Arbitration Award Vacated Because Arbitrators Were Impartial

3LonghornsAlthough we usually expect arbitrators to be impartial, the Supreme Court of Texas vacated an arbitration3Longhornsaward because the chosen arbitrators were too impartial. Americo Life, Inc. v. Myer, __S.W.3d__, 2014 WL 2789429 (Tex. June 20, 2014). Because the court found the parties’ agreement allowed each side to choose an arbitrator who was partial to it, but the AAA had disqualified the selected advocate-arbitrators, the award was vacated.

The case stemmed from Myer’s sale of a collection of businesses to Americo in 1998. The arbitration agreement in the sale document stated that any disputes should be decided by three arbitrators, with each party appointing one arbitrator and those two selecting the third. The arbitration would be governed by AAA’s commercial rules. Critically, “[e]ach arbitrator shall be a knowledgeable, independent business person or professional.” A dispute about the meaning of that sentence caused the arbitration and its appeals to last nine years.

In 2005, Americo demanded arbitration. At that time, the AAA rules explicitly required arbitrators to be “impartial and independent.” Therefore, when Americo (twice) chose an arbitrator that was partial towards it, the AAA disqualified those arbitrators. After a panel of three impartial arbitrators heard the evidence, they awarded Myer over $26 million in damages.

Americo moved to vacate the award, arguing that the arbitrators were not selected in accordance with the parties’ agreement. The trial court vacated the award, the court of appeals un-vacated it, and a majority of the Texas Supreme Court re-vacated it.

The high court’s analysis emphasized the fact that “arbitrators must be selected pursuant to the method specified in the parties’ agreement.” Because the touchstone is the agreement, the court had to interpret whether the contractual requirement that the arbitrator be “independent” meant that he or she be impartial. The court concluded it did not. The 1998 AAA rules allowed parties to appoint arbitrators that would serve as their advocates. Therefore, the court interpreted “independent” to mean only that the arbitrators would not actually be employed by a party or under its control. (It also found that the modified AAA rules could not trump terms in the agreement itself.)

Once the court concluded that the agreement allowed arbitrators to be biased toward the party that selected them, but the AAA had disqualified arbitrators for being biased, its decision to vacate became unavoidable. “[T]he arbitration panel was formed contrary to the express terms of the arbitration agreement. The panel therefore, exceeded its authority when it resolved the parties’ dispute.” Four justices dissented from the opinion, arguing that the AAA rules in effect in 2005 demanded impartial arbitrators unless the parties specifically agreed otherwise and the language of the parties’ agreement did not specifically allow non-neutral arbitrators.

This case shows why arbitration law is so hard for people to grasp. Essentially, this case says that an award reached by three impartial arbitrators has to be reversed, because two of those arbitrators should have been biased. That is a head-scratcher.  Only when you understand that the FAA emphasizes the parties’ agreement over almost everything else does that result make any sense at all. This case may become Exhibit B for me when I explain that case law under the FAA is not intuitive, even for lawyers (Exhibit A is Buckeye Check Cashing, which never fails to elicit a strong reaction from the uninitiated).

Topics:  American Arbitration Association, Arbitration, Arbitration Agreements, Arbitration Awards, Impartiality, Vacated

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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