Arbitration: South Carolina's Top Court Extends Arbitral Immunity to ADR Providers (Web)

The Supreme Court of South Carolina has extended the doctrine of “arbitral immunity” to organizations that sponsor or administer arbitrations, such as the American Arbitration Association. In Strategic Resources Co. v. BCS Life Insurance Co., No. 26022, 2005 WL 1943536 (S.C., Aug. 15, 2005)(available at http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=26022), the Court considered whether a trial court erred when it enjoined the AAA from administering the selection of an arbitrator according to one set of the association’s, rather than another.

Appellants BCS Life filed suit in Illinois state court against respondent Strategic Resources and related parties over a business deal gone awry. The Illinois court compelled the parties to arbitrate their dispute pursuant to a written agreement. According to the agreement, each party would select an arbitrator for an arbitral panel, and then the arbitrators would jointly select a third panelist. In the case, the arbitrators reached an impasse in the selection process and the appellants asked the AAA for help in selecting a third panelist. Id. at *1.

The appellants wanted the AAA to prepare a list pursuant to the AAA’s Supplementary Rules for the Resolution of Intra-Industry United States Reinsurance and Insurance Disputes, which apply to disputes involving insurance claims and coverage. That list consists of individuals with substantial experience in the insurance industry, but not necessarily in the law.

In contrast, the respondents contended that the arbitrator list should be prepared according the AAA’s “Commercial Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Commercial Disputes).” That list primarily would consist of attorneys. Ultimately, the AAA issued a list of proposed arbitrators pursuant to the Supplementary Rules, and required the appellants and respondents to “strike and rank” the candidates by July 18, 2003.

The respondents continued to object to the AAA list. On July 17, 2003, they initiated proceedings in South Carolina state court to enjoin the AAA from following the Supplementary Rules. Id.

The trial court agreed with the Respondents and enjoined the AAA from following the Supplementary Rules. Additionally, the trial court ordered the AAA to prepare a list of arbitrators according to the Commercial Rules. Id.

The Supreme Court of South Carolina reversed, finding (1) that “arbitral immunity” applied to the AAA as an organization that sponsors arbitration, and (2) that injunctive relief was an inappropriate remedy because the Respondents had an adequate remedy at law. Id. at *2.

The doctrine of “arbitral immunity” protects individuals serving as arbitrators from disputes between litigants, and the potential for having to defend themselves in litigation. “Arbitral immunity insures that an arbitrator benefits from the independence necessary to protect him from bias or intimidation arising out of the exercise of judicial functions.” Id. (citing Butz v. Economou, 438 U.S. 478, 508-511 (1978)).

The Court followed California and Massachusetts courts that extended arbitral immunity to organizations that sponsor or administer arbitrations, such as the AAA. See, e.g., Am. Arbitration Ass’n v. Superior Court, 10 Cal. Rptr. 2d 899, 900 (Cal. App. 1992); New England Cleaning v. Am. Arbitration Ass’n, 199 F.3d 542, 545 (1st Cir. 1999) (applying Massachusetts law). These courts reasoned that granting immunity to an individual arbitrator would be illusory if the same protections did not extend to the sponsoring association.

The Strategic Resources court stated: “Given the persuasive authority from federal courts and other jurisdictions, we find it necessary that arbitrators be afforded limited immunity from lawsuits related to decisions arbitrators make during the course of arbitration.” Id. at *3.

The Strategic Resources court noted that arbitral immunity is limited in the same way as judicial immunity. The immunity would not apply when (1) the arbitrator engages in nonjudicial actions, or (2) the arbitrator acts beyond the scope of his or her authority. See Mireles v. Waco, 502 U.S. 9, 11-12 (1991) (discussing limits on judicial immunity). The Strategic Resources court, however, found that neither limitation applied to the case at hand since (1) the decision to select a list of arbitrators was a quasi-judicial action, and (2) the parties’ arbitration agreement gave the AAA the authority to administer the selection of a third panelist upon an impasse. Id. at *3.

Significantly, the court stated that public policy favored expanding arbitral immunity: “sound public policy provides that an arbitrator not be forced to defend a claim and, in turn, be forced to step out of an impartial administrative role to assume an adversarial position.” Id. at *4.

Furthermore, the Strategic Resources court agreed that the trial court erred in granting injunctive relief because the respondents had an adequate remedy at law. Instead of asking for an injunction--an equitable remedy--the respondents could have participated in the arbitration, and then filed an appeal--a legal remedy.

The Supreme Court reasoned that the right to appeal protects the Respondents’ rights, and provides an opportunity to repair any prejudice caused by the alleged improper selection of a neutral arbitrator. Even though the Respondents and the trial court reasoned that it would have been wasteful to first participate in the arbitration and later challenge the propriety of the proceedings, the Strategic Resources court rejected the argument and found that the right to appeal affords adequate protection.

The American Arbitration Association rules are available here:http://www.adr.org/RulesProcedures

–By Eric Laufgraben, Associate, Dewey Ballantine LLP