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What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties? (Part IIIA)

April 1st, 2009 Arbitrability, Authority of Arbitrators, Legislative Developments Comments Off on What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties? (Part IIIA) By Philip J. Loree Jr.

Part IIIA:  Interpreting Section 2(c) of the Fairness Act to Apply to Domestic Arbitration Proceedings Involving Sophisticated, Commercial Entities

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….

         

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