Arbitration and Appraisal — Court Enforces Mandatory Appraisal Clause Even Though No Appraisers Exist Who Possess the Contractual Qualifications

From Singleton v. Grade A Market, Inc., 2009 U.S. Dist. LEXIS 31026 (D. Conn. April 13, 2009):

The precise question presented in this case -- whether a clause in a lease agreement, which clause requires the parties to the lease to settle a rent dispute through appraisal, is rendered void by the unavailability of appraisers with the exact qualifications set forth in the agreement -- appears to be one of first impression for both this court and the courts of the State of Connecticut. ***


[T]he language concerning the appraisal mechanism is straightforward: If the parties cannot agree as to the fair market value of the leased property, fair market value shall be determined by two (2) appraisers who are members of the American Association of Real Estate Appraisers." Modification Agreement, exhibit B to Singleton Affidavit, at 3. The language contains no clear intent of any special or technical meaning of the terms, and so it is given its ordinary meaning....

The language itself reveals no clues as to why the parties included the phrase "who are members of the [AAREA]" in the appraisal clause. There are no signals indicating either the importance, or unimportance, of the AAREA membership requirement. In fact, based solely on the language of paragraph 6(b), the parties' arguments appear equally plausible — the reference to the AAREA could be either an ancillary logistical concern or a fundamental term. The court must look elsewhere.

Under paragraph 12 of the Modification Agreement, the parties agreed that, "except as herein expressly modified, all the terms and conditions of the Lease shall remain in full force and effect." ... Thus, the court next looks to the language of the original Lease, which the parties incorporated by reference in the Modification Agreement.

The original Lease, dated July 12, 1982, does not contain an appraisal provision. It does, however, contain an arbitration agreement which governs rent disputes flowing from changes in the Property due to the exercise of eminent domain…. The incorporation of this clause into the Modification Agreement provides some insight into the parties' intent as to the appraisal clause. Specifically, the fact that the parties chose to leave the binding arbitration provision intact, despite making other substantive changes to the Lease, is evidence of their desire for binding alternative dispute resolution. This suggests that, with respect to the appraisal clause, the parties intended the crux of the clause to be their agreement to be bound by the appraisal process, rather than their agreement that the appraisers be members of the AAREA.

The court finds further support for this reading of the parties' intent in the absence of certain language in the Modification Agreement. For example, Grade A's argument that the AAREA membership requirement is a fundamental term, without which the entire appraisal clause fails, would be convincing if the Modification Agreement contained any language evidencing the importance of the AAREA to the resolution of disputes between these parties. It does not. Moreover, Grade A has not offered any evidence of the circumstances surrounding the execution of the Modification Agreement which supports its position. The record contains no evidence that AAREA appraisers are more qualified than appraisers belonging to other professional real estate appraisal organizations. Similarly, the record contains no evidence that an AAREA appraiser is more suited than a non-AAREA appraiser to assess the specific Property at issue in this case. Without such evidence, the court has no basis to conclude that the parties intended the AAREA membership requirement to be indispensable to the point of invalidating the entire appraisal clause.


As a result, the court determines that the parties' primary intent in paragraph 6(b) of the Modification Agreement was for any dispute as to the fair market value of the Property during the Option term to be settled by means of a binding appraisal process. The parties intended the AAREA membership requirement to be merely a method of assuring that the appraisers resolving the dispute would be qualified and disinterested individuals, rather than an essential term of their appraisal agreement. Consequently, plaintiffs are entitled to compel appraisal. Plaintiffs' Motion for Summary Judgment is therefore granted, and the parties shall proceed with appraisal as set forth in the Modification Agreement, using substitute appraisers in place of AAREA appraisers. See Celebrate Windsor, Inc. v. Harleysville Worcester Ins. Co., 2006 U.S. Dist. LEXIS 27043, *43 (D. Conn. May 2, 2006) (noting plaintiff's ability to compel defendant's participation in a binding appraisal process).

***Although neither plaintiffs nor Grade A claim that paragraphs 6(a) and 6(b) of the Modification Agreement created an arbitration agreement, both parties draw parallels to state and federal arbitration law in their briefs.

[Footnote 3] ***The parties' reliance on cases involving arbitration agreements is not misplaced. Connecticut courts have long recognized the close relationship between, and periodic overlap of, appraisal and arbitration. See, e.g., Covenant Ins. Co. v. Banks, 177 Conn. 273, 413 A.2d 862 (Conn. 1979) (holding that an appraisal clause in an insurance contract constituted a written agreement to arbitrate within the meaning of Connecticut's arbitration law). Further, both federal law and Connecticut law strongly favor arbitration as a means of resolving disputes with limited involvement from heavily-burdened courts. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983) ("Congress's clear intent, in the Arbitration Act, [was] to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible"); McCann v. Dep't of Envtl. Prot., 288 Conn. 203, 214, 952 A.2d 43 (Conn. 2008) ("Because we favor arbitration as a means of settling private disputes, we undertake judicial review of arbitration awards in a manner designed to minimize interference with an efficient and economical system of alternative dispute resolution"). While neither federal nor Connecticut courts have specifically adopted a similar policy favoring appraisal, in a case such as the one before this court — where a contract calls for dispute resolution through a binding appraisal process, and such process would completely dispose of the case — appraisal is akin to arbitration and therefore it is logical for the court to favor appraisal for the same reasons arbitration is generally favored.

Grade A urges the court to construe the parties' agreement to use AAREA appraisers as an agreement to arbitrate before a specific arbitral forum…. As Grade A correctly notes, numerous courts, including the Second Circuit, have refused to compel arbitration where the arbitral forum upon which the parties agreed is unavailable to arbitrate the dispute. See, e.g., Gutfreund v. Weiner (In re Salomon Inc. Shareholders Derivative Litig.), 68 F.3d 554 (2d Cir. 1995) (refusing to compel arbitration when the parties had agreed to arbitrate disputes only before the New York Stock Exchange, and the New York Stock Exchange refused to arbitrate the particular dispute in question); Provencio v. WMA Securities, Inc., 125 Cal. App. 4th 1028, 1032, 23 Cal. Rptr. 3d 524 (Cal. App. 2d Dist. 2005) ("When the parties to a contract agree to arbitrate any disputes before a particular forum, that provision becomes an integral part of their contract. If that forum is not available to hear the dispute, then a petition to compel arbitration may not be granted"); but see HZI Research Ctr. v. Sun Instruments Japan Co., 1995 U.S. Dist. LEXIS 13707, *8 (S.D.N.Y. Sept. 19, 1995) (holding that the non-existence of the arbitral organization referred to in the arbitration agreement "furnishes no impediment to enforcement of the arbitration agreement," because "[t]he dominant purpose of the parties, clearly expressed in their contract, was to resolve disputes by arbitration. If the parties imperfectly or incorrectly designate the instrumentality through which arbitration should be effected, the court will enforce the contract by making an appropriate designation"). The cases Grade A cites, however, are inapposite.

In the present case, the parties did not agree that a dispute concerning the fair market value of the Property should be resolved in a particular dispute resolution forum (e.g., the NYSE or the American Arbitration Association). Rather, they agreed that such a dispute should be resolved by persons having a certain attribute or qualification (i.e., appraisers with AAREA membership). The distinction is important. When parties designate a specific arbitral forum, such designation has wide-ranging substantive implications that may affect, inter alia, the arbitrator-selection process, the law, procedures, and rules that govern the arbitration, the enforcement of the arbitral award, and the cost of the arbitration. In contrast, when parties agree that the arbitrators must have certain qualifications, this agreement has a much narrower effect — it merely sets a minimum threshold for the quality of the arbitrators. Consequently, rather than seeking guidance from arbitration precedent in which the parties' choice of arbitral forum was unavailable, the court looks instead to cases in which an arbitrator with the parties' required qualifications was unavailable.