Arbitrator Designation Deemed Severable from Contract

Virginia Code § 8.01-581.01 et seq. evidences a public policy favoring arbitration. Virginia’s statutory scheme provides that arbitration agreements between parties are valid and enforceable, and courts uphold the parties’ designated method of appointing an arbitrator. Where the parties’ appointed arbitrator is unable to act and the parties have not provided a method of appointing a successor, the court can make an appointment. Contracting parties are presumed to know the statutory scheme, and they may alter it, but they must do so with clear and unambiguous language. In Schuiling v. Harris, the Virginia Supreme Court considered whether a clause appointing a specific arbitrator was severable from the rest of the contract or integral to the contract rendering the whole agreement unenforceable if the appointed arbitrator was unavailable.

William Schuiling hired Samantha Harris as his housekeeper. The parties signed an arbitration agreement providing that any and all disputes arising out of the employment would be resolved “exclusively by arbitration administered by the National Arbitration Forum…” The agreement also contained a severability clause stating that if any provision of the agreement was found to be invalid or unenforceable, it would be severable from the rest of the agreement and not affect any other provision. The agreement did not contain any other terms relating to non-competition, salary, wages or term of employment. The sole subject of the agreement was arbitration.

Harris filed a complaint against Schuiling alleging multiple torts, statutory violations and breach of contract. Schuiling filed a motion to compel arbitration under Virginia Code § 8.01-581.02(A). Schuiling asserted that the National Arbitration Forum scissors2.jpg(“NAF”) was no longer available to arbitrate the dispute and requested the circuit court to appoint a substitute arbitrator pursuant to Virginia Code § 8.01-581.03. Harris opposed the motion, arguing that NAF’s exclusive designation was an integral part of the contract and that because NAF was unavailable, the whole agreement was unenforceable. The circuit court denied Schuiling’s motion to arbitrate, finding that the parties’ designation of NAF was an integral part of the contract and that NAF’s unavailability rendered the whole agreement unenforceable. Schuiling appealed.

On appeal, Schuiling argued that the circuit court did not pay appropriate deference to the public policy preference of arbitration agreements as reflected in Virginia Code § 8.01-581.01 et seq. and that the court erred by refusing to appoint a substitute arbitrator pursuant to the statute. The Virginia Supreme Court agreed that the statutory scheme favors the enforcement of arbitration agreements, but it noted that the preference for arbitration is not absolute–parties can certainly agree to limit the scope of arbitration. For example, here, the parties may have limited their agreement to arbitrate by making it conditional upon NAF conducting the arbitration. The issue was whether they did that.

The court examined the words of the contract as well as the intention of the parties, giving terms their ordinary meaning and harmonizing the various provisions. The court noted that contract provisions are either integral to the agreement or they are severable. Here, several factors indicated that the arbitration clause was severable. First, the parties included a broad severability clause that permitted severing of whole provisions and “any part of any provision…determined to be invalid or unenforceable…for any reason…” The court held that “for any reason” included NAF’s unavailability and that “any part of any provision” included the clause designating NAF as arbitrator.

Second, the sole purpose of the agreement was to require the parties to arbitrate any claim arising out of the employment situation. The contract provided no other terms. A finding that NAF’s designation is not severable would defeat the whole agreement and be inconsistent with the court’s obligation to consider the contract as a whole and harmonize its provisions, giving effect to each one when possible.

Third, the parties were presumed to know that Virginia Code § 8.01-581.03 directs the circuit court to appoint an arbitrator when an arbitration agreement fails to do so or when the appointed arbitrator is unable to act. The parties did not include any language expressing an intention to limit the court’s statutory authority.

Finally, the agreement does not indicate that the parties contemplated NAF’s unavailability. The parties’ use of the word “exclusively” in NAF’s designation indicates that they were willing to submit to NAF’s authority presuming that it was available. The broad severability clause suggests that the parties intended NAF to be the exclusive arbitrator so long as it was available and if not, the designation would be severed. The parties’ failure to include a provision for the appointment of a substitute arbitrator indicates their presumed knowledge that Virginia Code § 8.01-581.03 provides a mechanism to do so. The court found that although parties can restrict operation of this mechanism, they must state an intention to do so in express and unambiguous terms.

The court relied on the parties’ intention as expressed in the agreement and held that the arbitrator designation was not integral to the agreement and could be severed in order to give effect to the arbitration provision.

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