Is An Arbitration Agreement Valid If The Designated Arbitrator Is Unavailable?
That’s a straightforward question, and the Virginia Supreme Court has given a rather straightforward answer: yes.
The question came up in Schuiling v. Harris, which we noted as coming over the transom but bears a little more scrutiny. Initially, let’s set aside some of the curious facts about this case. It’s not too curious that the plaintiff, William Schuiling -- owner of a collection of car dealerships in Virginia -- hired a housekeeper, Samantha Harris. It is a bit unusual, however, that Schuiling had his housekeeper sign an arbitration agreement as part of her employment – and that the agreement only addressed arbitration, and no other conditions of employment, such as how socks were to be folded or dusting the ceiling fans. It’s also odd that whatever happened in the employment relationship between Schuiling and Harris was pretty serious: it led Ms. Harris to file a “10-count complaint against Schuiling alleging multiple torts, statutory violations, and breach of contract,” as the Virginia Supreme Court explained – giving no details of the underlying allegations.
So, we’re left with this arbitration agreement which Ms. Harris signed. The boilerplate agreement very specifically said that “any and all claims, disputes or controversies arising out of or related to Employee’s employment…shall be resolved exclusively by arbitration administered by the National Arbitration Forum…” The agreement also contained a severability clause, which provided that if any part of the contract “is determined to be invalid or unenforceable for any reason, it shall be severable” from the rest of the contract, which shall otherwise “remain in full force and effect.”
We also have a significant fact: since the parties signed the agreement, the National Arbitration Forum – which was “exclusively” to resolve any dispute – “was no longer able to administer the arbitration,” for reasons the court did not make clear. What we know, though, is that the Forum stopped doing some types of consumer arbitrations in 2009 as a result of criticism and a settlement with the Minnesota Attorney General.
That creates the issue that went to the Virginia Supreme Court. When Ms. Harris filed her ten-count complaint against Mr. Schuiling in Virginia state court, Mr. Schuiling moved to compel arbitration, but given the unavailability of the NAF, he asked the court to appoint another arbitrator. Ms. Harris objected, arguing that the designation of NAF as the arbitrator was integral to the agreement – the whole point of it was to rout disputes to the NAF, and if the NAF couldn’t handle the disputes, the entire arbitration agreement was unenforceable. The state court agreed, and denied Mr. Schuiling’s motion.
On an interlocutory appeal (a relatively limited procedure in Virginia where a higher court will review a lower court’s ruling before the case is final), the Virginia Supreme Court reversed, and ordered the lower court to appoint a substitute arbitrator. Starting from the public policy favoring enforcement of arbitration agreements – whether in federal courts via the Federal Arbitration Act or in Virginia via the statute and court decisions – the court initially held that the entire point of the agreement was to make the parties arbitrate, not necessarily just before NAF: no other conditions of Ms. Harris’s employment were in it, so a “determination that NAF’s designation is not severable would defeat the entire agreement,” something the court had to try not to do given the policy in favor of enforcing arbitration agreements. The severability clause in the agreement was its way to accomplish this: that clause – allowing the rest of the contract to remain if the part designating NAF were struck out – allowed the Virginia Supremes to take the section of the agreement designating NAF as the “exclusive” arbitrator out, and fill it with a Virginia statute allowing a court to appoint an arbitrator if the designated one “fails to or is unable to act.”
Ms. Harris’s argument that the agreement said NAF would be the “exclusive” arbitrator didn’t stop this switch, the court held, because the parties did not contemplate “that collateral events might render NAF unavailable.”
The takeaway for employers and executives to avoid this type of dispute is this: while severability clauses and public policy favoring arbitration can be used by a court to make an arbitration agreement work, some flexibility in designating an arbitrator or arbitration system is another, perhaps easier, way to work around the problem of the “unavailable” arbitrator. That’s something to think about whether you’re hiring a housekeeper or your new CFO.