Withdrawal of Arbiter Without Replacement Mechanism Voids Dispute Resolution Agreement
Capparelli v. Lopatin
The appellate division of the New Jersey Superior Court recently issued a decision in Capparelli v. Lopatin. The court concluded that a lack of a replacement mechanism for an arbiter who had withdrawn from serving in that capacity in a dispute resolution as called for by the arbitration agreement, voiding the agreement on grounds of frustration of purpose and impossibility.
Facts of the Case
The parties in the case were former business partners whose business relationship ultimately deteriorated. They, then, engaged in extensive litigation in New Jersey and Florida related to the windup of their businesses. The parties ultimately entered a global settlement agreement that resolved their pending lawsuits and established a mediation/arbitration mechanism for the parties to settle any future disputes between themselves. The mechanism required the parties to first engage in informal mediation with the parties’ former corporate counsel. If mediation was unsuccessful, the parties would then submit their dispute to a three-person binding arbitration panel consisting of the parties’ corporate counsel and an arbitrator selected by each of the parties. Each party could dismiss their former corporate counsel as an arbitrator, with the remaining party-selected arbitrators tasked with agreeing on a replacement neutral third arbitrator.
When this mechanism proved to be cumbersome and expensive for their parties, they adopted a new settlement agreement that included a dispute resolution agreement that simply designated the parties’ former corporate counsel as the sole arbiter for resolving disputes between the parties. However, the parties’ former corporate counsel withdrew from his role as sole arbiter. The parties were unable to agree on a new arbiter.
As a result of the withdrawal of the parties’ former corporate counsel, one of the parties filed suit to compel the appointment of a replacement. In response, the other party asserted affirmative defenses including frustration of purpose and impossibility. The other party also asserted a counterclaim, seeking to have the two party-selected arbitrators from the first dispute resolution mechanism select a replacement sole arbiter, or in the alternative, to have the court select a replacement. The trial court ruled that the parties’ second dispute resolution agreement was null and void, directing the parties back to their first dispute resolution mechanism to settle their outstanding disputes.
The Court’s Ruling
On appeal, the appellate division affirmed the judgment of the trial court, concurring with the application of the doctrine of frustration of purpose and impossibility. The court ruled that the parties’ second dispute resolution agreement was based solely on the presence of their former corporate counsel. When he withdrew from service, the court concluded that it fundamentally changed the nature of the parties’ bargain since there was no mechanism to replace the sole arbiter.
The court further rejected arguments in favor of reading the two dispute resolution agreement together, noting that the second agreement never referenced the first agreement and did not qualify as a “carve out” because it instead replaced the three-person arbitration panel with a single arbiter to handle collections disputes. Finally, the court ruled that the Uniform Arbitration Act, which could authorize the trial court to appoint a substitute, did not apply to the second dispute resolution provision because that provision never used the word “arbitration” or made any invocation of arbitration law.
From this ruling, it is important to remember that when parties wish for their dispute resolution mechanisms be in arbitration, they must expressly designate that they are agreeing to an arbitration mechanism and frame it in such a manner that it is legally binding and enforceable. Moreover, it is important to expressly state a process for removing and/or replacing an arbiter, or to expressly identify a set of promulgated arbitration rules for the replacement of arbiters.
Contact a Haddonfield Employment Law Attorney for a Consultation About Arbitration in New Jersey Today
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