When Arbitration Becomes Impossible: When are parties excused from an agreement to arbitrate?
By Jeffrey I. Ehrlich
Advocate January 2006 | Download .pdf
The options available to courts and parties
So, when does an arbitration become “impossible,” and what can a trial court do when it does? The most common situations are when the arbitration provider, that is, the organization that provides the arbitral forum, refuses to administer the arbitration, or when the particular arbitrator appointed to conduct the arbitration is unable or refuses to proceed. Arbitrators may have other commitments that intervene, or they may become ill, or otherwise may be unable to proceed. Arbitration providers can go out of business, or may adopt rules or policies that are inconsistent with the terms of the arbitration clause that has been enforced, or may be subject to new legal requirements that they cannot satisfy, or that they do not wish to comply with.
Obviously, an arbitration provider or an arbitrator will refuse to proceed if one party has refused to pay the required fees. Impossibility requires at the threshold that the party claiming that it is impossible to proceed has not unilaterally created the situation. Although these difficulties might not occur frequently, they do occur often enough that there are published decisions that address the situation.
One example of an arbitration provider refusing to proceed is Alan v. Superior Court (UBS Painwebber) (2003) 111 Cal.App.4th 217 [3 Cal.Rptr.3d 377]. The dispute in Alan involved claimed mismanagement of an investors’ accounts. Like most actions involving securities, the investment agreements signed by the investor provided for all disputes to be arbitrated by the National Association of Securities Dealers (“NASD”). More specifically, the agreement provided for arbitration by one of the self-regulatory agencies (SROs) in the security industry, such as the NASD or the New York Stock Exchange (“NYSE”). The claimant did not specify which SRO should hear the case, and the defendant selected the NASD. (Alan, 111 Cal.App.4th at 223.) Before the dispute developed, California imposed new ethical standards for arbitrators, and the NASD refused to hear any cases in California unless the parties would agree to waive the new ethical standards. (111 Cal.App.4th at 222.) The NASD did agree to hear the case outside of California, as an alternative to a waiver. (Id.)
A similar situation was presented in Martinez v. Master Protection Corp. (2004) 118 Cal.App.4th 107 [12 Cal.Rptr.3d 663], which involved an employment dispute. There, the arbitration agreement specified that the arbitration would be conducted by the American Arbitration Association (“AAA”) under its rules. But AAA refused to administer that arbitration because the arbitration agreement did not meet its rules and due-process protocols. (Id. at 112.)
The failure to comply with AAA’s due-process protocols can arise outside of the employment context as well. AAA has also adopted a due-process protocol in the health care and health insurance areas. Because so many businesses incorporate AAA arbitration into their arbitration agreements, it is important for plaintiffs’ counsel to be familiar with AAA’s due process protocols. They can be viewed on its website, www.adr.org.
With respect to health care, effective January 1, 2003, AAA announced that it would no longer conduct arbitrations in California arising out of healthcare disputes, unless the parties have entered into an agreement to arbitration after their dispute developed. In other words, AAA has refused to continue to participate in the enforcement of pre-dispute adhesive arbitration clauses in health plans. AAA’s position is explained on its website this way:
Health Care Policy Statement
As a result of a review of its caseload in the health care area, the American Arbitration association has announced that it will no longer accept the administration of cases involving individual patients with a post-dispute agreement to arbitrate. In order to provide for an orderly transition, this change will become effective on January 1, 2003.
AAA, the world’s largest provider of alternative dispute resolution services, has also determined that there will be no change in the administration of cases in the health care area where businesses, providers, health care companies, or other entities are involved on both sides of the dispute.
Distinguishing a patient undergoing health care treatment from other situations involving an individual, AAA has determined that they will continue to administer pre-dispute agreements to arbitrate in all areas outside of the health care field, as long as there are appropriate due process safeguards as defined by the courts.
The impetus for this change was the report of a joint commission on healthcare dispute resolution established by AAA, the American Medical Association and the American Bar Association in 1997. The Commission’s final report, issued in 1998, strongly supported the use of arbitration in the health care area, provided that the consumer had given consent to arbitrate the dispute after the dispute arose. The joint commission’s final report is listed on the AAA website as the AAA’s “Healthcare Due Process Protocol.”
For example, on page 10 of the report, in the section describing the various ADR models that were considered, the discussion of arbitration includes the following statement: “[T]he Commission’s unanimous view is that in disputes involving patients and/or plan subscribers, binding arbitration should be used only where the parties agree to same after a dispute arises.”
Under its Health Care Policy Statement, when a case arising out of a healthcare dispute, such as a dispute between a health insurer and its policyholder, has been sent to AAA arbitration, AAA will send each party a new form asking for consent to have AAA administer the arbitration. Unless both parties sign the form, AAA will not proceed with the arbitration. Does this mean that a plaintiff can refuse to sign the form, invoke the impossibility doctrine, and ask the court to vacate its prior order compelling arbitration? Or can the court simply find a new arbitration provider who is willing to proceed on the basis of a pre-dispute arbitration agreement? The cases are mixed, but the recent trend is clear – if the arbitration clause specifies the arbitral forum, such as AAA, and that forum becomes unavailable, then the court will not require arbitration of the dispute, even if the plaintiff could break the impasse simply by signing a new agreement.
The California Arbitration Act seems to anticipate these issues. Section 1281.6 of the Code of Civil Procedure provides:
If the arbitration agreement provides a method of appointing an arbitrator, that method shall be followed. If the arbitration agreement does not provide a method for appointing an arbitrator, the parties to the agreement who seek arbitration and against whom arbitration is sought may agree on a method of appointing an arbitrator and that method shall be followed. In the absence of an agreed method, or if the agreed method fails or for any reason cannot be followed, or when an arbitrator appointed fails to act and his or her successor has not been appointed, the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator. (Emphasis added.)