Arbitration: Appeal, over Injunction, is the Remedy for Faulty Selection Processes (Web)

In a case involving a dispute over how the American Arbitration Association administered arbitrator selection, the South Carolina Supreme Court concluded that a trial court erred by granting an injunction against the association over the appointment procedure the association employed in the case.

The proper remedy, the Court held, is an appeal. Strategic Resources Co., et. al v. BCS Life Insurance Co., No. 26022, 2006 WL 539612 (S.C. March 6, 2006)(available at www.judicial.state.sc.us/opinions/displayOpinionPF.cfm?caseNo=26022).

The case proceeded on two fronts: An Illinois court had sent the case to arbitration. But Strategic Life and its insurers filed the South Carolina action because they “became dissatisfied with the actions of [BCS Life] and feared the American Arbitration Association (AAA) would utilize a set of rules they felt did not favor them,” according to South Carolina Associate Justice Costa M. Pleicones, who outlined the procedural history in an opinion both concurring with and dissenting from the three-judge majority opinion.

In the original case, two BCS insurance companies filed suit in an Illinois state court against Strategic Resources Co., Continental Assurance Co., and CAN Group Life Insurance Co., and an individual, after a business deal failed. The court referred the case to arbitration pursuant to the parties' written agreement.

The dispute was to be submitted to a three-arbitrator panel, with each side selecting one party arbitrator, and a third neutral arbitrator to be selected by the party arbitrators.

When the party arbitrators couldn’t agree on the third arbitrator, the BCS companies asked the AAA–which was a party to the original South Carolina matter but wasn’t involved in the Supreme Court case--to make the selection.

Once the matter was returned to the AAA, both sides also disagreed about which set of AAA rules should be applied.

BCS wanted to apply the Supplementary Rules for the Resolution of Intra-Industry U.S. Reinsurance and Insurance Disputes, while the Strategic Resources parties argued that the AAA's Commercial Arbitration Rules applied.

The AAA applied the supplementary rules. The Strategic Resources parties objected to the list of arbitrators issued by the AAA and started a series of proceedings.

In response, BCS filed a request for emergency relief in Illinois, according to Pleicones’ opinion. The Illinois court required the AAA to determine the procedure to be used in this matter, and stated, “After the AAA makes such a ruling, the arbitration shall proceed consistent with the AAA’s ruling. The [c]ourt retains jurisdiction over the parties and this dispute.”

Following a request by the Strategic Resources parties, a South Carolina trial court then issued an injunction, requiring the AAA to use the commercial arbitration rules preferred by Strategic Resources, rather than the supplementary rules. It found that BCS “had engaged in a variety of wrongful conduct, including . . . manipulating the AAA, violating the rules of the AAA, improperly communicating with the AAA, and making inconsistent statements to the trial court at hearings and in documents filed with the court."

The trial court held that it would not be fair to require the Strategic Resources parties to wait till the arbitration’s conclusion to challenge the process, as they would be participating "pursuant to inapplicable rules and with an improperly selected neutral arbitrator."

BCS appealed to the South Carolina Supreme Court.

The Court concluded that Strategic Resources not been entitled to an injunction because the arbitration award could be appealed. The Court, in an opinion by Acting Chief Justice James E. Moore, agreed with BCS’s view that Strategic Resources wasn’t entitled to an injunction since there was a South Carolina common law remedy, and reversed the trial court. Moore wrote:

The right to appeal provides respondents with an adequate remedy at law, a protection of their rights, and an opportunity to repair any prejudice caused by the alleged improper selection of the neutral arbitrator.

Justice Pleicones concurred with the decision to reverse the injunction, but noted that he is concerned that “the majority’s opinion may be read to hold that the ability to appeal from final judgment is always an adequate remedy at law such that an injunction will never lie.” He writes that he disagrees with that proposition.

From the ADR perspective, Pleicones notes that he is uncomfortable with the South Carolina trial court “injecting itself into an arbitration proceeding which is under the jurisdiction of the courts of Illinois.”

As a result, Pleicones writes that he would have vacated the injunction, but with a remand that the case should be dismissed, as “a matter of comity and public policy.”

--Zoltan Elek, CPR Intern