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In upholding an arbitration award in excess of $6 million, the Connecticut Supreme Court held that a vacancy on the arbitration panel did not preclude the arbitration from continuing because the applicable arbitration rules allowed the remaining members of the panel to determine whether the arbitration should continue.
In C.R. Klewin Northeast, LLC v. City of Bridgeport, No. 17590, 2007 WL 1051758 (Conn. Apr. 17, 2007), C.R. Klewin Northeast (Klewin) and the City of Bridgeport (the City) entered into a public works contract whereby Klewin would oversee the construction of a sports arena.
When a pricing dispute arose, Klewin filed an arbitration demand with the American Arbitration Association (AAA). Under the applicable AAA rules, the dispute would ordinarily be heard by a panel of three arbitrators. However, when one of the arbitrators resigned due to illness, the two remaining arbitrators chose to proceed with the arbitration over the City's objection.
On the twentieth day of hearings, the City sought to amend its answer to add a defense that the contract was procured illegally as part of a bribery scheme involving the City's former mayor, who had been indicted eighteen months earlier on corruption charges relating to the contract. The arbitrators disallowed the amendment as untimely.
After thirty-seven days of hearings, the arbitration panel awarded Klewin $6,020,231, plus interest. The trial court confirmed the award.
The City raised several issues on appeal. First, the City argued that the arbitration panel lacked jurisdiction because the underlying contract was procured illegally and thus void. The Court rejected this argument in light of the rule articulated in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). Specifically, the Court held that the defense of contract illegality was a question for the arbitrators, at least in the first instance, because the challenge related to the entire contract rather than just its arbitration clause.
The City also challenged the trial court's ruling that the City waived the defense of contract illegality through its conduct in the arbitration. In upholding this ruling, the Court explained that the City's attempt to raise the defense on the twentieth day of hearings "was, in essence, too little, too late."
The Court also upheld the trial court's ruling that the City waived any argument that the arbitration award violated the public policy against corruption in government contracting. Specifically, the Court reasoned that the City's public policy challenge was "functionally indistinguishable from its contract illegality defense" because whether the award violated public policy "turn[ed] on a subsidiary factual determination that the underlying contract was illegally procured."
Finally, the City argued that the arbitration panel lacked jurisdiction because it had only two members. In rejecting this argument, the Court noted that in the event of a vacancy, the AAA rules authorize the remaining arbitrators to continue with the hearing "unless the parties agree otherwise." See Rule 19(b) of the AAA Commercial Arbitration Rules.
This approach to arbitrator vacancies arguably aids the efficiency of arbitration by allowing the remaining arbitrators to continue the arbitration without revisiting the arguments or evidence that were previously presented. However, Rule 19(c) already guards against this inefficiency by giving the arbitrators "sole discretion" to determine "whether it is necessary to repeat all or part of any prior hearings."
Moreover, continuing the arbitration with a two-member panel poses an even greater risk of inefficiency because there is no tiebreaker in the event of a deadlock, in which case the entire proceeding would be for naught.
The National Arbitration Forum Code of Procedure takes a different approach. Specifically, under Rule 23(E), a substitute arbitrator is appointed "unless the [p]arties agree otherwise." In other words, under the FORUM Code of Procedure, there are no vacancies without the parties' consent.
A full panel is especially important where the panel consists of arbitrators with diverse areas of expertise. For example, in this case, the three-member arbitration panel included a construction attorney, a design professional, and a contractor. Under the AAA approach, even if the lone attorney on the panel resigned due to illness, the arbitration could proceed regardless of whether any of the parties objected.
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