Understanding the Role of an Arbitrator Under NJ Arbitration Law

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  • nj-arbitration-lawyerUnder Rule 1:40-2(a)(1), arbitration is “[a] process by which each party or its counsel presents its case to a neutral third party, who then renders a specific award.”
  • The “arbitrator’s role is evaluative, requiring the parties to present their evidence for a final determination to be made by the arbitrator.”
  • Arbitrators must always be fair and impartial.

The Role of the Arbitrator

The arbitration process in New Jersey is governed by both the parties’ contract (if any) and by statute.  An arbitration agreement may define procedures to be used, the method for initiating proceedings, and the manner in which the process is conducted, and the Act authorizes courts to recognize and enforce arbitration agreements.  Arbitrators have broad powers to resolve disputes, and judicial involvement is limited – once parties contract for binding arbitration, the court may only confirm the arbitration award, correct or modify the award, or, in limited circumstances, vacate the award.

Arbitrators must adhere to high standards of honesty, fairness, and impartiality in exercising power.”

Under N.J.S.A. 2A:23B-15(a), “[a]n arbitrator may conduct an arbitration in such manner as the arbitrator considers appropriate for a fair and expeditious disposition of the proceeding.”  While not required to hold a hearing, the arbitrator may hold conferences with the parties before a hearing and determine admissibility, relevance, materiality, and weight of any evidence, N.J.S.A. 2A:23B-15(a).

Ethical Requirements of an Arbitration

The Act confers broad authority to how the arbitrator handles a case and “does not require any particular procedures, mandate discovery, compel the maintenance of a record, command a statement by the arbitration regarding his findings and conclusions, or an expression of the reasons why he/she reached the result that he/she did’ unless expressly required under the parties’ arbitration agreement.”  (Emphasis added).  However, the hallmark of an arbitrator is neutrality, and an arbitrator should have “the appearance of a neutral fact finder.”

It is true that N.J.S.A. 2A:23B-11(d) permits a party arbitrator to be favorably predisposed toward the appointing party, but “[f]rom and after the commencement of an arbitration, an arbitrator shall act in good faith and exercise the arbitrator’s responsibilities in a manner consistent with the authority placed in the arbitrator by the courts of this State and this [A]ct.” While an arbitrator designated by a party “may approach the arbitration proceedings with some sympathy for the position of the party designating him,” the arbitrator “should conduct the proceedings in an evenhanded manner and treat all parties with equality and fairness at all stages of the proceedings.”

In one recent case, the arbitrator being challenged by a dissatisfied party did not have any direct contact with one side and did not offer the opportunity to both sides to submit any materials or statements in support of its position.  While an arbitrator does have wide latitude to conduct an arbitration as he or she sees fit to dispose of the matter fairly and expeditiously, the parties were not treated evenhandedly, and while this was certainly an expeditious way to dispose of the matter, it could not be said to be fair.

The process looked more like an appraisal than an arbitration, which is not what was called for under the plain language of the lease agreement.

A distinction is often drawn between an arbitration and a mere appraisal or valuation, or proceeding in the nature of an appraisal)] Although an appraisal may be used as another form of alternative dispute resolution, it is not arbitration.]] An appraisal is an informal, independent investigation conducted by individuals who base their decisions on their own knowledge.

Conflicts of Interests Must Be Disclosed

“Arbitrators are not identical with, and hence are to be distinguished, at least in some respects, from . . . appraisers. It has been stated that an arbitrator is more than a mere appraiser, and an arbitrator is viewed, in effect, as a private judge.”  “Appraisers act on their own skill and knowledge, need not be sworn and need hold no formal hearings so long as both sides are given an opportunity to state their positions.”  “[Appraisers] are not obliged to give the rival claimants any formal notice or to hear evidence, but may proceed by ex parte investigation so long as the parties are given opportunity to make statements and explanations with regard to matters in issue.”

In the case I previously referred to, the arbitrator conducted his investigation and compiled his report on his own, and while he considered a few comparable sales that he received from a party’s counsel that he “understood” were from the other side, even these were apparently without defendant’s knowledge, as defendant was not permitted to submit a statement and apparently the defendant did not even realize an arbitration proceeding was occurring.  Defendant was not permitted to submit a statement on its position on the underlying disputed facts. Therefore, the arbitrator’s investigation and report was more of the nature of an expert report prepared for a party, and no arbitration in any sense of the word appears to have been conducted.

Neither did the arbitrator comply with other arbitration requirements, such as disclosing potential conflicts of interest to both parties before proceedings began and providing both parties with notice and a copy of the final determination and award under N.J.S.A. 2A:23B-11, -12, and -19.

N.J.S.A. 2A:23B-11(c) states that “[a]n individual who has a known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party may not serve as a party arbitrator if such information has not been disclosed pursuant to section [twelve] of this [A]ct.”  Section twelve states that “[b]efore accepting appointment,” a potential arbitrator must disclose “to all parties” “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator in the arbitration proceeding,” which includes a financial or personal interest in the outcome and an existing or past relationship with any of the parties. N.J.S.A. 2A:23B-12(a)(1) and (2) (Emphasis added). Where an arbitrator fails to disclose such facts, and a party timely objects, a judge may vacate the arbitrator’s award. N.J.S.A. 2A:23B-12(d).

Here, the arbitrator made a “disclosure” in his report that he had previously appraised the property.  However, the report was well after his appointment as arbitrator and was not sent to defendant.  The appraiser did not make the disclosures directly to both parties, and did not even send his report directly to defendant.

Further, under N.J.S.A. 2A:23B-19(a), the arbitrator is required to make a record of an award and to “give notice of the award, including a copy of the award, to each party to the arbitration proceeding.” (Emphasis added). This was also called for in the arbitration agreement, where the arbitrators “shall give notice to [plaintiff] and [defendant] of their determination as soon as practicable.”

(Emphasis added). Here, defendant only received the report and notice of the “award” through plaintiff’s counsel; the arbitrator did not provide defendant with either notice or a copy of the award and by not complying with these requirements under the Act, it was deemed a further indication he was not acting as an “arbitrator,” but rather as a party’s expert appraiser and there was no “arbitration.”

To discuss your NJ arbitration matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Arbitration Attorney

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