Arbitration as a Forum of Equity

Summary: Once arbitrators are comfortable with the fact that arbitration is not a substitute for litigation; that they have the power and obligation to provide an equitable forum based on the evidence; and, that their Awards will almost always remain unchallenged by the courts, they should discourage parties from attempting to graft onto the process the dilatory and expensive trappings of litigation and get more quickly to the central, substantive issues in dispute. Their single mandate is to provide a full, fair and expeditious opportunity for parties to present their cases.

Presentation: I have been involved in the arbitration of commercial disputes for 35 years (as a practitioner, arbitrator, administrator and author) and begin each hearing that I chair with the following: “This is a forum of equity. The rules of evidence don’t apply but we will decide this case based on the evidence. You can assume that every document you wish to enter into evidence will be admitted and that every witness you want to present will be heard. With that license comes this obligation: Don’t waste our time. You’ve selected us to be your arbitrators. You should assume that it will not take us long to ‘get it’ and that repetitive testimony and duplicative exhibits will slow down these hearings and may cause us to lose focus on the central issues in dispute. We have read the pleadings. We understand the main arguments. We will ask questions of witnesses when we need subjects explained in a clearer fashion. At the end of the hearing, I’ll ask each of you whether you’ve had a full and fair opportunity to be heard. That’s our commitment to you.” This opening statement is usually followed by a great sigh of relief by the attorneys who had, until then, been referring to the Federal Rules of Evidence and, in their pre-hearing memos of law, to strings of ‘cases on point.’

What does it mean to provide an equitable forum and what should arbitrators understand about their powers?

Courts overwhelmingly hold that they will not second-guess arbitrators since the parties voluntarily agreed to arbitrate their dispute. Since arbitration is intended to be a final and binding process, courts resist efforts by parties to get an “adversarial mulligan” (i.e., vacate an arbitration Award and start all over again with a new panel). Arbitrators are given wide latitude in managing cases, but when they go seriously “off the reservation”- such as failing to make required disclosures about themselves; deciding issues not in the pleadings, taking part in ex parte communications with parties or their counsel or refusing to grant a reasonable adjournment request or to admit pertinent and material evidence – courts may very well vacate their Awards.

As long as arbitrators (a) provide a fundamentally fair hearing to all parties; (b) don’t engage in ex parte communications with a party or party representative; (c) don’t refuse to permit a party to cross-examine witnesses; (d) give each party an opportunity to complete his or her presentation of proof; (e) decide only the issues set forth in the pleadings; (f) decide all of the issues submitted; (g) disclose information about themselves that satisfy their obligation to be impartial; and, (h) have a reasonable basis for the denial of a request to adjourn or the refusal to hear certain evidence; and, as long as their Award is not completely irrational, contrary to a well-defined and dominant public policy, or lacking a factual basis, there is little to fear from the courts.

The Arbitrator’s Guide is published by the Financial Industry Regulatory Authority (FINRA), which administers most of the securities-related disputes in this country. The Guide sets the context for how equity must be a watchword for arbitrators and states that the Rules of Evidence do not have to be strictly adhered to:

“Equity is justice in that it goes beyond the written law. And it is equitable to prefer arbitration to the law court, for the arbitrator keeps equity in view, whereas the judge looks only to the law, and the reason why arbitrators were appointed was that equity might prevail.” – Domke on Aristotle

The strict rules of evidence applied in a court of law are not usually used in arbitration. This does not mean that the arbitrators should accept everything presented to them. The evidence should relate to the case. For example, no party should be allowed to introduce evidence of any settlement offer that it made or received. The parties should be given an opportunity to object or comment on anything that is presented to the panel. The key consideration is fairness.

While the Federal Rules of Evidence do not as a general matter govern the conduct of arbitration proceedings, the rules of evidence do, however, often provide good, practical guidance on what evidence is probative. The collective experience and judgment of the bar drawn upon in the formulation of these rules is useful in making particular determinations, but generally arbitration proceedings should be more informal and should permit more liberal introduction of evidence than would be permitted in court.

The law in New York on this critical issue is mirrored in all other states. Arbitrators are “not bound to abide by, absent a contrary provision in the arbitration agreement, those principles of substantive law or rules of procedure which govern the traditional litigation process. An arbitrator’s paramount responsibility is to reach an equitable result. An arbitrator is free to apply his own sense of law and equity to the facts.” “[An arbitrator’s] award will not be vacated even though the court concludes that his interpretation of the agreement misconstrues or disregards its plain meaning or misapplies substantive rules of law, unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on his power.” New York’s highest court has set a substantial burden on a party seeking to vacate an arbitration Award:

He may do justice as he sees it, applying his own sense of law and equity to the facts as he finds them to be and making an award reflecting the spirit rather than the letter of the agreement, even though the award exceeds the remedy requested by the parties… His award will not be vacated even though the court concludes that his interpretation of the agreement misconstrues or disregards its plain meaning or misapplies substantive rules of law, unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on his power.

There is a constant balancing act that arbitrators must achieve between law and equity: based on the evidence, to apply the law in an equitable manner. The influence of equity cannot be stressed enough in arbitration. When I chair a case, I am guided by one question when there is an objection to a witness, to the introduction of an exhibit or to any request of a party: What is fair?