Arbitration in Arizona: Changes Have Arrived
An update of David Tierney’s September 2010 article, “Arbitration in Arizona: Changes Are Coming”
I. ANCIENT HISTORY
In 1962, just before the Vietnam War began to escalate, the State of Arizona (which was smaller and less busy than today) adopted the Uniform Arbitration Act, A.R.S. § 12-1501 – 1518. The UAA was quickly adopted in 35 states (and in substantially similar form in 14 more states). For 45 years, the UAA provisions have controlled the arbitration of construction disputes, business disputes and the like, which are held under Arizona statutes.
In 2001, the State Bar of Arizona’s Alternative Dispute Resolution Section began urging that Arizona adopt the update to the UAA. The Revised Uniform Arbitration Act (RUAA) had been finalized by the Uniform Laws Commissioners (after three years of study) in 2000 and was slowly being adopted in states across the nation. To this date, the RUAA has been adopted in 14 states, and seven other states are in the process of adoption.
There are several reasons why the ADR Section had to return to the Arizona Legislature eight out of nine years since 2001 to obtain the enactment of this new legislation. In the past decade, our Legislature has become very wary of adopting uniform laws. The State Bar is viewed with suspicion by the legislators in many respects. The insurance lobby was concerned about one or two provisions. Then, the banking lobby became concerned about aspects of the RUAA. Finally, the 2008-2009 budget crises led to a year hiatus in the ADR Section’s pressing for the bill. However, due to a compromise with the insurance and securities and banking sectors, which resulted in excluding certain cases from its scope, the RUAA was adopted in April 2010 by the Legislature and made part of our state’s statutes by the Governor’s signature that month. The law became effective on January 1, 2011. Under § 12-3003, the RUAA now applies to every agreement to arbitrate, even if the old UAA was in force when that agreement was entered into.
The new law will “co-exist” with the old law, because the old law continues to apply in insurance, securities and banking disputes. The new law is responsive to a number of trends and modernizations of arbitration, which have occurred over the last 45 years, as you will see below.
The new law will also have to co-exist with the Federal Arbitration Act (FAA). The FAA applies to essentially all arbitrations that impact in any way interstate commerce. Unless parties act to make their arbitration subject to the RUAA, the FAA will likely apply to any disputes. The provisions of the FAA carefully deal with front-end rights (such as the right to have access to arbitration) and with back-end issues (such as the right to vacate an award procured by fraud). The FAA generally leaves the managing of the process of arbitration to state laws, so long as the state laws do not impede a federal provision. So, if the FAA applies, there may still be scope for the RUAA to apply, if the RUAA provisions as to the processing of an arbitration are not inconsistent with those of the FAA.
The RUAA has been endorsed by the American Bar Association’s House of Delegates, the American Arbitration Association, and the National Academy of Arbitrators.
Now, let’s go to the specifics as to how most arbitrations in Arizona (the ones subject to the RUAA) are regulated by our state statute after January 1, 2011.
II. THE “JUDICIALIZATION” STRUGGLE SETS THE STAGE
During the 45 years that have passed since Arizona adopted the UAA in 1965, the use of arbitration has expanded throughout the United States. More issues and more disputes are being submitted to arbitration each year, and more and more of those disputes involve increasingly complex (and larger dollar) problems. At the same time, Arizona has grown from a state economy based essentially on the six “C’s” – copper, cotton, citrus, climate (tourism), construction and cattle – to an Internet-age economy. Now, computer chip manufacturing, bio-medical research, aircraft manufacturing and international trade in electronic devices dominate Arizona’s business climate in a way that they did not in 1962.
While the economy was changing and arbitration was supplanting courthouse litigation, trends were evolving concerning arbitration procedures. Discovery (depositions and document disclosures), motion practice, lengthening hearings, interim and provisional remedies, punitive damages, appellate review possibilities, arbitrator disclosure, and subpoena powers were all being modified and addressed in rules being adopted by organizations, such as the American Arbitration Association and JAMS. These developments were arcing over our 1962 UAA state statutes on arbitration – and it was time for Arizona to deal with these new aspects of arbitration. The struggle over these modern aspects of arbitration is one that writers in the field have termed the attempted “judicialization” of arbitration.
In crafting the RUAA a decade ago, the Uniform Laws Commissioners were going to have to “walk a line” between adherents of the old theory (i.e., arbitration must be an informal, speedy, cheap, quick process to resolve disputes, with no right of appeal) versus those who seek to import into arbitration some of the due process safeguards present in courthouse litigation in order to instill greater confidence in arbitration, as it is starting to be used in increasingly complex cases. The clash between informal, cost-effective versus more deliberate and thorough process has occupied authors in the field of Social Policy for Arbitration for the last two decades, at least.
III. SEVEN KEY PROVISIONS IN THE NEW RUAA (AND FOUR FOOTNOTES)
In a 17-year-old opinion, First Options of Chicago, Inc. vs. Kaplan, 514 U.S. 939, 115 S.Ct. 1920 (1994), the U.S. Supreme Court considered the FAA and stated that, unless the contract of arbitration itself decides the question, when the arbitrability of a dispute is challenged, a court, not an arbitrator, decides the question of whether the dispute is, in fact, one that is arbitrable, as opposed to one that will be resolved in the courthouse. Only if the contract clause directs such to occur will the arbitrator decide on arbitrability. Key in all of this is that state statutes on arbitration are in a default position. They are relevant only when the FAA does not apply. For the last decade, the FAA has been seen as reaching into nearly every walk of life, since it reaches every activity that bears upon interstate commerce.
State law only reaches a dispute, such as a business dispute, when state law (i) is expressly made applicable, and (ii) is not in conflict with the FAA. The Uniform Law Commissioners attempted to fashion the RUAA in such a way that it did not conflict with the FAA. The Commissioners wanted RUAA provisions to supplement the FAA’s framework.
A. The First Key Provision: Who is Deciding Arbitrability? Courts Will!
In the Arizona initial version of RUAA, § 12-3006(B) stated that, when challenged, a court (not the arbitrator) would decide whether an agreement to arbitrate a particular dispute existed and whether a particular controversy is subject to a binding agreement for arbitration. However, questions as to whether the binding agreement to arbitrate is enforceable or whether a condition precedent to arbitration had been fulfilled were expressly left to the arbitrator by the RUAA.
The upshot of this important provision in the RUAA was to set up the process under the RUAA so that cases will likely see more court involvement as to the question of arbitrability if arbitrability is challenged. This crucial provision was currently the object of a successful attempt to revise this portion of the RUAA by our Legislature during 2011. The RUAA now mirrors the FAA in stating that a clause in the contract can make arbitrability an issue that the arbitrator (not a Court) will decide. See § 12-3004(B).
B. The Second Key Provision: Non-Waivability
You may have thought, as you read just above about the court deciding arbitrability, that it is not often going to be an issue, as the AAA rules will just put the arbitrator back in the position of deciding arbitrability. See AAA Commercial Rule No. 7. Unlike the UAA, the RUAA has a prominently placed provision (§ 12-3004(B)) which neuters any such possibility. A.R.S. § 12-3004(B) says that many provisions of this new state law cannot be waived in a contract clause by the parties. The non-waivable provisions of the RUAA include:
- § 12-3008, regarding the right of arbitrators to grant interim remedies, like temporary restraining orders or prejudgment garnishments;
- § 12-3017, regarding the right of the arbitrator to allow discovery, issue orders controlling discovery, and issue subpoenas in state and out of state; and
- §§ 12-3026, -3005, -2101, regarding the state’s right to enforce arbitration awards in its courts.
The purpose behind labeling these requirements as non-waivable seems to have been to avoid the problems created by powerful retailers, who were including in consumer contracts arbitration clauses which incorporated waivers of fundamental rights, thereby harming consumers. See Armendariz v. Foundation Health Psycare Services, Inc., 24 Cal. 4th 83, 99 Cal Repts. 2nd 745, 6 P.3d 669 (2001).
C. The Third Key Provision: Interim Remedies and Interim Awards
For the last 30 years, debate has raged over whether arbitrators have the right under the UAA to issue interim awards (before final award), whether an arbitrator can grant or order attachments and garnishments, restraining orders, and (if such is done) how can such orders be enforced?
A related question has been, if a party goes to court to get a needed interim remedy, for example, to enforce a Mechanic’s Lien, does the party thereby waive and abandon the right to go to arbitration?
In § 12-3008, the RUAA addresses this. It expressly provides that, in the period before an arbitrator is first appointed (or after appointment, if there is some reason – practical or legal – creating an impediment to a party getting speedy or adequate interim relief), the party may go into court to get interim relief, and such foray into the courthouse will not be a waiver of the party’s right to arbitrate.
D. The Fourth Key Provision: Disclosures By Arbitrators, Pre-Appointment and After
RUAA § 12-3012 codifies the results of over a decade of consumer litigation in California and other states. Before accepting appointment, a selected arbitrator must make a reasonable inquiry and must disclose to all involved in the arbitration any known facts that a reasonable person would view as likely to affect the impartiality of the arbitrator in the proceedings. The obligation to disclose continues as the arbitration proceeds, in the event that the arbitrator learns of such facts when certain evidence or a certain witness, etc. is placed before him. Failure to disclose a relationship with a party, a witness, an issue, etc. can be grounds for vacating the award.
Due to this new RUAA feature, it has become vital to get a complete list of exhibits and witnesses to the arbitrator well before the hearing starts. If such is not done, any party who thinks that he is losing the arbitration can (in the middle of the hearing) put into play a conflict whereby he can force the arbitrator to withdraw in the middle of the evidentiary hearing.
E. The Fifth Key Provision: Discovery, Depositions, Motion Practice, etc.
An extensive (but waivable) section of the RUAA, § 12-3015, empowers the arbitrator to:
- hold pre-evidentiary hearing conferences, so as to reduce or focus the issues or the evidence presentation, for example;
- consider a Motion for (partial or complete) Summary Judgment; and
- rule out certain hearing evidence.
These are all means by which to shorten the time to get to an evidentiary hearing; to reduce the expense of proceeding to hearing; and to reduce the expense of a hearing. As part and parcel of these powers, the arbitrator can allow, under § 12-3017, depositions and discovery, enforce his discovery orders, grant protective orders, and take other actions to make the arbitration hearing fair, expeditious, and cost effective.
This clearly is a step in the direction of “judicializing” arbitration. It was hotly debated by the Uniform Laws Commissioners and the theory was that this set of tools if properly used, would permit arbitrators to keep down the costs and lessen the delays in getting to and through hearings.
A side-effect of this move may be to reduce the use of non-lawyer arbitrators or to encourage organizations to train more intensively those arbitrators who are not lawyers. A second side-effect of this § 12-3015 will be that parties will “go to school” about their arbitrator and learn how strict or lenient he will be on discovery.
F. The Sixth Key Provision: Attorneys’ Fees and Punitive Damage Awards
These two clauses, principally, sparked resistance to the adoption of the RUAA in Arizona, as the insurance industry, the banking industry, and the securities industry all feared that the provision of § 12-3021(B), which allows an arbitrator to award lawyers’ fees, for example, as if the arbitrator were a court under A.R.S. § 12-341.01 (regarding contract claims), or § 33-420 (false liens), or § 33-998 (attorneys’ fees) would hurt their industry. In addition, for years, judges and authors have debated whether an arbitrator could award exemplary (punitive) damages under the UAA. RUAA § 12-3021(F) now resolves that question by allowing such punitive damage awards if law and fact findings are made, showing that punitive damages were allowable by a court. This is another feature of the RUAA that may require less use of, or more training for, non-lawyer arbitrators.
G. The Seventh Key Provision: Subpoenas
For years, under the UAA, a disadvantage inherent in taking matters into arbitration (rather than to the courthouse) has been that subpoenas issued under the UAA by arbitrators were only operable inside Arizona, and only for the purposes of bringing a witness and his documents to the evidentiary hearing. It is expressly stated in § 12-3017(D) and (F) that, an arbitrator can issue subpoenas and Subpoenas Duces Tecum for depositions and enforce those subpoenas.
Better yet, ending a controversy (and a huge practical problem), § 12-3017(G) permits an arbitrator in an Arizona arbitration under the RUAA, to issue a subpoena to an out-of-state witness to attend a deposition there and to bring records to that deposition. In the event that the distant witness fails to comply, a party in the Arizona arbitration may go to a court and get the court to enforce the arbitrator’s subpoena, subject to the court’s setting conditions to make the Arizona arbitration fair, expeditious, and cost-effective.
This feature makes feasible the use of RUAA arbitration in multi-state disputes, something that used to present a host of legal and practical problems.
H. Four Footnotes and Caveats
Many of the features of the UAA are, in effect, kept in place by the RUAA, such as the obligations of impartiality, the process for initiating an arbitration, the very limited five channels through which any award can be attacked, the correction of an erroneous award by the arbitrator, the ability of the parties working with the arbitrator to sculpt the procedures to be used in arbitration, as long as due process is assured, etc. In the RUAA, there are included some new provisions providing for a form of judicial immunity for arbitrators.
First, what is odd is that we will now have two separate statutes in Arizona governing arbitrations! The old UAA continues in effect for three categories of disputes that are excluded from the RUAA:
- Banking disputes between a national banking association or federal savings association and the customers;
- Disputes related to insurance contracts;
- Arbitrations involving certain securities and commodities acts.
It will be interesting to see if, in two or three years, some of these industries will want to see the RUAA (instead of the UAA) apply to these sorts of disputes.
Second, as I have written elsewhere before, there is a great struggle between forces seeking to turn arbitration into “arbigation;” forces seeking to over-judicialize arbitration. Even under the RUAA, the arbitrator has great discretion in allowing motion practice or discovery games to take over the arbitration. Clients and practitioners will need to be educated to evaluate the arbitrators whom they select by rating the arbitrators on a continuum of “hostile to discovery and motion games” to “too easy on allowing discovery and motions.”
Third, the airwaves and e-mail servers are full of the news of E-Discovery these days. Every lawyer is studying Rule 26.1(a)(9) of the Rules of Civil Procedure, and the costs of electronic discovery are soaring. A.R.S. § 12-3017(C) and (E) permit an arbitrator to fashion novel and cost-effective ways of dealing with electronic evidence, e-mails, text messages, and the like. This feature of the RUAA may militate in favor of using computer-savvy arbitrators or training arbitrators in E-Discovery, now that such discovery is becoming more common in litigation and in arbitrations under the RUAA.
Fourth and finally, there is likely to be some friction or slippage along two fault lines. Exactly how the RUAA interfaces with the FAA and how the RUAA interfaces with contract clauses incorporating rules like the AAA Commercial and Construction Rules may provide practitioners the opportunity to make some “small caliper” adjustments as time goes on.
For now, in the “honeymoon period.” We are inventing new procedures for the great majority of the commercial and construction arbitrations that will be handled in Arizona concerning the garden-variety commercial and construction business problems with which our community grapples.
 The Uniform Act, the UAA, had first been created in 1956 by the National Conference of Commissioners on Uniform Laws.
 See 9 U.S.C. § 1
 Stipanowich, Arbitration and Choice: Taking Charge of the ‘New Litigation?” 7 DePaul Business & Commercial Law Journal. 401 (6/30/09); and Stipanowich, Arbitration, the ‘New Litigation’ 2010 Univ. of Illinois Law Review, 1 (1/11/10)
 For this reason, many arbitration providers then inserted in their rules (to be incorporated in contracts) a provision that the arbitrator was empowered to decide questions of arbitrability. See AAA Commercial Rule No. 7 (6/01/09).