In Davidson v. Golden Living Center, the Pennslyvania Superior Court had to determine whether an arbitration agreement is enforceable when the clause states that a specific arbitration entity, in this case the National Arbitration Forum (NAF), but the arbitration entity is no longer accepting arbitration cases. The severability clause in the agreement stated that if a court finds any portion of the agreement unenforceable, that portion will be unenforceable but the rest of the agreement will remain effective. Here the arbitration forum selection clause of the arbitration agreement was held unenforceable because the specific arbitration forum was unavailable. Thus the court had to consider whether that clause was an essential term of the agreement and if that rendered the entire agreement unenforceable.
The trial court held that the agreement was unenforceable because an essential term failed. The court said that the severability clause could not save the agreement because it would require the court to rewrite the arbitration clause and devise “a new form and mode of arbitration for the parties.”
At the appellate level the defendants argued that the forum selection clause was not an essential part of the agreement because the primary purpose was not to have NAF arbitrate the dispute, but to have the dispute be submitted to arbitration. However the Court disagreed. Although generally an arbitration agreement will not fail because of the unavailability of a chosen arbitration forum, it will if the parties’ choice of forum is an integral part of the agreement. The court cited case law from other circuits holding that NAF’s participation in the arbitration process was an integral part of the agreement. The court adopted this reasoning as it own and held that in Pennsylvania, an arbitration agreement with a clause requiring the parties to arbitrate in front of the NAF will be rendered unenforceable because of the failure of an essential term of the agreement.
Thanks to Remy Lapidus for her contribution to this post.