One or Two Month Delay Due to Arbitration Selection Does Not Entitle Court to Appoint Arbitrator

The Supreme Court of Texas issued three decisions last week that all relate to arbitrator selection and offer reminders to drafters and litigators that arbitrator selection is a critical component of arbitration agreements.

Two of the decisions involved tort claims against the same defendant, a cemetery owner. In re Serv. Corp. Int’l, ___ S.W.3d ___, 2011 WL 6276124 (Tex. Dec. 16, 2011); In re Serv. Corp. Int’l, ___ S.W.3d ___, 2011 WL 6276126 (Tex. Dec. 16, 2011). The arbitration provisions within the cemetery owner’s contracts called for the parties to choose an arbitrator by agreement, but if that was not possible, the American Arbitration Association was authorized to select the arbitrator. In one of the cases, it took several months for the parties to agree on an arbitrator, and that individual was then disqualified based on his previous representation of the defendant. About a month after the disqualification, the trial court concluded that the parties were unable to agree on an arbitrator and appointed an arbitrator of the court’s choosing. The Supreme Court of Texas issued a writ of mandamus, directing the trial court to vacate its appointment of the arbitrator. The court analyzed Section 5 of the Federal Arbitration Act, which governs how and when courts may intercede in arbitrator selection. Section 5 provides that the selection provisions in the contract “shall be followed,” but if the parties “fail to avail” themselves of such a method or if there is a “lapse” in the naming of an arbitrator, the court may appoint the arbitrator.

Though the Texas court noted that previous cases have found a five month “lapse” in arbitrator selection was sufficient to allow the trial court to step in, it held that an impasse of “at most one month” did not constitute a “lapse” within the meaning of Section 5. (In the second cemetery case, the Texas court also issued a writ of mandamus, directing the trial court to vacate its order appointing an arbitrator, when there had been a two-month delay in the selection of an arbitrator.) Would three months be enough? Or four? Those are questions for another day…

Texas’ third arbitrator selection case from December 16 relates to whether a party-appointed arbitrator must meet the regular standards of the AAA, or only the requirements of the contract. Americo Life, Inc. v. Myer, __ S.W.3d __, 2011 WL 6276529 (Tex. Dec. 16, 2011). In the Americo case, the contract provided that the arbitration would be decided by a panel of three arbitrators: each party would appoint an arbitrator who is a “knowledgeable, independent businessperson or professional” (does that really cut down the list of possibilities?). The two chosen arbitrators would then select the third arbitrator. The contract also incorporated the commercial arbitration rules of the AAA, which provide that arbitrators shall be “impartial and independent.” Americo’s chosen arbitrator ended up being removed by the AAA for lack of impartiality. After Americo lost the arbitration (unanimously), it moved to vacate the award, arguing that the arbitration panel was not formed according to the parties’ contract. Americo argued that the party-appointed arbitrators only had to be “knowledgeable, independent business[people]” and did not have to meet the impartiality standards of the AAA. The Supreme Court of Texas did not address the merits of that dispute, however, and just clarified that Americo had properly preserved that issue for appeal.

These three cases illustrate that if the parties are going to insert an arbitrator selection process in the contract that varies at all from the “standard” arbitration rules they are incorporating, it is worth the time to clarify any potential inconsistencies between those two processes. It also shows that if there are alternative processes offered (like first trying to mutually agree, and then going to the AAA), it may be worth spelling out how to determine when the first process has failed and how the parties must move to the second option.

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by Liz Kramer

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com