When Arbitration Becomes Impossible: When are parties excused from an agreement to arbitrate?
By Jeffrey Isaac Ehrlich
Advocate January 2006 | Download .pdf
When the agreed-upon arbitral forum is unavailable, there can be no arbitration
Two cases that followed Alan did not hesitate to find that the refusal of the arbitration provider to administer the arbitration provided a basis for the trial court to put the case back on its docket. In Martinez v. Master Protection Corp., 118 Cal.App.4th at 107, after the AAA refused to hold the arbitration, the plaintiff moved to revive the litigation and have the matter resolved in court. The trial court denied the motion, and appointed a retired judge to arbitrate the dispute. The arbitrator ruled against the plaintiff, and the trial court confirmed the award. The plaintiff appealed, and the Court of Appeal reversed, on twin grounds – (1) that the arbitration agreement was unconscionable and could not be enforced, and (2) that the trial court lacked the authority to appoint an arbitrator after AAA refused to conduct the arbitration. (Martinez, 118 Cal.App.4th at 120.) Relying on Alan, the court explained:
The parties in this case agreed to an AAA forum, but AAA refused to participate. ‘An agreement to arbitrate before a particular forum is as integral a term of a contract as any other, which courts must enforce.’ [Citing Alan,111 Cal.App.4th at 228.] Thus, if AAA, the forum selected by the parties – declines to hear the matter, the dispute is to be tried in court.’” (Martinez, 118 Cal.App.4th at 121, citing Alan, 111 Cal.App.4th at 224.)
Most recently, this issue was addressed in Provencio v. WMA Securities, Inc. (2005) 125 Cal.App.4th 1028, 1032 [23 Cal.Rptr.3d 524].) There, the arbitration agreement provided for NASD arbitration. But under the NASD rules, if the brokerage house against whom the claim is made is no longer a NASD member, the NASD will not conduct the arbitration unless the customer agrees to arbitrate the claim after the claim has arisen. (Provencio, 125 Cal.App.4th at 1032, 1033 n.5.) Since the investor refused to consent to arbitration, the trial court refused to enforce the arbitration agreement. The defendant appealed, and the Court of Appeal affirmed.
The Court explained:
When the parties to a contract agree to arbitrate any disputes before a particular forum, that provision becomes an integral part of their contract. If that forum is not available to hear the dispute, then a petition to compel arbitration may not be granted. (Id., 125 Cal.App.4th at 1032, citing Alan, 111 Cal.App.4th at 224, 227-228.)
The Court held that since the investor had not provided the NASD with its written consent to arbitrate the claim against the defunct broker, the arbitration before the NASD was not possible and the motion to compel arbitration could not be granted. (Id. at 1033.)
It is important to note that in Alan and in Provencio, it was not truly impossible for the arbitration to proceed as ordered by the court. In both cases, the plaintiffs had the option of signing an agreement that would have removed the obstacle that was keeping the arbitration from moving forward. In Alan, the plaintiff could have waived the application of the new California ethics rules for arbitrators; in Provencio, the plaintiffs could have agreed to allow the NASD to proceed even though their brokerage house was no longer a member of NASD. As the Provencio court explained, “Strictly speaking, therefore, the issue is not whether NASD is available as a forum: it is available if the respondents choose to make it available.” (Provencio, 125 Cal.App.4th at 1033.) Yet, in each case, the courts proceeded as if the forum specified in the arbitration agreement was truly unavailable. The lesson is that the arbitration agreement has to be enforced in accordance with its terms. If the parties’ original agreement is not deemed sufficient by the forum to allow it to proceed with the arbitration, neither party can be required to execute what is, in essence, a new agreement to arbitrate on different terms.
Alan, Martinez, and Provencio all hold, either expressly or implicitly, that when an arbitration provider refuses to administer an arbitration, the problem cannot be remedied by resort to section 1281.6 of the Code of Civil Procedure. How then can these cases be squared with the earlier decisions in Richards v. Merrill, Lynch and Lewis v. Merrill, Lynch? One answer is that in Richards and in Lewis, the forum became unavailable because the court held that the arbitration agreement was unenforceable; in the trio of later cases, the arbitration clause was perfectly valid, but the forum was unavailable. The cases did not, therefore, present the same issue for resolution.
Alan also regarded Lewis as a case where the arbitration agreement did not actually make the specified forum the exclusive forum, and so therefore did not find that it was an integral part of the agreement. Specifically, the Alan court distinguished Lewis with the following parenthetical: “dictum stating that arbitral fora contained in arbitration provision were not exclusive arbitral fora; no analysis of whether choice of fora was integral term of agreement.” (Alan, 111 Cal.App.4th at 229.) Hence, the Alan court did not feel the need to refuse to follow Lewis, it simply found that the case before it presented different facts that dictated a different result.
Because Alan, Martinez, and Provencio are more recent than Lewis and Richards, and far more specific in explaining why section 1281.6 cannot be used to alter the arbitration agreement that the parties originally agreed to, there is not a true split of authority that would allow the trial court to choose whichever strand of authority it found most persuasive. Accordingly, when faced with a motion to vacate an order compelling arbitration because the arbitration provider’s refusal to proceed rendered it “impossible” to arbitrate the dispute, the trial court should follow Alan, Martinez, and Provencio, excuse the parties from arbitration, and restore the case to its docket. (Auto Equity Sales v. Superior Court (1962) 57 Cal.2d 450, 456 [20 Cal.Rptr. 321].) ■