Revised Code of Ethics Takes Hold, The

Dispute Resolution Journal, Aug-Oct 2006 by Tuchmann, Eric P

ETHICS IN ARBITRATION

On June 12, 2006, two state supreme courts issued decisions addressing the neutrality of party-appointed arbitrators that relied, in part, on the American Arbitration Association/American Bar Association Code of Ethics for Arbitrators in Commercial Disputes as revised in 2004.

The Wisconsin and Rhode Island Supreme Courts both vacated arbitration awards because of a close relationship between a party-appointed arbitrator and the party that appointed him. Borst v. Allstate Insurance Co., 717 N.W.2d 42 (Wis. 2006) and McGinity v. Pawtucket Mutual Insurance Co., 899 A.2d 504 (R.I. 2006).

Source of Ethical Guidance

The Code of Ethics has served as the primary source of ethical guidance for arbitrators since 1977, when it was originally drafted. While the Code did not carry the force of law, it was cited with approval in dozens of court opinions. After a number of years of deliberations by a joint committee composed of representatives from the AAA and the ABA, the Code was revised in 2004 to bring it into conformity with contemporary practice. While its basic architecture remained the same, the Code was revised in some significant ways.

The most significant revision to the Code was contained in the provision dealing with party-appointed arbitrators. The 1977 version of the Code presumed that all partyappointed arbitrators were not neutral (i.e., they could be partial to the party that appointed them). Therefore, party-appointed arbitrators could not be challenged because of partiality toward the appointing party or attorney, or a conflict of interest, no matter how direct or substantial. The parties were free to agree that party-appointed arbitrators would act as neutral arbitrators, but in the absence of such an agreement, it was presumed that the parties desired non-neutral arbitrators.

The revised Code of Ethics changed this by reversing the presumption of neutrality so that partyappointed arbitrators were presumed to act as neutral arbitrators. Consequently, they became subject to challenge based on allegation regarding their partiality or lack of independence involving any party, attorney, or witness who participates in an arbitration. The revised provision requiring neutrality of arbitrators appointed by a party is explicitly enunciated in the "Note of Neutrality" in the 2004 Revised Code of Ethics, which reads:

This Code establishes a presumption of neutrality for all arbitrators, including party-appointed arbitrators, which applies unless the parties' agreement, the arbitral rules agreed to by the parties or applicable laws provide otherwise.

A second major change to the Code of Ethics subjected all arbitrators, including party-appointed arbitrators, to the same disclosure requirements. The revised provisions call for all arbitrators to disclose conflicts of interest or relationships that are likely to affect their impartiality or might create an appearance of partiality. These disclosure requirements are contained in Canon II of the 2004 Code. Matters that should be disclosed under Cannon II include financial interests in the outcome of the arbitration, as well as financial, business, professional and personal relationships that might reasonably affect impartiality or lack of independence in the eyes of any of the parties. All arbitrators must also disclose any prior knowledge they may have about the dispute, and any other relationships or interests that must be disclosed under the rules of an administering institution, the parties' agreement, or applicable law.

These broad disclosure requirements were made to ensure that all parties learned of any relationships between an arbitrator (even a party-appointed arbitrator acting in a nonneutral capacity) and a party, attorney, or witness in an arbitration proceeding.

The AAA and the ABA determined that these revisions were necessary in light of the expressed preference for neutral party-appointed arbitrators by the majority of parties who use arbitration to resolve their disputes. In addition, the revisions were necessary to bring the Code into conformity with international practice, which has long required neutrality by all arbitrators, including party-appointed arbitrators.

Recent Cases

The change in the presumption of neutrality for party-appointed arbitrators was pivotal in the Borst and McGinity cases, which involved remarkably similar facts.

In Borst, a dispute arose out of an automobile accident regarding the amount due to a policyholder under an Allstate uninsured motorist policy. The arbitration clause in the Allstate policy called for each party to name an arbitrator, and then for the two partyappointed arbitrators to name the third arbitrator. The arbitration agreement did not specify whether the party-appointed arbitrators were to act in a neutral or nonneutral capacity. Borst commenced arbitration against Allstate and named an arbitrator. Allstate then named an arbitrator, which drew an immediate objection from Borst because Allstate's arbitrator was an attorney at a firm in which Allstate was a client.