New York Court Narrowly Reads Arbitral Forum Provision

Many foreign companies do business with companies in New York. Often those companies have cross-border agreements of some form (commercial agent, distributorship, joint venture) that calls for arbitration in the event of a dispute. Frequently, U.S. companies prefer arbitration under the commercial rules of the American Arbitration Association (AAA), so this posting should be of interest to both U.S. and foreign companies that use arbitration provisions in New York.

A New York state appeals court has ruled it is proper to compel non-AAA arbitration, despite a contract provision referring to proceedings pursuant to the American Arbitration Association’s commercial rules.

In a brief and unanimous decision, the Appellate Division, First Department, found that a contract clause calling for arbitration “in accordance with the commercial rules of the American Arbitration Association” does not require the arbitration to be administered by the AAA. The court is an intermediate appellate court having jurisdiction over cases from New York City and the Bronx. The case is Nachmani v. By Design, LLC, 901 N.Y.S.2d 838 (1st Dep’t. 2010).

According to the decision, the petitioner in the case demanded arbitration but not before the AAA, despite this contractual provision. The non-AAA arbitral body was not identified in the decision. For unknown reasons, the respondent waited 4 months before demanding that the arbitration proceed before the AAA. Before doing so, the respondent had already filed a counterclaim and designated its arbitrator.

While some commentators have questioned the decision, it appears that the court viewed the matter as a waiver issue because the respondent began participating in the non-AAA arbitration proceedings before demanding AAA arbitration. The court agreed with the petitioner that the contract clause was properly construed as a choice of law, not a forum selection clause, meaning that the non-AAA arbitral body would apply the AAA commercial rules to its proceedings. The court also pointed out that the respondent that AAA arbitration would not provide the respondent with “any greater assurances of arbitrator impartiality,” indicating that it saw no qualitative difference in which arbitral body administers the arbitration on the issue of impartiality.

The case should put parties on notice that the best practice is to carefully draft international arbitration clauses so their intentions as to which arbitral body will administer the arbitration are stated clearly. In addition, once arbitration is demanded, respondents should promptly decide their strategy to either participate in the proceedings before the body selected by the petitioner or challenge the forum selected or risk waiving those challenges.