ADR Agreement Designating the National Arbitration Forum is Unenforceable

By Joe Forward, Legal Writer, State Bar of Wisconsin

Dec. 28, 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.

In Riley 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 fraud.

“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 agreement.”