AAA, JAMS or Private: How Arbitrators Are Chosen and Why It Matters

The contract comes first

Arbitration is a creature of contract, and so is the choice of the person who decides it. Section 5 of the Federal Arbitration Act provides that if the agreement names a method of appointing an arbitrator, that method shall be followed. Section 171.041(a) of the Texas Civil Practice and Remedies Code says the same: the method of appointment is as specified in the agreement to arbitrate. If your clause says "a single arbitrator selected by agreement of the parties within 30 days, failing which by the AAA," that is the procedure, and neither side can skip to a court or a different provider.

Most business clauses do not spell out a method. They name a provider, most often the American Arbitration Association or JAMS, and incorporate its rules. The provider's rules then supply everything the clause left out, including the number of arbitrators and how they are chosen.

The AAA list procedure

Under Rule R-13 of the AAA Commercial Arbitration Rules, when the parties have not appointed an arbitrator and have not agreed on another method, the AAA sends each party an identical list of ten names from its National Roster, unless the AAA decides a different number is appropriate. The parties are encouraged to agree on someone from the list. If they cannot, each party has 14 calendar days from the transmittal date to strike the names it objects to, number the remaining names in order of preference, and return the list. The parties do not exchange their lists. A party that fails to return its list is deemed to accept every name on it. The AAA then invites the highest mutual preference to serve. If no mutually acceptable name remains, or none can act, the AAA appoints from the Roster without sending more lists.

Two features deserve attention. First, the AAA may limit the number of strikes, so a party cannot strike everyone. Second, the 14-day deadline is short and the default for silence is harsh: miss it and you have accepted the other side's preferred names. The list arrives with each candidate's biography and disclosures, and the days after it arrives are when counsel does the research described below.

Party-appointed arbitrators and the chair

Larger contracts often provide for three arbitrators: each side appoints one, and the two appointees, or the parties, or the provider, choose the chair. Rule R-14 governs direct appointment. Where the agreement names an arbitrator or a method, the AAA follows it; where a party is to appoint and fails to do so within the agreed time, or within 14 days of the AAA's notice if no time is agreed, the AAA makes the appointment. Rule R-15 covers the chair: the agreement's method controls, and if the party-appointed arbitrators or the parties do not agree within 14 days of the last party appointment, the AAA may appoint, using the list procedure of R-13 among the party-appointed arbitrators.

An important change in modern rules is that party-appointed arbitrators are presumed neutral. Under R-14(b) and R-19, an arbitrator named by one side must meet the same standards of impartiality and independence as the chair unless the parties have specifically agreed in writing that party appointees are to be non-neutral. The older practice of each side appointing an advocate has not disappeared, but it must now be chosen expressly.

How many arbitrators

Rule R-17 provides that if the agreement does not specify the number and the parties do not otherwise agree, one arbitrator decides the case, unless the AAA in its discretion directs three. The FAA's § 5 has the same default of a single arbitrator. Phrases such as "the arbitrator" or "the arbitrators" in a clause are not, under R-17(b), treated as an agreement on number. A party may request three in its demand or answer, and the amount in dispute is the usual reason the AAA grants it. Three arbitrators roughly triple the arbitrator compensation and lengthen scheduling; what that does to the budget is discussed in whether arbitration really costs less than litigation.

When the method fails: court appointment

If the agreement has no method, or the agreed method breaks down, or an appointed arbitrator cannot or will not serve and no successor is named, either party may apply to a court. Under 9 U.S.C. § 5 the court shall designate and appoint an arbitrator, who then has the same powers as one named in the agreement. Section 171.041(b) of the Texas act gives a state court the same power in the same three situations, and § 171.041(c) gives the court's appointee the powers of an arbitrator named in the agreement. This is the backstop that keeps an arbitration clause from failing because one side refuses to participate in selection.

Disclosure, and why nondisclosure can undo an award

Because an arbitrator's decision is nearly final, the rules on conflicts are strict. Rule R-18 requires any person appointed or about to be appointed to disclose to the AAA any circumstance likely to give rise to justifiable doubt as to impartiality or independence, including any financial or personal interest in the result and any past or present relationship with the parties or their representatives. The duty continues throughout the case. Rule R-19 subjects an arbitrator to disqualification for partiality or lack of independence, and the AAA's decision on a disqualification objection is conclusive within the arbitration.

The courts add teeth after the award. Both the FAA, 9 U.S.C. § 10(a)(2), and the Texas act, § 171.088(a)(2)(A), allow a court to vacate an award for evident partiality by an arbitrator appointed as a neutral. In Burlington Northern Railroad Co. v. TUCO Inc. (Tex. 1997) the Texas Supreme Court held that a neutral arbitrator who fails to disclose facts that might, to an objective observer, create a reasonable impression of partiality exhibits evident partiality, and that the nondisclosure itself establishes it whether or not the arbitrator was actually biased. The arbitrator there had accepted a substantial referral from the law firm of a co-arbitrator while the case was pending and said nothing; the award was vacated. The lesson for parties is to raise a conflict the moment it is known, because a party that learns of a relationship and proceeds without objecting will have a hard time complaining later. The other grounds for vacating an award are covered in whether an arbitration award can be appealed or vacated.

What to look for in a candidate

• Subject-matter background. A construction dispute benefits from an arbitrator who has read a pay application; a software dispute from one who understands a statement of work. Biographies on the list show practice history and prior appointments.
• Published decisions and writing. Many arbitrators are former judges or active lawyers whose opinions, articles and speeches reveal how they think about damages, dispositive motions and discovery.
• Approach to procedure. Under the AAA rules the arbitrator controls the exchange of information and may allow dispositive motions only if they are likely to succeed. A candidate's reputation for running a tight or a loose process matters as much as expertise.
• Availability. A sought-after arbitrator with no hearing dates for a year defeats the point of arbitrating.
• Disclosures. Read them, then check them. Prior appointments by the other side's counsel, shared bar activities, and business relationships are all fair grounds for a strike.

Example

Suppose a Dallas commercial contractor and a developer arbitrate a $2.1 million dispute under a clause that names the AAA and says nothing else. The AAA proposes three arbitrators given the amount; the contractor, mindful of cost, proposes one, and the parties agree on one. The AAA sends a list of ten. The contractor's counsel strikes two retired judges with no construction background and a lawyer who has been appointed four times by the developer's firm, and ranks the rest. The developer's counsel returns its list on day 15. Under R-13(b) the developer is deemed to have accepted every name on the list, so the appointment follows the contractor's ranking, and a construction lawyer with twenty years of arbitration experience is appointed. Six weeks in, that arbitrator discloses that her firm has just been retained by the developer's lender in an unrelated matter. The contractor objects within days; the AAA considers the objection under R-19. Whatever the outcome, the contractor has preserved the evident-partiality ground that silence would have forfeited.

Drafting the clause before the dispute

Every problem above can be prevented in the contract. Name the provider and the rules. Say how many arbitrators and set a dollar threshold for three. Require that arbitrators have a stated minimum of experience in the subject matter. Say whether party appointees are neutral. Set a time limit for agreement on a single arbitrator and name the provider as the fallback. A clause of five sentences removes most of the selection fights, and the balance of the process is described in how business arbitration works, step by step.

Tina Wysk represents businesses in AAA, JAMS and privately administered arbitrations in Dallas, including arbitrator selection and challenges. Her arbitration and mediation practice page has more.