ABA Section of Business Law
ABA Section of Business Law
Business Law Today
September/October 1999
Tweaking arbitration
Can the RUAA fill the gaps in the FAA?
By PAUL J. DUBOW
Dubow is senior vice president at Morgan Stanley Dean Witter in San Francisco. The views expressed in this article are those of the author and not necessarily those of his employer.
Have you ever been involved in arbitration? If so, or if you see it happening somewhere down the road, you should be aware that a change in the rules is on the way.
Earlier this summer, in July, the National Conference of Commissioners on Uniform State Laws (NCCUSL) heard a first reading of the Revised Uniform Arbitration Act (RUAA or act). It was the latest step in a process that began in 1996 with the creation of a study committee to determine whether the Uniform Arbitration Act (UAA) should be revised. The study committee opted for a revision and a drafting committee was created and given the task of developing a revised act.
The product that was presented to the commissioners was the result of five three-day meetings of the drafting committee, starting with a meeting in Cincinnati in the spring of 1997. At least one more meeting will occur in order to put the finishing touches on the revision so that it can be approved by NCCUSL at the second reading in the summer of 2000.
One might ask why it is necessary to go to all of this effort, particularly in light of the fact that the Federal Arbitration Act (FAA) seems to occupy the entire field of arbitration law so that there may be no need for the original UAA, much less a revised version. The answer is that the FAA’s occupation of the field is quite thin in a number of places.
The biggest (and perhaps most surprising) encroachment on the FAA’s dominance was made last December by the Ninth Circuit when it decided that the FAA did not apply to employment contracts. Craft v. Campbell Soup Co., 161 F.3d 1199 (1998), amended rehearing en banc, 177F.3d 1083(May 27, 1999). State courts within the Ninth Circuit are not obliged to follow the Ninth Circuit’s lead, but at least one intermediate California appellate court has done so. Gonzalez v. Hughes Aircraft Employees Federal Credit Union , 70 Cal. App. 4th 468, 472, 83 Cal. Rptr. 2d 763 (1999).
Furthermore, the FAA deals primarily with the validity and enforcement of arbitration contracts. That was the primary concern of supporters of arbitration in 1925, when the FAA was enacted. Thus, many issues pertaining to the conduct of arbitrations are within the purview of the UAA because of the FAA’s silence on the subject. These include such matters as consolidation, summary adjudication, provisional remedies and arbitrator immunity. Indeed, many of these issues were still not on the radar screen when the UAA was enacted in 1955. These issues are dealt with in the RUAA, which is an innovative act designed to meet the modern day needs of arbitration.
Finally, even where the RUAA is preempted, it could be the model for a revision of the FAA.
This article will not discuss every section of the RUAA but rather those that attempt to find new ground. Within this group, the proposals are divided between those that are controversial and those that are not. Any person who is interested in obtaining a copy of the entire draft bill may do so through the Internet at www.law.upenn.edu/b11/ulc/uarba/arbam99.htm.
Bear in mind, however, that the draft that is presently available on the Net will not be the final version of the RUAA. The present draft is the one that was presented to the NCCUSL commissioners at their convention in Denver in July for the first reading. Changes were suggested by the entire body of commissioners; most of them were stylistic. Also, there should be a few more changes prior to the second and final reading in the summer of 2000.
The most controversial section of the RUAA is Section 20(b), which is part of the act’s vacatur section. The version that appears in the previously mentioned draft provided that parties could contract in the arbitration agreement for judicial review of errors of law in the arbitration award, and if they so contracted, the court would vacate the award if it found that the arbitrator committed an error of law that substantially prejudiced the rights of a party. This provision was akin to the so-called "opt in" provision that is found in two existing statutes, the New Jersey Alternate Procedure for Dispute Resolution Act and Clause 69 of the English Arbitration Act.
This concept was also approved in decisions by three federal courts. Gateway Technologies Inc. v. MCI Telecommunications Corp. , 64 F.3d 993 (5th Cir. 1995); LaPine Technology Corp. v. Kyocera Corp. , 13 F.3d 884 (9th Cir. 1997); and Fils et Cables D’Acier de Lens v. Midland Metals Corp ., 584 F. Supp. 240 (S.D.N.Y. 1985). It was rejected in one federal case. UHC Management Company Inc. v. Computer Sciences Corp., 148 F.3d 992 (8th Cir. 1998).
Those who favored the provision argued that it was necessary because parties who enter into multi-million dollar contracts are reluctant to include a standard arbitration clause because when a dispute arises, they would be placing the outcome of the transaction into the hands of perhaps a single arbitrator.
Opponents of the provision fell into two camps. One group argued that the provision conferred additional jurisdiction on the trial court and that this was contrary to the purpose of both the FAA and UAA and that, in any event, it was preempted by the FAA because it created an additional method of vacatur. They also argued that it destroyed arbitration as we know it because lawyers, in order to avoid malpractice claims, would regularly insert a 20(b) clause into the contracts that they drafted. This in turn would mean that arbitration institutions would be forced to place only lawyers on their panels and that arbitration hearings would no longer be final.
Proponents of the provision responded that it did not confer additional jurisdiction on trial courts or create an additional method of vacatur because all it did was limit the arbitrator’s powers, something that parties have always been able to do in their contracts. Even if it were found to have created an additional method of vacatur, it is unclear whether the FAA preempts state rules on vacatur. Compare CT Shipping Ltd. v. DMI (USA) Ltd. , 774 F. Supp. 146, 148 (S.D.N.Y. 1991), with Siegel v. Prudential Insurance Agency , 67 Cal. App. 4th 1270, 79 Cal. Rptr. 2d 726 (1998).
The proponents also doubted if most arbitration contracts would include the opt-in clause because parties usually enter into arbitration contracts to save costs and might be willing to exchange their right to appeal for the reduction of litigation costs. Thus, they expected that the opt-in clause would be used mainly in contracts involving very large commercial transactions.
The other opponents of the provision claimed that it did not go far enough because a vacatur could only occur if there were substantial prejudice. They argued that the requirement of substantial prejudice to achieve vacatur gutted the section and rendered opt-in clauses nugatory. Proponents disputed this, noting that minor errors of law are usually not enough to overturn a decision rendered by a court. They also noted that courts are generally reluctant to vacate arbitration awards and so it was quite possible that the "substantial prejudice" standard or something like it would be impliedly invoked by the courts when they decided motions to vacate even if the language were not present.
The provision provoked so much debate within the committee that a subcommittee was appointed to try to find alternative language. The subcommittee presented four alternatives to the commissioners. Alternate I was the original language of Section 20(b). Alternate II simply stated that the parties could contract for any other review not prohibited by applicable law. Such language eliminated the preemption problem and drew the support of many who had supported the initial provision. Alternate III permitted parties to contract for appellate review of the arbitration award by another arbitration panel. That right exists under present law and thus it would seem that there would be no need to put it into the act. Alternate IV eliminated the concept of Section 20(b) altogether.
The commissioners voted that it would be "the sense of the house" that Alternates III and IV were preferred. However, the issue is not quite dead. It will be interesting to see what develops at the next meeting of the drafting committee.
There is one other change to the vacatur provision of the RUAA. Section 20(a), in addition to containing the four present methods of vacatur, adds a fifth standard reason — that there is no arbitration agreement. However, in order for a party to take advantage of this section, he or she must raise the objection no later than the start of the hearing.
Another part that provoked much discussion was Section 18, which deals with remedies. This section proceeds on two tracks. Section 18(a) states that the arbitrators shall have the power to award attorney fees or punitive damages or other exemplary relief (such as treble damages) if such an award is authorized by law in a civil action.
Section 18(b) states that, with respect to all other remedies, the arbitrators may act in a manner that is just and appropriate under the circumstances of the case and the fact that such relief could not or would not be granted by a court of law is not alone ground for vacating or refusing to confirm the award. The powers granted to arbitrators under both subparts of Section 18 can be modified by the arbitration agreement.
This two-track approach means that, except in those cases where the arbitration agreement speaks on the subject, punitive damages and attorney fees can only be awarded if they are permitted in a similar civil action, but all other remedies can be awarded even if not available in the civil action so long as the award is just and appropriate under the circumstances of the case.
But the situation is confused, at least with respect to the subject of punitive damages, by Section 18(d). The initial draft stated that if the arbitrators awarded a remedy of punitive damages, they had to state the facts justifying the law authorizing the award (as well as the amount of the award attributable to punitive damages). Thus, the award could be vacated if the underlying facts did not normally give rise to punitive damages or if the law did not provide for punitive damages.
However, the committee felt that such a revision widened the scope of appeal from an arbitrator’s award and it was loathe to make this quantum leap. Consequently, the words "the facts justifying" were stricken, so that the section now reads that the arbitrator must "specify the basis in law or the provisions in the agreement authorizing the award." Thus, if a jurisdiction did not allow punitive damages for breach of contract but permitted them for fraud, an award of punitive damages in a breach of contract case could be vacated as to the punitive damages only because there would be no basis in law for the punitive-damages award. However, an award for punitive damages based on fraud could not be vacated.
But suppose a state statute authorized punitive damages for negligence, provided that the defendant acted maliciously and outrageously. Suppose further that an arbitrator found the respondent to be negligent and awarded punitive damages but it was clear from the record that the respondent did not act in a malicious or outrageous fashion, notwithstanding such negligence. Could the punitive damages award be vacated? The answer is not clear. (Bear in mind also that malice, like beauty, is often in the eyes of the beholder.)
On the other hand, if the cause of action allowed for punitive damages but the underlying statute capped the amount of punitive damages that could be awarded and the arbitrator exceeded the cap, the court probably could vacate the portion of the punitive damages award that exceeded the cap.
Section 12(b) permits the arbitrators to decide a motion for summary disposition of a claim or a particular issue either by the agreement of all interested parties or on the request of one party, provided that all other interested parties have reasonable notice and an opportunity to respond. This provision (when it was known as Section 11(b)) provoked much discussion among the committee members and was stricken from the draft at the meeting in Rapid City, S.D., in October 1998.
Instead, Section 12(a) was amended so that it included a provision that arbitrators "may hold conferences with the parties prior to the hearing to act upon any matters, including requests for summary disposition, which may aid in the fair and expeditious disposition of the arbitration." At the Richmond meeting in February 1999, it was argued that this provision was not satisfactory because it did not clearly provide that all parties could respond to the request for summary disposition. Consequently, Section 12(b) was restored.
Section 11, which deals with immunity, and Section 13, which is unchanged from the UAA and deals with representation by a lawyer, surprisingly drew some opposition from some of the attendees at the committee meetings. Section 11 gives the arbitrator the same immunity from civil liability that a judge has. There is no immunity from criminal liability. Similar immunity will extend to the "arbitration institution" that administers the proceeding. ("Arbitration institution" is the phrase that the RUAA uses for the arbitration provider or forum.)
If the arbitrator is not performing in a judicial capacity, then there is no immunity for either the arbitrator or the institution. For example, in U.S. v. City of Hayward, 36 F.3d 832 (9th Cir. 1994), the court refused to extend immunity to an arbitrator and a municipal administrative agency that appointed him because it found that the arbitrator was an agent of the city charged with enforcing and interpreting its rent-control ordinance.
Nevertheless, Section 11 was opposed by some arbitration institutions, including the American Arbitration Association. The institution’s representatives argued that there already was a history of common law immunity in this country, and they feared that if a particular state did not adopt Section 11, it could be a basis for an argument that there was no common law immunity in that state. In order to assuage these fears, the drafting committee initially put Section 11 in brackets in order to invite comment. When no comment was forthcoming, the brackets were removed.
In addition, Section 11(c) provides that the immunity afforded by this section shall supplement, and not supplant , any applicable common law or statutory immunity.
Section 11 also states that an arbitrator is not competent to testify in any subsequent civil proceeding as to any statement, conduct, decision or ruling occurring at or in the underlying arbitration proceeding except where a party has made application to vacate the award on the ground that it was procured by corruption or fraud or on the ground of arbitrator misconduct, provided that the party moving to vacate has made a sufficient showing of facts to prove the allegations.
Section 13 states that a party has the right to be represented by a lawyer at any proceeding or hearing under the act. The debate over it began when an attempt was made to include Section 13 as one of the nonwaivable provisions in the RUAA. (The nonwaivable provisions are set forth in Section 27.) The purpose of making this section nonwaivable was to prevent a party with superior bargaining power from barring lawyers at the hearing.
However, some members of the committee felt that this would affect trade associations that often use nonlawyers to represent their members at arbitrations. Indeed, some members wanted to eliminate Section 13 entirely. The proponents of these two positions have read Section 13 too narrowly because it does not bar nonlawyers, although they could be barred by an unauthorized-practice-of-law statute that is not part of the RUAA. The UAA and RUAA merely permit parties to have lawyers if they choose. In the end, it was decided to retain Section 13 but not to include it among the nonwaivable provisions.
Section 5 of the RUAA specifically recognizes the need to allow courts or arbitrators to provide for provisional remedies such as injunctions to preserve property, secure the satisfaction of judgment, or protect the integrity of the arbitration process. There is no comparable provision in the FAA. A provision of this nature was included in the initial draft of the UAA in 1955 but was not adopted.
State and federal courts have since allowed the issuance of temporary restraining orders to prevent a defendant from conveying or encumbering property that was the subject of a pending arbitration. Salvucci v. Sheehan, 349 Mass. 659, 212 N.E.2d 243 (1965); Merrill Lynch, Pierce, Fenner & Smith Inc. v. Salvano, 999 F.2d 211 (7th Cir. 1993). However, there have been exceptions. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Hovey , 726 F.2d 1286 (8th Cir. 1984); Peabody Coalsales Co. v. Tampa Electric Co ., 36 F.3d 46 (8th Cir. 1994).
In addition, both California and New York in their arbitration statutes limit the issuance of provisional remedies by courts "only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief." Section 1281.8(b) of the California Code of Civil Procedure; New York CPLR § 7502(c). The RUAA will allow courts to render provisional relief prior to the appointment of the arbitrators and gives the same power to the arbitrators after their appointment.
The RUAA will also specifically allow for consolidation of certain arbitration proceedings. Some states have already enacted statutes that permit consolidation of arbitration proceedings. However, there is a split of authority in the states that do not have such statutes, with some courts holding that they have the inherent power to order consolidation while other courts hold that they cannot do so absent a specific provision in the statute.
The FAA does not have a consolidation provision and, by and large, federal courts have held that they do not have the power to order consolidation. This raises the question of whether the absence of a consolidation provision in the FAA would preempt such a provision in the RUAA. At least one court has said that this is not the case. Blue Cross of California v. Superior Court , 67 Cal. App. 4th 42, 78 Cal. Rptr. 2d 779 (1998).
Section 7(a) of the RUAA would allow a court to order consolidation of separate arbitration proceedings on the application of a party if the disputes in the various underlying proceedings arise in substantial part from the same transactions or a series of related transactions and there is a common issue of law or fact creating the possibility of conflicting rulings by more than one arbitrator or panel of arbitrators.
However, the act also allows for substantial limitations on the power to consolidate. The most effective of these limitations would be a provision in an arbitration contract that specifically prohibits consolidation. Such a provision would trump the act and one might expect to see such provisions in construction contracts where the traditional combatants are contractors, architects and owners who often enter into separate contracts with each other.
Consolidation would also be prohibited if it would substantially prejudice the rights of a party. For example, there would be no consolidation if the respective arbitration agreements provide for different methods of selecting arbitrators or provide for arbitration before different forums or even different hearing locales if such locales are sufficiently removed from each other. Finally, consolidation would also be prohibited if it led to significant delay or hardship to a party opposing consolidation. Thus, there would be no consolidation if one of the proceedings had been underway for a substantial period of time.
Section 9 of the RUAA deals with arbitrator disclosure. Generally speaking, an arbitrator who is aware of certain facts about himself or herself that might be of some concern to the parties could still issue a decision that is safe from vacatur if the arbitrator makes a specific disclosure and no action is taken by the parties to disqualify the arbitrator.
The initial drafts required a potential arbitrator to disclose any facts reasonably likely to affect the arbitrator’s impartiality. The current draft changes that language to "which a reasonable person would consider likely" to affect impartiality. The reason for this change was the belief that circumstances should affect the outcome. For example, in some cases the parties may be very familiar with the arbitrator and aware of his or her background and so less disclosure is needed.
If an arbitrator fails to make an adequate disclosure, the award rendered by that arbitrator could be subject to a successful attack on a motion to vacate. The basis for the motion to vacate would be Section 20(a)(2), which allows vacatur where there is evident partiality, corruption or misconduct by an arbitrator that prejudices the right of a party. Sometimes an arbitrator may not be aware of a problem that, if known, should have been disclosed. In such event, it would be up to the court deciding the motion to vacate to decide the fate of a decision on the facts before it.
However, if the arbitrator fails to disclose a known direct, material or personal financial interest in the outcome of the arbitration or a known substantial relationship with a party, a lawyer or representative, a witness or other arbitrator, then there is a presumption of evident partiality and the award is likely to be vacated.
Although the language in the section is relatively straightforward and probably does not change existing law, there could be a problem in the case of a party arbitrator. Is a party arbitrator neutral or predisposed? If predisposed, why is there a need for disclosure? If there is a need for disclosure, to whom should the disclosure be made? Section 9 is designed to assist the parties when they decide on an arbitrator but a party arbitrator is selected by just one party. Thus, there would appear to be no need for the party arbitrator to make any sort of disclosure to the other party or parties in the matter. Nevertheless, the reporter’s notes indicate that the integrity of the process demands that party arbitrators, like other arbitrators, disclose pertinent interests and relationships to all parties as well as to other members of the arbitration panel.
The RUAA takes a mild approach with respect to discovery. Basically, Section 14 of the act follows the majority approach that, unless the parties otherwise agree, discretion rests with the arbitrator with respect to the issue of discovery. However, if a party refuses to comply with a discovery order issued by an arbitrator, new Section 15 allows a party to apply to a court for an expedited summary order to enforce the arbitrator’s ruling.
Indeed, Section 15 would probably apply to any type of pre-award ruling by the arbitrator. For example, a party could challenge a ruling by the arbitrator determining whether a document or statement is privileged. The act really does not change existing law because courts have been quite willing to review arbitrators’ decisions concerning privileges prior to the issuance of the final award. See Hull Municipal Lighting Plant v. Massachusetts Municipal Wholesale Electric Co., 414 Mass. 609, 609 N.E.2d 460 (1993); DiMania v. New York State Dept. of Mental Hygiene, 87 Misc. 2d 736, 386 N.Y.S.2d 590 (1976). However, a decision by a court pursuant to Section 15 is not one of the appealable orders that are set forth in Section 26 of the RUAA.
The RUAA has been drafted with the current realities of arbitration practice in mind. In that sense, it will be a more modern act than the FAA. If the RUAA is adopted by most states in close to its current form, it would be interesting to see if this will have any effect on the FAA.
