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    CONTRACTS—Arbitration: Nonexistence of Designated Arbitral Institution at Time of Dispute May Void Mandatory Arbitration Requirement

    Posted by Charlene J. Hicks on Thu, Jul 20, 2017 @ 13:07 PM

    Charlene Hicks, Senior Attorney, National Legal Research Group

                Despite the federal policy favoring arbitration, prospective plaintiffs continue to push courts to reexamine the enforceability parameters of arbitration agreements. These efforts have met with some success in cases where the arbitration agreement designates a particular arbitral institution to resolve a dispute between the parties, and the designated institution no longer exists at the time an actual dispute arises.

                This factual scenario has unveiled a degree of uncertainty in the meaning of the Federal Arbitration Act ("FAA"). The FAA provides that if "there shall be a lapse in the naming of an arbitrator . . . or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator[.]" 9 U.S.C. § 5. It is unclear from the statute whether the nonexistence of an arbitral institution designated in an arbitration agreement to resolve disputes between the parties constitutes a "lapse in the naming of an arbitrator" such that the court is authorized to appoint a substitute arbitrator. If the designated institution's nonexistence does not fall within the dictates of 9 U.S.C. § 5, then the court does not have the power to appoint a substitute. To do so would violate the long-established contractual principle that a party cannot be compelled to arbitrate a dispute that he or she has not agreed to submit to arbitration.

                No definitive answer to this question has yet been reached. Some circuits have ruled that the choice of a designated arbitral forum is a material part of the agreement to arbitrate and, therefore, the court cannot legitimately appoint a replacement. See Flagg v. First Premier Bank, 644 F. App'x 893, 897 (11th Cir. 2016); Ranzy v. Tijerina, 393 F. App'x 174, 176 (5th Cir. 2010). Other circuits have reached the opposite conclusion and ruled that the unavailability of a named arbitral institution constitutes a lapse within the meaning of 9 U.S.C. § 5, and the court may, therefore, appoint a substitute. See Green v. U.S. Cash Advance Ill., LLC, 724 F.3d 787, 793 (7th Cir. 2013); Khan v. Dell Inc., 669 F.3d 350, 356 (3d Cir. 2012).

                In Moss v. First Premier Bank, 835 F.3d 260, 265 (2d Cir. 2016), the Second Circuit ruled that the arbitral institution named in the parties' arbitration agreement was the exclusive forum for arbitration regardless of whether the named institution was in existence at the time of the actual dispute. The contract's mandatory language indicated that the parties contemplated arbitration only before the named institution. Id.

                According to the Moss court, the language of 9 U.S.C. § 5 did not alter this conclusion because a "lapse in the naming of an arbitrator" refers only to a mechanical breakdown in the arbitrator-selection process, such as a time lapse in the naming of an arbitrator or in the filling of a vacancy on an arbitration panel.  The statutory language could not be stretched so as to cover the nonexistence of a designated arbitral institution. 835 F.3d at 266. To extend the statute in such a fashion would result in the court's circumventing the parties' contractual designation of an exclusive arbitral forum and wrongfully coercing a party to arbitrate a dispute which he or she had not agreed to so submit. Id. As a result, the court concluded that the nonexistence of the designated arbitral institution at the time of the parties' dispute served to void the mandatory arbitration requirement. Id.

                As Moss demonstrates, courts in several circuits do not allow the federal policy favoring arbitration as a means of dispute resolution to override the bedrock principle of freedom of contract. Counsel for prospective plaintiffs who seek to set aside a mandatory arbitration clause should keep this line of reasoning in mind when formulating a litigation strategy. 

    Topics: contracts, enforceability, arbitration, arbitral institution

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