January 24, 2015
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January 22, 2015
Two Recent Cases Address What Happens When the Arbitral Forum Selected by the Parties is Not Available
When parties include an arbitration provision in a contract, they often agree on an arbitral organization to administer the dispute resolution process and provide governing rules. But what happens when it comes time to arbitrate and the organization no longer accepts cases? This situation was addressed in two recent court decisions, which reached consistent results for different reasons.
In Green v. U.S. Cash Advance Illinois, LLC, 724 F.3d 787 (7th Cir. 2013), the plaintiff sued a lender for alleged violations of the Truth in Lending Act. The lender moved to compel arbitration under a contract signed in 2012 which included a provision stating that, “all disputes shall be resolved by binding arbitration, by one arbitrator by and under the Code of Procedure of the National Arbitration Forum.” That organization stopped accepting cases for arbitration in 2009, after settling a suit brought by the Minnesota Attorney General. The lender asked the district court to appoint a substitute arbitrator. The court refused, finding that the identity of the arbitral forum was “integral” to the contract, and was rendered void by the unavailability of the parties’ chosen forum. The appellate court reversed because the contract provided for arbitration under the National Arbitration Forum’s (NAF) rules, not for the NAF to itself to conduct the arbitration. Moreover, the NAF Code of Procedure states that if a court finds any part of the Code to be unenforceable, the remainder of the Code remains effective. The Code also states that parties who are denied a chance to arbitrate before the NAF may seek other remedies in accord with applicable law.
The Seventh Circuit viewed the Federal Arbitration Act as one such law. Concluding that Section 5 of the FAA allows a court to supply details to make the arbitration process work, the case was remanded to the district court with instructions to appoint an arbitrator to resolve the case under the NAF Code. In its Opinion, the Seventh Circuit discussed similar cases from the Third and Eleventh Circuits in which substitute arbitrators were appointed, and a case from the Fifth Circuit which reached an opposite result after finding that the choice of the NAF was integral to the parties’ agreement.
Anonymous, M.D. v. Hendricks, 994 N.E.2d 324 (Ind. Ct. App. 2013) arose from a dispute between a patient and Lane House, a healthcare institution. As in Green, the contract in Hendricks was signed after the NAF settlement precluded its acceptance of new cases. The contract provided for arbitration by the NAF under the Code of Procedure then in effect, but went on to say that if the NAF was unable to serve, the parties would mutually agree on another arbitral forum. After the patient sued, Lane House moved to compel arbitration. The patient argued that arbitration was impossible because the NAF was not accepting new cases. The trial court denied Lane House’s motion, but the Court of Appeals reversed.
After first addressing an agency issue about whether the patient’s health case representative had authority to sign the contract (she did), the Court of Appeals turned to the arbitration issue raised by the NAF’s unavailability. Recognizing that public policy favors arbitration and that doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, the Court examined the intent of the parties as expressed in their contract. The requirement of a mutual agreement on another arbitration provider if NAF was not available was not a “passing phrase” that was “tacked on to the end of the agreement,” as argued by the patient. Rather, the language showed that the NAF was not integral to the agreement. Ignoring the language would render it meaningless. In its Opinion, the Court distinguished this situation fromGeneva-Roth Capital, Inc. v. Edwards, 956 N.E.2d 1195 (Ind. Ct. App. 2011), a payday loan case in which disputes were to be arbitrated “by and under” the NAF Code of Procedure. Designation of a single arbitrator was deemed integral to that agreement, particularly since the provision stated in mandatory terms that arbitration “shall” be submitted to the NAF. (Note that the provision in Green included the same mandatory language.)
The Green and Hendricks cases are good examples of how arbitration is a creature of contract, and that the intent of the parties will be determined from the language used in their contract in light of applicable law. The issue of what happens when the chosen arbitral forum is unavailable is one of many contingencies the parties can anticipate and address, to avoid litigation before their case proceeds to arbitration.