The Senate Arbitration Fairness Act adds a Chapter 4 to the Federal Arbitration Act, rather than amending Section 2 of Chapter 1.  This Proposed Chapter 4 consists of two sections:  Section 401, entitled “Definitions”; and Section 402, entitled “Validity and Enforceability.”  Proposed Section 402(a) states:  ”In General – Notwithstanding any other provision of this title, no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment, consumer, franchise, or civil rights dispute.”  Proposed Section 402(b) provides: 

(1)  IN GENERAL – An issue as to whether this chapter applies to an arbitration agreement shall be determined under Federal law.  The applicability of this chapter to an agreement to arbitrate and the validity and enforceability of an agreement to arbitrate to which this chapter applies shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement. 

(2)  COLLECTIVE BARGAINING AGREEMENTS – Nothing in this chapter shall apply to any arbitration provision in a contract between an employer and a labor organization or between labor organizations, except that no such arbitration provision shall have the effect of waiving the right of an employee to seek judicial enforcement of a right arising under a provision of the Constitution of the United States, a State constitution, or a Federal or State statute, or public policy arising therefrom. 

There are at least four aspects of the Senate Arbitration Fairness Act that warrant mention.  First, unlike the drafters of the House Arbitration Fairness Act, the Senate version’s drafters used clear and unambiguous language to make the Act’s scope easy to discern.  As readers of our multi-post series, “What Does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties” (available here) (and our guest-blog article in Disputing (here))  may remember, our principal criticism of the House version is that the drafters did not clearly state their intent, and as a consequence, the House Arbitration Fairness Act’s application to domestic and international commercial and industry arbitration involving sophisticated parties was uncertain. 

Second, the Senate version of the bill abolishes:  (a) the severability doctrine; and (b) the rule allowing arbitrators to decide arbitrability questions when the parties clearly and unmistakably so agree, with the arbitrators’ decision subject to the same standards of review applicable to all other arbitration awards (the “Own Jurisdiction Rule”), but does so only where a party claims that a predispute agreement allegedly requires arbitration of a consumer, employment, franchise, or civil rights dispute or where the question is whether such an agreement is valid and enforceable.   Thus, the Senate version does not abrogate these doctrines in commercial and industry arbitration involving only sophisticated, commercial entities. 

Third, the Senate version of the bill is broader than the House version in that it clearly and unambiguously prohibits predispute arbitration agreements that require arbitration of consumer, employment, franchise and civil rights disputes that fall not only under Proposed Chapter 4, but also under Chapters 2 and 3, which implement the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”), and the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”).  Proposed Section 402(b), entitled Technical and Conforming Amendments, amends FAA Sections 208 and 307 to provide “This chapter applies to the extent that this chapter is not in conflict with chapter 4.”  Readers of our series on the House version of the Arbitration Fairness Act may recall that the House Arbitration Fairness Act would probably not be construed to apply to arbitration agreements falling under Chapters 2 and 3 of the Convention, although the matter is not entirely free from doubt. 

Fourth, the Senate version of the bill is broader than the House version as respects arbitration clauses in collective bargaining agreements.  The House version exempts collective bargaining agreements from its scope, whereas the Senate version exempts collective bargaining agreements with the proviso that “no such arbitration provision shall have the effect of waiving the right of an employee to seek judicial enforcement of a right arising under a provision of the Constitution of the United States, a State constitution, or a Federal or State statute, or public policy arising therefrom.”  This amendment was designed to abrogate the United States Supreme Court’s recent decision in on 14 Penn Plaza LLC v. Pyett, ___ U.S. ___ (2009) (Thomas, J.) (blogged here and here), in which the Court held that an arbitration provision clearly and unmistakably providing for arbitration of an Age Discrimination in Employment Act (“ADEA”) claim was enforceable under federal law. 

We shall keep readers apprised of developments as and when they occur.  .  .  .

On a related matter, I am pleased and honored to note that Victoria has invited me to guest blog for Disputing this Monday, April 27, 2009.  My post will propose some solutions to the problems that the Arbitration Fairness Act of 2009 will likely create in disputes between commercial entities.  Readers may recall that we discussed those problems in considerable detail in our multi-part post on the Arbitration Fairness Act entitled “What Does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties?” (available here).  Our preferred solution would be that Congress not enact the Arbitration Fairness Act in the first place, but the post is written on the hopefully  mistaken assumption that Congress decides to jump onto the anti-arbitration bandwagon. 

Speaking of the anti-arbitration bandwagon, keep your eyes on the blogosphere this coming week, because Wednesday, April 29, 2009, is Arbitration Fairness Day (blogged here and here), which will be celebrated by a press conference on Capitol Hill in support of the Arbitration Fairness Act and other anti-arbitration legislation.  There will no doubt be many complaints by persons who perceive themselves as “victims” of arbitration, and who assume (correctly or incorrectly) that they would have fared better in court.  But we also expect to see level-headed posts calling for restraint, explaining the importance of identifying problems with empirical – not anecdotal – evidence, and advocating narrowly-tailored solutions to the extent that pervasive problems are identified.  Let’s not throw the proverbial baby out with the bathwater.  

Finally, early this coming week we expect to post our critical analysis of the Second Circuit’s recent decision in ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___ (2d Cir. 2009) (blogged here), in which the Court held that an arbitration panel in a reinsurance case was authorized to award attorney fees for a party’s alleged bad faith conduct in the arbitration, even though the parties agreed that each would bear its own attorney fees.  As we shall see, even a court as highly-respected and influential as the Second Circuit can occasionally render decisions that are open to question, and Judge Pooler’s dissent in that case is recommended reading.  We wonder if the decision would withstand review en banc.     

Stay tuned.  .  .  .   

 Part V:  Summing Up

This is the final part of our multi-part post on the Arbitration Fairness Act of 2009 (the “Fairness Act”).  We did not address all aspects of the Fairness Act, but focused our attention on whether the Act may change the status quo in arbitrations involving only sophisticated, commercial entities. 

So what does the Arbitration Fairness Act of 2009 have to say about commercial and industry arbitration involving sophisiticated parties?  If you have been following our last six posts, you know the answer is not clear, and that the only thing that can be said with any degree of certainty is that the Fairness Act will result in litigation between sophisticated parties concerning the continuing viability of two fairly settled principles of arbitration law – severability and what we refer to as the Own Jurisdiction Rule.  That may be good news to some and bad news to others. 

The point of our posts has not been to take a position on how we believe the Fairness Act should be interpreted if enacted.  Rather, our prinicipal concern is that the Act lacks clarity as applied to disputes involving sophisticated, commercial entities.  We have tried to demonstrate that point by walking the reader through the sometimes convoluted interpretative processes necessary to reach one result or the other. 

It may be that the drafters wish to abolish severability and the Own Jurisdiction Rule in all cases falling under Chapter 1 or simply where one party claims that the arbitration agreement falls under Proposed Section 2(b).   But the drafters need to make their intent clear.  If persons who might be affected by the Act know what the drafters have in mind, then they can support or oppose the Fairness Act as they see fit.  Otherwise, persons will decide whether they wish to support, oppose or remain silent based on their own private assessments of the likelihood that they may be involved in litigation, its importance, and how it might turn out.  By intentionally or unintentionally obscuring or misstating their intent, the drafters have done all a great disservice.     

 We have said very little concerning the principal purpose of the Fairness Act, which is to render invalid and unenforceable arbitration agreements requiring the arbitration of consumer, employment, franchise and statutory civil rights disputes.  There are undoubtedly those who believe they have been “victims” of the arbitration system, and that they would have prevailed in court.  And there are undoubtedly instances where arbitrators have rendered awards that were arguably unfair to consumers, but which could not be vacated under the very deferential standards of review applicable to arbitration awards.  By the same token, there are no doubt instances where arbitrators have rendered awards against commercial entities that were arguably unfair and not subject to meaningful review.  And we suspect that the largest category of cases are those in which disputes were resolved fairly and efficiently.    

Is arbitration a perfect system for resolving consumer, employment, franchise and statutory civil-rights disputes?  Of course not.   But no matter what the dispute, there is no such thing as a perfect system for resolving it.    

Does the Fairness Act represents sound congressional policy?   It does not – unless, of course, throwing the baby out with the bath water represents sound parental policy.  

To the extent there are pervasive problems, the answer is not to abolish arbitration of consumer, employment, franchise and statutory civil rights disputes, and assign a whole new caseload to an already overburdened state and federal judiciary.  The answer is to identify with specificity what those problems are, determine whether it is necessary to address them, and, to the extent it is necessary, to do so through narrowly-tailored legislation.   For example, underlying the Fairness Act is the notion that certain arbitration organizations may have an institutional bias toward their corporate customers, who presumably send them repeat business.  Assuming that is true (and we do not suggest it is), perhaps it could be remedied by placing some modest restrictions on the ability of large commercial entities to require that party-appointed arbitrators (or even neutrals) must be affiliated with a single arbitration service provider chosen by the commercial entity.  There are no doubt other narrowly-tailored  measures that might be enacted to help improve consumer, employment, franchise, and statutory civil rights arbitration, assuming there is a legitimate need for such improvement. 

But any legislative reform that might be enacted must take costs into account.  Consumer, employment, franchise and statutory civil rights arbitration has been the norm for quite some time.  While we have not researched empirical data on the numbers of disputes of these types that are resolved in the United States each year by arbitration, we believe it safe to assume that the numbers are very large.  If the Fairness Act is passed, all or most of those disputes will end up in state or federal courts.  Deciding all of those new cases will presumably  require additional resources, the cost of which must be borne by the taxpayers.   

In addition, the informality of arbitration can (but does not always) make it a cost-effective alternative to court proceedings.  Thus, other costs that must be considered are increased legal fees and litigation expenses that may be incurred by commercial entities and consumers if the Act is passed. 

If Congress is indeed serious about the Fairness Act, then it should commission the General Accounting Office to conduct an appropriate analysis to determine what the cost of the Fairness Act might be.  Part of that study ought to focus on whether, and if so, to what extent, there is any basis for the Fairness Act’s litany of “findings”.   That way, members of Congress can make a reasoned assessment of the costs and benefits and proceed (or not proceed) accordingly. 

So there you have it.  We are indeed skeptical about the Fairness Act in general, not just about its consequences in cases involving only sophisticated commercial entities.  We are particularly skeptical because we believe that the principal beneficiaries of the Act will be lawyers, not consumers – and not just so-called  “trial lawyers,”  but all lawyers handling cases that, as a result of the Fairness Act, will be heard in a judicial rather than an arbitral forum, will be the subject of Federal Arbitration Act satellite litigation, or both.    Perhaps the Arbitration Fairness Act might more accurately be described as the “Lawyers’ Full Employment Act”.  .  .  .     

We shall keep our readers apprised of developments as and when they occur.

Introduction

In Parts I and II we discussed how the Arbitration Fairness Act of 2009 (the “Fairness Act”)  will likely lead to litigation concerning whether, and if so, to what extent, Proposed Section 2(c) abrogates: (a) the severability doctrine; and (b) the rule that arbitrators may determine their own jurisdiction if the parties clearly and unmistakably agree, with that determination subject only to deferential judicial review (the “Own Jurisdiction Rule”).    In Parts IIIA-C  we discussed two constructions of Proposed Section 2(c):  one that would abrogate severability and the Own Jurisdiction Rule in all cases falling under Chapter 1 of the FAA  (the “Broad Construction”); and one that would limit the scope of Proposed Section 2(c) to Chapter 1 cases where one of the parties contends that the arbitration agreement requires arbitration of a consumer, employment, franchise or statutory civil rights dispute (the “Narrow Construction”). 

In this Part IV we consider whether Proposed Section 2(c) of the Fairness Act applies to agreements and awards falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or the “Convention”), which are governed by Chapter 2 of the FAA.  While the matter is not entirely free from doubt, Proposed Section 2(c) of the Fairness Act will probably be construed not to apply to awards and agreements falling under the New York Convention.  Thus, the doctrine of severability and the Own Jurisdiction Rule will probably continue to apply in cases falling under FAA Chapter 2, even if courts adopt the Broad Construction of the Fairness Act in cases governed by Chapter 1.      

What Agreements and Awards Fall Under the New York Convention?

FAA Section 202 broadly defines an agreement or award falling under the Convention as “[a]n arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title.  .  .  .”  FAA Section 202 exempts from the Convention “[a]n agreement or award arising out of such a relationship which is entirely between citizens of the United States.  .  .  unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.” 

Courts have interpreted FAA Section 202 to mean that the Convention applies not only to arbitration awards rendered in signatory states other than the United States, but also to arbitration awards and agreements “made within the legal framework of another country, e.g., pronounced in accordance with foreign law or involving parties domiciled or having their principal place of business outside the enforcing jurisdiction.”  See Bergesen v. Joseph Muller Corp., 710 F.2d 928, 932 (2d Cir. 1983).  Thus, the Convention also governs arbitration awards made in the United States, or agreements which provide for arbitration within the United States, provided there is some reasonable  nexus between the agreement or award and a jurisdiction other than the United States. 

Does Proposed Section 2(c) of the Fairness Act Apply to Arbitration Agreements That Fall Under the Convention but do not Require Arbitration of Consumer, Employment, Franchise or Statutory Civil Rights Disputes?

Proposed Section 2(c) provides that: 

Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.  .  .  . 

Whether or not Proposed Section 2(c) applies to actions and proceedings falling under the New York Convention depends on whether it conflicts with Chapter 2 or the Convention.  FAA Section 201 says that the Convention “shall be enforced in United States courts in accordance with this chapter [2 of the FAA].”  Chapter 2 contains a “residual application” provision, which says that Chapter 1 of the FAA applies to actions and proceedings involving awards and agreements falling under the Convention “to the extent that chapter is not in conflict with this chapter or the Convention as ratified by the United States.”  9 U.S.C. § 208. 

There is nothing in the Convention or Chapter 2 that expressly conflicts with Proposed Section 2(c), but that does not end the inquiry.  Severability and the Own Jurisdiction Rule were developed in cases arising under Chapter 1 of the FAA, but have been found fully applicable to actions and proceedings falling under the Convention.  See, e.g.,  Sarhank Group v. Oracle Corp., 404 F.3d 657, 661-62 (2d Cir. 2005) (Own Jurisdiction Rule); China Minmetals Materials Import and Export Co., Ltd. v. Chi Mei Corp., 334 F.3d 274, 289-90 (3^rd Cir. 2003) (Own Jurisdiction Rule); Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir. 1998) (severability); Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 854 (2d Cir. 1987) (severability). 

Just as the severability doctrine and Own Jurisdiction Rule are part of the judicial gloss placed on FAA Chapter 1, so it is part of the judicial gloss placed on FAA Chapter 2.  But Proposed Section 2(c) does not (and could not) purport to remove that judicial gloss from Chapter 2 cases.  The Fairness Act would have to amend Chapter 2 to accomplish that result.  So a Court considering whether Proposed Section 2(c) conflicts with Chapter 2 and the Convention would probably conclude that it does.  Under the Broad Construction Proposed Section 2(c) abrogates severability and the Own Jurisdiction Rule, but they arguably remain applicable in Chapter 2 cases.  

There is at least one other reason why a court may find Proposed Section 2(c) in conflict with Chapter 2 and the Convention.  The enforceability commands of Chapter 2 and the Convention are at least as broad as FAA Section 2, the provision from which severability and the Own Jurisdiction Rule are derived.  FAA Section 201 says that the Convention “shall be enforced in United States courts.  .  .  .”  Convention Article II(1) provides that: 

Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

 Article II(3) provides that:

The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

And Article III provides that:

Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles.  .  .  .  

Just as the United States Supreme Court has declared that  severability and the Own Jurisdiction Rule implement FAA Section 2′s broad enforceability command, so do they arguably implement FAA Chapter 2′s and the Convention’s broad enforceability commands.  Depriving that implementation mechanism from cases falling under the Convention would be inconsistent with Chapter 2 and Articles II and III of the Convention. 

In any event, the Fairness Act does not amend  FAA Chapter 2, which strongly suggests that the drafters did not intend Proposed Section 2(c) to change the status quo as respects the allocation of authority between arbitrators and courts in cases falling under the New York Convention.  Had the drafters intended Proposed Section 2(c) to apply to agreements and awards falling under the Convention, then they could have amended Chapter 2 to abrogate severability and the Own Jurisdiction Rule.   

Is Consideration of Chapter 2 and the New York Convention Relevant to the Construction of the Fairness Act in Cases Not Falling Under the Convention?

Consideration of FAA Chapter 2 and the New York Convention provides some additional support for the Narrow Construction of the Fairness Act discussed in Parts IIIB and IIIC of this post.  Specifically, Premise 5 requires that Proposed Section 2(a) be construed as not being subject to Proposed Section 2(c)’s directive that courts decide questions that arbitrators would ordinarily decide under the doctrines of severability and the Own Jurisdiction Rule.   One of the problems with Premise 5 is that it requires Proposed Section 2(a)’s broad proviso “Except as otherwise provided in this title” to be construed more narrowly than Proposed Section 2(c)’s narrower prefatory language “Except as otherwise provided in this chapter.”    

FAA Chapter 2 and the Convention may help overcome this hurdle.  Proposed Section 2(a), construed in conjunction with Proposed Section 2(b), provides that arbitration agreements falling within its scope — other than ones requiring arbitration of consumer, employment, franchise, and statutory civil rights disputes — are valid and enforceable.  Proposed Section 2(a)’s broad proviso, however, renders it subject to provisions in the FAA (Article 9 U.S.C.), which “otherwise provide”.   FAA Section 201 and Chapters II and III of the Convention arguably provide something “otherwise” than Proposed Section 2(a) in that they render valid and enforceable all arbitration agreements falling within their scope, including agreements that require arbitration of consumer, employment, franchise and statutory civil rights disputes.  Interpreting Proposed Section 2(a)’s proviso as encompassing Chapter 201 and Articles II and III of the Convention gives effect to that broad proviso, and thus lends additional support to the Narrow Construction.     

In part V we shall sum up and consider whether the Fairness Act represents sound legislative policy or whether it might more accurately be described as the ”The Full Employment for Lawyers Act of 2009.”

Introduction

In Part IIIB  (here) we discussed in general terms the “Narrow Construction” of the Arbitration Fairness Act of 2009 (the “Fairness Act”), which would limit the scope of Proposed Section 2(c) to situations where the party resisting arbitration claims that the arbitration agreement requires predispute arbitration of consumer, franchise, employment or statutory civil rights disputes.   We also set forth the five premises on which the Narrow Construction is based.  This Part IIIC addresses the validity of those premises.  [Because this post  frequently refers to Proposed Section 2 and its subsections, we have reproduced at the end the pertinent parts of Proposed Section 2.]

 The Narrow Construction is fairly complex.  A court choosing it would have to determine each of its five premises to be valid.  In addition, the validity of Premise 3 is interlinked to that of Premise 5:  Premise 3 is easier to accept when viewed without regard to Premise 5 and Premise 5 is harder to accept when viewed in isolation from Premise 3.  If a court believes that Premise 3 is reasonable, but has reservations about its validity, when it considers Premise 3 in conjunction with Premise 5, it may conclude that both are invalid.  But if it is confident that Premise 3 is valid, that confidence might lead it to conclude that Premise 5 is valid.  These are important considerations that a party advocating one construction or the other should take into account in structuring its argument.  

Premise 1:  The Doctrine of Severability is Derived from the text of FAA Section 2, Which is Incorporated in Pertinent Part into Proposed Section 2(a).

Premise 1 is fairly straightforward.  FAA Section 2 is the most important provision of the FAA in that it makes arbitration agreements within its scope “valid, irrevocable and enforceable.”  The United States Supreme Court has declared that by enacting FAA Section 2, “Congress.  .  . mandated the enforcement of arbitration agreements” and intended to “place ‘[them].  .  . upon the same footing as other contracts.  .  .  .’”  See Southland Corp. v. Keating, 465 U.S. 1, 10 & 15-16 (1984) (quoting legislative history).  If the Fairness Act is passed, FAA Section 2 will be incorporated into Proposed Section 2(a) with some modifications, which are set forth in bold:   

A written provision in.  .  .  a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable to the same extent as contracts generally, except as otherwise provided in this title.”  (emphasis added)  

The United States Supreme Court in Buckeye Check Cashing v. Cardengna, 546 U.S. 440, 449 (2006), explained that severability “ultimately arises out of [FAA] Section 2’s substantive command that arbitration agreements be treated like all other contracts.”   546 U.S. at 447 (emphasis added).   According to the Court, “[t]he rule of severability establishes how this equal-footing guarantee for ‘a written [arbitration] provision’ is to be implemented.” Id.   [Historical note:  The United States Supreme Court originally did not base the doctrine of severability on FAA Section 2, but on FAA Section 4, which authorizes federal courts to compel arbitration.  See Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967).]  

Buckeye provides strong support for the argument that severability is derived from FAA Section 2, which, in turn, supports the argument that severability is derived from the text of Proposed Section 2(a).  By the same token, Buckeye also evidences the Court’s tacit recognition that severability is not “provided” by that text, at least not expressly so.  The Court merely said that severability “implemented” that text. 

Premise 2.  For different reasons, the Own Jurisdiction Rule is also derived from the text of FAA Section 2, which is incorporated in pertinent part into Proposed Section 2(a).

Premise 2 is arguably not as strong as Premise 1, but it makes logical sense.  The United States Supreme Court has not expressly attributed to FAA Section 2 the rule that arbitrators can determine questions of arbitrability  when the parties “clearly and unmistakably” so agree (the “Own Jurisdiction Rule”).  The rule originated in cases governed by federal labor law, not the FAA.  See AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986).  In First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995), the Court applied it to cases governed by the FAA.  But the Court’s reasoning suggests that the Own Jurisdiction Rule is nevertheless rooted in FAA Section 2’s command that an arbitration agreement should be enforced like any other contract:  

Just as arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question “who has the primary power to decide arbitrability” turns upon what the parties agreed about that matter.  Did the parties agree to submit the arbitrability question itself to arbitration?  If so, then the court’s standard of review for reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate.

.  .  .  .

This Court, however, has .  .  . added an important qualification, applicable when courts decide whether a party has agreed that arbitrators should decide arbitrability:  Courts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’  evidence that they did so. 

514 U.S. at 943-44 (emphasis in original; citations omitted).  
 
While the Court in First Options did not expressly rely on or even cite FAA Section 2, the notion that arbitrators can determine arbitrability if the parties agree is one of the logical consequences of FAA Section 2’s enforceability command.  And just as severability is one of the ways that command is “implemented” when a party challenges the validity and enforceability of the contract containing the arbitration agreement,  so can the Court’s “clear and unmistakable” requirement be considered the way FAA Section 2’s command is implemented when the question is whether the parties agreed to arbitrate arbitrability. 

Premise 3.  Proposed Section 2(c)’s “except as otherwise provided in this chapter” prefatory language was intended to refer not only to Proposed Section 2(a)’s text, but also to judicial doctrines derived from that text.

Premise 3 is more difficult to sustain than Premises 1 and 2.  The validity of Premise 3 is linked to that of Premise 5 and vice-versa.  The more confident a court is about Premise 3′s validity, the more likely it is that it will find Premise 5 to be valid.  The converse is also true. 

Proposed Section 2(c) says that the “validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator” “except as otherwise provided in” FAA Chapter 1.  It prescribes the manner in which Proposed Section 2(a) and Proposed Section 2(b) are to be implemented under the Fairness Act. 

There are three different types of  “validity or enforceability” questions that may arise under Proposed Section 2.  First, there will be cases where neither party contends that Proposed Section 2(b) applies, in which case the agreement will be valid and enforceable “to the same extent as contracts generally.”  Second, there will be cases where one party contends the agreement to arbitrate falls under Proposed Section 2(b) and is unenforceable because it requires arbitration of a consumer, employment, franchise or statutory civil rights dispute.  Third, there will be cases where one party contends that neither 2(a) nor 2(b) applies.

If Proposed Section 2(c)’s prefatory language ”except as otherwise provided” is interpreted to mean “except as otherwise” expressly ”provided” in Chapter 1,  then judicial doctrines that help implement provisions of Chapter 1 — but are not expressly provided in Chapter 1 —  are irrevelvant.  Proposed Section 2(a) does not expressly provide for the doctrine of severability or the Own Jurisdiction Rule and, under this interpretation, those doctrines could not countermand Proposed Section 2(c), even when the arbitration agreement at issue concededly falls under Proposed Section 2(a).  Proposed Section 2(a) only says arbitration agreements within its scope are enforceable, not that they must be enforced in a manner contrary to Proposed Section 2(c). 

For Premise 3 to be valid, Proposed Section 2(c) must be interpreted to mean “except as otherwise provided by” the text of Proposed Section 2(a), including the judicial doctrines that implement that text.  While this interpretation may read too much into Proposed Section 2(c)’s prefatory language, it has some support in both the text of the Fairness Act and judicial decisions interpreting FAA Section 2.     

When the dispute is whether an arbitration agreement falling under FAA Section 2 is enforceable to the same extent as other contracts, severability and the Own  Jurisdiction Rule have traditionally provided the manner in which FAA Section 2′s enforceability command  is to be implemented when certain types of enforceability and other arbitrability questions arise.  In all other situations, the default rule has been that the court decides the enforceability or arbitrability question.  

As respects disputes over arbitration agreements that fall under Proposed Section 2(a), but are not alleged to fall under Proposed Section 2(b), Proposed Section 2(a), like its predecessor, FAA Section 2,  arguably “provides” not only that the agreement is enforceable, but how that enforceability command will be implemented in certain situations.  So, if the parties clearly and unambiguously agreed that arbitrability would be decided by the arbitrators, then Proposed Section 2(a) arguably ”provides” that the arbitrator should decide what other matters fall within the scope of the arbitration agreement.  And if the question is whether an attack on the contract as a whole renders the entire agreement, including the arbitration clause, unenforceable or subject to rescission, then Proposed Section 2(a) arguably “provides” that the arbitration agreement itself is to be enforced because it is severable from the contract in which it is contained.  

Disputes as to whether Proposed Section 2(a)  is applicable in the first place stand on a different footing.  In that class of cases, what Proposed Section 2(a) “provides” about its implementation to a dispute within its scope is irrevelant until a decision maker determines the threshold question whether the agreement falls under Proposed Section 2(a) in the first place.  In those cases, Section 2(c) provides the manner in which the FAA’s provisions are to be implemented, so this question would be decided by the court. 

Assuming a court were to find this interpretation reasonable, it could conclude that the statute is ambiguous.  That would require the court to decide whether it, or the alternative construction, best suits what Congress had in mind.    

Premise 4.  The “except as otherwise provided language in this title” language in Proposed Section 2(a) was intended to exempt the disputes listed in Proposed Section 2(b) from the command of Proposed Section 2(a).

Premise 4 is fairly straightforward.  Proposed Section 2(a), like Section 2(c), contains the proviso “except as otherwise provided in this title.”  That proviso is broader than Proposed Section 2(c)’ s prefatory language in that it extends to anything “otherwise provided” in this “title” — i.e., Chapters 1, 2 and 3 of the FAA —  not just anything “otherwise provided” in Chapter 1.   

There is little question that Section 2(a)’s proviso was, at the very least, intended to mean “except as otherwise provided” in Section 2(b). Section 2(a) defines the universe of arbitration agreements subject to the FAA that are valid and enforceable.  Section 2(b) was intended to carve out a subset of those agreements and declare them invalid and unenforceable.  If Section 2(a) was not subject to Section 2(b), then that subset of agreements would be enforceable under Section 2(a) but unenforceable under Section 2(b), which makes no sense.  

Premise 5.  Proposed Section 2(a)’s “except as otherwise provided in this title” language was not intended to mean that doctrines judicially derived from the text of Proposed Section 2(a) are subject to Proposed Section 2(c).

The validity of Premise 5 is less clear and is tied to the validity of Premise 3.  As discussed, both Proposed Section 2(c) and Proposed Section 2(a) contain “except as otherwise provided” language.  Interpreted literally, Proposed Section 2(a) and Proposed Section 2(c) cancel each other out:  Proposed Section 2(c) may be subject to Proposed Section 2(a), but Proposed Section 2(a) is likewise subject to Proposed Section 2(c).  Even if one accepts the validity of Premise 3 — that Proposed Section 2(c) is limited in scope to cases where the question is whether Proposed Section 2(a) is applicable in the first place – acceptance of the Narrow Construction requires that this conflict be resolved.     

To accept the validity of Premise 5, one must interpret (a) Proposed Section 2(a) to be subject to Proposed Section 2(b), but not Proposed Section 2(c); and (b) Proposed Section 2(c) to be subject to Proposed Section 2(a).  While far from perfect, that construction gives meaning to the “except as otherwise provided” language in Proposed Sections 2(a) and 2(c).  

This construction may be questionable because it would result in Proposed Section 2(a)’s proviso being interpreted more narrowly than Proposed Section 2(c)’s prefatory language, even though Proposed Section 2(a)’s proviso is broader than Proposed Section 2(c)’s prefatory language.  But, as we shall see in Part IV, the breadth of Proposed Section 2(a)’s proviso can be given effect by interpreting it to exclude from Proposed Section 2(b) arbitration agreements that fall under the Convention on the Recognition of Foreign Arbitral Awards, which are governed by Chapter 2 of the FAA. 

A court with doubts about this construction, or with doubts about the validity of Premise 3, might conclude that the drafters intended that neither provision should intrude upon the other.  In that case, a Court could interpret (a) Proposed Section 2(c) as abrogating severability and the Own Jurisdiction Rule in all cases; and (b) Proposed Section 2(a) as requiring enforcement of arbitration agreements within its scope that do not fall under Proposed Section 2(b), but not as requiring severability or the Own Jurisdiction Rule to implement that enforcement.  That interpretation would support the Broad Construction and is consistent with interpreting Proposed Section 2(c)’s prefatory language as meaning “except as otherwise [expressly] provided by this chapter.”  (See Premise 3, supra, & Part IIIA of this post, here.) 

Finally, if a court were to deem both constructions reasonable, it would be faced with a statutory ambiguity.  Once again, that would require the Court to decide which construction — Broad or Narrow — best serves the purpose of the statute.  While a strong argument could be made for the Narrow Construction, the Broad Construction is not inconsistent with the Act’s purpose, either.  Furthermore, the Court might find it significant that the drafters could easily have — but have not — limited the scope of Proposed Section 2(c) to disputes over whether the invalidity or unenforceability argument turns on whether Proposed Section 2(a) or Proposed Section 2(b) applies to the arbitration agreement.  That fact tends to support the Broad Construction. 

In Part IV we examine how the Fairness Act might be interpreted in cases governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  In Part V we sum up and move on.   

For reference purposes Proposed Sections 2(a)-(c) are set forth below with the key, newly added text in bold: 

Sec. 2. Validity and enforceability.

(a)  A written provision in .  .  .  a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable to the same extent as contracts generally, except as otherwise provided in this title. 

(b) No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of–
(1) an employment, consumer, or franchise dispute; or
(2) a dispute arising under any statute intended to protect civil rights.

(c) An issue as to whether this chapter applies to an arbitration agreement shall be determined by Federal law. Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement. 

.  .  .  .

The Fairness Act would not provide a direct basis for an attack on Pyett because it exempts collective bargaining agreements from its scope, and Pyett concerned a collective bargaining agreement.  But Professor Cole’s point is that the Fairness Act may lead to an ”effort to overturn Pyett”, not that the Fairness Act would, in and of itself, abrogate Pyett.   Her comments are right on the mark. 

As discussed in our April 4 post, the rationale of Pyett was largely based on  Gilmer v. Interstate/Johnson Lane Corp.,  500 U.S. 20 (1991), in which the Court held that an individual employee could be compelled to arbitrate ADEA claims under a private agreement with a securities exchange governed by the FAA.  Gilmer found that “nothing in the text of the ADEA or its legislative history explicitly precludes arbitration.  .  .  .” and that arbitration would not undermine the ADEA’s “remedial and deterrent function.”   500 U.S. at 28.  The Pyett Court concluded that “[t]he Gilmer Court’s interpretation of the ADEA fully applies in the collective-bargaining context.”  Slip op. at 9. 

The Fairness Act would abrogate Gilmer because (a) the arbitration clause at issue required Gilmer to arbitrate an employment dispute; and (b) in any event, a claim under the ADEA would likely be considered “a dispute arising under [a].  .  . statute intended to protect civil rights” for the purpose of the Fairness Act.  The abrogation of Gilmer would undermine the rationale of Pyett and would provide a basis for an effort to overturn Pyett.       

Another interesting point raised by Professor Cole concerns the requirement that the Union and the employer “clearly and unmistakably” agree to arbitrate statutory claims:  “While unions and employers may clearly and unmistakably require union members to arbitrate ADEA claims, it is not clear what the standard governing the interpretation of  ’clear and unmistakable’  is.”  That is certainly true.  We suspect that courts may be guided in part by cases involving another “clear and unmistakable” rule that applies in both labor and commercial arbitration— namely, that arbitrator determinations of their own jurisdiction are subject to de novo review by courts unless the parties “clearly and unmistakably” agree that the arbitrators are to decide arbitrability questions.  See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995) (FAA);  AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986) (labor).   One potential controversy may arise in labor arbitrations where:  (a) the parties’ arbitration agreement is ambiguous concerning the arbitrability of statutory claims; and (b) the parties submit a statutory claim to the arbitrator for determination without any party reserving its rights on arbitrability grounds.  That scenario seems oddly reminiscent of what happened in Gardner-Denver.  .  .  . 

Introduction

In Part IIIA we discussed what we call the “Broad Construction” of the Arbitration Fairness Act of 2009, and showed how the Act could be construed to abrogate in all commercial disputes:  (a) the doctrine of severability; and (b) deferential review under the Federal Arbitration Act (“FAA”) of arbitrator determinations of arbitrability in cases where the parties clearly and unmistakably submit arbitrability questions to the arbitrators (the “Own Jurisdiction Rule”).  In this Part IIIB and in Part IIIC we discuss the “Narrow Construction”, which would limit the scope of Proposed Section 2(c) to situations where the party resisting arbitration claims that the arbitration clause requires predispute arbitration of consumer, franchise, employment or statutory civil rights disputes.  

The Narrow Construction

The Narrow Construction is more technical and complex than the Broad Construction.  Among other things, it requires the court to read Proposed Section 2(c)’s prefatory language “except as otherwise provided in this title” as referring not only to the plain text of Proposed Section 2(a) – which incorporates in pertinent part text that is currently contained in FAA Section 2 – but also the interpretive gloss the United States Supreme Court has placed on FAA Section 2.  As we shall see in Part IIIC, the severability doctrine is at least loosely based on the text in Proposed Section 2(a) and, perhaps with less force, the same can be said of the Own Jurisdiction Rule. 

The Narrow Construction rests on five premises, which are set forth below.  (For reference purposes the pertinent text of Proposed Section 2, with the key, newly added provisions in bold is quoted at the end of this post):     
 
• Premise 1.  The doctrine of severability is derived from the text of FAA Section 2, which is incorporated in pertinent part into Proposed Section 2(a).
     
• Premise 2.  For different reasons, the Own Jurisdiction Rule is also derived from the text of FAA Section 2, which is incorporated in pertinent part into Proposed Section 2(a).     

• Premise 3.  Proposed Section 2(c)’s “except as otherwise provided in this chapter” prefatory language was intended to refer not only to Proposed Section 2(a)’s text, but also to judicial doctrines derived from that text.  

• Premise 4.  The “except as otherwise provided language in this title” language in Proposed Section 2(a) was intended to exempt the disputes listed in Proposed Section 2(b) from the command of Proposed Section 2(a). 

• Premise 5.  Proposed Section 2(a)’s “except as otherwise provided in this title” language was not intended to mean that doctrines judicially derived from the text of Proposed Section 2(a) are subject to Proposed Section 2(c). 

We shall explore the validity of these premises in Part III.C.  Reasonable minds can easily differ on that score.
 
Perhaps the best argument for the Narrow Construction lies not in its means, but in its end.  The main purpose of the Fairness Act is to exempt from enforceability predispute arbitration agreements to the extent they require arbitration of consumer, employment, franchise or statutory civil rights disputes.  Jettisoning the severability doctrine and Own Jurisdiction Rule for all purposes  is not necessary to achieve that goal.  Conversely, the severability doctrine and Own Jurisdiction Rule are inimical to the statute’s main purpose to the extent that they are applied to disputes over whether an  arbitration agreement falls under Proposed Section 2(b).

Suppose parties A and B enter into a contract containing an arbitration agreement that clearly and unmistakably requires the parties to submit arbitrability questions to the arbitrators.  Party A subsequently claims that the arbitration agreement is unenforceable because it allegedly requires arbitration of  a “consumer dispute”, but B disagrees.  Under the Own Jurisdiction Rule, the arbitrators would decide whether the dispute falls under Proposed Section 2(b), and the arbitrators’ decision would be subject only to the deferential review afforded by Sections 10 and 11 of the FAA.  The drafters of the Fairness Act presumably wanted courts, not arbitrators, to decide whether or not a dispute falls under Proposed Section 2(b) – in which case it would not be arbitrable – or Proposed Section 2(a) – in which case it would. 

Just as the Own Jurisdiction Rule may frustrate the main purpose  of the Fairness Act, so too may the severability doctrine.  Whether or not the dispute is a consumer dispute may depend on what the contract says.  Under the severability doctrine, that would be a question for the arbitrators.

But ends do not justify means, and the means that the Fairness Act’s drafters have chosen to accomplish these apparently desired ends are inadequate.  First, as we shall see in Part IIIC, the premises of the Narrow Construction are open to question, and even if those premises are supportable, the road from the premises to the conclusion is a torturous one.  In that respect, the Broad Construction arguably fares better.
 
Second, if the drafters intended to limit the scope of Proposed Section 2(c) to cases where one of the parties claims that the arbitration agreement falls under Proposed Section 2(b), then drafters could have easily drafted the Act to say that.  Legislative ambiguity where clarity could easily be accomplished suggests that the drafters had something other than the Narrow Construction in mind, but, for whatever reason, were reluctant to say so.     

Third, the ambiguity may be costly from a public policy perspective.   Whether or not the ambiguity is clarified, by removing a large number of disputes from arbitration and placing them in the court system, the Act will greatly increase the burden on an already overburdened judiciary.  But the litigation between sophisticated, commercial entities that may result from the ambiguity will further burden the courts. 

In any event, if the drafters intended the Narrow Construction to prevail, but the courts adopt the Broad Construction, then the burden on the courts will be increased even more than the drafters intended.  If the drafters intended the Broad Construction to prevail, but the Narrow Construction is adopted, then the ambiguity will likewise frustrate the intent of the drafters. 

Stay tuned.  .  .  . 

[Note:  For reference purposes Proposed Sections 2(a)-(c) are set forth below with the key, newly added text in bold]: 

Sec. 2. Validity and enforceability.

(a)  A written provision in .  .  .  a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable to the same extent as contracts generally, except as otherwise provided in this title. 

(b) No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of–
(1) an employment, consumer, or franchise dispute; or
(2) a dispute arising under any statute intended to protect civil rights.

(c) An issue as to whether this chapter applies to an arbitration agreement shall be determined by Federal law. Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement. 

.  .  .  .

Introduction

In Part I we provided general background on the Arbitration Fairness Act of 2009 (the “Fairness Act”) and said it was likely to generate litigation over the allocation of power between courts and arbitrators in commercial arbitration proceedings involving sophisticated, commercial entities.  In Part II we briefly discussed why litigation will likely occur if the Act becomes law. 

In this Part IIIA we discuss what we call the “Broad Construction” of the Fairness Act, under which it is construed to abrogate in all commercial disputes:  (a) the doctrine of severability; and (b) deferential review under Federal Arbitration Act (“FAA”)  Sections 10 and 11 of arbitrator determinations of arbitrability in cases where the parties unambiguously submit arbitrability questions to the arbitrators.  This construction would limit fairly significantly the power of arbitrators in commercial disputes involving sophisticated parties. 
    
In Section IIIB we shall discuss the “Narrow Construction”, which would limit the scope of Section 2(c) to situations where the party resisting arbitration claims that the arbitration clause requires predispute arbitration of consumer, franchise, employment or civil rights disputes.   This construction would not alter the allocation of power between courts and arbitrators in commercial disputes involving commercial entities. 

[Note:  We previously said we would cover both constructions in a single post.  We have concluded, however, that it would be easier on our readers if we addressed each separately. ] 

The Broad  Construction

 The Broad Construction relies principally on the plain language of Section 2(c) and other provisions of the Federal Arbitration Act.   As discussed, Proposed Section 2(c) would read: 

(c) An issue as to whether this chapter applies to an arbitration agreement shall be determined by Federal law.  Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.  (emphasis added) 

To appreciate how Section 2(c) can plausibly be read as allocating exclusively to the courts the power to make arbitrability determinations and abrogating the doctrine of severability, it is helpful to break down the second sentence of Proposed Section 2(c) into three subparts.  

The first subpart is the prefatory clause, which says “Except as otherwise provided in this chapter.  .  .  .”  “This chapter” is a reference to Chapter 1 of the FAA and encompasses 9 U.S.C. §§ 1 – 16.   The prefatory clause suggests that the rule that follows may be subject to an exception.  It also says that any exception must be “provided” by the text of Chapter 1.  

The second subpart is Section 2(c)’s command that the “court, rather than the arbitrator” has the exclusive authority to determine “the validity or enforceability of an agreement to arbitrate.  .  .  .”   It means that, unless Chapter 1 “otherwise provides”, arbitrability questions are exclusively for the court to decide.    
 
The third subpart provides that courts, not arbitrators, decide arbitrability questions “irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically, or in conjunction with other terms of the contract.”   It means that, unless Chapter 1 “otherwise provides”, the severability doctrine is no longer good law.   
   
The question whether the Broad Construction is plausible boils down to whether there is anything in Chapter 1 of the FAA that unambiguously says that in commercial disputes involving only commercial entities, arbitrators may decide contract validity defenses and can decide arbitrability questions if the parties unambiguously delegate that power to them.  The short answer to the question is “no” — nothing in the Chapter 1 unambiguously says that. 

One might argue that the prefatory language “Except as otherwise provided in this chapter” necessarily implies that the drafters believed that something in Chapter 1 does say that, and to conclude otherwise would render the prefatory language meaningless.  So, the argument goes, the prefatory language must be interpreted to mean that judicially created doctrines like severability and the arbitrators’ power to determine their own jurisdiction — which are, at best, loosely based on the language of Chapter 1 – are “provided” in Chapter 1.  As we shall see in Part III.B, the Narrow Construction is partly based on this argument.    
 
We believe, however, that the argument may read too much into the prefatory language.  It may well be that the drafters do not want the courts to find exceptions to Proposed Section 2(c) based solely on a judicial gloss placed on Chapter 1, and accordingly made clear that any exception to Proposed Section 2(c) must be expressly provided in Chapter 1.  Even if the argument has some merit, it may only demonstrate that the Fairness Act is ambiguous, which means that a court will have to determine which construction – Broad or Narrow — is most closely in line with the intent of the drafters.  While it may be tempting to conclude that the Narrow Construction best fits that bill, we do not believe that conclusion is necessarily preordained. 

More to follow….

In Part I of this multi-part post we provided some general background on the Fairness Act and said it was likely to generate litigation over the allocation of power between courts and arbitrators in commercial arbitration proceedings involving sophisticated, commercial entities.  In this Part II we briefly discuss why litigation will likely occur if the Fairness Act becomes law. 

The question whether an arbitrator or a court gets to decide a particular issue may raise some high stakes.  The answer can be outcome determinative, or at least may increase the chances that one or the other party will prevail on the issue’s merits. 

Contract invalidity claims and defenses and arbitrability issues are matters on which the parties’ decision-maker preferences are likely to differ.  For any number of reasons, parties seeking to rescind or invalidate their contracts based on fraudulent inducement or other grounds may conclude that their chances of success are increased if a court decides the issue.  A party that unambiguously submitted arbitrability questions to the arbitrators, but later challenges the arbitrability of a claim or issue, may likewise prefer that a court rule on arbitrability, especially if the party is principally relying on technical legal arguments.  

Today these forum preferences are largely moot because under established precedent, both matters are for the arbitrators.  But section 2(c) of the Fairness Act would provide at least a plausible basis for a party to argue that this precedent is no longer good law, and that a court must decide all contract validity and arbitrability questions, whether or not they arise out of commercial contracts involving commercial entities.

The result, of course, will be litigation, and we believe that a good deal of it is likely to arise out of reinsurance disputes.  First, contract rescission claims probably arise more frequently in reinsurance than in other commercial contracts.  Claims for rescission of reinsurance contracts are usually easier to establish than claims for rescission of ordinary contracts.   What sets reinsurance contracts apart is the duty of utmost good faith (uberrimae fidei):   To establish a prima facie case for rescission, a reinsurer need only show that pre-contract the cedent failed to disclose material facts concerning the original risk of loss.  Even an innocent nondisclosure will suffice.  See, e.g., Union Indemnity Ins. Co. v. American Centennial Ins. Co., 89 N.Y.2d 94, 106-07 (1996) (copy here).  To obtain rescission of an ordinary contract based on pre-contract events, generally one must establish fraudulent misrepresentation, fraudulent concealment or mutual mistake. 

Second, certain reinsurance arbitrators may be somewhat predisposed against awarding rescission.  We (and, we suspect, others) believe that  reinsurance arbitrators tend to be more reluctant than courts to award rescission, particularly where they consider it unfair, unwise or otherwise inappropriate based on their understanding of the customs, practices and norms of the industry.  Rescission is the exception, not the rule, in reinsurance arbitration practice.  Institutional predispositions of arbitrators (real or perceived) tend to make the court seem the more attractive forum for the party seeking rescission.   

Third, reinsurance arbitrators may have even greater leeway than other commercial arbitrators to depart from the strict rules of law, and this leeway may increase the odds that they will deny rescission (or grant alternative relief) when faced with facts that would likely lead a court to grant rescission.  Many reinsurance contracts feature “honorable engagement” clauses that provide that arbitrators:  (a) are not required to abide by the strict rules of law; (b) may base their decisions on the customs and practices of the industry; and (c) should interpret the contract as an honorable engagement, rather than a strict legal obligation.   If a party has a strong rescission claim on the law, commonsense and logic suggests that it is risky business to submit that claim to arbitrators who have been relieved expressly of any obligation to follow strict rules of law. 
   
One final note.  The spate of litigation that may follow the Fairness Act could occur shortly after its effective date.  The Fairness Act would “take effect on the date of [its] enactment” and would “apply with respect to any dispute or claim that arises on or after that date.”  Thus, in the reinsurance context the Fairness Act might apply to an arbitration agreement in a treaty entered into decades ago, so long as the claim arose subsequent to the Act’s effective date. 

In Part III of this post we shall explore two alternative interpretations of the Fairness Act as applied to domestic arbitration proceedings between sophisticated parties.  Part IV will tackle how courts might interpret the Fairness Act as applied to nondomestic arbitration proceedings falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.