left border of this site.)
An earlier Second Circuit case had held that where a vacancy occurs due to the death of an arbitrator, and the parties have no agreement on how to fill the vacancy, the “general rule” is that absent “special circumstances,” a new panel must be formed and the arbitration commenced anew. That decision was not overruled in INA. The Court did however take note of “eroding support” for that decision, and that the “general rule” had first been stated in a case in which the Court had in fact declined to require a new panel to be appointed when one arbitrator died after the panel had rendered a partial final award.Â Thus, Second Circuit law has long recognized that the potential for waste and inefficiency might in some situations outweigh the prejudice a party might suffer from having to continue an arbitration with a replacement party-appointed arbitrator.Â
In INA the Court has gone further down this path. It holds that the so-called “general rule” does not apply to resignations of any kind, even those resulting from permanent incapacity of the resigning arbitrator (and thus having the same impact on the panel as would a death). In any resignation situation, therefore, no presumption will apply that an entirely new panel must be convened and the proceedings started anew.
Equally, the Court’s holding is not stated to be limited to the resignation of a party-appointed arbitrator — although the case did involve resignation of a party-appointee, and district courts might seek to read the holding as limited to that scenario.
But if courts take the Second Circuit at its words: “in dealing with vacancies resulting from resignations, the [ “general rule” applicable on death of an arbitrator] does not apply,” then district courts are now free to decide that even in case of resignation of the sole arbitrator, or the presiding arbitrator, circumstances may dictate that the reconstituted tribunal should be allowed to move forward rather than begin anew.
Indeed, if there is a broad arbitration clause, district courts may well hold that the extent to which proceedings must be repeated is an arbitrable issue to be resolved by the reconstituted tribunal. Section 5 of the FAA addresses the filling of a vacancy, but does not expressly confer power on a court to decide to what extent proceedings should be repeated. The Second Circuit’s so-called “general rule,” requiring a fresh start in case one of three arbitrators dies, is a common-law rule, not one that purports to be based on the FAA itself.Â
Institutional rules governing international arbitrations, and the UNCITRAL Rules,Â typically confer power on the reconstituted tribunal to decide whether and to what extent proceedings should be repeated. This reflects a broad consensus among practitioners and institutions that the tribunal is in the best position to balance considerations of efficiency and fairness, and that a case-by-case approach makes the most sense.
The Second Circuit’s decision in the INA case appears to be moving American arbitration law toward conformity with the international arbitration position.