The last instalment of this post discussed Section 5, the circumstances under which Courts can appoint arbitrators under Section 5, what papers are filed on a Section 5 application, and what the application should show.
This segment addresses the FAQ “How does Section 5 Work in Practice?” Next we’ll address the FAQ “Does Section 5 of the Federal Arbitration Act Authorize a Court to Appoint a Replacement Arbitrator if an Arbitrator on a Three-Person Panel Dies Prior to the Panel Making an Award?”
The Arbitrator Selection Process
Once arbitration is demanded, the arbitrator selection process begins.
Arbitration agreements address arbitrator selection in different ways. Sometimes parties simply agree that the process set forth in arbitrator provider rules applies. Sometimes parties specify their own method of selection, and sometimes by their agreement they modify an otherwise agreed provider-rule-governed selection procedure.
The qualifications of the arbitrators, the number of arbitrators to serve, and the procedures (if any) to apply if the parties reach an impasse, are key components of the selection process.
For illustration purposes only let’s consider how, for example, arbitrator selection may work under what we sometimes refer to as the traditional, industry tripartite arbitrator selection model. While that model may vary according to the parties’ agreement, typically it requires the party demanding arbitration to appoint a party appointed arbitrator, and for the other party to appoint its own party appointed arbitrator within X days.
The two appointed arbitrators then select an umpire. Sometimes the parties agree that the appointed arbitrators select three umpire candidates each, strike two from the other’s list, and resolve the tie by coin flip, Dow Jones pick (last digit odd or even), or a like tie-breaking procedure.
If the other party fails to appoint timely its arbitrator, then the party demanding arbitration gets to appoint that arbitrator, and the arbitration may proceed even if the other party refuses to participate.
In administered arbitration, single arbitrators are often appointed by the arbitration provider generating a list of an odd number of arbitrator candidates and allowing the parties to strike an even number of candidates, with the remaining candidate being appointed as an umpire. Sometimes provision is made for the arbitration provider to submit an additional list if one or both parties request it.
These are simply examples of how arbitrator selection may proceed. If you’ve agreed to administered arbitration, be sure to check provider rules, for they typically specify the number of arbitrators to serve, their qualifications, how they are to be selected, in situations where the parties do not otherwise agree.
How does Section 5 Work in Practice?
Let’s look at how Section 5 works in practice, using for context the three situations in which Courts are authorized to appoint arbitrators:
- “if no method be provided therein. . . [;]”
- “if a method be provided and any party thereto shall fail to avail himself of such method[;] or”
- “if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy. . . .”
9 U.S.C. § 5.
Section 5: Appointing an Arbitrator “if no Method” is Specified
Section 5 provides a default method of arbitrator selection—appointment of by the court—in cases where the parties’ agreement is silent on arbitrator selection. Thus, in cases where parties simply agree to submit disputes arising out of a contract to arbitration, a court, acting under its Section 5 authority, can implement that agreement by appointing an arbitrator to hear the dispute. Section 5 also specifies that in such cases that “the arbitration shall be by a single arbitrator[,]” “unless otherwise provided in the agreement. . . .” 9 U.S.C. § 5.
Again, if the parties have agreed to arbitrate according to provider rules, those rules typically specify how arbitrators are to be selected, the number of arbitrators, and what their qualifications must be.
Appointing an Arbitrator “if a Method be Provided and any Party. . . Shall Fail to Avail himself of such Method”
Where the parties specify a method of arbitrator selection, Section 5 states that “such method shall be followed[,]” but also provides for relief in two instances in which the parties specify a method. The first is where “any party” “fail[s] to avail” itself of the “method.” 9 U.S.C. § 5.
Let’s consider what “fail[s] to avail” itself means in the context of the two arbitrator-selection-method examples discussed earlier. Suppose a party responding to an arbitration demand fails to appoint its party arbitrator within the time specified in our industry tripartite arbitration example, the demanding party appoints the responding party’s arbitrator, and the responding party demands that is own, belatedly appointed, arbitrator serve.
Can the responding party obtain an order confirming its belated appointment of an arbitrator on the ground that it or the other party “failed to avail” itself of the specified method? The answer is generally “no,” because the parties agreed that the demanding party could appoint the responding party’s arbitrator if the responding party failed to make a timely appointment. Universal Reinsurance Corp. v. Allstate Ins. Co., 16 F.3d 125, 128-30 (7th Cir. 1993).
The validity of the appointment is not subject to review until a final award is made. (See our discussion of how such a party would not be “aggrieved” for purposes of Section 4, here.) There are some cases to the contrary, which have excused late appointments on the ground that, for example, time was not “of the essence” of the contract. See Universal, 16 F.3d at 127-28 (citing cases); see, e.g., Texas Eastern Transmission Corp. v. Barnard, 285 F.2d 536, 539-40 (6th Cir. 1960).
Suppose now that the parties have agreed to select a single arbitrator by striking names on a list provided by the arbitration provider, and that the other party does not participate in the strike-out procedure. In that situation, a party would have a legitimate basis for seeking relief under Section 5.
“[I]f for any other Reason there Shall be a Lapse in the Naming of an Arbitrator or Arbitrators or Umpire, or in Filling a Vacancy. . . .”
The second situation where Section 5 relief may be provided in situations where parties have specified a method of arbitrator selection is where “there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy. . . .” 9 U.S.C. § 5.
The Second Circuit has defined a “lapse” as “‘a lapse in time in the naming of the’ arbitrator or in the filling of a vacancy on a panel of arbitrators, or some other mechanical breakdown in the arbitrator selection process. . .” In re Salomon Inc. Shareholders’ Derivative Lit., 68 F.3d 554, 560 (2d Cir. 1995) (quoting and citing Pacific Reinsurance Mgt. v. Ohio Reinsurance Corp., 814 F.2d 1324, 1327, 1329 (9th Cir. 1987); other citations omitted).
One example of a “lapse” is a “deadlock in [the] naming of [an] arbitrator.” Salomon, 68 F.3d at 560 (citing Pacific Reinsurance, 814 F.2d at 1329). Another is where an appointed arbitrator cannot or will not serve. See Salomon, 68 F.3d at 560-6 (citing cases). Still another is where an arbitrator resigns prior to making a final award. Insurance Co. of N. America v. Public Service Mutual Ins. Co., 609 F.3d 122, 130 (2d Cir. 2010).
There is an important potential limitation on what constitutes a “lapse” within the meaning of Section 5, which has caused a split in the federal circuit courts of appeal. The Second Circuit has held that courts may not “use Section 5 to circumvent the parties’ designation of an exclusive arbitral forum.” Salomon, 68 F.3d at 561.
In Salomon, the Court “read the” parties’ “agreements. . . as providing for arbitration only before the NYSE [i.e., the New York Stock Exchange].” 68 F.3d at 561 (emphasis in original). The district court compelled arbitration before the NYSE, but the NYSE exercised the discretion conferred upon it by Article XI, Section 3 of its Constitution to decline to hear the dispute.
The party demanding arbitration then asked the district court to appoint “substitute arbitrators under Section 5,” but the district court denied that request for relief and set the matter down for trial. 68 F.3d at 555-56.
On appeal, the Second Circuit affirmed, holding that the parties had designated an “exclusive arbitration forum” (the NYSE), which means that “whether the NYSE would arbitrate the dispute was central to the parties’ agreement to arbitrate.” 68 F.3d. at 561 (quotations and citation omitted).
“[W]here,” said the Court, “it is clear that the failed [forum selection] term is not an ancillary logistical concern but rather is as important a consideration as the agreement to arbitrate itself, a court will not sever the failed term from the rest of the agreement and the entire arbitration provision will fail.” 68 F.3d. at 561 (quotations and citations omitted; some bracketed text in original).
There was no “lapse” in the selection process because the district court judge “promptly referred the matter to the NYSE for arbitration[,]” 68 F.3d at 560, and once the NYSE exercised its discretion not to hear the matter, “there [was] no further promise to arbitrate in another forum.” 68 F.3d. at 557.
The issue of what happens when the party’s choice of arbitral provider becomes unavailable has generated a split in the circuits over the question whether courts can appoint substitute arbitrators in cases where the contractually-specified arbitration provider is no longer available. Many of these cases resulted from the National Arbitration Forum (“NAF”) in 2009 ceasing to administer consumer disputes as part of a settlement of litigation brought by the Minnesota Attorney General. Compare Moss v. First Premier Bank, 835 F.3d 260, 265-67 (2d Cir. 2016) (finding designation of NAF was exclusive, following Salomon, and holding district court “correctly declined to compel Moss to arbitrate her claims before a forum to which she did not agree.”); with Green v. U.S. Cash Advance Ill., LLC, 724 F.3d 787, 790-91, 792 (7th Cir. 2013) (distinguishing Salomon and holding that Section 5 required appointment of arbitrator to replace the NAF); see Moss, 835 F.3d at 266-67 (acknowledging conflict and citing cases).
Another issue that has generated some controversy and a split in the circuits is whether a court can appoint a substitute arbitrator when an arbitrator serving on a three-person panel dies before the panel makes a final award. And that is the subject of the next segment of this post.
Please note. . .
This guide, including the installments that will follow in later posts, and prior installments, does not purport to be a comprehensive recitation of the rules and principles of arbitration law pertinent or potentially pertinent to the issues discussed. It is designed simply to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face in arbitration-related litigation and how engaging a skilled, trustworthy, and experienced arbitration attorney can help them confront those challenges more effectively.
This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they elect voluntarily to do so.
If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should request legal advice from an experienced and skilled attorney or law firm with a solid background in arbitration law.
Contacting the Author
If you have any questions about arbitration, arbitration-law, arbitration-related litigation, this article, or any other legal-related matter, please contact the author, Phil Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is a former partner of the litigation departments of the New York City firms of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP (now known as Katten Munchin Rosenman LLP).
Loree & Loree represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and often serves as co-counsel, local counsel or legal adviser to other domestic, and international, law firms requiring assistance or support.
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Tags: Appoint Arbitrator, Arbitration FAQs, arbitrator selection, Death of Arbitrator, Fail to Avail, Federal Arbitration Act, INA v. Public Service, Industry Tripartite Model, NYSE, Pacific Reinsurance, Pre-Award Litigation, Preaward Practice, Section 5, Substitute Arbitrator, Three-person Panel, Tripartite Arbitration, Tripartite Panel, Vacancy
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