ADR

Editor's note: This article describes a hypothetical situation.

Nothing is easy or expeditious when it comes to the arbitration agreements that Bob drafts. He spends lots of time and lots of his clients' money to incorporate all kinds of so-called protective provisions. “This way,” he tells clients, “I get the best and avoid the worst of arbitration.”

Bob's present predicament is another example of his seeking-to-have-his-cake-and-eating-it-too philosophy.

Bob understood that a court's review of an arbitration award is so deferential that it is virtually impossible to vacate a legally erroneous award. A court will not vacate an award even if an arbitrator makes mistakes of law (or fact), so long as the arbitrator acted within the bounds of his bargained-for authority. How could Bob cure this problem? By incorporating an arbitration appellate review panel into his boilerplate arbitration agreement. Here is what Bob came up with:

The arbitrator's award will be final and binding, except that any party may appeal the award to a three-arbitrator panel (panel) appointed by XYZ arbitration company—provided the appeal is filed no more than 30 days after entry of the award. The panel will reconsider de novo any aspect of the appealed from award. The panel's decision will be final and binding. Any court with jurisdiction may enter judgment upon the panel's award.

One problem with Bob's appeal program: it applied to any arbitration award, no matter how small. Result: Bob's clients often won an arbitration award, but then faced a time-consuming de novo “appeal” to a three-arbitrator panel. No less than four arbitrators ended up considering the merits of the small dispute. “But this appeal process corrects errors and leads to justice,” Bob protested. “Enough is enough. This make-work review program enriches lawyers and arbitrators alike,” sneered Bob's former clients.

Bob's current quandary did not involve a small arbitration award. The award in favor of Bob's client was for more than $1 million dollars. And maybe it was not a predicament after all—Bob's adversary inexplicably did not file an appeal to the three-arbitrator panel until more than two months after the entry of the award.

Because his adversary seemingly had blown the 30-day appeal period, Bob concluded there was no reason to delay entry of judgment. Always Johnny on the spot, Bob moved under 9 U.S.C. Section 9 to confirm the award in a federal district court because there was diversity and the amount in controversy was for well more than $75,000. He explained his strategy to his client: “No reason to slug out the timeliness issue before a three-arbitrator panel. The other side waited too long to take advantage of the appeal process. I'm going to save you lots of time and money by going directly to court.”

Bob was astounded when his adversary sought to dismiss Bob's attempt to obtain judgment. Relying upon “the complete arbitration rule,” Bob's adversary said it was up to the three-arbitrator panel and no one else, including a court, to consider whether the requested de novo appeal was untimely.

“Nonsense,” Bob told the court: “How can the other side say that a panel with no jurisdiction has jurisdiction to consider the timeliness issue? Talk about putting a rabbit in a hat! Makes no sense.”

Except when it does make sense—the court granted the motion to dismiss Bob's attempt to obtain a judgment on the arbitration award because Bob's attempt was “premature.” Which means Bob's gambol of going into court wasted more time and more money.

What happened? Two things.

First, under the “complete arbitration rule,” a federal district court, absent exceptional circumstances, should not entertain an attempt to confirm an arbitration award until the arbitration is all over. Reviewing an award before the parties complete the arbitration would delay the process and could result in piecemeal litigation. Here, the “complete arbitration rule” applies; thanks to Bob's arbitration appellate review panel program, the arbitration process was by no means over—the parties had not even presented their positions to the panel regarding the timeliness of Bob's adversary's appeal so the arbitrators still had work to do.

Second, Bob's arbitration agreement incorporated the rules of XYZ arbitration company. Why? Because—apparently unbeknownst to Bob—the XYZ rules said that the parties automatically incorporated the XYZ rules into their arbitration agreement if the parties' agreement provided for arbitration by XYZ (which the Bob-drafted agreement did); and “the arbitrator(s) shall have the power to rule on his, her or their own jurisdiction.” (Is it any surprise that Bob neglected to read the XYZ rules when he drafted the arbitration agreement?) So it is not up to a court to determine whether Bob's adversary's “appeal” was untimely. That is up to the three-arbitrator panel.

As a matter of law, Bob may well be right that his adversary blew the 30-day appeal period. But Bob should have slowed down and presented his contention to the three-arbitrator appellate panel in the not-yet-concluded arbitration process. By leapfrogging over the arbitrators and into court, Bob did exactly the opposite of what he intended to do—he wasted lots of time and lots of his client's money.

Bob could have avoided this result by drafting the arbitration agreement differently. If Bob did not want the arbitrators to consider arbitrability issues, he then should have included the following in the arbitration agreement:

The arbitrator(s) shall not have any authority or power to consider or rule on his, her or their jurisdiction, including any objection regarding the arbitrability of any claim, counterclaim or de novo appeal to the panel.

A court faced with this provision would not have been able so easily to conclude that the parties agreed to let the arbitrators determine arbitrability.

But don't breathe a sigh of relief for Bob. This suggested modification will not always give him what he wants.

Consider how Bob would feel if he sought to take advantage of the three-arbitrator appellate review panel after his client lost before a single arbitrator; and his adversary simultaneously went to court to try to confirm the single-arbitrator arbitration award. Under the modified process, the court would determine whether Bob had the right to appeal to the appellate review panel; the modified provision says that the arbitrator(s) does not have the authority to determine this jurisdictional issue.

However, by giving the court the authority and power to determine the arbitrability question—the reverse of what happened above with Bob's million dollar plus award—there could be a significant delay in the process. If the court agrees with Bob's substantive argument, the court then would send the matter back to arbitration so Bob's client could take advantage of the appellate review process. The result: piecemeal litigation, more delay, increased legal fees. It would have been more expeditious and cost effective if the arbitrator(s) had had the power and authority to decide this arbitrability issue.

Who said, “You can't always get what you want”?

Charles F. Forer independently provides arbitration, mediation and all other neutral services. He is a former chair of both the Philadelphia Bar Association's alternative dispute resolution committee and fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings. Contact him at 610-999-5764 and c[email protected].