A new code of ethics for commercial arbitrators: The neutrality of party-appointed arbitrators on a tripartite panel.

• Author: Byrne, Olga K.

This natural right of self-regulation is a precious possession of a democratic society, for it embodies the principles of independence, self-reliance, equality, integrity, and responsibility, all of which are of inestimable value to any community. (1) It is a call for self-reliance, a way of living in harmony with our neighbors, an endorsement of voluntarism. (2)

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Having an impartial and neutral judge resolve disputes has been a fundamental goal in the American justice system. (3) But in some arbitrations, party-appointed arbitrators on a tripartite panel are expected to act as "non-neutrals" and may be predisposed to decide in favor of the party who appointed them, while the third arbitrator is neutral. This system presents a problem to those who feel that all adjudicators should be neutral when making a decision. In international arbitration, for example, the rule is firm that arbitrators must act in an independent and impartial manner, unless the parties agree otherwise. (4) Since increasing numbers of commercial disputes are international, professionals within the international community have urged that domestic commercial arbitration standards should more closely resemble international norms. (5)

The finality of arbitration is another reason for aspiring to a higher standard of neutrality. Arbitration awards are final and binding, subject to very limited review by the courts. (6) Wide discretion is left to the parties, their attorneys and the arbitrators to fashion the procedure as they wish, without any judicial interference, (7) The binding nature of arbitral awards requires a clear ethics code to create some behavioral benchmark and uphold the integrity of arbitration practice. (8)

Currently, the American Arbitration Association ("AAA") and the American Bar Association ("ABA") are working to revise the existing ethics code for commercial arbitrators in a way that encourages neutrality of all arbitrators. This Note refers to a text prepared by a team from the AAA and the ABA (herein called the "2003 Revision"). That text is expected to become effective March 1, 2004, but it must be recognized that at the time of this writing (October 1, 2003), it had not been finally approved by either organization. The text had been approved by the Executive Committee of the AAA, but was subject to further refinement, and it had not yet been acted on by all of the concerned bodies of the ABA. Meanwhile, the existing code of ethics remains in effect.

In the following analysis, Part I of this Note describes the importance of the tripartite panel and the new standards that it is expected will be adopted in a revised code of ethics for commercial arbitrators. Part II examines the opposing arguments concerning the role of party-appointed arbitrators with respect to neutrality. Proponents of an all-neutral panel urge that our judicial value system should allow no other alternative, while others support the use of non-neutrals when parties mutually agree to exercise their autonomy to do that. Part III proposes that the revisers educate participants in the arbitral process of the new standards demanded of all arbitrators, so as to maintain confidence and stability in arbitration. Although arbitration is a private process and its construction should be left substantially to the preference of the parties, ethical norms create faith in the system and provide a reliable foundation upon which to structure specific mechanisms for resolution.

1. THE ARBITRATION PROCESS

   Arbitration is an alternative to litigation whereby parties voluntarily submit their dispute to a tribunal of their own choosing to obtain a judicially enforceable decision. (9) It is often chosen over litigation for its speed, cost-effectiveness, privacy, and less hostile atmosphere than the courts. (10) The parties may decide the scope and content of the arbitration, define its procedures, and choose the location of the arbitration by specifying these stipulations in the arbitration agreement. (11) Most importantly, parties have the power to choose the decision maker. (12) This freedom to select the arbitrator is why arbitration has been described as "hiring your own private judge." (13) Section 5 of the Federal Arbitration Act articulates the federal policy of enforcing the parties' right to compose their own tribunal, stating: "If in the agreement provision be made for a method of naming or appointing an arbitrator ..., such method shall be followed." (14) Parties often want the arbitrator to be an expert in the field of the dispute and may stipulate desired qualifications in the arbitration agreement, such as technical background or industry experience. (15) In many industries, business professionals prefer to settle their disputes through arbitration, where the arbitrators are acquainted with trade customs and are more likely to understand the parties' positions, rather than litigate before a jury without such qualifications. (16) Courts are aware of this benefit as well. Judge Posner acknowledged that parties "prefer a tribunal knowledgeable about the subject matter of their dispute to a generalist court with its austere impartiality but limited knowledge of subject matter." (17)

   1. The Tripartite Panel

      The arbitration agreement either designates the number of arbitrators that will decide the controversy, or refers to institutional rules that provide a procedure to determine the tribunal's composition. (8) Common arrangements are either a single arbitrator or a panel of three, wherein each party appoints one arbitrator and the two party-appointed arbitrators agree on a third. (19) This three-member tribunal, known as a tripartite panel, (20) has been chosen by disputants to settle controversies for hundreds of years. For example, George Washington indicated in his will that a tripartite panel should be selected to resolve any controversy as to his estate: "All disputes (if unhappily any should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chosen by the disputants--each having the choice of one--and the third by those two." (21)

      A tripartite panel may therefore consist of the two "party-appointed arbitrators" and a third arbitrator, who will generally be referred to in this writing as "the neutral." (22) The custom of appointing a party arbitrator arose because of the risk that a single arbitrator might not entirely appreciate the parties' positions. (23) This system allows each party to have its own "judicial" appointee (24) on the panel who will make sure the party's position is clearly and effectively presented to the neutral. (25) Party-appointed arbitrators "help clarify technical issues" (26) and offer assurance to the parties that the third arbitrator "fully understands the issues and background of the case, the contentions of each party, and the possible implications of the award before it is issued." (27) They will "see to it that the tribunal does not overlook the strong points of [the appointing] party's case." (28) Throughout the course of the arbitration, when the three arbitrators confer privately during executive sessions, they combine various viewpoints on the subject area. (29) This exchange of ideas should lead to a more thorough and comprehensive decision. (30) Also, an award rendered by three persons is often more acceptable to the parties and recourse to the courts is therefore less likely. (31)

   2. The Party-Appointed Arbitrators

      In many domestic arbitrations that use a tripartite panel, the two party-appointed arbitrators are not expected to be neutral, in the same sense as the third arbitrator, but are permitted to be "predisposed toward the party who appointed them." (32) Courts have repeatedly upheld the parties' right to select non-neutral party-appointed arbitrators. (33)

      Lack of neutrality in arbitrators is not a novel feature of the arbitral process. In medieval Iceland, partiality was a known characteristic of arbitration. (34) Arbitrators were not expected to be neutral or impartial so long as they acted in moderation and remained effective. (35) In one documented case, a party who sought compensation for the alleged murder of his son agreed to allow the suspect's brother to arbitrate the matter. (36) The arbitrator's relation to one of the parties was not important because of his seemingly fair behavior. (37) Similarly, in eleventh century France, where arbitration was sometimes used to resolve property disputes, the parties would usually select arbitrators who were relatives, friends or business associates. (38)

      Early labor arbitrations in the United States most often used party-appointed arbitrators. (39) The "so-called federal Arbitration Act of 1888" strongly encouraged impartiality and disinterestedness, (40) but subsequent legislation in labor arbitration failed to mention the neutrality of the party-appointed arbitrators. (41) Today, party-appointed labor arbitrators are most often non-neutrals. (42) In commercial arbitration, the use of non-neutral versus neutral party-appointed arbitrators is a choice left open to the parties. (43) In some circumstances, non-neutral arbitrators, because of a connection with or relationship to the appointing party, prompt the opposing party to challenge the validity of the award in court.

   3. Judicial Review

      Judicial interference in arbitration is very limited. (44) Courts give greater deference to an arbitrator's decision than they would to a lower court, making it very difficult for the parties to have an award overturned. (45) Generally speaking, arbitrators have authority to devise remedies equal to that of the judiciary. (46) But unlike a court, they need not give express reasons for the remedy they grant, (47) are not obliged to follow rules of evidence, (48) and may use their own judgment or personal knowledge in making the decision. (49) Under AAA commercial arbitration rules for...