Should your contracts specify a standby arbitrator?

Why You Should Consider Naming a Back-up Arbitrator In Your Business Contracts

Business and consumer agreements frequently contain provisions that require contract disputes to be resolved via arbitration. But what happens if the arbitrator named in the contract is no longer available — should you designate a back-up arbitrator? The issue of arbitrator unavailability has divided the federal circuit courts. Most recently, the Second Circuit Court of Appeals refused to enforce an arbitration agreement because the specified arbitration forum was no longer available. Its decision is at odds with several other federal appeals courts, including the Third Circuit.

Facts of Moss v. First Premier Bank

In Moss v. First Premier Bank, Deborah Moss signed an arbitration agreement providing that any disputes between her and her payday lenders would be resolved by arbitration before the National Arbitration Forum (NAF). When Moss filed a class-action against the lenders, they moved to compel arbitration on the basis of the arbitration agreements that she signed when applying for the loans.

After the district court ordered the parties to arbitrate, Moss sent a letter to NAF seeking to arbitrate her claims. NAF responded that it was unable to accept Moss’s dispute pursuant to a consent judgment that it had entered in 2009 barring it from accepting consumer arbitrations. Moss subsequently moved to vacate the district court’s order compelling arbitration, arguing that she could not arbitrate her claims because NAF declined to arbitrate her case. The district court concluded that the language of the arbitration agreements reflected the parties’ intent to arbitrate exclusively before NAF and declined to compel Moss to arbitrate before a different arbitrator.

Second Circuit Refuses to Compel Arbitration

The Second Circuit affirmed. Citing the “pervasive references to NAF in the agreement” and the “absence of any indication that the parties would assent to arbitration before a substitute forum if NAF became unavailable,” the federal appeals court concluded that the parties agreed to arbitrate only before NAF.

The Second Circuit also rejected the argument that the district court was required to appoint a substitute arbitrator pursuant to Section 5 of the Federal Arbitration Act (FAA). Section 5 authorizes the court to substitute an arbitrator if there is a “lapse in the naming of an arbitrator.” According to the Second Circuit, there was no “lapse in the naming of an arbitrator” in the case; rather, “the parties designated an exclusive arbitral forum, the district court compelled the parties to arbitrate before that forum, and the forum declined to accept the case.”

As acknowledged by the Second Circuit, the Eleventh and Fifth Circuits have reached similar conclusions, while the Seventh and Third Circuits have found that the FAA mandates appointing a new arbitrator. In light of the Second Circuit’s decision, New York businesses may want to review their arbitration provisions and consult an experienced business attorney with any concerns.

Are you considering designating a back-up arbitrator in your business agreement? Would you like to discuss the matter further? If so, please contact me, Joel Kreizman, at 201-806-3364.