102 Alternatives CPR Institute for Dispute Resolution Vol. 13, No. 8 August 1995

Case Illustrates Pitfalls of Arbitration Clauses By James P. Mercurio

A recent decision by the District of Columbia Court of Appeals illustrates a common error in drafting arbitra- tion clauses.

The case, Carter u. Cathedral Avenue Cooperative, Inc., involved a clause that called for a “tripartite” panel of arbitra- tors, 1995 DC App LEXIS 107. Under such clauses, each side appoints an ar- bitrator within agreed time periods, and those two arbitrators select a third. If one side fails to appoint its arbitrator within the specified time, however, the typical tripartite clause calls for a Draconian measure: submission of the underlying dispute to the arbitrator the other side has selected.

Over the years, courts have been asked to mitigate the harsh effect of these clauses. Some courts have held that, at

James l? Mercurio is a lawyer with the firm of Arent, Fox, Kantnq Plotkin & Kahn in Wash- ington, D. C. He represented Cathedral Av- enue Cooperative in the case discussed here.

least in the absence of prejudice to the other side, a partywho has failed to meet the contract deadline can nonetheless appoint an arbitrator so that the tripar- tite panel can be formed. See, e .g , TexaJ Eastern Transmission Co?. u. Barnard, 285 F.2d 536 (6th Cir. 1960). Other courts have opted for strict construction and held that any failure to meet the agreed deadline-even by a few days-results in the party’s having to submit the dis- pute for resolution by an arbitrator ap- pointed by the other side. See, e.g., Universal Reinsurance Corp. u. Allstate Ins. Co., 16 F.3d 125 (7th Cir. 1994).

In its May 31 decision, the District of Columbia Court of Appeals took a third course. The case before it involved an arbitration clause in a 99-year ground lease. When the landlord invoked the arbitration clause and named an arbi- trator, the tenant brought an action to enjoin the arbitration and-before the 30-day period for the tenant to name its arbitrator had expired-obtained a re- straining order against the arbitration.

After five years of litigation, an appel- late court vacated the order. Finally free

to proceedwith the arbitration, the land- lord waited several months. Then, cit- ing the passage of more than 30 days since he had named his arbitrator, the landlord invoked the strict rule for arbi- trator selection found in the lease. He notified the tenant that their dispute had to be submitted to the arbitrator who the landlord named five years before.

The tenant responded by naming an arbitrator and demanding that a tripar- tite panel be formed to arbitrate both the underlying dispute and the thresh- old question of whether it had lost the right to have a tripartite panel decide the case.

On the landlord’s motion to compel arbitration before a single arbitrator, the trial court ordered the arbitration to proceed before a tripartite panel. That panel could address the question ofwhether the sole arbitrator the land- lord had appointed should decide the underlying dispute, the trial court said.

The District of Columbia Court of Appeals affirmed. Central to the courts’ approach was the fact that the tenant (continued on buck page)

Court Says Arbitrator Doesn’t Have Conflict Just Because Prior Firm Worked for a Party With the recent increase in lawyer mobility, people who work as arbitra- tors and mediators may face difficult conflicts issues. How deeply must they probe their professional pasts when doing conflicts checks?

Faced with a case that raised this question, a California Court ofAppeal chose not to applyapersetest. The case involved an arbitrator whose prior firm had a relationship with one of the par- ties to the arbitration. But the court found that alone was not a reason to vacate an arbitral award.

At the heart of the matter was a gar- den-variety partnership dispute. Heide Betz and Charles Pankow, the partners, turned to arbitration when they could not agree on terms to dissolve their business. A panel of three arbitrators ruled in favor of Mr. Pankow. Later, Ms. Betz learned that one of the arbitra-

tors had been a partner in a law firm that represented three businesses bear- ing Mr. Pankow’s name. Based upon this new information, Ms. Betz moved to vacate the judgment.

Two years of litigation followed. In the course of it, a trial court found that the arbitrator’s past professional relation- ship with his previous firm created a rea- sonable impression of possible bias. In fact the arbitrator, David Sandborg, had not met Mr. Pankow, worked on his case, or even known that Mr. Pankow had been a client of the firm. But the lower court found that the arbitrator should have conducted a conflicts check with his previous firm or disclosed his rea- sons for not doing so.

The Court of Appeals applied an objective standard, with a very differ- ent result. A conflicts check would have been impossible for Mr. Sandborg to

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conduct since he no longer worked at the firm, the court said.

What’s more, the American Arbitra- tion Association rules, which governed the proceeding in question, only re- quire arbitrators to make a reasonable effort to discover past professional or business relationships. Since Mr. Sandborg no longer had access to the client list of his former firm, the court determined that his actions satisfied the AAA standards.

Nor did the facts suggest that Mr. Sandborg had been biased in Mr. Pankow’s favor. Mr. Sandborg had never met Mr. Pankow and didn’t know that his office had ever represented Mr. Pankow’s businesses (it had done so in just one action) .Therefore, the court refused to vacate the arbitration award. Betz u. Pankow, No. 902-532 (Ct.App.

- A 11111 First App. Dist. Jan. 31, 1995).