The Arbitrator Selection Process and New Ethical Standards

By Elizabeth Shampnoi

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DECEMBER 2005 - Disputes are an inevitable reality of day-to-day business practice that corporations, individuals, and government agencies face. Unfortunately, such disputes often lead to wasted time and money during the course of a lengthy litigation. Alternative dispute resolution (ADR) techniques, such as mediation and arbitration, have been utilized by the accounting profession for decades, and such methods of resolution continue to gain in popularity. ADR encompasses a range of flexible, economical, private, fast, and impartial processes for handling disputes that accounting professionals face, such as disagreements over fees, performance, partnership dissolutions, and breaches of contract, as well as disputes over sales or purchases, employment, construction, and real estate.

By its nature, the arbitration process allows parties to avoid the delay, expense, and formalities associated with litigation. Arbitration is a forum in which the parties can control the process. They can control the range of issues to be decided, the scope of relief to be awarded, the qualifications of the neutrals, and many of the procedural aspects of the process. Arbitration is generally a less formal proceeding than litigation, and discovery is limited, as compared to the protracted discovery in litigation that tends to be time-consuming, costly, and often unnecessary. Arbitration is also private and confidential. Another advantage of ADR processes, particularly mediation, is their ability to preserve business relationships.

Options in Arbitrator Selection

One of the primary advantages of arbitration often cited by parties is the ability to choose a decision maker with expertise that mirrors the nature of the dispute. In arbitration, parties can mutually agree upon who will serve as their arbitrator. Because arbitrator selection is pivotal to the quality and outcome of the proceeding, careful consideration should be given to how the arbitrator will be selected, how many are needed, and their specific qualifications.

Arbitrators are recognized for their standing and expertise in their fields, their integrity, and their dispute-resolution skills. By using an experienced arbitrator, the parties can avoid extraneous matters and get to the heart of the issue much sooner, saving both time and money, because there is no need to educate the arbitrator about the field of the dispute.

First, the parties must determine how many arbitrators will be appointed to hear the dispute. A single arbitrator is frequently chosen for small and mid-size cases, while for larger, more complex matters, parties may prefer a panel of three arbitrators. A “less is more” attitude may be advantageous when choosing the number of arbitrators to serve. For example, three arbitrators may lead to a loss of efficiency and economy of the process, depending on the nature of the case. It is often difficult for parties and their counsel to agree on mutually convenient dates, and scheduling may become difficult with three arbitrators.

Furthermore, the use of CPAs, lawyers, and judges with substantial experience in a given field or industry, or the combination of three individuals with diverse backgrounds, may alter how a hearing is conducted and affect how a dispute is considered and analyzed. In larger and more complex cases, three experienced arbitrators with diverse backgrounds may enhance the breadth of the decision-making process.

Once the parties are prepared to select the arbitrators, they should attempt to mutually agree on the appropriate individual for their case. In a highly contentious case, however, this is not always possible. When parties cannot agree, they may opt for the strike and rank method, outlined in R-11 of the American Arbitration Association’s (AAA) Commercial Arbitration Rules and Mediation Procedures (available at www.adr.org). This method begins with the parties providing the case manager with the qualifications they are seeking in an arbitrator. For example, they might desire commercial litigators with experience in accounting disputes, or CPAs that handle business valuations. The case manager then develops a list that meets the parties’ expectations. If the parties cannot agree, they must choose who they want to eliminate, and rank those remaining in order of preference. The AAA then tallies the results and appoints the arbitrator ranked highest by the parties. If the parties do not return the lists, the AAA will deem all arbitrators to be acceptable and invite an arbitrator from that list to serve. The parties may also request that the AAA administratively appoint the arbitrator.

Another selection process is the party-appointed method. This system allows each party to pick its own arbitrator, and those two generally select a third individual, who generally serves as the chairperson. Historically, the benefit of this selection process was having someone on the panel to act as each party’s own advocate during the arbitration by trying to sway the third arbitrator. The party-appointed arbitrator is generally paid by the party that selects them, and the opposing party has no input into the selection process.

This method is often disfavored for a number of reasons. For example, why would one need an arbitrator to act as an advocate when the parties are represented by counsel? What is the proper conduct of each party-appointed arbitrator with the chair? Doesn’t this method put the neutral in an awkward position? How much convincing should they be allowed to do? Do the party-appointed arbitrators cancel each other out, leaving the ultimate decision with the chair?

One might argue that the purpose of a party selecting its own arbitrator is to have an advocate who understands the party’s particular field and offers insight to a chairperson who might not have experience in that area. It is also argued, however, that neutrality should never be sacrificed for this gain. Furthermore, because arbitrators are available from most industries, the need for such practice is lessened, and often an expert can serve this role through direct testimony.

Arbitrator Ethics: Newly Revised Standards

The AAA adopted a newly revised code of ethics for arbitrators in commercial disputes in March 2004 that addresses the subject of party-appointed arbitrators. It is important that parties are aware of these guidelines, particularly in preparing for and executing the arbitrator-selection process.

For more than 25 years, the AAA/ American Bar Association (ABA) Code of Ethics for Arbitrators in Commercial Disputes served as the definitive source of ethical guidance for arbitrators and others involved in the dispute-resolution field. The code has practical application to arbitrators serving on cases administered by the AAA, because AAA arbitrators sign an oath stating they will abide by the code.

As noted in the 2004 revised code’s preamble, the use of arbitration forms a significant part of the system of justice on which society relies for a fair determination of legal rights. Arbitrators, therefore, undertake serious responsibilities to the public as well as to the disputing parties; those responsibilities include important ethical obligations. Few cases of unethical behavior by commercial arbitrators have arisen, but the code sets forth standards of ethical conduct for the guidance of arbitrators and parties in commercial disputes in the hope of contributing to the maintenance of high standards and continued confidence in the process of arbitration.

The provisions of the revised code are subject to any contrary principles that may be found in governing law or applicable arbitration rules, and also defer an agreement of parties to an arbitration to proceed under different rules or standards.

Two of the most substantive changes in the code related to party-appointed arbitrators are the following:

  • Presumption of neutrality. A presumption of neutrality is applied to all arbitrators, including party-appointed arbitrators. This reverses the presumption of nonneutrality for party-appointed arbitrators that was in the 1977 code. The concept of neutrality encompasses both independence and impartiality. When the parties use nonneutral arbitrators, the revised code delineates ethical obligations that nonneutral arbitrators are expected to maintain.
  • Duties of party-appointed arbitrators. Party-appointed arbitrators are obligated, under the revised code, to ascertain and disclose whether they will be acting as neutral or nonneutral arbitrators as early in the arbitration as possible. In the event of doubt or uncertainty, party-appointed arbitrators will serve in a neutral capacity until such doubt or uncertainty is resolved.

Other changes to the code include the following:

  • Duty to disclose interests and relationships. The revised code subjects all arbitrators, whether serving as neutral arbitrators or nonneutral arbitrators, to the same obligation to disclose interests or relationships likely to affect impartiality or to create an appearance of partiality.
  • Communications with the parties and other arbitrators. Limits on permissible communications between arbitrators and parties are clarified. The revised code established new guidelines regarding communications between party-appointed arbitrators and the chair of the tribunal in tripartite arbitrations.
  • Arbitrator suitability. In addition to imposing impartiality and independence standards that form the basis of the presumption of neutrality, arbitrators are obligated to determine their competence and availability to serve in the case.

Greater Confidence

The flexibility of the arbitrator-selection process, coupled with important ethical standards for arbitrators, should instill confidence in the arbitration process. By utilizing the method that best meets their needs, parties to a business dispute can effectively choose an arbitrator who will hear their case in a fair, efficient, and unbiased manner, with the highest standards of independence and neutrality.


Elizabeth Shampnoi, JD, is the district vice president of the New York region for the American Arbitration Association. She routinely works with corporations, law firms, and professional organizations on matters related to alternative dispute resolution. She is admitted to practice in New York and Connecticut.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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