ADR Spotlight: Judicial intervention in arbitration proceedings pre-award

By Gene J. Esshaki

The Federal Arbitration Act was enacted in 1925 to counter widespread judicial hostility to private arbitration agreements.  The Act, 9 USC 1 has been interpreted in its text and structure to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. AT&T Mobility LLC v Concepcion, 131 S Ct 1740 (2011).  Since the inception of the Act, courts have recognized that the underlying purpose of the legislation was to ensure that parties to a contract containing an arbitration clause would be entitled to the same rights to enforce that clause as exists in all other contracts between parties.  Courts have consistently held that the FAA establishes a strong federal policy in favor of enforcing arbitration agreements.

Section 10 of the FAA establishes for extremely limited grounds upon which an arbitration award may be attacked.  These include: 

(1) Where the award was procured by corruption, fraud, or undue means;

(2) Where there was evident partiality or corruption in the arbitrators, or either of them;

(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.  9 USC 10. 

In reliance upon this language, courts have consistently held that in order to implement the strong federal policy in favor of enforcing arbitration agreements and because the scope of judicial review of arbitration awards was so limited, courts should not intervene in the arbitration process until the award has been issued.  The United States Supreme Court has held that to maintain “arbitrations essential virtue of resolving disputes straightaway,” courts may vacate an arbitration award “only in very unusual circumstances.”  Oxford Health Plans LLC v Sutter, 133 S Ct 2064 (2013).  The Supreme Court indicated that “[i]f parties could take full-bore legal and evidentiary appeals, arbitration would become merely a prelude to more cumbersome and time consuming judicial review process.”  The court concluded that there are only two stages at which a court may intervene in an arbitration proceeding.  Initially, a court may intervene to decide gateway matters such as arbitrability or whether the parties have a valid arbitration agreement at all or whether a certain type of issue falls within the confines of the agreement.  Additionally, courts may intervene at the conclusion of the arbitration proceedings to confirm, vacate or modify the award but only upon the narrow provisions referenced in Section 10 of the Act. 

A long line of cases have held that judicial intervention in the middle of an arbitration proceeding is strictly prohibited. 

Recently, the Court of Appeals in Michigan deviated from policy that courts should only intervene in arbitration proceedings to determine arbitrability issues or at the conclusion of the award and authorize intervention in an action involving a challenge to the arbitrator selection process.  In Oakland-Macomb Interceptor Drain Drainage Distr v Ric-Man Construction, Inc, et al, ___ Mich ___, ___ NW2d ___, 2014 WL 4066630 (Mich Ct App January 30, 2014), the Court of Appeals determined that judicial intervention was appropriate at the early stage of an arbitration proceeding in the arbitrator selection process where the administering agency, the American Arbitration Association, failed and refused to implement a very detailed and distinct arbitrator selection protocol. 

In Ric-Man, a case involving a significant municipal construction project, the parties agreed on several criteria to be implemented in selecting the neutral chair of the arbitration panel.  Those criteria were set forth in the arbitration agreement and specified four separate and distinct categories that a potential arbitrator must meet in order to be considered for the chair position.  Additionally, the same criteria were to be applied to an alternate to be selected in the event the chair was unable or unwilling to proceed with the arbitration.  If no person could be found that fit all four requirements then the person fitting the next three was deemed acceptable. 

It was undisputed that the AAA did not select an arbitrator that fit all four criteria established in the arbitration agreement.  Even more confounding, the AAA selected an alternate that, in fact, fit all four criteria.  When the respondent objected to the selection of the panel chair, AAA overruled the objection.  Respondent moved for consideration of this decision by the Oakland County Circuit Court which affirmed the position of the AAA. 

On appeal to the Michigan Court of Appeals, the decision of the trial court was reversed.  The court indicated that given the specific criteria that had been bargained for between the parties in establishing the position of panel chair for this complex commercial dispute, to deny one party the benefit of the bargained for criteria in the panel chair would create such an injustice that a party must have the right to petition a court for relief before entry of the final award.  The court reasoned that if the objecting party waited until the final award, it was highly unlikely a reviewing court would reverse the decision of the administrator and the aggrieved party would have no remedy and would be specifically denied its bargained for criteria in selecting an appropriate chair for the panel. 

Shortly after this decision of the Court of Appeals, the United States Circuit Court for the Sixth Circuit issued its decision in Savers Property and Cas Ins Co v National Union Fire Ins Co of Pittsburg, PA, Case No. 13-2288/2289 (April 9, 2014).  In a nutshell, in Savers, two critical decisions were made by one party-appointed arbitrator and the chair without the participation of the other party-appointed arbitrator.  The absence of this arbitrator was attributed simply to unavailability.  The aggrieved party moved to challenge the interim awards that had been entered on a two-zero basis before issuance of a final award.  The aggrieved party moved to enjoin the arbitration and set aside the interim awards which relief was granted by the Federal District Court. 

On appeal, the panel concluded that the long-standing policy favoring enforcement of arbitration provisions set forth in the Federal Arbitration Act, as well as the limited review of awards provided in Section 10 of the statute, permitted a court to intervene in an arbitration proceeding only at the initial stages involving questions of arbitrability and enforceability of the contract or after an award is entered.  Court of Appeals reversed the decision of the trial court and sent the matter back to the arbitration panel. 

The decision in Oakland-Macomb Interceptor Drain Drainage Dist cannot be reconciled with Savers Property and Casualty Ins Co.  The long-standing policy of non-intervention by courts in arbitration proceedings pre-award is beyond dispute.  While the Michigan Court of Appeals may have carved out an exception based upon the exceptional fact-pattern in Oakland-Macomb, it is unlikely this decision will get any traction in any subsequent pre-award intervention cases. 
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Gene J. Esshaki is a member of Professional Resolution Experts of Michigan (http://premiadr.com). He is a graduate of Wayne State University Law School.  Since graduation, he has continuously practiced law in the Detroit metropolitan area, specializing in complex commercial litigation and alternative dispute resolution.  He is a neutral arbitrator on the complex case panels of the American Arbitration Association and the International Center for Dispute Resolution.  He has an active practice in mediation and is appointed frequently by state and federal judges to mediate some of their most complex commercial cases.  Esshaki is a member of the American Board of Trial Advocates and a frequent lecturer for ICLE on ADR topics.  He is a founding shareholder in Abbott, Nicholson, Quilter, Esshaki, & Youngblood PC located in Detroit.