The Missouri Supreme Court recently upheld a refusal to compel parties to arbitrate their dispute before a different forum when the one listed in their agreement could not accept the case. In doing so, the court deepened a split of authority that ups the chances the U.S. Supreme Court will soon decide what happens when the arbitrator the parties chose in their agreement is not available to hear the dispute. The court’s decision provides useful lessons for those who draft and rely upon arbitration provisions in their business dealings: be thoughtful and deliberate when drafting arbitration clauses in commercial contracts, stick with reputable and stable arbitral forums, and list alternatives to your first choice.
A-1 Premium Acceptance, Inc. v. Hunter
involved a series of small consumer loans that A-1 Premium Acceptance made to Meeka Hunter; A-1 sued Hunter when she failed to repay the loans. Hunter countersued for violations of state consumer protection laws, and A-1 sought to compel Hunter to arbitrate her counterclaims. Per the loan agreements, the parties’ disputes unrelated to Hunter’s default had to be resolved “by binding arbitration by the National Arbitration Forum, under the Code of Procedure then in effect.”
Years after A-1 made the loans, the National Arbitration Forum, or “NAF,” agreed with Minnesota regulators to never again serve as an arbitral forum for consumer claims anywhere in the U.S. So the question in the Missouri case became what to do given NAF’s inability to serve as arbitrator. A-1 invoked a potential remedy in Section 5 of the Federal Arbitration Act (“FAA”) stating that a “court shall designate and appoint an arbitrator” if “for any reason there shall be a lapse in the naming of an arbitrator.” A-1 asked the state court to appoint a substitute in NAF’s absence. The trial court declined to do so and the Missouri Supreme Court affirmed.
In “plain and unambiguous language,” the state high court held, the parties “agreed to arbitrate before—but only before—NAF.” The court anchored its decision in the loan agreement’s use of the mandatory language “shall” and a provision stating that any arbitration would proceed “under the Code of Procedure then in effect,” which, by its terms, only NAF could administer. Finding further support for its holding, the court pointed to the agreement’s demand that claims be “filed at any office of the National Arbitration Forum” or at NAF’s home office in Minnesota. Acknowledging that naming an arbitrator in the agreement cannot justify refusing to name a substitute under the FAA, the court nevertheless found a basis in this case to conclude that “the parties’ arbitration agreement was limited to a specified arbitrator.” In a footnote running nearly a full page, the court catalogued decisions from jurisdictions that had previously reached both similar and different results. The court may have been quietly suggesting that U.S. Supreme Court review is required.
comes at a busy time in the relationship between courts and arbitrators. The U.S. Supreme Court has already heard three oral arguments this term in cases posing questions about the interplay between courts and arbitrators. In the first argument
, the justices will decide whether a court can use the FAA to compel arbitration of a dispute about an independent contractor agreement. In the second argument
, the justices will determine whether the FAA demands arbitration of a dispute even where a court finds “wholly groundless” the argument that the dispute falls within the contract’s arbitration clause. The third argument
involves yet another question about the availability of class arbitration.
What the Decision Means for Your Business
offers helpful reminders to those who draft arbitration provisions and expect courts to enforce them. The first is the most obvious: If you wish to wed yourself to a particular arbitral forum, it is best to choose one with an established track record, such as the American Arbitration Association (“AAA”), Judicial Arbitration and Mediation Services (“JAMS”), or FINRA (for disputes in the financial industry). If you wish to keep your options open, propose primary and secondary forums, or list a number of potential forums you are comfortable with. (In Hunter
, the court listed examples of such clauses.) But do not decline to list any
forum, as courts
have held that such gaps defeat arbitration clauses altogether.
Be aware that arbitral forums can become unavailable for a number of reasons. For example, starting in 2009, the AAA decided not to hear health care disputes involving individual patients who did not sign a post
-dispute agreement to arbitrate. Other reasons why an arbitral forum can become unavailable include conflicts of interest with the forum and the forum no longer doing business.
A final lesson from Hunter
is to consult a good attorney you trust when drafting or considering arbitration provisions. Counsel can help navigate this minefield. Arbitration is a matter of consent, governed by the specific language the parties use in their agreement. Arbitration clauses come in many shapes and sizes and can be designed to fit the individual needs of your business. Attorneys current on the issues can advise whether or not arbitrating (rather than litigating) potential disputes that your business may experience fits your company’s overall goals. Trusted counsel can help draft arbitration language tailored to the needs of your business.
Consult the author or your Polsinelli attorney if you have questions.