In Parm v. National Bank of California, N.A., Case No. 15-12509 (decided August 29, 2016), United States Court of Appeals for the Eleventh Circuit decided how a court should respond to an arbitration agreement when the arbitrator designated in the agreement does not exist.
The case arose out of a loan agreement between Parm and Western Sky Financial, LLC (Western Sky). Western Sky was a South Dakota limited liability company owned by a member of the Cheyenne River Sioux Tribe. The loan agreement provided for arbitration of all disputes and that the arbitration "shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules ...." Opinion, p. 3. Because the Tribe had no arbitrators, the district court refused to enforce the arbitration agreement. The Eleventh Circuit affirmed.
Although the loan agreement had other language that appeared to recognize that the arbitration could be administered by the American Arbitration Association or by JAMS, that language did not change the requirement that the arbitrator must be an "authorized representative" of the Tribe. Consequently, the agreement could not be enforced as written.
Although Section 5 of the Federal Arbitration Act allows the appointment of an alternative arbitrator in the event there is a lapse or failure of the named forum, the Eleventh Circuit, relying on a prior decision, concluded that the unavailability of the chosen arbitrator precludes arbitration whenever the choice of the arbitrator "is an integral part of the agreement to arbitrate, rather than an ancillary logistical concern." Opinion, p. 12. Because the arbitration agreement used mandatory "shall" language, the Court concluded that the naming of a representative of the Tribe as arbitrator was an essential part of an agreement.
This highlights an issue on which drafters of arbitration agreements should focus. The drafters need to be sure that the agreement identifies a functioning arbitral forum and allows for the appointment of an alternative arbitrator if the one selected is unavailable.
The Opinion is available at http://media.ca11.uscourts.gov/opinions/pub/files/201512509.pdf
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