Tuesday, February 23, 2010

Agreements to Arbitrate - What If the Designated Arbitrator or Forum Goes Out Of Business?

This question came up recently as I was reviewing a construction contract.  The contract, as is common in the construction industry, contained an agreement to submit any disputes to binding arbitration, and specified the organization to manage the arbitration.  The problem was that by the time the dispute arose the designated arbitration organization was no longer in business.  What now?  This issue was addressed in the recent Illinois case Carr v. Gateway, Inc, No. 5-07-0711 (5th Dist. 2009).

Carr is a class action case in which the plaintiffs alleged that Gateway and Intel Corp. had violated consumer protection laws in Illinois and elsewhere in the U.S. by engaging in deceptive advertising regarding the capabilities of various computer processors.    Gateway moved to dismiss the case or alternatively to stay the proceedings and compel arbitration pursuant to an arbitration agreement included when the Carrs (the named plaintiffs seeking to represent the class) purchased their computer.  This arbitration agreement stated that any dispute would be resolved "exclusively and finally" by arbitration administered by the National Arbitration Forum (NAF).  The agreement further included a statement that the purchaser "expressly and knowingly waived" the right to litigate a dispute in court, and that if either party should bring a dispute in any forum other than the NAF, the arbitrator may award attorneys' fees, costs and expenses for enforcing this provision. During the course of the appeal proceedings however, the NAF announced that it would cease administering all consumer arbitrations.

Gateway argued that NAF's unavailability constituted a "lapse in the naming of an arbitrator" under Section 5 of the Federal Arbitration Act, and that therefore the court must designate an alternative arbitrator who would have the same powers and authority as the NAF would have had under the arbitration agreement.  The appellate court noted that courts are split as to whether Section 5 applies in this type of case, but that courts that have found Section 5 applicable have required that the chosen arbitration forum be merely an "ancillary logistical concern" in the agreement.  If the forum selection is an integral part of the agreement to arbitrate, then the failure of the chosen forum will preclude the court from enforcing arbitration.  In this case, the Fifth District found the language of the agreement specifically and exclusively requiring that the NAF be the sole forum to be an integral part of the agreement.  Therefore Section 5 of the Federal Arbitration Act could not be used to modify the arbitration agreement by selecting an alternate forum, and the appellate court affirmed the circuit court's denial of Gateway's motion to compel arbitration.

Now, this was a non-construction industry, consumer goods contract at issue in the Carr case.  The contractual language was very strict, to the point of penalizing a party for seeking an alternative forum, but I have seen similar language in construction contracts.  It would be wise to take another look at your contract forms, even if you are using an industry standard document, and make sure the arbitration and/or mediation clauses address the question of what happens if the designated forum organization is not available to hear your dispute.

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