Consumer Law

Arbitration clause naming NAF as arbitrator is unenforceable.

By Richard Alderman

The United States District Court for the Southern District of Texas has held that an arbitration agreement naming NAF as the arbitrator was unenforceable. In light of the substantial number of contract containing similar clauses, this may be just one of many opinions dealing with this issue.

The question before the court in Ranzy v. Extra Cash of Texas was whether section 5 of the Federal Arbitration Act authorizes the court to name a substitute arbitrator.  The court noted,

Although the FAA was designed "to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate," it "does not require parties to arbitrate when they have not agreed to do so." Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989) (citations  omitted). The FAA "simply requires courts to enforce private negotiated agreements to arbitrate, like other contracts, in accordance to their terms." Id. The FAA does, however, provide for the court to appoint an arbitrator under certain circumstances. Section 5 of the FAA provides:

If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or infilling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.

The court concluded that:

In the present case, the court need not determine whether § 5 is applicable when a chosen arbitrator becomes unavailable because the NAF was clearly an integral part of the arbitration provision. "Arbitration agreements are subject to the same rules of construction used to interpret contracts." Harvey v. Joyce, 199 F.3d 790, 794 (5th Cir. 2000). However, any ambiguities must be resolved in favor of arbitration. Id. To determine whether a named arbitrator is an integral part of the arbitration agreement, the court must look to the "essence" of the arbitration agreement. Grant, 678 S.E.2d at 439 (citations omitted). In this case, the plain language of the arbitration provision in both the Note and the Arbitration Agreement explicitly states that all disputes "shall be resolved . . . by and under the Code of Procedure of the [NAF]." Dkt. 15, Exs. 1, 2. Additionally, "all claims shall be filed at any NAF office," or on the NAF web site. Id. This is mandatory, not permissive language and evinces a specific intent of the parties to arbitrate before the NAF. See Reddam, 457 F.3d at 1059-61 (outlining criteria for courts to use in determining whether the selection of a specific arbitrator is integral to the arbitration clause and noting, that at a minimum, the arbitrator must be expressly named); Carideo v. Dell, No. C06-1772JLR, 2009 U.S. Dist. LEXIS 104600, 2009 WL 3485933, *4 (W.D. Wash. Oct. 26, 2009)  (arbitration provision that provided that disputes "shall be resolved exclusively and finally by binding arbitration administered by the NAF" was sufficient to find the NAF as integral to the arbitration clause) (emphasis added); but see Adler v. Dell, No. 08-cv-13170, 2009 U.S. Dist. LEXIS 112204, 2009 WL 4580739, *4 (E.D. Mich. Dec 3., 2009) (same language as Carideo insufficient to show NAF integral to the arbitration clause). In light of the plain meaning of the arbitration provision, the court cannot appoint another arbitrator even though the NAF is an unavailable forum-the parties "cannot be compelled to arbitrate a dispute if [they have] not agreed to do so." Nat'l Iranian Oil, 817 F.2d at 335 (citations omitted). The motion to compel arbitration is, therefore, denied.

Full post as published by CL&P Blog on April 19, 2010 (boomark / email).