ADR Agreement Designating the National
Arbitration Forum is Unenforceable
By org jforward wisbar Joe Forward, Legal Writer,
State Bar of Wisconsin
2012 – An alternative dispute resolution (ADR) agreement designating the National
Arbitration Forum (NAF) as arbitrator using NAF
rules and procedures is unenforceable, a state appeals court has ruled,
because NAF is no longer available.
In 2010, Judy Riley signed an ADR agreement on behalf
of her husband, who entered a health and rehabilitation center in
Beloit. The center is run by Extendicare
Health Facilities, Inc. The ADR agreement designated
NAF, an arbitration service, as arbitrator
using NAF rules.
After her husband died, Riley filed a civil action, alleging wrongful
death, negligence, and breach of contract. Extendicare moved
to compel arbitration. The circuit court denied Extendicare’s motion and ruled that Riley
could proceed on her claims in state court.
v. Extendicare Health Facilities, Inc.,
2012AP311 (Dec. 27, 2012), the District IV
Wisconsin Court of Appeals affirmed, ruling that the ADR agreement is unenforceable.
Turns out, NAF entered a consent judgment to cease
arbitration services in 2009 after Minnesota’s attorney general
filed a complaint alleging NAF was engaging in
“After NAF exited the consumer-arbitration business,
questions concerning the proper interpretation of contracts mandating
NAF arbitration or invoking NAF’s rules and procedures have arisen in
courts across the country,” Judge JoAnne Kloppenburg noted.
Extendicare argued that the ADR agreement still works because the NAF designation was not an integral term; the
parties could pick another arbitrator, which the agreement allowed.
The circuit court ruled in favor of Riley because the contract required
use of NAF rules, a provision that is integral to the contract and
cannot be severed. The appeals court agreed.
Although the Federal and Wisconsin arbitration acts and case law allow
a court to substitute for an arbitrator that is unavailable,
“these cases did not involve arbitration clauses in which the
parties also designated specific governing rules, which themselves
governed both the selection of the arbitrator and the arbitration
process,” Judge Kloppenburg explained.
The appeals panel rejected the argument that a non-NAF arbitrator could
apply NAF rules, an argument accepted the South Dakota Supreme Court
facing the same NAF issue in Wright v. GGNSC Holdings LLC, 2011
SD 95, 808 N.W.2d 114.
“We decline to follow Wright, because Wisconsin contract
law does not allow courts to similarly rewrite an ADR agreement,”
Judge Kloppenburg wrote. “Under Wisconsin law, if the NAF Rules of
Procedure cannot be administered, the fact that the parties or the court
can appoint a non-NAF arbitrator does not make the clause requiring use
of the NAF rules less integral to the ADR agreement, or save an ADR