Alleghany Arbitration

Next to war the greatest source of economic waste in our national life is needless litigation.

Thus spoke Herbert Hoover when he was Secretary of Commerce. Today Mr. Hoover may have other notions as to what constitutes prime peacetime waste but he is still an honorary president of the American Arbitration Association, whose sole purpose is elimination of needless litigation. Mr. Hoover's AAA maintains a quasi-judicial system throughout the and where business disputes may be settled quickly, cheaply, secretly.

Arbitration is always voluntary. No one can force a businessman to take his squabbles to a private tribunal unless he has arbitration clauses in his contracts. And no one can force him to use arbitration clauses. But once the bickering parties submit their controversy to AAA they must proceed according to AAA's uniform, formalized and legally-binding rules. They are sure, however, that their trade secrets will be honored and their defeats discreetly hidden.

The arbitrators are hand-picked panels of public-minded citizens in 1,700 U. S. cities. Special panels of experts are maintained for technical trade disputes. In Manhattan the AAA has nearly 1,500 in its panels including names like Banker Winthrop Aldrich, Lawyer James M. Beck, Cineman Jesse Lasky, Funnyman Eddie Cantor, Mrs. Vincent Astor. The arbitrators serve free, are called two or three times a year, may be excused if busy.

When a case is submitted to the AAA either jointly or by the disaffected party to a contract containing an arbitration clause, some 25 names are suggested as arbitrators. Each side strikes from the list any objectionable names and from the remaining roster the AAA picks the three arbitrators. At least one always knows the business or profession involved. Hearings seldom last more than one day, though each side may present evidence, produce witnesses, hire lawyers.

Last week an AAA decision made news because it not only was one of the rare cases where findings are published but it also affected a goodly number of investors who were not directly party to the dispute. The controversy was between two groups of New York Stock Exchange firms, one of which had sold, the other bought, Alleghany Corp. prior preferred stock "when, as and if issued."

Though the stock was not actually issued until a year later, trading began in 1934 after the Van Sweringen Brothers proposed to escape an interest default by swapping this prior preferred for the coupons on some Alleghany bonds. To put over the plan the Van Sweringens had to resort to the courts where under Section 77B of the Bankruptcy Act a two-thirds majority can coerce a stubborn minority. Meantime the Alleghany "when issued" stock dropped from $30 per share to $14.

When certain Stock Exchange firms dispatched runners with the certificates which they had promised to deliver, the firms that had bought flatly refused to accept them, much less to pay for them. Their defense was involved but it turned on the claim that these were not the same certificates they had contracted to take. That stock was to have been issued under the original plan. This stock was issued in a bankruptcy reorganization and while it might look the same it was really authorized under a different plan. No, said the sellers, the original plan was merely approved by the courts, hence precisely the same, voluntary or bankrupt. And they cited a Federal judge to prove it.

Under Stock Exchange rules any serious argument between members must be taken to arbitration, not to court. So the two groups submitted the question to an AAA tribunal. The arbitrators: Richard Whitney, onetime Stock Exchange president who knew the technicalities of the market; Arthur Atwood Ballantine, onetime Under Secretary of the Treasury who knew the legalities; Thomas H. Mclnnerney, president of National Dairy Products, presumably named for his good common sense.

After a one-day hearing in the AAA's comfortable chambers at No. 521 Fifth Avenue and five weeks of pondering, the arbitrators unanimously decided in favor of the sellers, ordering the buyers to accept the Alleghany stock, pay up. Thus was settled a case involving some 30 Stock Exchange firms and innumerable transactions, which might have dragged out for years in the courts.

A non-profit organization founded in 1926 as a merger of three older arbitration bodies, the American Arbitration Association slaves for better arbitration laws and wider use of arbitration. Curiously, both the bar and the bench are behind its efforts--lawyers because they feel that an expeditious case is the best assurance of a prompt fee; judges because they are usually from one to three years behind their calendars.

One of AAA's most notable accomplishments has been the promotion of standard arbitration clauses in contracts, which assure an extra-judicial settlement no matter how embittered the makers later become. Two notoriously litigious industries--fur and theatre--have been entirely converted to arbitration. Another arbitration-minded field is building and contracting. Many a broker uses standard clauses in all customer contracts. And through trade associations the AAA is making gains among industrial purchasing agents, whose contracts are the most common basis of business disputes.

Present head of the Arbitration Association is Lucius Root Eastman, president of Hills Bros. Co., big Manhattan fruit importers (Dromedary Dates). A slight bush-browed, serious gentleman of 61, he spreads the propaganda of arbitration as U. S. representative of the economic committee of the League of Nations.

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