Arbitrator Selection Process and New Ethical Standards
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.
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
in Arbitrator Selection
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.
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.
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.
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.
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
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.
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.
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?
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.
Ethics: Newly Revised Standards
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
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.
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.
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.
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.
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
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
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.
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.
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.