The South Carolina Supreme Court has held that section 5 of the Federal Arbitration Act (FAA) does not allow for the appointment of an alternate arbitrator when the designated administrator refuses to hear the parties’ dispute, finding that the selection of an arbitrator implies the waiver of certain procedural rights and that the selection of an arbitral forum is therefore a "material term."
In Grant v. Magnolia Manor-Greenwood, Inc., No. 26668, 2009 WL 1678204 (S.C. June 15, 2009), Grant admitted his wife to the Magnolia nursing home facility. Upon admission, Grant executed the admission contract on his wife’s behalf. The contract contained a broadly-worded arbitration agreement specifying the National Health Lawyers Association, later the American Health Lawyers Association (AHLA), as the arbitration administrator.
Grant’s wife died while a resident at Magnolia, and Grant brought suit against Magnolia for survival, wrongful death, and loss of consortium. Magnolia moved to compel arbitration and stay the judicial proceedings. Grant opposed the motion, noting that AHLA policy now forbade it from administering any arbitral proceedings for personal injury claims pursuant to a pre-dispute agreement. Although Magnolia argued that the Federal Arbitration Act (FAA) provided for the appointment of an alternate arbitrator under such circumstances, the trial court denied Magnolia’s motion.
On appeal, Magnolia alleged that the trial court erred by refusing the enforce the parties agreement, despite the AHLA’s refusal to administer the arbitration. The Court disagreed, finding that the inability or refusal of the AHLA to act in accordance with the terms of the parties’ agreement evinced a lack of a "meeting of the minds" as to "the essential and material terms of the contract."
The Court acknowledged the majority rule among courts presented with this same question that 9 U.S.C. § 5 generally allowed for the appointment of alternate arbitrators when the named arbitrator refuses to or cannot act. See Ex Parte Warren, 718 So.2d 45, 48 (Ala. 1998) (under the circumstances, a court should not void the agreement, but instead appoint an arbitrator pursuant to section 5); Brown v. ITT Consumer Fin. Corp., 211 F.3d 1217, 1220 (11th Cir. 2000) (same).
Nevertheless, the Court expressed affinity for the minority rule expressed by the Second Circuit Court of Appeals that section 5 was only meant to empower arbitral substitution in limited circumstances where the appointment fails, but the forum remains available. See In re Salomon Inc. Shareholders Derivative Litig., 68 F.3d 554, 560 (2d Cir. 1995).
However, the Court instead rested its refusal to appoint an alternate arbitrator on a finding that the designation of the AHLA as an "arbitral forum" was an essential and material term, rendering its failure fatal to the parties’ agreement. It opined that forum selection implies the waiver of rights through the forum’s streamlined procedural rules, and that waiver was not "ancillary" or "logistic." Accordingly, the Court affirmed the denial of Magnolia’s motion to compel arbitration.
Arguably, the Court in Grant allows the "essential and material term" exception to swallow the majority rule that the appointment of alternative arbitrators is allowed under section 5 of the FAA. All forum selection inherently involves the selection of some rule set that simplifies -- or in the Court’s opinion waives -- certain procedural rules. Therefore, under the Court’s interpretation, any forum selection is a "material term" upon which enforcement of the agreement depends.
In any case, the Grant opinion is clearly a strong reminder to drafting parties to 1) ensure that their selected arbitral administrator will in fact administer the types of disputes the parties will likely have, 2) specify that the selection of a particular administrator is not a essential and material term and is severable if the parties still contemplate enforcement upon the arbitral forum’s failure to refusal to administer the arbitral proceedings, and 3) review any previously executed agreements to verify that any designated administrator will continue to hear the parties’ disputes in its forum.