Ruling Highlights Need for Clear Outline of ADR Process
By ADRWorld.com Staff Reporters
June 27, 2006
A new ruling denying immunity for a neutral who failed to issue a final award in a case should serve as a wake up call for ADR practitioners and participants to clearly distinguish between mediation and arbitration in order to limit further litigation, observers say.
John Blackman, president of the California Dispute Resolution Council (CDRC), said the "case is yet another reminder to practitioners to be especially careful when mixing ADR processes, and to make every effort to ensure that the parties and their attorneys understand what procedural rules they are operating under when they get off the beaten path."
Eric Tuchmann, general counsel for the American Arbitration Association, said it is "very unfortunate to see any circumstance where a court does not recognize arbitral immunity," but this case is "unique because it addresses a person serving in a dual roles, arbitrator and mediator."
The ruling "serves as a warning to neutrals to be cautious when switching roles," and it highlights the need to "get the parties' agreement in writing about service as a mediator and further service as an arbitrator," he suggested.
The case arose when Morgan Phillips sued two mattress manufacturers for not making products according to its specifications. The parties agreed to mediation by JAMS mediator John Bates and a settlement was reached, but two years later Morgan Phillips invoked the dispute resolution clause in the settlement agreement because the products were still allegedly not being properly manufactured.
The process was purportedly turned into an arbitration and the sides presented evidence to support their arguments, but Bates continued to assist the parties in reaching a settlement. Later in the day Bates withdrew as the neutral and did not render an award.
Morgan Phillips then sued JAMS and Bates alleging breach of contract and unfair competition and false advertising. JAMS and Bates asserted the claims were barred by arbitral immunity and the trial court agreed. Morgan Phillips appealed.
The appeals court said in its June 20 decision that state common law arbitral immunity protects arbitrators from civil suit for actions taken in their capacity as decision-makers in a similar fashion to judicial immunity.
However,
According the appeals court, the exception is justified because the "failure to render an arbitration award is not integral to the arbitration process; it is, rather, a breakdown of that process."
In addition, unlike in court where the litigants have recourse to compel performance in the face of nonfeasance by a judge, parties to an arbitration must file suit for damages, the court noted.
Based on the facts as presented, Bates withdrew, failed to render an award and provided the parties with no reason for his actions, the court said, adding that his conduct is inconsistent with his role as arbitrator and "amounts to a breach of his contractual duty to conduct a binding arbitration."
However, the court emphasized that the case is still in the pleading stage, and "a decision to withdraw because of substantial doubt of the ability to fair and impartial, or because of a conflict of interest, is entitled to immunity."
"Assuming the allegations of the first amended complaint to be true, we conclude that the trial court erred in ruling that the doctrine of arbitral immunity bars Morgan Philips' claims against JAMS and Bates," the court concluded.
JAMS General Counsel Jay Welsh said "this was a complaint filled with bizarre allegations that were all false."
The court "emphasized that its decision was limited by the fact that it was reviewing a demurrer to an amended complaint, a complaint specifically amended to plead the only recognized exception to arbitral immunity, which is complete non-performance," Welsh noted.
According to Welsh, the court "had to accept Morgan Phillips' allegations as true," and "JAMS was not able to present the court with evidence regarding why the arbitrator withdrew."
He noted that the court said JAMS and the arbitrator are entitled to arbitral immunity if the arbitrator withdrew because of substantial doubt of the ability to be fair and impartial, or because of a conflict of interest. "We are confident that this will be established once this case proceeds beyond the pleading stage," he said.
Richard Bayer, immediate past president of CDRC, said "CDRC may look to de-publish" the decision, which would prevent it from being cited as precedent.
Bayer called the case "disturbing because it apparently allows someone to plead around arbitral immunity" and "opens the door to further testimony from mediation cases."
If the parties agreed to a mediation process but then one brought suit for a breach of contract based on the neutral's failure to render an arbitration award, the defendants are place in a "conundrum" because "mediators cannot testify [about mediation communications] due to the strictness of the state's mediation statute."
Therefore, they are unable to defend themselves unless they can get information into evidence that shows this was a mediation, not an arbitration, and the neutral would be entitled to protection under the principle of arbitral immunity, he said.
The case shows the "problems with med/arb" and informs parties of the need to "draw lines" between the two processes when agreeing to utilize the hybrid dispute resolution process, Bayer suggested.
CDRC's Blackman also said the court "unambiguously holds that common law arbitral immunity is alive and well in California, and further strengthens the notion that if the arbitrator makes any kind of a decision or takes any kind of action at all, arbitral immunity applies."
According to Blackman, the court's ruling importantly clarifies that pre-arbitration conduct by an arbitrator is covered by arbitral immunity.
"If anyone had any doubts before this, however, this decision lays those doubts to rest by clearly holding that an arbitrator's conduct in connection with exercising duties under the ethical standards and relevant statutes is 'integral to the arbitral function,' and therefore protected by arbitral immunity," he said.