Attorney who drafted settlement agreement acts as arbitrator over disputes arising under the agreement. What could possibly go wrong?

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Every now and again I read a decision that leaves me with lots of unanswered, and perhaps unanswerable, questions. Asphalt Paving Systems, Inc. v. Associated Asphalt Partners, LLC is one of those cases.

In Asphalt Paving, plaintiff and defendants settled their lawsuit shortly after plaintiff filed its complaint. They agreed that any disputes over the terms of the settlement agreement would be resolved through arbitration, and further agreed that the attorney who drafted the settlement agreement would be the arbitrator. (Question No. 1: Would you ever agree – as either one of the parties or the attorney – to this set up? I don’t think I would. It seems rife with potential problems.)

As you might have guessed, a dispute arose between the parties and they proceeded to arbitration. At the end of the arbitration, the arbitrator asked the parties, “What would be the result if I determined the agreement is too ambiguous to enforce?” (Question No. 2: Why bring this up even if you thought it might be true?) Plaintiff alleged that, in response, defendants’ attorney “raised his voice, pointed his finger angrily at the arbitrator, and threatened that the arbitrator would be sued for malpractice.” The arbitrator entered an award against plaintiff, and plaintiff sued. It alleged that the award was procured by undue means — defendants’ counsel’s alleged threat to sue the arbitrator.

The trial court dismissed the complaint, holding that “based on his personal knowledge of the arbitrator, there was no possibility that the putative threat would have affected the arbitrator’s ability to be fair and impartial in rendering the arbitration award.” (Question No. 3 – Didn’t the trial court know that the “trust me, I know he is a good guy” rationale probably would not survive appeal?) Plaintiff appealed and the Appellate Division reversed, holding that the trial court erred in basing its decision on personal experience rather than evidence adduced at a hearing.

On remand, the trial court held an evidentiary hearing, taking testimony from the arbitrator and others present when the alleged threat was made. The trial court found that the arbitrator did ask what would happen if he determined that the settlement agreement was too ambiguous to enforce, and that, in response, defendants’ counsel did say, “Well, you’ll get sued.” But defendants’ counsel “described the dialogue between he and the arbitrator as being ‘banter’ and ‘witticism,’ and that, when the colloquy occurred, he was laughing and so was the arbitrator.” (Question No. 4: Witticism? In the words of Inigo Montoya, I do not think that word means what you think it means.)

The trial court held that this was not enough to find that the arbitrator’s award was procured through undue means. But the trial court was critical of the “banter” between the arbitrator and defendants’ counsel:

The court found defendants’ counsel’s reference to a possible lawsuit against the arbitrator “wholly inappropriate” and that the banter between the arbitrator and defendants’ counsel constituted “unsuitable behavior that calls into question the very quality and professionalism of [the] proceedings.” In any event, the court found that “it is clear from the testimony that [the arbitrator] did not view [defendants’ counsel’s] comments as a threat, but rather something said in jest and made in response to his own ill-chosen question.” The court further found the dialogue was not “of such a nature that it affected [the arbitrator’s] decision-making process” and, as a result, defendants’ counsel’s statement “does not constitute a ‘material threat.'”

Plaintiff appealed and the the Appellate Division affirmed the trial court’s decision on this issue. The Appellate Division held that it was required to defer to the trial court’s factual findings, which were supported by credible evidence. Based on the trial court’s findings that the arbitrator was not threatened by defendant’s counsel’s comments and that his comments did not impact the arbitrator’s decision, the Appellate Division held: “[T]he arbitration award could not have been procured by a statement that, as a matter of fact, did not affect the arbitrator’s decision making.”

[Note: Although the Appellate Division affirmed the trial court on this issue, it remanded the case back to the trial court because the trial court failed to consider plaintiff’s argument that, even if the award was not procured by undue means, the arbitrator’s conduct created “an impermissible appearance of impropriety and lack of impartiality.” So, the case continues.]

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