Moss v. First Premier Bank, Nos. 15-2513-cv, 15-2667-cv, 2016 U.S. App. LEXIS 15917 (2d Cir. Aug. 29, 2016)
In a non-reinsurance case, the US Court of Appeals for the Second Circuit affirmed an order vacating a prior order compelling the parties to arbitrate in a consumer contract. We included this case because of its ramification for all arbitration clauses that include provisions for arbitration only before a certain arbitral organization.
This case 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 sought 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 (FAA) could not be used to circumvent the parties’ designation of an exclusive arbitral forum by compelling arbitration before a substitute.
The Second Circuit also noted that difference in opinion among the circuits on this issue, so at some point the US 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. While many reinsurance arbitration clauses do not designate an arbitral forum, some do and care needs to be taken to address contingencies like the unavailability of that forum when a dispute arises.