Wisconsin Lawyer
Vol. 79, No. 12, December 2006

Borst Clarifies Arbitration Procedures

by Mark A. Frankel

ue to its many advantages as an alternative to litigation, arbitration is a popular choice among parties seeking an efficient resolution of a wide range of legal disputes. Arbitration tends to be a more private and less expensive alternative than formal litigation. It has greater finality and is generally quicker than litigation. Arbitration also allows disputing parties to choose a tribunal that is likely to have more technical expertise about a specific industry or type of dispute than a typical judge or jury may have. However, for arbitration to function efficiently and remain an attractive litigation alternative, parties must have a high degree of certainty about the procedural ground rules underpinning the arbitration option.

As a result of the Wisconsin Supreme Court's recent decision in Borst v. Allstate Insurance Co.,¹ important procedural aspects of arbitration have been significantly clarified. Because the arbitration process and alternative dispute resolution (ADR) generally exist outside the immediate purview of close judicial scrutiny, many assumptions about how arbitration operates have evolved within the ADR community. On those infrequent occasions when appellate courts are asked to rule on the validity of a disputed arbitration outcome, the court has an opportunity to reshape long-held institutional perceptions about the process. The Wisconsin Supreme Court decision in Borst clarified several ill-defined aspects of the arbitration process.

In Borst, the supreme court established several new principles that further delineate the arbitration process. The court held that a party-appointed arbitrator now is presumed to be a true neutral in the arbitration decision-making process, unless explicitly designated as an advocate for the appointing party in a tripartite arbitration². An arbitrator with a potentially disqualifying bias or affiliation with one of the parties is not relieved of that bias merely by making a full disclosure of that bias or relationship in advance of the arbitration. An aggrieved party in arbitration now has the recognized right to seek equitable judicial relief before the arbitration hearing based on a claim of undue partiality on the part of an arbitrator. Finally, the supreme court established that, in the absence of explicit contractual authority authorizing prearbitration discovery, an arbitrator has no inherent discretion to authorize the taking of discovery in an arbitration proceeding. These newly articulated principles, while easily defensible, differ from many commonly accepted beliefs concerning how the arbitration process works.

Background of the Borst Dispute

Borst arose out of an uninsured motorist accident in November 2000. After receiving treatment for injuries he suffered in the accident, Russell Borst sought reimbursement from Allstate Insurance Co. under the uninsured motorist clause of his automobile insurance policy. Allstate raised the issue of Borst's contributory negligence as a potential cause of his own injuries. Allstate offered to settle with Borst for an amount only half of that claimed by Borst because, in Allstate's view, Borst's negligence was partially responsible for causing the accident. Borst rejected Allstate's settlement offer and demanded arbitration under his policy.

Borst's insurance policy contained an "If we can't agree" provision specifying that if the parties could not agree on an amount to settle a claim, the dispute would be resolved by arbitration under the rules of the American Arbitration Association (AAA). The contract further specified that each side was to select an arbitrator and that the two party-appointed arbitrators would then select a third arbitrator. A written decision of two of the three arbitrators would resolve the disputed issues.

Allstate selected attorney Rick Hills as its designated arbitrator. Borst immediately objected to the neutrality of Hills' appointment on the ground that Allstate was a regular client of Hills' law firm. Hills asserted that, despite his firm's representation of Allstate, he could still serve as a neutral arbitrator. Hills and Borst's appointed arbitrator then jointly selected a third arbitrator. Borst challenged Allstate's selection of Hills as an arbitrator in circuit court, but he did not succeed in having Hills removed as an arbitrator. The three arbitrators, over Borst's objection, authorized the taking of discovery by use of depositions, interrogatories, and the provision of medical releases.

The arbitration panel unanimously determined that Borst's total damages were only $3,531 and that his net award was $1,765.50, after a 50 percent reduction for Borst's contributory negligence. Borst then challenged the confirmation of the arbitration award in circuit court under Wis. Stat. section 788.10, on the ground that, because Hills' law firm regularly represented Allstate, Hills was unduly partial to Allstate. The circuit court determined there were no rules governing bias and because there was a presumption of validity, the circuit court confirmed the arbitration award under Wis. Stat. section 788.09. Borst appealed, and the court of appeals certified the case to the Wisconsin Supreme Court.

Impartiality Required of a Party-appointed Arbitrator

Arbitrators serve in what is, essentially, a judicial capacity, albeit in a nonjudicial setting. One of the hallmarks of the judicial system is that judges are expected to be impartial concerning the disputes that come before them. Tripartite arbitration is historically an area in which arbitrator impartiality has not always been presumed. To the contrary, many lawyers and courts have assumed that an arbitrator appointed by one of the parties is expected to function more as an advocate for the appointing party than as a true neutral.³

The supreme court recognized in Borst that there has been a great deal of confusion and uncertainty about the appropriate role of a party-appointed arbitrator in tripartite arbitrations. It had been commonly accepted practice within certain industries to appoint a designated arbitrator known to be and expected to be sympathetic to the appointing party.⁴ Until 2004, the AAA's commercial arbitration rules explicitly presumed that a party-appointed arbitrator would be an advocate for the appointing party. In 2004, the AAA, in conjunction with an American Bar Association taskforce, updated the AAA's commercial arbitration rules to specify a rebuttable presumption of neutrality for all arbitrators, including party-appointed arbitrators.

The Wisconsin Supreme Court accepted the position advocated by the State Bar of Wisconsin Alternative Dispute Resolution (ADR) Section⁵ that, unless the parties expressly designate their appointed arbitrators to function in an advocacy capacity, party-appointed arbitrators should be presumed to function as true neutrals. There are several advantages to this resolution of the issue. First, it serves to eliminate the significant confusion that previously existed among arbitrators and practitioners as to the appropriate role of the party-appointed arbitrator. This role clarification should reduce post arbitration disputes over the impartiality of appointed arbitrators. Parties still retain the right to contractually specify that appointed arbitrators in their disputes will function in other than a neutral role, free from impartiality requirements. Second, absent a contractual choice to use partial arbitrators, the decision expands the functional decision-making from just the one historically neutral arbitrator, to all three neutral arbitrators.

From the practitioner's point of view, the strategic focus in selecting an arbitrator now shifts to seeking an arbitrator with the experience and credibility to make an informed, impartial, and intelligent decision. Previously, counsel frequently focused on selecting an arbitrator with the presumed ability to persuade the one neutral arbitrator to accept counsel's position on the merits of the dispute.

Evident Partiality and the Role of Full Disclosure

Allstate argued that, because Hills had declared his impartiality and fully disclosed his law firm's relationship with Allstate, there was no basis to reject the arbitration award based on a claim of evident partiality under Wis. Stat. section 788.10(1)(b). The supreme court strongly rejected the argument that neutrality only requires a full disclosure of potentially conflicting relationships.

The court specified the standard for determining whether an arbitrator has demonstrated evident partiality under Wis. Stat. section 788.10(1)(b). If there is "clear, plain and apparent" evidence of bias, so that a reasonable person would have serious doubts about the impartiality of the arbitrator to serve on a neutral arbitration panel, the award will not be confirmed. The court concluded, as a matter of law, that Hills' substantial, ongoing attorney/client relationship with Allstate met the test for evident partiality, and the court ordered the arbitration award vacated. The supreme court made clear that arbitrators are not held to the same standard of impartiality as judges. However, recusal or vacation of an award will be required when the disclosure reveals the existence of a substantial relationship between an arbitrator and one of the parties, something more than a "… casual, innocent, superficial, insignificant or inconsequential …" relationship.

The larger question for the court was whether a party is entitled to challenge the impartiality of an appointed arbitrator before a final award is rendered. The court ultimately concluded that affording the right to a prearbitration judicial challenge to the impartiality of an arbitrator enhances the efficiency of the arbitration process.⁶ The supreme court concluded that circuit courts have the equitable authority to order a party to select another arbitrator, if necessary to assure the impartiality of an arbitration process.

Arbitrators' Authority to Order Prehearing Discovery

In the absence of an express contractual agreement on discovery, the parties presented a significant dispute over the extent of prehearing discovery allowable in arbitration. Borst asserted that, given the relatively simple nature of the insurance claim dispute, no prehearing discovery should have been permitted. Conversely, Allstate argued that, because the Wisconsin Legislature had expressly authorized the use of court-approved depositions under Wis. Stat. section 788.07, the legislature also must have implicitly authorized the use of less expensive forms of discovery. To the surprise of many practitioners, the court held that, because there is no statutory authority specifying discovery in arbitration (outside of depositions under section 788.07), arbitrators have no inherent ability to determine the necessity and scope of allowable discovery.

The clear alternative for lawyers concerned about ensuring the potential availability of discovery in arbitration is to specify, in the arbitration agreement, the extent and types of discovery that will be available if arbitration ultimately is used. Alternatively, contracting parties by reference may incorporate publicly available arbitration rules specifying discovery rules that will be used as part of the arbitration process.⁷ Because arbitration is, at its core, a matter of contract, courts should have little or no reluctance to approve discovery procedures that the parties themselves have contractually agreed to in advance of any subsequent arbitration disputes.

Conclusion

Borst presents lawyers and their clients with a clearer understanding of exactly how arbitration is designed to operate in Wisconsin. This new clarity should reduce parties' concerns that procedural disputes will result in unnecessary post-hearing litigation after an arbitration award has been rendered.

Endnotes

Wisconsin Lawyer