Appealing Arbitration Decisions

The Fifth Circuit has issued a harsh reminder that in order to preserve issues of arbitrator bias for appeal, the bias must have been raised before the arbitration award was issued.

In Dealer Computer Servs. v. Michael Motor Co., 2012 WL 3317809 (5th Cir. Aug. 14, 2012), one party (DCS) received a unanimous and favorable arbitration award.  The other party moved to vacate that award, arguing there was “evident partiality” by the arbitrator selected by DCS.  (The parties had agreed to each select one neutral member of the arbitral panel, with those selected members choosing the third.)  The district court agreed, finding that the arbitrator’s previous service on a panel considering similar contract language and involving the same damages expert created an impression of bias sufficient to vacate the award.

The Fifth Circuit reversed the district court’s decision to vacate the award.  Instead of taking on the substantive issue of whether the arbitrator showed partiality within the meaning of Section 10 of the FAA, however, it ruled that the appellant had waived its complaint by failing to raise its objection before the issuance of the arbitration award.  Upon selection, the “biased” arbitrator had immediately disclosed that she previously served on a panel that heard a dispute involving DCS (but not that DCS won, or that the contractual arguments were the same, or that the damages expert would be the same).  Where the district court had found the arbitrator’s disclosure was not sufficient to put the appellant on notice of the potential partiality, the Fifth Circuit said it was “sufficient to put [appellant] on notice” of any potential bias or conflict, and triggered the appellant’s “reasonable duty to investigate information of potential partiality.”  Because the appellant did not investigate further, and did not raise any issue during the arbitration, the Fifth Circuit held it waived any right to complain about bias based on the arbitrator’s prior experience with the parties. 

(Note that the result of the case probably would have been the same if the Fifth Circuit had considered the merits.  The facts are remarkably similar to a February Second Circuit case, which reversed a district court’s decision to vacate award for “evident partiality.”  The Second Circuit found that arbitrating a case with the same party, even if it involves similar issues and witnesses, is not enough to create evident partiality.)

To me, the interesting question here is: what is an arbitrating party to do if they receive a disclosure indicating the arbitrator had previous experience with the parties, attorneys or witnesses?  If the party asks follow-up questions of the arbitrator, it risks ticking off one of the three panel members that may decide its dispute.  Plus, the arbitrator may refuse (on the basis of confidentiality) to provide the type of information that would truly allow you to determine bias (for example, who won the previous case, which party appointed the arbitrator, or the identities of all parties and witnesses).  Without more information, how could a diligent party even carry out its “reasonable duty to investigate”?  Even a private investigator (and yes, I have hired one) would be hard pressed to find out what cases an arbitrator has handled, who the parties were, what the primary issues were, and who won/lost. 

Given how hard it is to acquire perfect information about the arbitrator’s potential partiality, maybe the best way to preserve a right to vacate on this basis is to: ask at least one round of follow-up questions (to satisfy the duty to investigate) and then qualify your acceptance of the arbitrator’s service with a statement like “we do not oppose the arbitrator’s service, based on the information reasonably available to us at this time.”  The risk is that it is not clear whether even that is sufficient to preserve appeal rights under a decision like this one in Dealer Computer Services.

This Catch 22 for parties in arbitration was recognized by the district court decision in Dealer Computer Services, and it can only be resolved by having arbitration rules be more clear about the information an arbitrator must disclose or by case law clarifying that parties in arbitration can only waive information they could reasonably have discovered.

The Eleventh Circuit has “ironed out a wrinkle” in Alabama’s arbitration jurisprudence that seemed to find executors outside the scope of arbitration contracts signed by the decedent. 

In Entrekin v. Internal Medicine Assocs. of Dothan, P.A., ___ F.3d __, 2012 WL 3208641 (11th Cir. Aug. 9, 2012), the district court had denied a nursing home’s motion to compel arbitration of a wrongful death claim brought by the executor of the decedent’s estate.  The district court rested its decision on old Alabama state cases saying that wrongful death claims do not belong to the decedent or its estate, but only to the personal representative.  Here, as the decedent had signed the arbitration agreement, the district court reasoned that the agreement did not bind the executor of that estate.

The Eleventh Circuit reversed.  Brushing aside any technical distinctions between personal representatives and executors, the Eleventh Circuit pointed out that the Alabama Supreme Court had compelled arbitration of wrongful death claims against nursing homes in three recent cases.  Those three cases established “the rule that an executor suing a nursing home for wrongful death is bound by an arbitration agreement that binds the decedent.” 

Interestingly, on appeal the nursing home tried to argue that there was a valid delegation clause that authorized only the arbitrator to determine the scope of the arbitration agreement.  The Eleventh Circuit was not impressed, noting that “if arguments were people, this one would be so feeble that it would need nursing care.”  Fundamentally, the nursing home was precluded from raising that issue on appeal because it never raised that issue in the district court and instead asked the court to determine the question of arbitrability.

While a court may vacate an arbitration award if the arbitrator exceeds the scope of his authority, the City of Lebanon was unable to convince the Supreme Court of New Hampshire that an arbitrator exceeded his authority when siding against the City in a tax dispute.

The plaintiff in Lebanon Hanger Assoc. v. City of Lebanon, ___ A.3d ___, 2012 WL 2094387 (N.H. June 12, 2012), had been leasing property from the City for 15 years.  During the first 14 years, the City only taxed the value of the buildings.  In the 15th year, the City taxed the value of the buildings plus the value of the land, quintupling the taxable amount.  The plaintiff objected and the parties then arbitrated under a clause in the lease saying “any controversy arising out of or relating to this lease… shall be settled by arbitration.”

The arbitrator ruled for the plaintiff.  The arbitrator found the lease allowed the City to tax the value of the land, but that mutual mistake warranted reformation of the lease such that the plaintiff was not obligated to pay taxes on the value of the land.  The trial court vacated that decision, finding that the arbitrator’s authority was limited to deciding the meaning of the “four corners of the lease agreement.”

The Supreme Court of New Hampshire wisely saw that the City was playing too cute with its arbitration clause and its static definition of “lease,” and held that the arbitrator did not exceed the scope of his authority.    The Court relied on the broad scope of the arbitration clause, the parties’ statements to the district court in initially staying the case, and the parties’ submissions to the arbitrator in concluding that the parties’ agreed to have the arbitrator consider extrinsic evidence and to fully decide the dispute about whether the land was taxable.

The Fifth Circuit just issued a decision openly disagreeing with how the Second Circuit has interpreted both the Stolt-Nielsen decision and case law regarding the level of deference that courts owe arbitrators.  In Reed v. Florida Metropolitan Univ., Inc., __ F.3d __, 2012 WL 1759298 (5th Cir. May 18, 2012), the Fifth Circuit vacated an arbitration award that permitted class arbitration, acknowledging that SCOTUS’s “lengthy discussion of the significant disadvantages of class arbitration” in Stolt-Nielsen and Concepcion led the court to ditch the extraordinary deference it usually grants decisions by arbitrators.

Reed involved a potential class of students who attended undergraduate online learning programs, only to find out that graduate programs and employers did not recognize their online degrees.  The students’ Enrollment Agreements contained these key provisions: “any dispute arising from my enrollment at Everest University…shall be resolved by binding arbitration under the [FAA] conducted by the” AAA; and “any remedy available from a court under the law shall be available in the arbitration.”  Based on these provisions, the federal district court had compelled arbitration, but concluded that the arbitrator should decide whether the case could proceed as a class action in arbitration.  After interpreting the enrollment agreement and the relevant case law, the arbitrator ruled that the students could proceed as a class.  The district court confirmed that award.

The Fifth Circuit reacted like a guard dog, growling protectively about Stolt-Nielsen.  After confirming that the arbitrator (and not the court) had the power to decide whether the claims should proceed as a class in arbitration (based on the parties’ incorporation of the AAA rules, which now include Supplementary Rules clearly authorizing arbitrators to decide whether the arbitration clause permits class arbitration), the court launched into an eight page analysis of the merits of the arbitrator’s decision.  Why is that significant?  Because SCOTUS has said (and the Fifth Circuit even quoted) that “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,” the arbitrator’s decision should be confirmed.  In Reed, the Fifth Circuit implicitly acknowledges that the arbitrator thoughtfully construed the enrollment agreement and the appropriate case law under the FAA, and had the authority to do so.  Even so, the Fifth Circuit vacated the arbitrator’s decision.

The Fifth Circuit held that neither of the contract clauses cited by the arbitrator (and quoted above) could properly be interpreted as allowing class arbitration.  It found the “any dispute” clause only reflects an agreement to arbitrate and is “not a valid contractual basis upon which to conclude that the parties agreed to submit to class arbitration.”  Similarly, it found the “any remedy” clause insufficient because “while a class action may lead to certain types of remedies or relief, a class action is not itself a remedy.”  In sum, said the Fifth, “the arbitrator lacked a contractual basis upon which to conclude that the parties agreed to authorize class arbitration.  At most, the agreement in this case could support a finding that the parties did not preclude class arbitration, but under Stolt-Nielsen this is not enough.”

Toward the end of the opinion, the Fifth Circuit acknowledged that the Second Circuit came to a different conclusion in Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d. Cir. 2011).  The Second Circuit’s decision in Jock, confirming an arbitrator’s decision to permit class claims, was fundamentally determined by its understanding of the appropriate standard of review.  The Second Circuit noted that it could not decide whether the arbitrator correctly interpreted the arbitration agreement, but only whether the arbitrator had authority to do so and “whether the agreement or the law categorically prohibited the arbitrator from reaching” its conclusion.  What the Fifth Circuit failed to acknowledge is that the Third Circuit issued a decision just last month, agreeing with the Second Circuit.  See Sutter v. Oxford Health Plans LLC, __ F.3d __, 2012 WL 1088887 (3d Cir. April 3, 2012) (affirming an arbitrator’s decision to allow class arbitration based on an arbitration agreement that never mentioned class actions at all).

My own prediction is that the Supreme Court will not grant an appeal of these decisions, but will leave the circuit courts to try and develop a majority approach to this issue in the coming years.  As long as the existing cases about the deference courts must grant to arbitrators under Section 10 of the FAA remain good law, the approach of the Second and Third Circuits should be persuasive.

Although courts and practitioners may think of the Stolt-Nielsen decision as the death knell of class arbitration, the Third Circuit’s ruling last week serves as a reminder that the Stolt-Nielsen did not deal a mortal blow.  In fact, in Sutter v. Oxford Health Plans LLC, __ F.3d __, 2012 WL 1088887 (3d Cir. April 3, 2012), the Third Circuit affirmed an arbitrator’s decision to allow class arbitration based on an arbitration agreement that never mentioned class actions at all.

The arbitration agreement at issue in this dispute over medical reimbursements succinctly provided: “No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration…”  (Before you criticize the drafters, let me point out that this agreement was executed in 1998, before the availability of class arbitration was a hot topic.)  The putative class of doctors initially brought their case in state court, and the court granted the insurer’s motion to compel arbitration, noting that the issue of whether the case could proceed on a class basis was for the arbitrator to determine. 

The arbitrator determined that the arbitration agreement allowed the doctors to proceed in arbitration as a class.  The arbitrator based his analysis on both the breadth of the arbitration agreement and the absence of any express carve-out for class arbitration, which led him to conclude the parties intended to authorize class arbitrations. 

After the arbitration proceeded on a class-wide basis, the insurer moved to vacate the arbitrator’s decision to allow the class-wide claim.  The insurer argued the arbitrator “exceeded his power” within the meaning of Section 10 of the FAA.  (It is probably safe to assume the insurer lost the arbitration, although the opinion does not say…)  The district court and Third Circuit both upheld the arbitrator’s decision. 

The extraordinary deference that courts grant arbitrators was critical to the decision; the Third Circuit noted that as long as an arbitrator “makes a good faith attempt” to interpret and enforce the contract, the court will not vacate the arbitrator’s decision.  Because the arbitrator in Sutter rooted his decision in an analysis of the text of the arbitration agreement, the court concluded “the arbitrator performed his duty appropriately” and his decision on class arbitration could not be vacated. 

This decision is important for other courts, counsel, and arbitratorswho are interpreting Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 130 S. Ct. 1758 (2010).  The Third Circuit recognized that “an arbitrator may exceed his powers by ordering class arbitration without authorization,” but also addressed some misconceptions about Stolt-Nielsen.  Most critically, the court emphasized that “Stolt-Nielsen did not establish a bright line rule that class arbitration is allowed only under an arbitration agreement that…expressly provides for aggregate procedures.”  Instead, it “established a default rule” that parties may not be compelled to class arbitration unless the contract indicates the party consented to class arbitration.   

What is the distinction?  It is that courts and arbitrators should not use the presence or absence of magic words like “class arbitration” or “class action” as the basis to rule on the availability of class arbitration, but instead must carefully analyze the contract to determine the parties’ intent.  The “default rule” mentioned in Sutter leaves the door open a smidge wider for arguments about the propriety of class arbitration than the “bright line rule”.  Just a smidge.


The Fourth Circuit recently affirmed that it will consider “manifest disregard of the law” as a separate basis for attacking an arbitration award, in addition to the four bases set forth in Section 10 of the Federal Arbitration Act.  Wachovia Secs., LLC v. Brand, __ F.3d ___, 2012 WL 507022, at *8 (4th Cir. Feb 16, 2012) (“[M]anifest disregard continues to exist either ‘as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.”)  The federal circuits are now split on whether “manifest disregard” lives on after the Supreme Court decisions in Hall Street and Stolt-Nielsen.

For many years, courts have overturned arbitration awards on the grounds that the arbitrator showed a “manifest disregard of the law,” but the Supreme Court questioned the validity of that basis in Stolt-Nielsen v. Animalfeeds Int’l Corp., 130 S. Ct. 1758, 1768 n.3 (2010) and Hall Street Associates, L.L.C. v. Mattel, Inc., 552U.S. 576, 585 (2008).  In those cases, the Court suggested that the four statutory bases in Section 10 are the exclusive bases for vacating an arbitration award.

In the wake of those two decisions, the circuits are split into opposing camps about the vitality of “manifest disregard.”  The First, Fifth, Seventh, Eighth and Eleventh Circuits have determined that “manifest disregard” is no longer viable.  See Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281, 285 (7th Cir. 2011); Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324-25 (11th Cir. 2010); Medicine Shoppe Intern., Inc. v. Turner Investments, Inc., 614 F.3d 485, 489 (8th Cir. 2010); Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 358 (5th Cir. 2009); Ramos-Santiago v. UPS, 524 F.3d 120, 124 n.3 (1st Cir. 2008). 

On the other hand, in addition to the Fourth Circuit, the Second, Sixth,  Ninth and Tenth Circuits have continued to analyze cases under the “manifest disregard” standard. Biller v. Toyota Motor Corp., __ F.3d __, 2012 WL 336135, at *5-6 (9th Cir. Feb. 3, 2012); Jock v. Sterling Jewelers, 646 F.3d 113, 121-22 (2d Cir. 2011); Lynch v. Whitney, 419 Fed. Appx. 826 (10th Cir. 2011); Coffee Beanery Ltd. v. WW, LLC., 300 F. App’x 415, 419 (6th Cir. 2008).

 The Third Circuit has taken a middle ground, finding cases did not meet the “manifest disregard” standard, assuming it was still valid.  Rite Aid New Jersey, Inc. v. UFCW, 2011 WL 5075657, at *2 (3d Cir. Oct. 26, 2011).

Given how active the Supreme Court has been in this area, I predict it is simply waiting for the perfect “manifest disregard” case, and then it will resolve this circuit split (most likely against the vitality of any bases other than those in Section 10).

The Sixth and Second Circuits addressed whether to vacate an arbitrator’s award recently.  The Sixth Circuit vacated the award of an arbitrator who “exceeded his powers,” while the Second Circuit refused to vacate for “evident partiality.” 

 Based on the parties’ agreement, the Sixth Circuit considered vacatur under the Michigan Arbitration Act.  In particular, the appellant argued that the arbitrator “exceeded his powers.”  Muskegon Central Dispatch 911 v. Tiburon, Inc., 2012 WL 340319 (6th Cir. Feb. 2, 2012).  The Sixth Circuit agreed, finding that the arbitrator exceeded his power by ignoring “the plain language of the contract” and improperly concluding that a contract section provided an exclusive remedy.  In other words, the arbitrator exceeded his powers by interpreting the contract in a way that the Sixth Circuit thought was incorrect. 

 Not only did the Sixth Circuit vacate the award, but it refused to remand to the original arbitrator.  Invoking “functus officio” like Hogwarts heroes, the court declared “a new arbitrator should review” the claims.  Id.

The next day* the Second Circuit came out with an opinion that reversed the S.D.N.Y’s decision to vacate an arbitrator’s award.  Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire & Marine Ins. Co., __ F.3d __, 2012 WL 335772 (2d Cir. Feb. 3, 2012).  The district court judge had concluded that the award of three arbitrators should be vacated for “evident partiality” because two of the three arbitrators did not disclose that they were also serving together on a different arbitration panel, with similar issues, related parties, and a common witness.  The judge’s concern was that the two panelists could “receive ex parte information about” relevant issues and make credibility determinations based on their service in the second panel, and that because the conflict was not disclosed, it constituted “evident partiality.”

The Second Circuit reversed, finding that the appellant did not meet its burden of showing that the undisclosed matter (service on the second panel) was indicative of bias.  While the court reaffirmed the principle that non-disclosure of a relationship or interest can be suggestive of bias, it also noted that not all undisclosed matters indicate bias.  After adopting four factors for courts to use in determining whether a failure to disclose amounted to evident partiality,  the court rested on its analysis that “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against any party.” 

Wary of encouraging non-disclosure, however, the Second Circuit clarified that it does “not in any way wish to demean the importance of timely and full disclosure by arbitrators. . . but the better course is not necessarily the only permissible one.”  Id.  The Scandinavian Reinsurance decision should give comfort to the many arbitrators who are concerned that by not disclosing their every Facebook friend or LinkedIn link, they may subject themselves to a claim of “evident partiality.”

Of the two decisions, the Sixth Circuit’s is more surprising as it feels like a de novo review of a lower court’s legal conclusions rather than the exceedingly deferential standard usually applied to arbitrator awards.  Its national impact is limited, however, given that it was interpreting the Michigan state statute.

 *Curiously, the Ninth Circuit also issued a decision on vacatur on February 3: Biller v. Toyota Motor Corp., __ F.3d__, 2012 WL 336135 (9th Cir. Feb. 3, 2012).  It was one of the more run of the mill vacatur decisions, however, where the courts show the appellant the many, many ways in which it does not meet the standards for vacatur under the FAA.

The Second Circuit just held that a federal court has the power to enjoin an ongoing arbitration.  In re Am. Express Fin. Advisors Sec. Litig., ___ F.3d ___, 2011 WL 5222784  (2nd Cir. 2011).  While many litigants would no doubt like a federal court to enjoin their arbitrations — especially when arbitrators refuse to dismiss frivolous claims — application of this case’s holding is limited to a very unique set of facts. 

In the American Express case, a couple filed a FINRA arbitration against Ameriprise, alleging multiple claims relating to Ameriprise’s management of their assets.  Ameriprise notified the arbitrators that the couple was part of a class action that had been settled, and because they had never opted out of the class, they were bound by the settlement agreement’s release of their claims.  The arbitrators did not blink and ordered that the arbitration should proceed full speed ahead. 

Ameriprise then took the unusual step of asking the Southern District of New York, which retained jurisdiction of any disputes over the class action settlement, to enjoin the arbitration.  And the district court took the unusual step of granting that injunction and ordering the couple to dismiss their arbitration claims.

The Second Circuit affirmed much of the trial court’s decision.  The court framed the dispute between the parties as one of arbitrability, and therefore appropriate for the court (not an arbitrator) to decide.  That was because “the Class Settlement revoked Ameriprise’s consent to arbitrate certain claims. The question therefore is not whether those claims had been settled, thus precluding arbitration, but whether there was a surviving agreement, following the settlement, to arbitrate those claims at all.”  Furthermore, the Second Circuit placed emphasis on the fact that the trial court had specifically retained jurisdiction over all matters relating to the Class Settlement.  

Interestingly, neither party had briefed or argued the court’s power to enjoin an arbitration, a power that  the FAA does not specifically grant to federal courts.  Having considered the issue sua sponte, the Second Circuit concluded that the district court possessed “the authority to order the cessation of an arbitration by parties within its jurisdiction where such authority is necessary in order for a court to enforce the terms of the parties’ own agreement.”  

Can this decision be used by parties in future arbitrations who may be frustrated by an arbitration panel’s refusal to dismiss claims that are time-barred or otherwise subject to a strong legal defense?  Probably only if the legal defense can be said to call into question the validity of the agreement to arbitrate.  And even then I imagine courts would be skittish.   


The lawyers who sought to disqualify their opposing counsel during a pending arbitration must have been giddy when they drew Judge Shira Scheindlin of the Southern District of New York as their judge.  Judge Scheindlin, who is famously tough on unscrupulous lawyers, did not disappoint.  She went out of her way to exercise jurisdiction over the motion and disqualified  attorneys who had received improper communications from the arbitrator in Northwestern Nat’l Ins. Co. v. Insco, Ltd., 2011 WL 4552997 (S.D.N.Y. Oct. 3, 2011).

At issue in Insco was the communication between the defendant’s lawyer and the arbitrator the defendant had appointed.  The arbitration agreement called for each party to appoint one non-neutral arbitrator, and then for a third neutral arbitrator to be chosen by lottery.  At the outset, the parties and arbitrators agreed that each party could communicate ex parte with their appointed arbitrator, but there could be no ex parte communication about pending motions after they were fully briefed. 

One year into the arbitration proceedings, the arbitrator appointed by the defendant shared 130 e-mails with the defendant’s counsel (ostensibly because he was concerned about another arbitrator’s bias).  The e-mails included many private emails that had been exchanged solely among the arbitrators during their deliberations over various motions.   The arbitrator who had turned over the e-mails then resigned, another arbitrator was appointed, and the panel noted that the resigned arbitrator’s actions were “highly inappropriate” but that the panel would proceed to the hearing and would decide the case on the merits.   After the plaintiff’s summary judgment motion was denied, it asked the federal court to disqualify the defendant’s counsel from representing defendant any further in the arbitration, based on its actions in obtaining the private emails and failing to timely disclose their contents. 

Judge Scheindlin disqualified the defendant’s attorneys, finding they had engaged in “serious violation[s] of arbitral guildelines, as well as ethical rules.”  The Judge further found that the ethical violations could taint the arbitration hearing itself, because the private e-mails “relate[d] to actual and ongoing disputes in the arbitration” — indeed the e-mails included drafts of orders and the neutral arbitrator’s views on a number of pending issues.  The Judge noted that: “Allowing parties to obtain confidential panel deliberations would provide an unfair advantage in the legal proceedings and have a chilling effect on the ability of arbitrators to communicate freely.”

The case is unusual in large part because the Court was willing to hear this mid-arbitration motion.  In general, the FAA only allows courts to consider any arguments as to the arbitration after the final award is issued.  For example, a non-party to an arbitration agreement recentlly brought a petition to federal court, seeking to overturn an arbitrator’s decision to join that non-party to the arbitration proceeding.  The court dismissed the action, noting that Section 10 of the Federal Arbitration Act only authorizes a court to review the fairness of the arbition proceeding after a final award.  Northland Truss Sys., Inc. v. Henning Constr. Co., LLC, ___ F. Supp. 2d ___, 2011 WL 3915538, at *4 (S. D. Iowa Sept. 2011). 

In Insco, however, the court relied on New York precedent finding attorney discipline is beyond the jurisdiction of arbitrators and can only be decided by courts.   The court also noted that the arbitration panel had refused to consider any sanctions as a result of the e-mail disclosure.   The court included some choice quotes from the panel, like “I avoid that whole circumstance because I go forward in life.  I don’t go backward.”  Those glib quotes from the panel may well have influence the court’s decision to intercede before the final award. 

If New York law applies in an arbitration, there is now a new basis to seek court intervention during an arbitration gone very, very wrong: the unethical conduct of lawyers that may taint the hearing.  In fact, the argument may hold water under the law of other jurisdictions as well.  A Connecticut court has also been willing to consider a motion to disqualify a lawyer in the middle of an arbitration proceeding.  City of Bridgeport v. Kasper Group, Inc., 2002 WL 1008244 (Conn. Sup. Ct. 2002) (denying motion to disqualify, after noting that was an issue for the courts).  Furthermore, Judge Scheindlin’s high regard as a jurist will make most courts take a mid-arbitration motion for attorney disqualification seriously going forward.

What is an arbitrator to do after concluding that the parties’ entire agreement — the same agreement that authorized the arbitration proceeding — is invalid?  That is the question that the California Court of Appeal addressed this week.  The California court ruled that the arbitrator was authorized to reach a decision on the merits of the construction dispute even after it concluded that the parties’ agreement was illegal, and therefore the arbitration award should be confirmed.  Templo Calvario Spanish Assembly of God v. Gardner Constr. Corp., __ Cal. Rptr. 3d ___, 2011 WL 3586481 (Cal. Ct. App. Aug. 16, 2011). 

The construction dispute in Templo Calvario was between a church and an unlicensed contractor.  Although the contractor had initially balked at arbitrating the dispute (despite the contract’s arbitration clause), the opinion says that it later “agreed to submit the matter to arbitration.”  The arbitrator applied California’s strict licensure statutes and ruled that the contractor had to disgorge all the money the church had paid the contractor.  The church moved to confirm the award.  The district court vacated the award, reasoning that the contractor’s unlicensed status voided the parties’ contract, including its arbitration provision, and “the arbitrator was without authority to render a decision.”  The appellate court reversed, finding that under California law, contracts with unlicensed contractors are not “automatically illegal and void.”  For example, if a contractor was licensed while it performed the work at issue, and had only been unlicensed when it signed the contract, that may not void the construction contract.  [Based on the factual description, it seems the court could have confirmed the arbitration award on a less controversial basis.  The court could have held that the contractor’s post-dispute agreement to arbitrate authorized the arbitrator to decide the issues, so that any invalidity of the parties’ original contract was immaterial.]

The arbitrator in Templo Calvario is not the first to have decided the merits of a dispute even after concluding that the entire contract was invalid.  E.g., Elem Indian Colony of Pomo Indians v. Pacific Dev. Ptnrs. X, LLC, 2010 WL 2035331 (N.D. Cal. May 19, 2010); Ultimate Experience, USA v. Raging Waters Grp., 2005 WL 2995259 (Cal. Ct. App. Nov. 9, 2005).  At least one court, however, has refused to confirm an award reached by an arbitrator who had already concluded the entire agreement was unenforceable.  Niven v. G.F.B. Enterprises, LLC, 849 So. 2d 1093, 1094 (Fl. Ct. App. 2003).  In it, the appellate court found “the trial court erred by confirming an arbitration award based on an agreement that never existed.”  Id.

In short, the arbitrator and the parties should proceed with caution if the entire contract containing the arbitration agreement is declared invalid.  No one wants to waste resources on an arbitration proceeding that a court may later determine was unauthorized.