Exclusive arbitral forum carries risk

Arbitration can help to control your litigation costs. In drawing up an arbitration clause for a contract, you can pick and choose many elements that should reduce the cost and complexity of many disputes. Typically, in most contracts, specificity is important. By using carefully tailored language, with precise meanings, you can ensure that your contract represents the agreement you desired.

Arbitration is flexible and allows you to choose such things as the jurisdiction, the choice of law and even the number of arbitrators. You will choose the rules of arbitration, such as those from the American Arbitration Association (AAA). But certainty can have its own risks, as was seen in a case involving an exclusive arbitral forum.

A consumer had a dispute involving a payday loan and sued in court. The banks demanded the case be sent to arbitration, as required by the loan agreement the consumer had signed. When the consumer filed her arbitration, NAF refused to accept it, as they were then under a consent decree from the Attorney General of Minnesota and they were not permitted to handle consumer arbitrations.

The consumer returned to the district court, the banks requested the court name an alternative arbitrator. The court found it could not appoint a substitute arbitrator based on the terms of the agreement.

The banks appealed and the Second Circuit affirmed that when the parties have chosen an exclusive arbitral forum and that arbitrator cannot take the case, the court lacks the power to compel arbitration. The court went on to point out that when there is an exclusive forum chosen, they cannot use the Federal Arbitration Act (FAA) to circumvent the parties’ intentions.

When choosing an arbitral forum, you should exercise caution and consider the prospect of how you would deal with a situation like this where the preferred forum is unavailable.