Arbitration in business law is a method used for mediating contradictions between the parties to an agreement. Arbitration agreements make the requirement that the arbitrators, or those who are over the arbitration discussions and the ultimate agreement are neutral parties and in no way in support of either of the parties to the arbitration process.
According to one sources arbitration is "one of the dispute resolution processes being practiced, and it similar to a lawsuit. In this process, there is a neutral decision maker, popularly known as an arbitrator. He is either selected by the concerned parties or by a neutral ADR service provider. Sometimes, arbitration process is carried on with a panel of three arbitrators in order to ensure different and more effective solutions." (Class of 1, 2012) The parties in arbitration proceedings are generally represented by their attorneys who make provision of the required evidence and legal arguments to the arbitrator. The arbitrator makes a decision, which is deemed as an award. Decisions made by arbitrators are usually final decisions and are subject to only very limited review by a court as expressly set out in the law. Arbitration can be used in consumers and employment matters and where arbitration is authorized by the terms of employment or commercial contracts.
I. Advantages of Arbitration
Included in the advantages of arbitration are the following stated advantages:
(1) When the subject matter of the dispute involves a lot of technicality, arbitrators with a great deal of expertise can be appointed;
(2) It is a faster process when compared to litigation, which consumes a lot of time;
(3) It is a cost effective process;
(4) It is a very flexible process and can be adjusted to the needs of the parties;
(5) Arbitral proceedings and arbitral awards are usually maintained confidentially, thereby providing a sense of security; '
(6) As a result of the provisions of the NEW York Convention, 1958 arbitration awards are easier to enforce in most of the nations; and (7) In most of the legal systems that prevail, the avenues available for appeal of an arbitral award are very limited which is very advantageous to the concerned parties. (Class of 1, 2012)
Arbitrability of a case has as its basis the nature of the subject matter of the dispute. There are reported to be two types of legal procedures that cannot be arbitrated: (1) Procedures which are more likely to result in a determination wherein the parties to the dispute may not enter into an agreement; and (2) some legal orders are exempt or present the potential of arbitration for reasons on grounds of protection of public weaker members or consumers. (Class of 1, 2012)
II. Issue of Law
At issue in this study is the impartiality requirement of arbitration agreements. The work of Yu and Shore entitled "Independence, Impartiality, and Immunity of Arbitrators -- U.S. And English Perspectives" states that in the field of international commercial arbitration "an issue that is fundamental to the arbitral process is preserving the independence and impartiality of the arbitrators. Independence and impartiality are two different concepts. The terms are not interchangeable but are often used interchangeably." (2003, p.935) Yu and Shore state that the impartial arbitrator is one who "by definition, is not biased in favor of or prejudiced against, a particular party or its case." (2003, p.935)
II. Case Law on Arbitration
A case recently decided by the New York Court of Appeals is reported as having started out "as an ordinary commercial dispute." (Oberman, 2012, p.1) U.S. Electronics and Sirius XM Radio Inc. are reported to have entered into "non-exclusive agreements allowing USE to distribute radios capable of receiving Sirius's subscription satellite radio service. Before long, neither party was happy in the relationship, with each side blaming the other for why things were not working out as they'd hoped. In May 2006, USE commenced an arbitration with the American Arbitration Association, alleging that Sirius improperly favored a competing distributor (DEI) over USE. The parties selected three neutral arbitrators, and William S. Sessions, a former federal court judge and a former director of the FBI, was appointed chairman. The panel conducted 20 days of hearings. On August 27, 2008, the AAA delivered the panel's unanimous 149-page award, dismissing all of USE's claims and denying USE any recovery of damages." (Oberman, 2012, p.1)
This case ended up in the New York Court of Appeals and it is reported that "While parties speak of "final and binding arbitration," the Federal Arbitration Act ("FAA") does provide very narrow grounds for judicial review of arbitration awards issued in cases affecting interstate commerce. In November 2008, USE filed a petition in the Supreme Court for the State of New York, New York County, seeking to vacate the award; Sirius cross-moved to confirm the award. USE invoked the FAA ground of 'evident partiality'." (Oberman, 2012, p.1) It was alleged by USE that Chairman Sessions "failed to disclose that his son, Pete, a member of Congress, twice made statements in support of the then-pending merger between Sirius and XM Satellite Radio Inc. USE also contended that the chairman failed to disclose that his son was a close political ally of Rep. Darrell Issa (R-CA), the founder -- and still a director and major shareholder -- of DEI (the competing distributor). USE argued that these allegations proved that the chairman was partial to Sirius." (Oberman, 2012, p.1)
The court entered a judgment on July 7, 2009, that denied the petition and confirmed the award. It was found by Justice Ira Gammerman found that USE "had failed to show evident partiality under the "reasonable person" standard formulated by the U.S. Court of Appeals for the Second Circuit for evident partiality -- namely, that a reasonable person 'would have to conclude' that an arbitrator was partial to one party to the arbitration." (Oberman, 2012, p.1) Reports state that USE "appealed to the Appellate Division-First Department, which unanimously affirmed the judgment in May 2010. But -- as the Court of Appeals ultimately noted -- the legal standard applied by the Appellate Division could not be 'gleaned from federal precedent' explaining why the Court of Appeals granted leave to appeal on November 18, 2010." (Oberman, 2012, p.1)
The report states that the case (U.S. Electronics v. Sirius Satellite Radio) "arrived at the Court of Appeals without controlling precedent from the Supreme Court of the United States on the meaning of 'evident partiality' under the FAA. This absence of controlling precedent has resulted in lots of litigation over the meaning of 'evident partiality'." (Oberman, 2012, p.1) Therefore, the New York Court of Appeals had to face the question that was unresolved asking what standard that New York state courts should apply in the case of 'evident partiality' challenges under the FAA. The court had the option of making a decision to follow the Second Circuit's standard in the event it was found persuasive but the court was not required to follow the Second Circuit's standard. (Oberman, 2012, paraphrased)
It is reported that the Supreme Court considered 'evident partiality' one time in 1968 in Commonwealth Coatings Corp. v. Continental Casualty Co but it is reported that the "minimum of five of the nine justices were unable to agree upon a majority opinion deciding the case. This resulted in 40 years of debate among the lower federal courts and also state courts on whether the plurality opinion of Justice Black (agreed to by four justices) or the concurring opinion of Justice White (joined by two justices) should be followed. And through this process, a variety of formulations was spawned." (Oberman, 2012, p.1)
The court is reported to have made the observation that the Second Circuit "…had a well-developed body of case law applying its 'reasonable person' standard, and the New York court adopted that standard for when New York state courts are called upon to apply the FAA. So this issue is now settled. Applying the standard, the court affirmed the Appellate Division's order." (Oberman, 2012, p.1) Harmonization of the law applied in New York state courts with the law applied within the Second Circuit for 'evident partiality,' by the appeals court resulted in the avoidance by the New York court of the situation by which parties would "maneuver to get into the court that had the more advantageous standard for its side. And, in February of this year, the Second Circuit issued an opinion in Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., which provides an especially clear presentation of the "reasonable person" standard." (Oberman, 2012, p.1)
Stated as a case that can be used as an example where parties are litigating an issue of arbitration law has not yet settled is that of the Supreme Court's 2003 opinion in Green Tree Financial Corp. v. Bazzle. This case has been widely interpreted as "permitting class actions in arbitration when the parties' arbitration agreement could be construed by the arbitrator as intending class arbitration (even…