Comments on the Revised Uniform Arbitration Act

(Tentative Draft No. 6, October 29, 1999))

Minnesota State Bar Association

Section on Conflict Management and Dispute Resolution

November 18, 1999

INTRODUCTION

In 1955 the National Conference of Commissioners of Uniform State Laws ("NCCUSL") promulgated the Uniform Arbitration Act ("UAA"). Since then, the UAA has been adopted in 35 states while 14 other states have arbitration statutes that substantially adopt the UAA. Minnesota is one of the 35 states that have adopted the UAA. (Minn. Stat. §§ 572.08-572.30 (1998).)

Recently the NCCUSL has been working on revising the UAA, and the most current draft of the Revised Uniform Arbitration Act ("RUAA") is Tentative Draft No. 6, dated October 29, 1999. This and other drafts of same are available on the Internet: http://www.law.upenn.edu/library/ulc/ulc.htm.

In order to review this significant development, the Minnesota State Bar Association's Section on Conflict Management and Dispute Resolution ("CMDR") appointed a special committee to review and comment on the RUAA.

The RUAA makes many significant changes from the UAA, and the Prefatory Note to said draft of the RUAA, a copy of which is attached hereto as Exhibit A, summarizes these changes. CMDR is impressed with said draft and commends the NCCUSL for its work on same. The CMDR special committee did not have the time or resources to review and comment on every section of said draft. Instead, the special committee identified some of the sections with more significant changes to review and discuss.

COMMENTS

1. Parties' ability to contract for different provisions.

The RUAA is based, in part, upon the principle "that arbitration is a consensual process in which autonomy of the parties who enter into arbitration agreements should be given primary consideration, so long as their agreements conform to notions of fundamental fairness. This approach provides parties with the opportunity in most instances to shape the arbitration process to their own particular needs. The RUAA provides a default mechanism if the parties do not have a specific agreement on a particular issue." (RUAA, Prefatory Note, at 1-2.)

Thus, the RUAA is stated to be primarily a default statute with parties generally being able by agreement to provide otherwise than what is in the RUAA. (RUAA § 1(7) & Reporter's Note 5; id. § 27(a).)

There, however, are several exceptions to the parties' ability to provide otherwise. An unconscionable contractual provision would not be enforced. (Id.; RUAA § 3, Reporter's Note 6.) Nor would certain restrictions on an arbitrator's remedies be enforceable. (RUAA § 1, Reporter's Note 5; id. § 18, Reporter's Note 2.) Finally, the RUAA prohibits the parties from:
· waiving certain provisions of the RUAA (RUAA § 27(b)(1);
· unreasonably restricting the right to notice of commencement of arbitration (RUAA § 27(b)(2); and
· waiving the right of the parties to be represented by attorneys (RUAA § 27(b)(3)).
These are very important provisions. We do not recommend any changes in same.

We note that at the first reading, an important stylistic question was raised regarding this basic principle of the RUAA. Commissioner Henderson and the Reporter have discussed the possible combination of sections 1(7) and 27 into a new section 2 or 3 of RUAA. We think this is a good idea with the proviso, as suggested by the Chair of the Drafting Committee, that the phrase "unless the parties otherwise agree" still be used throughout the RUAA, where permitted, to alert practitioners to the possibility of having an agreement providing otherwise. (See RUAA, § 1, Reporter's Note 5.) Indeed, as is noted below, we urge the Drafting Committee to include comments to point drafters of arbitration clauses to ways in which an arbitration clause could provide otherwise. (See p. ___ infra.)

2. Grounds for nonenforceability of arbitration agreements (section 3(a)).

RUAA § 3(a) provides that an arbitration agreement is "valid, enforceable, and irrevocable except upon grounds that exist at law or in equity for the revocation of any contract."

There is no special rule in the RUAA for determining the validity of arbitration agreements that are contracts of adhesion or unconscionable. But there is a proposed official comment to section 3 in Reporter's Note 6 that reviews the case law on this topic as well as the development of protocols to ensure procedural and substantive fairness in arbitrations involving employees, consumers and patients. We, however, think that the last paragraph of this comment should be deleted. It states:

"Because an arbitration agreement in many instances effectively waives a party's right to a jury trial, courts should ensure the fairness of an agreement to arbitrate, particularly in instances involving statutory rights which provide claimants with important remedies. Courts should determine that an arbitration process is adequate to protect these important rights. Without these safeguards, arbitration loses credibility as an appropriate option to litigation."

In an era of e-Commerce and agreements by mouse click, consumers should be able to accept, if they wish, an arbitration procedure designed to achieve rough justice expeditiously and economically, and not be limited by law to arbitration procedures which largely replicate what the courts provide. The almost shrill cry in the last paragraph of Reporter's Note 6 to section 3 for courts to assure a more perfect justice, even if terms such as a waiver of jury trial may be prominently displayed to the consumer, seems like an unwarranted intrusion on the previously mentioned principle of arbitration as a consensual process.

We also point out that form contracts are an efficient mechanism for the delivery of legal services. It is unrealistic and uneconomic to assume that the norm for determining enforceability is an individually negotiated contract with both parties represented by counsel.

3. Arbitrability jurisdiction (section 3(b)).

Consistent with U.S.A. decisional law, RUAA § 3(b)(1) states, "A court shall decide whether an agreement to arbitrate exists or a controversy is subject to the agreement." This default rule, however, like many others in the RUAA, may be altered if "the parties otherwise agree." (RUAA § 3(b).)

One way for the parties to agree otherwise is to agree to arbitration under a set of rules that leaves such arbitrability issues to the arbitral tribunal.

Because RUAA § 3(b)(1) is a default rule and is the established rule in the U.S.A., we are not troubled with this provision. However, an official comment to section 3 should refer to the various arbitration rules that provide otherwise. This would assist drafters of arbitration clauses in effectuating the parties' intent on this issue.

4. Provisional and other remedies (sections 5, 15, 18).

The RUAA clearly empowers an arbitrator to award injunctive relief, both preliminary or provisional and final. (RUAA §§ 5(b), 15, 18(b).)

We believe that this is the proper approach and that the RUAA should not "follow" a recent California case reaching the opposite conclusion. (Broughton v. Cigna Health Plans, 76 Cal. Rptr. 2d 431 (Ct. App) (arbitrator cannot issue injunction under California Consumers Legal Remedies Act, thereby precluding arbitration), review granted, 964 P.2d 439 (Cal. Sup. Ct. 1998). At the September 9, 1999, hearing of the appeal in Broughton, two California Supreme Court Justices raised the possibility of allowing arbitral injunctive relief for individuals, but reserving injunctive relief in class actions for the courts. (Arbitrator's power aired in Calif., Nat'l L. J., Sept. 27, 1999, at _______.)

5. Consolidation (section 7).

Section 7 of the RUAA would empower courts, with one exception, to order consolidation of separate arbitrations where "the controversies . . . arise in substantial part from the same transaction or series of transactions" and where "there is a common issue of law or fact creating the possibility of conflicting decisions." (RUAA § 7(a)(1)-(2).) The exception is where consolidation "would be contrary to the express terms of an agreement to arbitrate or would substantially prejudice the rights of, or would result in undue delay or hardship to, a party to the arbitration proceeding opposing consolidation." (RUAA § 7(b)(deletion of emphasis of change in the Tentative Draft No. 6).)

We believe that this is a desirable change for the reasons stated in the Reporter's Notes. We, however, endorse the concern expressed about the exception in section 7(b) at the first reading by Commissioner Hawkins; the exception for instances where consolidation "would substantially prejudice the rights of, or would result in undue delay or hardship" to a person opposing consolidation, the Commissioner suggests, creates a bias against consolidation. To meet this concern, we suggest the following alternative language for subsection (b):

(b) The court may not order consolidation of separate arbitration proceedings where consolidation is contrary to the express terms of an agreement to arbitrate or where prejudice resulting from consolidation to a party to the arbitration proceeding substantially outweighs the prejudice resulting from non-consolidation to another party to the arbitration proceeding.

We also note that section 7 is not one of the provisions that cannot be waived or modified by agreement of the parties. (See RUAA § 27.) Thus, it is possible for the parties to agree to have the arbitrator, rather than the court, make the decision about consolidation, but this should be permissible only when all of the arbitration agreements in the various arbitrations so empower the arbitrator; otherwise, this should be an issue for the court.

6. Disclosure by arbitrators (section 9).

Disclosure by potential arbitrators is a new topic for the RUAA; it was not covered in the UAA. Section 9 of the RUAA provides as follows:

SECTION 9. DISCLOSURE BY ARBITRATOR.
(a) Before accepting appointment, a person who is requested to serve as an arbitrator shall make a reasonable inquiry and disclose any facts learned that a reasonable person would consider likely to affect the impartiality of the arbitrator, including any:
(1) financial or personal interest in the outcome of the arbitration; and
(2) existing or past relationships with the parties, their counsel or representatives, witnesses, or other arbitrators.
(b) The obligation to disclose under subsection (a) is a continuing one that extends throughout the period of appointment as arbitrator.
(c) Unless the parties have otherwise agreed to procedures for disclosure, disclosure must be made directly to all parties and to other arbitrators.
(d) Objections based on any undisclosed interests, relationships, or facts described in subsections (a) and (b) or any unwaived objections of a party based on any of those interests, relationships, or facts disclosed in accordance with subsection (c) may be grounds for vacation of an award under Section 20(a)(2). The failure of an arbitrator to make a significant disclosure required under this section creates a presumption of evident partiality prejudicing the rights of a party under Section 20(a)(2).
(e) If the parties have agreed to the procedures of an arbitration institution or any other procedures for pre-award challenges to arbitrators, substantial compliance with those procedures is a condition precedent to a motion to vacate on those grounds under Section 20(a)(2).

We agree that this topic should be covered n the RUAA, but have a number of comments regarding the current version of section 9 quoted above.

First, section 9 is written as if the potential arbitrator were a sole practitioner or proprietor. This is an unrealistic approach and avoids the difficult issues that are raised when the potential arbitrator is a member of a law firm or a larger company.

For example, the prospective arbitrator is to make "an inquiry reasonable under the circumstances of an arbitration proceeding" and disclose "existing or past relationships with the parties to the agreement to arbitrate, their counsel or representatives, witnesses or other arbitrators." For a prospective arbitrator in a law firm, this legitimately means that he or she searches his or her own memory to see if he or she has had any prior relationship with the parties or their attorneys and that at least the names of the parties and presumably their counsel are entered in the law firm's conflicts system. Thereafter, the prospective arbitrator would disclose his or her personal contacts as well as the law firm's contracts presumably with the comment that he or she had no personal involvement in some of the firm's matters. For a prospective arbitrator in an organization (other than a law firm) without a conflicts systems, he or she as part of the "reasonable inquiry" should ask others in the company whether they have or have had a relationship with at least the parties or their attorneys. But for a multinational company, does this mean a worldwide search? Presumably not.

Second, section 9 is legitimately concerned about a prospective arbitrator's present or past relationship with a party's "representatives" and "witnesses." But in many instances, those persons are not known at the commencement of an arbitration.

Third, section 9 legitimately provides that the disclosure obligation is "a continuing one that extends throughout the period of appointment as an arbitrator." In the law firm setting, at least for parties and perhaps their attorneys, this is handled by having the attorney-arbitrator enter these names in the law firm's conflicts systems so that the arbitrator presumably is notified of a subsequent new file involving the same parties or their attorneys. This in turn should lead to the declination of the new matter if the attorney-arbitrator is the one who would be involved in the new matter. But what if other attorneys in the firm would handle the matter? Are they and the entire firm disqualified through normal attribution rules (absent disclosure and consent by all parties to the arbitration)? Section 6 of RUAA provides no answer or guidance.

Fourth, we object to the provision of section 9(d) that "the failure of the arbitrator to make a significant disclosure required under this section creates a presumption of evident partiality prejudicing the rights of a party to the arbitration proceeding under Section 20(a)(2)." This provision is especially improper, in our opinion, in light of the prior comments about arbitrators in law firms or larger companies.

Fifth, section 9 says nothing at all about the issue of conflicts for an arbitrator after the conclusion of the arbitration or "down-stream" conflicts.

Sixth, arbitrator disclosure of facts that might affect impartiality is only one facet of arbitrator ethics. We believe the RUAA should cover all facets of arbitrator ethics, instead of relegating such issues to a separate set of rules. We, therefore, urge the RUAA's Drafting Committee to re-consider section 9 in light of Rules 4.5.3 and 4.5.4 of the Proposed Model Rule of Professional Conduct for the Lawyer as Third Party Neutral promulgated by the CPR-Georgetown Commission on Ethics and Standards in ADR (http://www.cpradr.org/cpr-george.html), a copy of which is attached as Exhibit B, and to the recent revision of the Code of Ethics for Arbitrators in Commercial Disputes (http://www.abanet.org/ftp/pub/dispute/arbdoc.txt.).

7. Arbitrator immunity (section 11).

Section 11(a) and (b) of the RUAA provides a broad grant of civil immunity to arbitrators and arbitration organizations.

If an arbitrator or arbitration organization asserts immunity, section 11(d) provides that the arbitrator or organization is not competent to testify in a civil action. Although the language is straightforward and worthy of support, there is still room for argument that the first sentence of section 11(d) does not really accomplish the purpose explained in the first paragraph under "4." in the Reporter's Notes: the arbitrator could testify about his or her services with respect to a claim for arbitrator's fees, while simultaneously invoking the right not to testify with respect to a counterclaim against the arbitrator.

8. Summary disposition (section 12(b)).

RUAA § 12(b) provides as follows:

An arbitrator may decide a request for summary disposition of a claim or particular issue, either by agreement of all interested parties or upon request of one party to the arbitration proceeding if all other interested parties to the arbitration proceeding have reasonable notice and an opportunity to respond.

Reporter's Note 3 to RUAA § 12 states that this provision has provoked considerable debate within the Drafting Committee and that those opposed to this provision believe it "will encourage a form of motion practice that will result in more cost and delay" and will prevent both sides from presenting their cases at a hearing.

We agree with those opposed to RUAA § 12(b) for the same reasons. There is no question that summary disposition may sometimes expedite the resolution of a matter, just as there can be no question that a summary disposition procedure could sometimes result in more cost and delay. Rather than provide that the summary disposition procedure is always available in every case, the RUAA should leave it to the parties to decide whether to give the arbitrators this option. If the parties want to empower the arbitrators to have the option of summary disposition of a claim or a particular issue, then, given the RUAA's encouragement of the parties agreeing otherwise, they may do so.

9. Hearings and depositions (sections 12(d), 14(e)).

RUAA § 12(d) provides as follows:

If the arbitrator orders a hearing under subsections (c), the parties are entitled to be heard, to present evidence material to the controversy, and to cross-examine witnesses appearing at the hearing

Consideration should be given to adding a sentence in section 12(d) authorizing the arbitrator to take testimony by telephone, by video conference, or by some other method than the examination of "witnesses appearing at the hearing." Although this authority may be implicit in the RUAA, and while such procedures undoubtedly occur on many occasions with the consent of both parties, express statutory authorization seems desirable.

Under the RUAA as drafted, section 14(b), which authorizes an arbitrator to permit depositions, could be read to imply that the only way to get the testimony of a witness who "is unable to attend the hearing" is by means of a deposition authorized by the arbitrator at the request of a party. Of course, if the parties want to contract for a more courtroom-like procedure, they should be free to do so. In the absence of such a restrictive provision in the arbitration clause, however, arbitrators may often feel that it is more helpful to hear a live witness on the speaker phone than it is to read the transcript of a deposition.

Moreover, depositions are often the most expensive method of discovery in the U.S. civil litigation process, and one of arbitration's advantages is avoiding such expenses. Therefore, we are troubled by the RUAA's opening the door for depositions.

10. Other discovery provisions (section 14).

In addition to section 14(b)'s permitting depositions for use as evidence, section 14(c) states:

Unless the parties otherwise agree, an arbitrator may permit such discovery as the arbitrator decides is appropriate in the circumstances, taking into account the needs of both of the parties to the arbitration proceeding and other affected persons and the desirability of making the arbitration proceeding fair, expeditious, and cost-effective.

This approach to discovery is advantageous in that it does not attempt to set out the equivalents of the formal discovery methods in civil litigation: initial disclosures, document requests, interrogatories and requests for admission. On the other hand, this approach's vagueness invites parties to push arbitrators to decide all discovery issues on an ad hoc basis and thereby creates an incentive for discovery motion practice.

We suggest that the Drafting Committee add a comment to section 14(c) something like the following:

One of the perceived advantages of arbitration over civil litigation is avoidance of the latter's expensive pretrial discovery process. This advantage of arbitration must not be lost in allowing discovery under section 14(c). Instead, parties and arbitrators are encouraged to adopt the approach to discovery in the IBA Rules on the Taking of Evidence in International Commercial Arbitration (adopted June 1, 1999) [http://www.ibanet.org], a copy of which is attached hereto as Exhibit C.

11. Rejection of manifest disregard of law and against public policy as grounds for vacating award (section 20, Note C).

RUAA § 20 does not adopt "manifest disregard of the law" or "against public policy" as grounds for vacating an arbitral award. Reporter's Note C sets forth the following justification for this decision:
· Neither ground is provided in the Federal Arbitration Act, which would probably preempt such a provision in the RUAA.
· It is difficult to draw clear tests for these standards.

We agree that it is difficult to draw clear tests for these standards. We, however, are not persuaded by the other stated reason for the RUAA's rejection of these grounds for vacating an award--nonconformity with the Federal Arbitration Act ("FAA"). We suggest that the updating of the UAA in the RUAA should not be retarded by reference to the FAA, which was adopted in 1925 and which has not been subjected to an overall legislative review since then. (See 9 U.S.C.A. §§ 1-16; 9 U.S. Code Serv. §§ 1-16.) Instead, the provisions of the RUAA, we submit, should be based upon an objective analysis of the issues without regard to the FAA. Once the RUAA is adopted, Congress should then take the RUAA as a basis for re-examining and updating the FAA.

The possible "need" for vacating an award because of manifest disregard of the law or its being against public policy would be obviated if the RUAA enabled the parties by contract to call for greater scrutiny of an award by a court. We recommend that the RUAA adopt what was Alternative I in the July '99 draft, which states as follows:

In addition to the grounds to vacate an award set forth in subsection (a), the parties may contract in the arbitration agreement for judicial review of errors of law in the arbitration award. If they have so contracted, the court shall vacate an award made by an arbitrator if the arbitrator has committed an error of law substantially prejudicing the rights of a party.

The Reporter's Notes indicate that at the first reading of the RUAA, this alternative provision was voted down by a wide majority. (RUAA § 20, Reporter's Note B.) One of the stated grounds for this decision was potential FAA preemption, but, as just noted, we do not think it wise to base decisions on the RUAA on our out-of-date FAA. The other ground for this decision is parties' inability to create subject-matter jurisdiction for a count. (Id.) But if the RUAA with such an opt-in provision became positive law in a state, such a statute, in our view, would create the jurisdiction, not the parties' own wishes.