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August 14, 2009

Challenging the Replacement of a Party-Appointed Arbitrator

The Seventh Circuit U. S. Court of Appeals has addressed one of the difficult issues arising from the mid-stream replacement of a party-appointed arbitrator. The Court held that the Federal Arbitration Act (“FAA”) generally requires that a party who contests its opponent’s appointment of a replacement party-arbitrator, on the ground that the substitution is not within the agreement if the parties, must do so by an application to the Court at the time of the substitution, or else the objection will be forfeited. WellPoint, Inc. v. John Hancock Life Ins. Co., 2009 U.S. App. LEXIS 17841 (7th Cir. Aug. 7, 2009).

The basis for the Court’s holding in WellPoint is Section 5 of the FAA. That Section — fully applicable to international arbitrations held in the U. S. — provides in pertinent part that the Court may appoint an arbitrator to fill a vacancy if for any reason there is a failure of the parties to do so by agreement.

In WellPoint, the Claimant had asked its own party-appointee to resign, several years into the case but before any hearings on the merits. Respondent John Hancock objected, but while maintaining its objection Hancock proposed a method to break the impasse on naming a replacement. After the method Hancock proposed was adopted and used by WellPoint, the case went forward before the re-constituted panel, and resulted in an award against Hancock. Hancock then moved to vacate, arguing that the re-constituted panel was not properly constituted in accordance with the arbitration agreement, and therefore lacked power to render the award.

Efficiency considerations, the Court held, preclude a construction of the FAA that would permit a losing party to forego using Section 5 to obtain an interlocutory court selection of a replacement arbitrator in lieu of the opposing party’s attempted unilateral selection, proceed to award before the contested re-constituted panel, and formally raise the issue of the winning party’s appointment of a replacement arbitrator for the first time only in a motion to vacate the award.

By finding waiver/estoppel-type principles dispositive, the Court avoided having to decide whether an agreed-upon methodology for replacment of a party-appointed arbitrator was implicit in an arbitration clause that, on its face, only addressed the procedure for initial appointments.

Also, the Court was able to dodge the issue of whether any or all proceedings need to be repeated when a party-appointed arbitrator is replaced. In dicta, however, the Court condemned the so-called federal “general rule” — requiring proceedings to begin anew — as an ill-advised waste of resources.

Indeed, the posture of the WellPoint case at the time the original party-arbitrator for Welloint resigned would have been an attractive one for declining to apply that “general rule.” The parties had conducted extensive discovery, and the panel had ruled on numerous discovery disputes. But there had not yet been any interim awards, nor even hearings for the taking of testimony. Further, the resignation was not occasioned by death or disability of the arbitrator. WellPoint had asked its arbitrator to resign shortly after Hancock amended its counterclaim to increase the alleged damages ten-fold. WellPoint had also engaged new counsel at that point. It is inferable that WellPoint, advised by new counsel, was simply second-guessing its original selection.

As discussed in a July 28, 2009 posting on this site (“Judicial Replacement of the Deceased or Disabled Arbitrator”), the so-called federal “general rule,” that all proceedings must be repeated after replacement of a party-appointed arbitrator, is out of step with contemporary practice globally. The general trend is to vest the panel or the sponsoring arbitral body with discretion to decide which if any proceedings should be repeated. The Seventh Circuit’s decision is a welcome indication the American law may be moving into harmony with contemporary practice.