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February 10, 2011

Party-Appointed Arbitrator May Sometimes Serve in Consecutive Related Cases — 7th Circuit Holds

Rarely may an arbitrator serve in consecutive arbitrations involving the same issues under the same contracts, as one party or another will object that the arbitrator who has once decided an issue cannot re-decide the same issue impartially in a second case.

But sometimes, notably but not exclusively in U.S. domestic arbitration, it is agreed that the party-appointed arbitrators in a three-member tribunal will not be impartial. That may change materially the analysis of whether the arbitrator may serve in consecutive related arbitrations upon appointment by the same party.

A new decision of the U.S. Seventh Circuit Court of Appeals deals with this issue, and holds that where the agreement of the parties provided that the co-arbitrators would be merely “disinterested” and not impartial, the re-appointed co-arbitrator in a second arbitration between the same parties could not be disqualified based on his knowledge of the prior proceedings. (Trustmark, Inc. v. John Hancock Life Ins. Co., 2011 U.S. App. LEXIS 1931 (7th Cir. Jan. 31, 2011)).

Complicating the analysis for the Seventh Circuit was a confidentiality agreement from the first arbitration, which the arbitrators had joined counsel and the parties in signing. Trustmark did not object to Hancock’s re-appointment of its co-arbitrator in the second case (the first having ended in an award in Hancock’s favor), but then the second case tribunal, with two new members, construed the confidentiality agreement to permit disclosure to the new panelists of the proceedings, evidence, and award in the first case.  Trustmark, contending that the deliberations over the confidentiality agreement entailed not only misconduct by the re-appointed arbitrator but also the arbitration of a non-arbitrable subject (the confidentiality agreement had no arbitration clause), moved in federal district court to enjoin the second arbitration for so long as the re-appointed Hancock arbitrator remained on the panel. The District Court obliged and enjoined the parties from continuing the arbitration.

The Seventh Circuit reversed. The Court rejected the notion that arbitration over an issue the panel considered arbitrable but the movant did not — the meaning of the confidentiality agreement — constituted irreparable harm justifying an injunction. The remedy in such circumstances, the Court held, is a motion to vacate the award.

(Had the Court upheld the injunction, it would have effectively sanctioned an interlocutory appeal to the District Court from an arbitral determination of arbitrability that the arbitrators had jurisdiction to make. This would have been quite odd, given that under the Federal Arbitration Act a judicial decision compelling arbitration is not appealable except in the context of a motion to vacate the final award).

Turning then to the conduct of the re-appointed co-arbitrator, the Court held that his participation in the second panel’s deliberations over the meaning of the confidentiality agreement could not be viewed as a breach of that agreement or as misconduct warranting disqualification. Further, the fact that the re-appointed co-arbitrator had knowledge of the prior proceedings and had joined in issuing the first award was not disqualifying where the parties’ agreement provided for co-arbitrators who are disinterested (that is, having no economic stake in the result) but not also impartial.

Thus the Seventh Circuit’s decision is not, as some have feared, an aberrational general endorsement of arbitral service in consecutive related cases. It pertains to a very narrow context, which includes much but not all reinsurance arbitration, in which the party-appointed arbitrators are presumed to be effectively members of the parties’ legal teams. Its holding as to the arbitrator’s conduct has virtually no relevance where impartiality is required by the law or arbitral rules or the parties’ agreement.

The decision may be viewed as strongly supportive of arbitral competence to decide arbitrability issues properly presented to them — as it effectively instructs district courts not to review such rulings under the rubric of enjoining arbitration. This view of the decision is valid, but within limits. The construction of the confidentiality agreement by the second panel was viewed by the Seventh Circuit as the type of procedural issue ancillary to the merits that is within the arbitral domain under settled federal case law. Whether that Court would take as forceful a position against judicial intervention where the arbitral ruling concerns the type of merits disputes within the ambit of a clause, or the validity of the clause, cannot be entirely predicted based on this decision.