January, 2012

Matthew Chabal III, Esq.
James Smith Dietterick & Connelly, LLP
P.O. Box 650, Hershey, PA 17033
[email protected]

On January 20, 2012, in Khan v. Dell Inc., the United States Circuit Court for the Third Circuit ruled that Section 5 of the Federal Arbitration Act (“FAA”) requires the appointment of a substitute arbitrator when the arbitrator designated by the parties is unavailable. This was the first time this issue has been addressed by the Third Circuit, which, by a 2-1 vote, overturned a New Jersey District Court’s ruling that the arbitration provision was rendered unenforceable because it provided for the parties to arbitrate exclusively before a forum that was unavailable. The court specifically found that such a situation triggers the substitution process outlined in Section 5 of the FAA.

The plaintiff claimed he experienced problems with his Dell computer and filed a consumer class action. However, because the purchase was governed by Terms and Conditions of Sale that included an arbitration clause designating the National Arbitration Forum (“NAF”) as the arbitrator for any disputes, Dell moved to compel arbitration of the claim. The District Court denied the motion, finding that the arbitration clause was rendered unenforceable because, prior to the plaintiff’s lawsuit, NAF had been barred from conducting consumer arbitrations. Integral to the District Court’s ruling was its conclusion that the language of the arbitration clause demonstrated “the parties’ intent to arbitrate exclusively before a particular arbitrator, not simply an intent to arbitrate generally.”

Citing cases from the Ninth and Eleventh Circuits, the Third Circuit reversed the lower court’s ruling and declared that the unavailability of NAF did not preclude enforcement of the arbitration clause. Perhaps the following paragraphs from the opinion bests sum up the ruling:

Although courts are divided on the issue, we conclude that the “liberal federal policy in favor of arbitration” counsels us to favor the Brown line of cases. The language relied on by Khan is at best ambiguous as to whether the parties intended to have their disputes arbitrated in the event that NAF was unavailable for any reason. Because of the ambiguity, it is not clear whether the designation of NAF is ancillary or is as important a consideration as the agreement to arbitrate itself. See Brown, 211 F.3d at 1222. Therefore, we must resolve this ambiguity in favor of arbitration.
.. .
The contract’s language does not indicate the parties’ unambiguous intent not to arbitrate their disputes if NAF is unavailable. Section 5 of the FAA requires a court to address such unavailability by appointing a substitute arbitrator. The District Court’s contrary conclusion is at odds with the fundamental presumption in favor of arbitration.

Although Khan v. Dell Inc., was a consumer arbitration case, it seems likely the lower courts in the Third Circuit will apply it in interpreting arbitration clauses in other contexts — including construction contracts, in which arbitration clauses are commonplace. We still see the occasional contract in which a nonexistent arbitration provider is identified.

For more information, please contact Matt Chabal, P.O. Box 650, Hershey, PA 17033 | 134 Sipe Ave., Hummelstown, PA 17036 | 717.533.3280 EXT 2070 | [email protected].

This Alert is provided for informational purposes only and does not constitute legal advice. Before taking any action related to the issues addressed above, you should consult with an attorney of your choice.