When party-arbitrators (and their appointing parties) are at loggerheads over umpire selection, the entire arbitral process quickly grinds to a halt. Usually one party or the other is then compelled to seek judicial relief pursuant to §§ 4 and 5 of the Federal Arbitration Act (“FAA”) if the matter is subject to federal court jurisdiction. The courts have taken a variety of approaches to resolve such problems as illustrated by a recent California federal district court decision, which dealt with an umpire selection stalemate in combination with an effort by one party to stay four related arbitrations and consolidate them with a fifth after a state court in another jurisdiction had appointed an umpire that party had proposed.
The party-arbitrators in the four related arbitrations between a cedent and three reinsurer affiliates of the same parent company had been wrangling over umpire selection and apparently bogged down at the point when umpire slates were to be exchanged. The arbitration clauses in each of the four reinsurance contracts at issue were identical and provided for the two party-arbitrators to attempt to agree on a third. If they were unable to do so within 30 days of their appointment, each was to name two candidates, decline one, and then draw lots. As is typical, no time frame was specified for the exchange of umpire slates. To break this multiple umpire selection deadlock, the cedent petitioned the California federal district court for relief.
Meanwhile, a fifth arbitration had been commenced between the same parties, and, again, umpire selection was at an impasse. This dispute was referred to a Massachusetts state court, which had issued an order appointing an umpire whose name happened to have been proposed by the reinsurer. Before the now fully constituted Massachusetts panel, the reinsurer was allegedly planning to seek consolidation of all five arbitrations and sought to stay the four California arbitrations so that the other panel would be the first to rule on its consolidation motion.
The California federal district court cited as the applicable standard § 5 of the FAA, which provides that if a party fails to avail itself of the umpire selection method prescribed by the parties’ agreement, then upon application of either party, the court “shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require.” Citing a 1987 U.S. Court of Appeals for the Ninth Circuit decision, Pacific Reinsurance Management Corp. v. Ohio Reinsurance Corp., 814 F.2d 1324 (9th Cir. 1987), the court adopted a two-prong procedure to break the umpire selection deadlock.
The first prong of the court’s order mandated compliance with the terms of the parties’ arbitration agreement. The parties were required to exchange umpire slates within 30 days of the court’s ruling. Seven days thereafter, the arbitrators were ordered to decline one from the other’s slate and draw lots to select the umpire. If the arbitrators failed to follow this procedure, the second prong was to order the parties to submit their umpire slates in each of the four arbitrations, with umpire curricula vitae attached, within 37 days of the order. The court would then select the umpires from those slates.
As for the reinsurer’s effort to stay the California arbitrations to seek consolidation with the one pending in Massachusetts, the court agreed that consolidation might be the parties’ “most efficient course” (e.g., it probably would make more economic and practical sense from a business perspective and avoid the risk of inconsistent rulings), but it was not persuaded that a stay of these proceedings was warranted because “[t]he issue of whether, when, and how to consolidate these arbitrations is for the arbitration panels to decide.” It found no legal basis under the case law, the FAA, or the parties’ arbitration clause for it to refrain from proceeding with its statutory duty under § 5.
The court’s ruling, however, highlights the evolving, and still murky, status of arbitration consolidation motions under the current law. Which of the five panels in this scenario gets to decide whether one or more of the other arbitrations will be stayed and consolidated? The first to rule? What happens if the various panels reach different conclusions about which, if any, of the other arbitrations ought to be consolidated or one declines to obey another panel’s consolidation order? Reciting their mantra that the consolidation issue is one for the arbitration panels to decide, will the courts continue to refuse to get involved in such disputes? The potential tactical benefits of getting the panel with your umpire candidate on it to seize control of the other arbitrations by means of a consolidation motion, particularly when the adverse party’s candidate is the umpire in some or all of them, underscores the many challenging issues that will be playing out before arbitration panels and the courts in the years, if not decades, ahead.
Clearwater Insurance Co. v. Granite State Insurance Co., 2006 U.S. Dist. LEXIS 74771 (N.D. Cal. Sept. 29, 2006).