What happens when the arbitrator designated in a contract is not available when a dispute arises? Recent decisions by the Pennsylvania Superior Court and the U.S. District Court for the District of New Jersey address whether an arbitration clause is enforceable when the specific arbitration panel identified in a contract is unavailable. In both Stewart v. GGNSC-Canonsburg — a Nov. 4 Superior Court opinion — and Khan v. Dell Inc. — an Aug. 18 decision from the District of New Jersey — the courts held that when an arbitration clause provides for an exclusive arbitrator and the arbitrator is unavailable, the arbitration clause is unenforceable. In both instances, the court refused to rewrite the arbitration clause and devise a new form and mode of arbitration for the parties.
The arbitration provision detailed in the Stewart opinion states: “‘[All claims, disputes, and controversies] shall be resolved exclusively by binding arbitration … in accordance with the National Arbitration Forum [the "NAF"] Code of Procedure … This agreement shall be governed by and interpreted under the Federal Arbitration Act.” The arbitration provision in Khan is substantively identical to the provision in Stewart .
Defendants in both cases sought to compel arbitration, arguing that the unavailability of the specified arbitrator was ancillary to the agreement. Specifically, they argued that the primary purpose of the arbitration agreement was that any dispute be submitted to arbitration — not merely that NAF was to arbitrate the dispute. They also pointed to Section 5 of the Federal Arbitration Act, which provides that when a chosen arbitration forum is unavailable, or has failed for some reason, a substitute arbitrator may be named. Moreover, at least in Stewart , the contract contained a severability clause, which, the defendant argued, further evinced the parties’ primary intent to arbitrate, and that selection of the NAF was merely ancillary to that intent.
In both cases, the courts rejected the defendants’ arguments and held that the arbitration clause was unenforceable. In discussion, both courts acknowledged that Section 5 of the Federal Arbitration Act provides a mechanism for courts to appoint a substitute arbitrator if the choice of forum is not integral. Both courts also recognized that the arbitration provisions at issue were subject to the Federal Arbitration Act. However, while neither contract stated that the parties waived the right to arbitrate in the event the NAF was unavailable — and despite long-standing judicial rulings favoring arbitration — both courts nonetheless struck down the arbitration provision.
The courts based their holdings on the fact that the plain language of the arbitration clauses delineated the NAF and its code as exclusive arbitrators and rules of the arbitration proceedings. The courts reasoned that this language evidenced the parties’ intent to arbitrate only with the NAF. The courts determined the contract was the sole evidence of the parties’ intent and that looking beyond the clear and unambiguous terms for other extrinsic evidence of the agreement would have run afoul of well-established contract principles.
Both courts’ decisions joined the growing trend of courts that have struck down similar arbitration provisions involving the NAF. Specifically, Pennsylvania and the District of New Jersey join the 5th U.S. Circuit Court of Appeals, Western District of Texas, Western District of Washington, Illinois appellate court, and the Texas appellate courts, all of which have struck down arbitration provisions regarding the NAF’s unavailability. However, when faced with the same issue, the District of South Dakota and Eastern District of Michigan upheld the arbitration provisions, holding that the parties’ intent was to arbitrate future disputes and that the NAF was not essential to the arbitration provision. While there is a split between courts across the nation, neither the 3rd Circuit nor the Pennsylvania Supreme Court has addressed this issue.
Lesson Learned: Say What You Mean To Say
Lawyers know the importance arbitration clauses play in handling future disputes. Indeed, arbitration provisions often determine how and where future disputes will be litigated, thus making tomorrow’s newsworthy lawsuit today’s confidential mediation.
Because of the arbitration clause’s importance, the client who seeks an arbitration provision wants to ensure its enforceability. As such, lawyers counseling clients with respect to arbitration provisions and forum selection clauses must be aware that courts will not enforce arbitration provisions where the contracted-for arbitrator is unavailable.
Accordingly, clients and counsel should be advised that if they want to arbitrate a dispute regardless of the identity of the arbitrator, they must say exactly that. In fact, if the parties’ intent is to arbitrate any future dispute, the parties must expressly indicate that the primary purpose of the arbitration provision is the arbitration itself. Conversely, if the parties have a particular arbitrator in mind, but would want to arbitrate the dispute even if the specific arbitrator was not available at the time of the dispute, the parties should include language within the arbitration provision indicating that the identity of the arbitrator or arbitral forum is not essential to the arbitration clause. Simply put, the parties can include a sentence in the arbitration clause that says that the arbitration provision is enforceable regardless of whether a specific arbitrator is available.
No matter how an arbitration agreement is crafted, counsel and clients should appreciate that courts will look only to the plain language of the document to discern the parties’ intent. As such, it is more important than ever for counsel to draft specific, clear and unambiguous language to ensure that their client’s desire to arbitrate will be enforced. •
Grant S. Palmer is a partner and chair of the commercial litigation department at Blank Rome. He focuses his practice in complex commercial, products liability, insurance and intellectual property litigation in addition to counseling clients as to alternative dispute resolution methods.
Michael A. Iannucci is an associate at the firm and concentrates his practice in complex commercial, corporate, products liability and consumer financial services litigation.