THE FLEXIBLE ARBITRAL PROCESS

by
John Allen Chalk, Sr.

The Connecticut Supreme Court has recently decided that “the flexibility of the arbitral process” is too important to require arbitrators, absent the parties’ express agreement to the contrary, to apply claim preclusion (res judicata) based on prior arbitral awards.¹ This recent decision joins an earlier ruling by the same court that chose “the flexibility of the arbitral process” over requiring arbitrators, absent the parties’ express agreement to the contrary, to apply issue preclusion (collateral estoppel) based on prior arbitral awards.² Both cases interpreted Connecticut state arbitration law, not the Federal Arbitration Act.³ Both cases involved a subsequent arbitration and arbitral award involving the same parties and the interpretation of the same contractual provision as in a prior arbitration and arbitral award.⁴ Both were first impression cases in Connecticut regarding an arbitrator’s obligation to apply issue preclusion⁵ and claim preclusion⁶ respectively.

The Connecticut Supreme Court emphasized in both opinions arbitration as “a creature of contract”⁷ and the parties’ agreement (in their contract) to obtain the arbitrator’s independent judgment.⁸ If the parties choose to submit their disputes with a broad form arbitration clause and without restraints on their arbitrators’ discretion, the court will not substitute its judgment “merely because our interpretation of the agreement or contract at issue might differ from that of the arbitrator.”⁹ This arbitrator independence also means that it is the arbitrator who chooses what, if any, effect should be given a prior arbitral award involving the same parties and the same issues.¹⁰

Stratford and Lasalla present two competing policy considerations: “(1) the desire to promote stability and finality of judgments, and the closely related interest of judicial economy; and (2) the desire to maintain the flexibility of the arbitral process.”¹¹ But “the overwhelming precedent in the federal courts,”¹² the parties’ freedom to bargain and contract arbitration of their disputes (even including “a provision establishing a system of arbitral precedent”),¹³ the arbitrator’s power to interpret the meaning of “final and binding,”¹⁴ and “the ordinarily single tiered nature of arbitration and the very limited scope of judicial review of arbitration awards,”¹⁵ supports the arbitrator’s right to assess whatever import or weight he or she chooses, if any, for arbitral precedent. This guarantees that the parties get the bargained for arbitration of each dispute by a fully-empowered arbitrator that “creates an informal system of checks and balances in the arbitral process and thus helps to ensure that arbitration proceedings result in just dispositions.”¹⁶ This protects the flexibility and discretion “that lies at the core of the arbitral process.”¹⁷

The court in Lasalla also emphasized that parties who “must deal with each other in an ongoing business relationship for a lengthy period of time” would be greatly disadvantaged by requiring arbitrators to apply claim and issue preclusion based on prior arbitral awards.¹⁸ The ongoing business relationship would be excessively burdened and disrupted by requiring a party in arbitration to bring all possible claims. The claim and issue preclusion burden would unnecessarily escalate many disputes “likely to be worked out amicably between the parties.”¹⁹

Texas courts have not addressed claim and issue preclusion in the context of serial or multiple arbitrations involving the same parties and same contract. Texas courts have repeatedly stressed the finality and binding nature of arbitration awards, including awards never confirmed by court order.²⁰ Texas courts have also recognized the preclusive effect of arbitration awards in subsequent litigation.²¹ The policy considerations in Stratford and Lasalla suggest that Texas courts should leave to the arbitrator and the parties’ arbitration agreement what, if any, preclusive effect to give prior arbitral awards.

Practical Planning Considerations

1. These two cases from the Connecticut Supreme Court strongly encourage the careful, thoughtful drafting of arbitration agreements. The arbitration clause should never be an after-thought in contract negotiation and drafting. Arbitration is a creature of contract!²²

2. The nature of the business or other relationship of the parties should shape the terms of arbitration agreement the parties negotiate. Many parties don’t want to consider possible future disputes in a new business relationship and thereby leave themselves vulnerable to expensive, time-consuming, inefficient, and inflexible dispute resolution. How parties resolve their disputes is as important as whether parties do business with each other.

3. How the arbitration is conducted and who conducts the arbitration are vitally important questions. Administered arbitrations provide the parties with two levels of dispute resolution process leadership - the arbitral institution who administers the arbitration and the arbitrator. Private, non-administered arbitrations often produce confusion and delay in resolution of the dispute.

4. Selection of an arbitrator requires due diligence. The arbitrator’s independence and discretion require great care in selection of the parties’ arbitrator. The arbitrator is a key player in the well-executed arbitration.

5. Flexibility in the arbitration (as an alternative dispute resolution method) is critical but that flexibility must be considered in the drafting of the arbitration agreement. Much of the current criticism of arbitration results from unthoughtful and badly-drafted arbitration agreements.

^1. Lasalla v. Doctor’s Assoc., Inc., 898 A.2d 803 (Conn., 2006).
^2. Town of Stratford v. Int’l Ass’n of Firefighters, AFL-CIO, Local 998, 728 A.2d 1063, 1072-73 (Conn. 1999).
^3. However, Stratford interpreted numerous federal court holdings (including 1st, 2nd, 3rd, 4th, 5th, 7th, 8th, 9th, 11th, and D.C. circuits), to say that arbitrators are not required to apply claim and issue preclusion based on prior arbitral awards. 728 A.2d at 1070-71.
^4. In Lasalla the Claimant was a franchise development agent under contract (that called for arbitration of all disputes) with a franchisor to develop and service Subway sandwich shop franchises. Claimant was to be compensated under the contract by a percentage of royalties and transfer fees paid to the franchisor by the franchisees. Both arbitrations involved the same parties disputing the meaning and application of the compensation provisions of the development agent’s contract. In Stratford the town and its firefighters’ union had a collective bargaining agreement that called for arbitration of all disputes. In multiple arbitrations the same parties disputed what firefighter positions were subject to the collective bargaining agreement’s promotion provisions.
^5. See Stratford, 728 A.2d at 1069 (“It should be noted, however, that although collateral estoppel precludes subsequent litigation in our courts of issues meeting the above requirements, we have never addressed whether the doctrine properly applies in the context of arbitration.”).
^6. See Lasalla, 898 A.2d at 811 (“We turn, therefore, to the aspect of the defendant’s claim that we have not squarely decided [in Stratford], namely, that the doctrine of claim preclusion should be imposed in voluntary arbitration as a matter of public policy.”).
^7. See Stratford, 728 A.2d at 1068; Lasalla, 898 A.2d at 810.
^8. See Stratford, 728 A.2d at 1068, 1071 (“Put simply, the parties bargain for the arbitrator’s independent judgment and sense of justice, unfettered by the opinions of other arbitrators.”); Lasalla, 898 A.2d at 810.
^9. Stratford, 728 A.2d at 1068.
^10. See Lasalla, 898 A.2d at 810.
^11. Stratford, 728 A.2d at 1069; Lasalla, 898 A.2d at 810.
^12. Lasalla, 898 A.2d at 810.
^13. Id.; see also Stratford, 728 A.2d at 1071n.6.
^14. Lasalla, 898 A.2d at 810; see also Stratford, 728 A.2d at 1072 (“Although one arbitrator might interpret such a phrase [“final and binding”] so as to require the application of collateral estoppel or res judicata principles, a subsequent arbitrator is free to construe that language as applicable only to subsequent arbitrations between the exact same parties, on the same contract provision, on precisely the same facts.”).
^15. Id.; see Stratford, 728 A.2d at 1072.
^16. Lasalla, 898 A.2d at 810-11; Stratford, 728 A.2d at 1072.
^17. Stratford, 728 A.2d at 1073.
^18. Lasalla, 898 A.2d at 812.
^19. Id.
^20. See Tanox, Inc. v. Akin, Gump, Strauss, Hauer & Feld, L.L.P., 105 S.W.3d 244, 270 (Tex.App.Houston [14th] 2003, pet. denied); Milliken v. Grigson, 986 F.Supp. 426, 431 (S.D.Tex. 1997), aff’d 158 F.3d 583 (5th Cir.1998).
^21. See Tanox, 105 S.W.3d at 270.
^22. “But no matter how much arbitration is to be favored by the courts, or how deferential our review of arbitration awards is to be, arbitration agreements are still creatures of contract and must be analyzed as such.” Peacock v. Wave Tec Pools,Inc., 107 S.W.3d 631, 636 (Tex.App. - Waco 2003, no pet.).