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Arista Marketing Associates, Inc. v. The Peer Group, Inc.

316 N.J. Super 517, 720 A.2d 659 (App. Div. 1998)

ARBITRATION—A party-appointed arbitrator with an apparent conflict of interest can be removed for “evident partiality,” but the remaining two panel members need not then be removed.

In this commercial arbitration appeal, the Court examined its authority for the pre-arbitration removal of a party-appointed arbitrator, designated pursuant to a tripartite arbitration procedure set forth in the corporate dissolution agreement of the parties. It also considered whether the pre-arbitration disqualification of a party-appointed arbitrator based on “evident partiality” requires appointment of an entirely new arbitration panel.

Pursuant to the agreed-upon arbitration procedure, one party selected an attorney as its designated arbitrator and the other party selected another attorney as its designated arbitrator. The two attorneys then selected an accountant as the neutral arbitrator. After his appointment, and pursuant to the rules of the American Arbitration Association (AAA), one of the attorneys disclosed that he and his firm had been previously retained by the party that selected him to commence a corporate dissolution proceeding against the other party to the arbitration in the event that the negotiations between those two parties failed. When the second party became aware of the prior representation, he objected to that arbitrator’s participation in the proceeding. The AAA did not remove the “tainted” arbitrator because it had no rules governing such a situation. The disappointed party then asked the Chancery Division to disqualify the “tainted” attorney from the arbitration proceedings on the basis of “evident partiality.” After oral argument, the Chancery Division judge disqualified the arbitrator. The party that had selected that arbitrator appointed another arbitrator, under protest. That party then objected to the remaining two arbitrators continuing to serve, contending that since the replacement arbitrator was not part of the original arbitration proceeding, the selection process should start from the beginning. Essentially, he contended that the continuation of the two other arbitrators prejudiced him, because the replacement arbitrator did not participate in the selection of the neutral arbitrator. Further, he contended that the ability of the two remaining arbitrators to be impartial was tainted by their participation in the aborted arbitration hearing. The AAA, following its rules, refused to disqualify the other two arbitrators. Upon appeal, the Court agreed with the Chancery Division that where reasonable people would perceive a relatively high risk of biased and partisan decision making on the part of an arbitrator, the appearances inherent in such a situation fatally compromise the independence and impartiality required of such an arbitrator. In fact, prior to the commencement of arbitration proceedings, every arbitrator must disclose to the parties any relationship or transaction he has had with the parties or their representatives. This rule, promulgated by the New Jersey Supreme Court, was intended to allow the parties to make an initial decision as to whether to object to an arbitrator designated by the other side and, if necessary, to seek judicial determination of whether the arbitrator appears to be too partial to be permitted to participate in the arbitration. In this case, the disclosure was especially important because case law requires that “arbitration should be conducted by arbitrators, not by parties themselves or their legal advocates.” With respect to disqualifying the remaining arbitrators, in the absence of any substantive challenge to either or both of them based on allegations of “evident partiality,” procedural issues are for determination in the arbitration forum, in accordance with the agreement of the parties, free from judicial interference. Under rules of the AAA, the two remaining arbitrators were entitled to continue with the proceedings, and the Court would not upset that decision.


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