Arbitration clauses in commercial contracts often specify an arbitral forum before which any dispute must be arbitrated. Insurance and reinsurance contracts containing arbitration clauses are no different. Specificity about the arbitral forum (or the arbitral rules or the appointing authority in case of an impasse) in an arbitration clause has resulted in much case law over the years when the forum no longer exists or refuses to take the dispute (or where the rules referenced have changed or are outdated or the appointing authority does not exist or refuses to appoint). So while specificity is generally a good thing in a contract, sometimes too much specificity backfires when a dispute arises years later and circumstances have changed.
The United States Court of Appeals for the Second Circuit recently addressed the issue of an arbitral forum that refused to take an arbitration in a consumer contract. While not an insurance or reinsurance contract, the court’s pronouncements could have an effect on a dispute under an insurance or reinsurance contract where an arbitral forum is exclusively prescribed in the arbitration clause.
Moss v. First Premier Bank, Nos. 15-2513-cv, 15-2667-cv, 2016 U.S. App. LEXIS 15917 (2d Cir. Aug. 29, 2016), involved a payday lender dispute. The loan application had an arbitration clause specifying that all disputes were subject to arbitration under the Code of Procedure of the National Arbitration Forum (“NAF”)) in effect at that time. After the borrower brought a class action, the lender sought to compel arbitration. When the district court ordered the parties to arbitration, the borrower sent a notice of intent to arbitrate to NAF. NAF, however, responded that because of a consent judgment concerning consumer arbitrations, it could not accept the arbitration. The borrower then returned to federal court and moved to vacate the order compelling arbitration. The district court granted the motion.
In affirming the district court, the Second Circuit focused on the language of the arbitration clause. The court noted that the clause did not address how the parties should proceed in the event that NAF was unable to accept the dispute. Citing an earlier case, In re Salomon Inc. Shareholders’ Derivative Litigation, 68 F.3d 554 (2d Cir. 1995), the court held that the parties’ agreement to arbitrate evinced an intent to designate an exclusive arbitral forum; arbitration before NAF. Because of this mandatory language, said the court, and the absence of any indication that the parties would assent to arbitration before a substitute, the order compelling arbitration was properly vacated.
The dispositive factor was whether the arbitral forum was exclusive. Where it is exclusive, the court held that Section 5 of the Federal Arbitration Act could not be used to circumvent the parties’ designation of an exclusive arbitral forum by compelling arbitration before a substitute. In other words, if you pick an exclusive forum and that forum is not available or refuses to accept the case, your dispute gets resolved in court.
The Second Circuit also noted a difference in opinion among the circuits on this issue so at some point the United States Supreme Court may weigh in. But for now, in the Second Circuit, if you designate an arbitral forum as the exclusive entity to hear the dispute, you are bound by that choice and if that forum is not available, then you stay in court. While many reinsurance arbitration clauses do not designate an arbitral forum, some do and others designate specific rules or a specific appointing authority. Because of that care needs to be taken to address contingencies like the unavailability of that forum when a dispute arises.