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June 13, 2011

Arbitrators and Untimely Motions: Thoughts on a Case Gone Awry

A recent US Second Circuit Court of Appeals decision re-affirmed some well-settled principles about the appealability of district court orders dealing with arbitration. The Court held that an order of the district court refusing to enjoin a pending arbitration was not appealable while the arbitration was in progress. (Accenture, Inc. v. Spreng, 2011 U.S. App. LEXIS 10933 (2d Cir. May 27, 2011)). But what seems more interesting about the case, for the practicing arbitrator, is the arbitral procedural order that led to this costly spasm of collateral litigation.

Accenture was named a Respondent in a breach of contract arbitration by the former owner of a company Accenture had purchased – the owner having been given an employment contract that Accenture later terminated. The case was on an accelerated timetable, commenced in June 2010 and scheduled for merits hearings beginning October 19, 2010. In mid-September, Claimant received documents from Accenture, responsive to discovery requests, that led Claimant to seek permission to add a claim for fraudulent inducement of the contract. But Claimant made his request to amend only one week before the first hearing date, and the arbitrator denied leave to amend.

Claimant responded by filing with the AAA a “without prejudice” withdrawal of the pending arbitration, and a new arbitration demand encompassing the original contract claim and the new fraud claim. Accenture asked the arbitrator in the first case to determine that the withdrawal of claim was “with prejudice,” but was informed by the AAA that the arbitrator was functus officio. That decision launched Accenture’s litigation initiative, seeking to enjoin the second arbitration in favor of the first.

The case report does not indicate whether the second arbitration progressed during the litigation. But whereas the district court decided the motion to enjoin on December 23, 2010 and the Second Circuit agreed to hear and decide the case on an accelerated timetable (while denying a stay of the arbitration pending appeal), it seems fair to assume that arbitration #2 was on hold, whether by stipulation or voluntary decision of the arbitrator or indulgence of the AAA, until the litigation ran its course.

Looking back on this history today, and considering that seven months were lost to litigation that resolved no aspect of the pending dispute, it seems fair to ask whether the arbitrator might have made a more prudent decision. Claimant’s willingness to start anew in order to arbitrate the fraud and contract claims in one proceeding should have been anticipated. If the arbitrator was not aware that the AAA would permit “without prejudice” withdrawal and recommencement in the circumstances, it would seem that sound case management by the AAA and the arbitrator should have led to the arbitrator being so informed. Further, Accenture’s responses, before the AAA and the courts, were also foreseeable.

An order granting leave to amend obviously would have required postponement of then-imminent hearings and a new round of discovery and pre-hearing submissions. But if Claimant deserved to suffer some procedural adverse consequence for having (apparently) been dilatory in proposing the new fraud claim — notably allowing nearly four weeks to elapse after obtaining the critical new documents, a period that ended only a week before the hearing date — perhaps the better approach, consistent with the objectives to optimize decision costs and streamline proceedings, would have been to grant leave to amend, to require completion of pre-hearing activity on the fraud claim on a timetable that placed burdens on the parties commensurate with their respective responsibility for the late emergence of the new claim, and to reschedule the merits hearings perhaps 60 or 90 days forward.

It might be counter-argued that in a civil litigation in the same posture, most judges would deny leave to amend a pleading one week before the trial date. But to approve of the arbitrator’s decision on this basis overlooks two fundamental differences between arbitration and civil litigation. First, litigation consumes scarce public resources (judges, clerks, courtrooms, etc.), and rules and judicial doctrines concerning amendments, withdrawal of proceedings, etc. reflect to a significant extent concerns about the systemic, public costs of ill-timed strategic corrections by the parties. An arbitrator hired by the parties and being well-paid for her time has far less reason to consider her own inconvenience resulting from a belated proposed schedule change. Second, judicial rules for pleadings, discovery, pre-trial orders, etc. are relatively inflexible due to the sheer volume of cases the courts must process. The arbitrator’s discretion to short-circuit formalities of pleadings and to truncate pre-hearing proceedings is, within the confines of due process, one of the principal strengths of arbitral procedure.

Much of the foregoing will seem obvious to the experienced arbitrator. But the ranks of arbitrators include, often by choice of the parties, many retired judges and senior status lawyers arriving from careers focused in other disciplines without particular exposure to the arbitral process. Arbitral institutions that welcome, as they should, such newly-minted arbitrators to their rosters, bear a large responsibility for their exposure to shared norms and best practices in the arbitrator community.




One Response to “Arbitrators and Untimely Motions: Thoughts on a Case Gone Awry”

  1. I find curious the filing of a withdrawal with the AAA. Without the appointing authority, a claimant could not withdraw a claim without the counterparty’s consent, because the arbitrator still would have power to make an award of costs thrown away. I suggest that the logical method in the instant case would be to file an application for leave to amend the claim with the original arbitrator. Is there something about the AAA intervention to prevent that from being done?