By: William E. Kelley, Jr., LEED AP BD+C
Is an arbitration clause unenforceable if the selected arbitrator or arbitration provider is unavailable? That is the question recently addressed by the Indiana Court of Appeals in two recent cases, both of which resulted in an arbitration clause being rendered void. In Geneva-Roth Capital, Inc. v. Edwards, 956 N.E.2d 1195 (Ind. Ct. App. 2011), r’hng denied and Apex 1 Processing, Inc. v. Edwards, 2012 WL 169251 (Ind. Ct. App. 2012), the Indiana Court of Appeals addressed nearly identical situations involving “payday loan” agreements that required arbitration to be administered through the National Arbitration Forum (NAF). In both cases, a consumer electronically signed an online agreement with the payday loan company, and both agreements contained clauses that provided that the parties agreed to resolve any claims by binding arbitration to be administered through the NAF.
The problem was that the NAF was no longer available to administer the arbitration process by virtue of a consent judgment in which NAF agreed to longer administer, process or in any manner participate in arbitrations of consumer disputes. The Plaintiffs argued that the unavailability of NAF to administer the agreed-upon arbitration process rendered the entire agreement to arbitrate unenforceable under the doctrine of impossibility. Conversely, both lenders argued that the unavailability of the NAF did not render void the agreement to participate in arbitration; instead, they argued that 9 U.S.C.A. §5 (Section 5) of the Federal Arbitration Act (FAA) provided a viable process for the trial court to appoint a replacement arbitrator. Thus, the Plaintiffs sought to litigate the disputes, while the lenders asked the trial court to compel arbitration and to appoint replacement arbitrators pursuant to Section 5.
The Indiana Court of Appeals held in both cases that the arbitrations clauses were void as a matter of law, finding that the selection of the NAF was an “integral” part of the arbitration clause. Since the NAF was no longer available to administer the arbitrations, the Court held that the arbitration clauses were null and void as a matter of law on grounds of impossibility. The Court further held that Section 5 could not be used to save an arbitration provision where the chosen, but unavailable, arbitrator is determined to be “integral” to the agreement; consequently, Section 5 could not be used as a mechanism to appoint a substitute arbitrator in either case. The result in both cases is that the disputes were ordered to proceed in litigation, rather than arbitration, despite the existence of an arbitration provision in the original agreement between the parties.
In the construction industry, parties often use arbitration clauses that specifically designate use of the American Arbitration Association (AAA) in accordance with its Construction Industry Arbitration Rules. What would happen if the AAA was no longer available (probably a long shot) or if there were no longer any specific Construction Industry Arbitration Rules (equally a long shot)? The agreement to arbitrate would not necessarily be void per se, but the Indiana Court of Appeals has made clear that “an express designation of a single arbitration provider weighs in favor of finding the designated provider is integral to the agreement to arbitrate.” More troubling may be clauses that identify specific arbitration providers other than the AAA, or even specific arbitrators or pools of arbitrators. If those arbitrators or arbitration providers become unavailable, you risk voiding the entire agreement to arbitration. You should take a moment to review your contractual dispute resolution provisions and consult your legal counsel to discuss how best to address these risks so that you do not inadvertently lose your right to arbitrate.