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Is A Specified Arbitral Provider or Rule Set An Essential Term Of The Arbitration Agreement?

By Liz Kramer and Patrick Burns (http://www.valuesolveadr.org/patrick.html ), Guest Blogger

If an arbitration agreement calls for the dispute to be administered by an ADR provider that will not or cannot accept the case, or calls for the application of non-existent rules, it may not be enforceable.  That issue seems to be increasingly prevalent in consumer arbitrations today, which frequently call for the application of rules or arbitral fora that are unavailable. 

Consumer arbitration in the United States changed drastically in 2009.  In July of that year, the National Arbitration Forum (NAF) was essentially put out of the consumer arbitration business by the Minnesota State Attorney General’s Office.  Soon thereafter, the American Arbitration Association (AAA) ceased administering almost all consumer cases.  

Yet the resulting void of administrated consumer arbitration programs did not change the fact that many existing contracts still called for arbitration via those primary providers’ programs.  Nor does it appear to have stopped businesses from naming those same two ADR administrators in their subsequently-revised contracts.

The result is that after a dispute arises, both consumers and businesses are faced with an arbitration provision that calls for something impossible –arbitration administered by an ADR provider that refuses to accept the dispute or under rules that do not exist.  If the parties cannot agree to proceed in a replacement forum or under replacement rules, they must decide whether to roll the dice with the courts.  The trend among courts to date appears to be that they will not compel arbitration (under any rules or in any forum) if the arbitration agreement calls for arbitration before an administrator that refuses to hear the dispute. 

For example, a Pennsylvania state court recently refused to enforce an arbitration agreement between orthopedists and their patients when it called for non-existing rules.  The agreement in question called for the application of “‘Health Care Claims Arbitration Rules of the American Arbitration Association,” yet there are no rules with that title from the AAA.  In fact, the only health care rules available from the AAA do not govern disputes between doctors and patients.  The AAA’s health care rules only apply to “business-to-business” disputes (such as reimbursement disputes between health care providers and insurance payors).  The orthopedists argued that the agreement to arbitrate should still be enforced, just in another forum and under different rules, but the court found that the specific rules and forum were essential terms of the agreement.  Because those essential terms failed, the arbitration agreement was not enforceable.  (The decision is not reported; its title is Luderer v. Nazarian, and it was issued on Sept. 12 by the Philadelphia Common Pleas Court.)

 Similarly, in February of this year, the Supreme Court of Illinois held that the selection of the NAF in a consumer contract was “integral to the parties’ agreement to arbitrate,” such that when the NAF stopped conducting consumer arbitrations, the arbitration agreement was unenforceable.  Carr v. Gateway, Inc., 944 N.E.2d 327 (Ill. 2011).  However, the authors are aware of a Minnesota state court judge who resolved this problem by ordering the parties to select a new forum for arbitration when the one specified in the arbitration agreement was no longer available.   

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