This second instalment of the Businessperson’s Federal Arbitration Act FAQ Guide addresses three threshold questions pertinent to the Federal Arbitration Act (the “FAA” or “Federal Arbitration Act”):
1. Does Chapter 1 of the FAA apply to my arbitration agreement?
2. Assuming it does, will a federal district court have subject matter jurisdiction over FAA litigation concerning the agreement or any awards made under it?
3. Does the Federal Arbitration Act apply in state court?
Does Chapter 1 of the FAA Apply to My Arbitration Agreement?
If your written arbitration agreement is contained in a maritime contract or a contract affecting commerce, or concerns a dispute arising out of such a contract, then it falls under Chapter 1 of the Federal Arbitration Act, unless it falls within Section 1’s exemption for contracts of employment of transportation workers engaged in interstate commerce. (See here.) It may also fall under Chapters 2 or 3 of the FAA, which implement the New York and Panama Conventions.
In our first instalment of this FAQ guide (here) we explained that Federal Arbitration Act Section 2, as interpreted by the U.S. Supreme Court, applies to written, pre-dispute arbitration agreements in: (a) “maritime contract[s]” (“Maritime Contracts”); or (b) “contract[s] evidencing a transaction involving commerce. . . .” (“Contracts Affecting Commerce”). It also applies to written post-dispute arbitration agreements “to settle by arbitration a controversy thereafter arising out of such [Maritime Contracts or Contracts Affecting Commerce], or the refusal to perform the whole or any part thereof. . . .” 9 U.S.C. § 2; see Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273-282 (1995); Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 55-58 (2003).
Section 2’s requirement that an arbitration agreement be “written” seems simple enough, and, for the most part, it is, at least in wholly domestic arbitrations to which Chapters 2 or 3 of the FAA do not concurrently apply. But there are some caveats.
First, just because a contract is required to be “written” doesn’t necessarily mean the arbitration agreement must be signed. The arbitration agreement between the parties need only be in writing, although the arbitration-agreement proponent would need to show that the parties assented to the writing.
For example, suppose A agrees to provide services for B and further agrees that any disputes arising out of or relating to their agreement will be submitted to arbitration. A and B proceed to memorialize their agreement in a writing, including the agreement to arbitrate, spelling out the essential terms of their agreement. While the writing is not signed or initialed, both parties agree that it reflects the essential terms of the parties’ bargain. The written memorialization of the agreement is sufficient to establish a “written” agreement, even though it is not signed by the party opposing its enforcement.
Second, provided there is a written agreement between at least two parties, persons who are not parties to that agreement (“nonparties”) may, in appropriate circumstances, enforce the agreement or be bound by it if general principles of state law permit that result. Such general principles include “‘assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel[.] . . .’” . Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009) (citations omitted). This Term the United States Supreme Court is to determine whether such principles apply in cases governed by Chapter 2.
As respects whether a “contract” “evidenc[es] a transaction involving commerce,” the U.S. Supreme Court has interpreted Section 2 broadly to mean the Federal Arbitration Act applies to arbitration agreements in contracts or transactions that “affect” commerce, that is, to any contract or transaction that Congress could regulate in the full exercise of its Commerce Clause powers. See Allied-Bruce, 513 U.S. at 281-82; U.S. Const. Art. I, § 8, Cl. 3 (giving Congress power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes”).
Whether a contract “affects” commerce depends on the facts concerning, among other things, the parties, the contract’s subject matter, and the actual or contemplated transactions constituting the contract’s performance or contemplated performance. See Alafabco, 539 U.S. at 56-57. A party does not have to demonstrate that the contract has a “specific” or “substantial” “effect upon interstate commerce if in the aggregate the economic activity in question would represent a general practice subject to federal control.” Id. (citations and quotations omitted). The question is whether the “aggregate economic activity in question” “bear[s] on interstate commerce in a substantial way.” Id. at 57.
Assuming that Chapter 1 of the FAA Applies to my Arbitration Agreement, Will a Federal District Court have Subject Matter jurisdiction over FAA Litigation Concerning the Agreement or any Awards Made under it?
Not necessarily. Unless an arbitration agreement also falls under Chapters 2 or 3 of the FAA, then there must be an independent basis for federal subject matter jurisdiction.
This is the first in a series of posts that will pose and answer several important questions about the Federal Arbitration Act (the “Federal Arbitration Act” or “FAA”), and FAA practice and procedure. The Federal Arbitration Act is the federal statute that governs arbitration agreements that “affect commerce,” making them irrevocable, valid and enforceable to the same extent as contracts generally. It provides for the expedited enforcement (including the challenge) of arbitration awards, empowers arbitrators to issue hearing subpoenas that are enforceable in court against third parties, and authorizes Courts in appropriate circumstances to compel arbitration, stay litigation, and appoint arbitrators.
Chapter One of the Federal Arbitration Act, and the many court decisions construing it, constitute the main body of arbitration law governing arbitration agreements in contracts “affecting commerce.” That body of arbitration law also includes state law governing contracts generally as well as state arbitration law, where applicable. More on that another day.
Before addressing specific FAQs, we review why arbitration law is important and what small businesses can do to help protect themselves in today’s challenging arbitration environment. We next provide an overview of Chapter One of the Federal Arbitration Act, summarizing its provisions.
This guide, including the instalments that will follow in later posts, is not designed to be a comprehensive recitation of the rules and principles of arbitration law. It is designed simply to give clients, prospective clients, and other readers general information that will educate them about the legal challenges they may face and how engaging a skilled, trustworthy, and experienced arbitration attorney can help them confront those challenges more effectively.
Why is Federal Arbitration Act Arbitration Law Important and How can Small Businesses Protect Themselves in Today’s Challenging Arbitration Environment?
Arbitration can be a very effective way of resolving a wide range of disputes arising out of many legal and commercial relationships. It can benefit the parties if they make informed decisions about agreeing to it, craft their agreement accordingly, invest ample time and resources into the dispute-resolution process, proactively manage it, and make reasonable strategic and tactical decisions aimed at maximizing the odds of a beneficial outcome. It can benefit the courts and the general public by shifting to the private sector dispute-resolution costs that the public-sector (funded by tax payers) would otherwise bear.
Arbitration is not a perfect form of dispute resolution (and none is, including court litigation). That is so even when: (a) parties carefully draft their arbitration agreements and arbitrate in good faith; and (b) arbitrators, arbitration service providers and courts do their best to ensure the integrity, reliability, and cost-efficiency of the process and otherwise strive to protect the legitimate contractual expectations of the parties.
But at least over the last few decades or so, arbitration has, in the eyes of many, become a less attractive alternative to court litigation than it was intended to be, could be, and once was. One reason for the decline is because courts and arbitrators do not always enforce arbitration agreements in a way most likely to promote arbitration, even though they may believe in good faith that their decisions make arbitration a more attractive alternative to litigation.
The Arbitration Cottage Industry: Repeat Players versus Outsiders
Yet another reason is that arbitration has evolved into a cottage industry consisting of arbitration providers; and professional arbitrators (whether affiliated or not with one or more arbitration providers or arbitration societies). This industry serves (or is supposed to serve) relatively large businesses as well as smaller businesses, individuals, and consumers.
But it is a business that frequently pits repeat players—businesses which frequently use an arbitration provider’s services, usually because they regularly appoint in their arbitration agreements the arbitration provider as administrator—against outsiders—businesses or individuals who find themselves in an arbitrations administered by an arbitration provider before which they do not find themselves on a regular basis, usually because they either do not regularly appoint the arbitration provider as administrator in their arbitration agreements, or because they do not ordinarily agree to arbitrate in the first place.
Repeat players generate more revenue for arbitration providers and their stable of arbitrators over time than do outsiders. In theory that shouldn’t matter, for at least ostensibly, providers and arbitrators offer the market neutral dispute resolution services that are not supposed to favor repeat players, outsiders, or anyone else.
But economic realities can make that ostensible goal difficult to achieve in practice, even for exceedingly-well-intentioned providers and arbitrators. Those economic realities suggest an actual or potential conflict of interest—that is, a conflict between the provider’s and arbitrator’s interest in neutrality and their interest in an arbitration outcome that will not dissuade the repeat player from continuing regularly to use the provider’s services.
Businesses, particularly smaller business that are not arbitration provider repeat players, thus may find themselves in a challenging environment, one in which they probably did not anticipate being when they agreed to arbitrate. They are outsiders in an arbitration system that may be administered by an organization, and presided over by one or more arbitrators, who may consciously or unconsciously habor, or at least labor under, institutional predispositions that could tip the scales in favor of the repeat player and against the outsider.
The potential for such free-floating institutional bias or predisposition ordinarily will not, without more, support an argument that the arbitrator has a material conflict of interest. The reasons that is so are, for present purposes, beyond the scope of this post, but irrespective of whether arbitration law provides or should provide any relief from such a conflict, the economic realities described pose risks for outsiders, whose odds of success on the merits might not be what they would otherwise be if the tables were turned, and they, not their adversaries, were the repeat players.
Outsiders who find themselves in arbitration disputes with repeat players need all the help they can get.
Arbitration Law: Limited Relief, Arcane Rules, and Traps for the Unwary
The nature of arbitration law itself poses other challenges with which businesses (including repeat players) must grapple. Arbitration law authorizes courts to provide only very limited relief to parties who claim to be the victims of arbitration-agreement violations, whether committed by arbitrators or by an adverse party.
To make matters worse it is not unusual for certain judges to interpret and apply arbitration law in a way that makes it all the more difficult to obtain relief, even when granting that relief would, in all likelihood, promote arbitration as an attractive alternative to litigation, which is the main objective of arbitration law.
For example, courts will sometimes confirm arbitration awards that should have been vacated even though the facts reveal that the arbitrators egregiously violated the parties’ arbitration agreement by exceeding their powers, being guilty of fraud, corruption, or evident partiality, or committing prejudicial procedural misconduct. Courts seem conciously or unconsciously to go out of their way to avoid recognizing such grave improprieties, perhaps because the public might perceive the outcome – a vacated arbitration award and an arbitration do over – as disfavoring arbitration. And that is so even though vacatur would, in all likelihood, promote arbitration by enforcing the parties’ arbitration agreement and protecting reasonable expectations of fundamental fairness.
The same kind of scenario may play out in the context of a pre-arbitration dispute about compelling arbitration and staying litigation pending arbitration. Believing in good faith that they are promoting arbitration, and perhaps desiring an outcome that appears to favor arbitration—such as one that compels arbitration and stays litigation pending arbitration—Courts sometimes determine persons have consented to arbitration in circumstances where a comprehensive examination of the facts and applicable law may indicate otherwise.
Arbitration law doctrines, rules, and procedures remain somewhat arcane even though arbitration disputes and arbitration-related litigation are fairly common. Consequently, outcomes and rationales are often counterintuitive, unless the lawyer has thorough knowledge of and experience with arbitration law. We’ll discuss some examples in later posts.
Even apart from that, arbitation law’s procedural rules are fraught with traps for the wary, which are, among other things, designed to encourage early forfeiture of defenses that might otherwise be raised in FAA litigation. Most, if not all, of these rules nevertheless serve purposes which at least arguably promote arbitration as a viable alternative to litigation. If your attorney doesn’t know the rules well or doesn’t follow them, then your interests may be in jeopordy.
Protecting your Interests in Arbitration and Arbitration-Related Litigation
How can you best protect your interests in the seemingly informal, but sometimes covertly hostile, arbitration environment? First, you must make sure that you are represented by an attorney who has abundent knowledge of and experience in arbitration law and in representing parties in arbitrations and in FAA litigation.
This can make a huge difference – the author has, over the years, encountered situations where another lawyer did not, for example, detect or adequately preserve for judicial review issues that may otherwise have provided a basis for vacating an adverse award. As a consequence, these parties lost the race before it even started, and ended up being saddled with arbitration awards that, in a more perfect world, they may have been able to vacate. Needless to say, situations like this are far less likely to occur if experienced arbitration counsel been involved from the start.
If you are already represented by an attorney in your arbitration, but find yourself facing challenging FAA enforcement litigation, or the prospect of such litigation, then your interests are best suited by hiring skilled and experienced counsel who regularly handle such litigation. Depending on the circumstances, your own needs, and other considerations, you may wish to retain a new lawyer to handle the FAA litigation, while continuing to retain your current lawyer for purposes of handling the merits of the underlying arbitration (but making sure the FAA litigation lawyer is consulted at each step along the way to help preserve and enhance the record for future FAA litigation).
Second, you should work closely with that attorney, advising him or her of all matters pertinent to your claims and defenses, including matters that may be peculiar to your particular business or industry, including customs, practice, and usage. Always be an active part of your case and work only with attorneys who allow and encourage you to do that.
Third, you should keep yourself informed about arbitration-law related matters, as well as the legal rules and principles that bear on the merits of your case. This series of posts addresses numerous basic questions concerning the Federal Arbitration Act, and thus should be a useful educational aid for that purpose.
An Overview of the Federal Arbitration Act and its Provisions
The judicial and arbitral enforcement of arbitration agreements that affect interstate commerce is governed by the Federal Arbitration Act (the “FAA”), a statute first enacted in 1925 as the “United States Arbitration Act.” As originally enacted, the FAA consisted of 15 provisions, section 14 of which Congress repealed in 1947, renumbering as Section 14 former Section 15.
In 1970 Congress designated those remaining 14 provisions as “Chapter 1” of the FAA, and added a “Chapter 2,” which consists of various provisions implementing and enabling the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”).
In 1988 Congress added two additional provisions to Chapter 1 of the FAA, Sections 15 and 16. In 1990 Congress added to the FAA a Chapter 3, which consists of provisions implementing and enabling the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”).
The majority of U.S. domestic arbitration disputes are decided under Chapter One of the FAA, 9 U.S.C. §§ 1-16. Of these 16 relatively sparse statutory provisions, Sections 1 through 14 have been on the statute books in largely the same form for about 95 years.
The provisions of Chapter One have not only been on the books for nearly 100 years, but they are fairly sparse, and certainly do not even come close to addressing expressly and comprehensively all of the many issues that may arise concerning the enforcement of arbitration agreements and awards.
Out of necessity, a robust body of judicial interpretations and applications of the provisions has arisen to attempt to address these problems. These interpretations and applications of the FAA often vary from one circuit court of appeals to the next, and the U.S. Supreme Court has, on many occasions over the last four decades (and even before) stepped in to resolve such circuit splits and attempt to make FAA law more uniform by developing and implementing various FAA rules and principals, a number of which were first created in cases arising out of Labor Management and Relations Act (“LMRA”)-governed labor arbitration cases.
But before delving into any of the gory details, let’s look at the domestic, commercial arbitration-law outline that Chapter One of the FAA provides. Our starting point is Section 2, which is sometimes referred to as the FAA’s “enforcement command.”
The Federal Arbitration Act’s Enforcement Command: Section 2
Section 2 of the FAA is the provision that declares that arbitration agreements falling within its scope are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of of any contract.” 9 U.S.C. § 2.
It also tells us what arbitration agreements fall within the scope of Section 2 and the other provisions of FAA Chapter One: (a) “[a] written provision in any maritime transaction or 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 [(b)] an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal. . . .” 9 U.S.C. § 2.
Section 2’s scope provision therefore, and as interpreted by the U.S. Supreme Court, applies to written pre-dispute arbitration agreements in: (a) “maritime contract[s]” (“Maritime Contracts”); or (b) “contract[s] evidencing a transaction involving commerce. . . .” (“Contracts Affecting Commerce”). It also applies to written post-dispute arbitration agreements “to settle by arbitration a controversy thereafter arising out of such [Maritime Contracts or Contracts Affecting Commerce], or the refusal to perform the whole or any part thereof. . . .” 9 U.S.C. § 2; see Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273-282 (1995); Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 55-58 (2003). As interpreted by the U.S. Supreme Court, Section 2’s use of the “word ‘involving,’ like ‘affecting,’ signals an intent to exercise Congress’ commerce power to the full.” Allied-Bruce, 513 U.S. at 277. More on that another day.
Under Section 2, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019). Section 2 also “requires courts to place arbitration agreements on an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and citations omitted).
Section 1 of the FAA : Definitions and an Exemption
Section 1 of the FAA provides some definitions and exempts from the FAA a fairly limited universe of agreements that would otherwise fall within the scope of the Act. See 9 U.S.C. § 1. As respects the exemption, Section 1 provides that “nothing [in the FAA] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1.
According to the United States Supreme Court, the exemption applies “only” to “contracts of employment of transportation workers.” Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 119 (2001). But those “contracts of employment” include not only contracts establishing an employer-employee relationship, but also contracts establishing independent contractor relationships. New Prime Inc. v. Oliveira, 139 S. Ct. 532, 539-41, 544 (2019).
The Rest of the FAA
The other provisions of Chapter 1 implement the enforcement command by lending judicial support to the enforcement of arbitration agreements and awards. These are briefly summarized below:
Section 3 – Requires courts to stay litigation in favor of arbitration.
Section 4 – Provides for courts to compel arbitration.
Section 5 – Provides for courts to appoint arbitrators when there has been a default in the arbitrator selection process.
Section 6 – Provides that motion practice rules apply to applications made under the FAA, thereby expediting the judicial disposition of such applications.
Section 7 – Provides for the judicial enforcement of certain arbitration subpoenas.
Section 8 – Provides that where the basis for federal subject matter jurisdiction is admiralty, then “the party claiming to be aggrieved may begin his proceeding [under the FAA]…by libel and seizure of the vessel or other property….” 9 U.S.C. § 8.
Section 9 – Provides for courts to confirm arbitration awards, that is, enter judgment upon them.
Section 10 – Authorizes courts to vacate arbitration awards in certain limited circumstances.
Section 11 – Authorizes courts to modify or correct arbitration awards in certain limited circumstances.
Section 12 – Provides rules concerning the service of a motion to vacate, modify, or correct an award, including a three-month time limit.
Section 13 – Specifies papers that must be filed with the clerk on motions to confirm, vacate, modify, or correct awards and provides that judgment entered on orders on such motions has the same force and effect of any other judgment entered by the court.
Section 14 – Specifies that agreements made as of the FAA’s 1925 effective date are subject to the FAA.
Section 15 – Provides that “Enforcement of arbitral agreements, confirmation of arbitral awards, and execution upon judgments based on orders confirming such awards shall not be refused on the basis of the Act of State doctrine.”
Section 16 – Specifies when appeals may be taken from orders made under the FAA, and authorizing appeals from final decisions with respect to arbitration.
More to follow in future posts. . . .
You might also be interested in the following posts here, here, here, here, and here.
Photo Acknowledgment
The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law. L&L has added text to the photo.
Favorable arbitration awards are wonderful things, but they are not self-enforcing. Sometimes the other side voluntarily complies, but if not, there is really not much of anything the arbitrator can do to help.
Arbitrators are not judges and do not have the authority to garnish wages, seize property, foreclose on encumbered property, freeze bank accounts, impose contempt sanctions, and so forth. Parties can delegate to arbitrators broad adjudicatory and remedial authority, but that is relevant only to the nature and scope of their awards, and does not confer power on the arbitrators to enforce their awards coercively.
Apart from its potential preclusive effect in subsequent litigation or arbitration, an arbitration award stands on the same footing as any other privately prepared legal document, and for all intents and purposes it is a contract made for the parties by their joint agent of sorts—the arbitrator or arbitration panel. It may be intended by the arbitrator or panel, and at least one of the parties, to have legal effect, but it is up to a court to say what legal effect it has, and, if necessary, to implement that legal effect through coercive enforcement.
A judgment, by contrast, is an official decree by a governmental body (the court) that not only can be coercively enforced through subsequent summary proceedings in the same or other courts (including courts in other states and federal judicial districts), but is, to some extent, self-enforcing. A judgment, for example, can ordinarily be filed as a statutory lien on real property, and applicable state or federal law may, for example, authorize attorneys to avail their clients of certain judgment-enforcement-related remedies without prior judicial authorization.
Confirming Arbitration Awards 2
The Federal Arbitration Act, and most or all state arbitration statutes, provide for enforcement of arbitration awards through a procedure by which a party may request a court to enter judgment on the award, that is to “confirm” it. Once an award has been reduced to judgment, it can be enforced to the same extent as any other judgment. See, e.g., 9 U.S.C. § 13 (Under Federal Arbitration Act, judgment on award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered”); Fla. Stat. § 682.15(1)( “The judgment may be recorded, docketed, and enforced as any other judgment in a civil action.”); N.Y. Civ. Prac. L. & R. § 7514(a) (“A judgment shall be entered upon the confirmation of an award.”).
Chapter One of The Federal Arbitration Act (the “FAA”), and most or all state arbitration statutes, authorize courts to confirm domestic awards in summary proceedings. State arbitration-law rules, procedures, limitation periods, and the like vary from state to state and frequently from the FAA, and state courts may apply them to FAA-governed awards (provided doing so does not frustrate the purposes and objectives of the FAA). And Chapter 2 of the FAA provides some different rules that apply to the confirmation of domestic arbitration awards that fall under the Convention on the Recognition of Foreign Arbitral Awards (the “Convention”), and the enforcement of non-domestic arbitration awards falling under the Convention (i.e., awards made in territory of a country that is a signatory to the Convention.
But let’s keep things simple, and take a brief look at the FAA’s requirements for confirming arbitration awards, as applicable in federal court for domestic awards not falling under Chapter Two of the Federal Arbitration Act in situations where there is no prior pending action related to the arbitration, and there are no issues concerning federal subject-matter jurisdiction, personal jurisdiction, sufficiency or service of process, venue (i.e., whether the suit should have been brought in a different federal judicial district), or the applicability of Chapter One of the FAA (9 U.S.C. §§ 1-16). We’ll also discuss how applications to confirm are supposed to be summary proceedings, why timing of an application is important, and how courts decide them.
What are the Requirements for Confirming Arbitration Awards under the Federal Arbitration Act?
Confirming Arbitration Awards 3
Like most other issues arising under the FAA, whether a court should confirm an award depends on what the parties agreed. Section 9 of the FAA, which governs confirmation of awards, says—with bracketed lettering added, and in pertinent part: “[A] If the parties in their agreement have [B] agreed that a judgment of the court shall be entered upon [C] the award made pursuant to the arbitration, and [D] shall specify the court, then [E] at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and [F] thereupon the court must grant such an order unless [G] the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” 9 U.S.C. § 9. Items [A] through [D] above each concern party consent as evidenced by the parties’ arbitration agreement.
The key substantive requirements for confirming arbitration awards are thus: Continue Reading »
This is Part II of this two-part Arbitration Law FAQ Guide, which is designed to provide individuals and businesses with a brief and broad overview of challenging awards under the Federal Arbitration Act. Part I (here) addressed eight FAQs concerning this topic. This Part II addresses six more.
These FAQs, like the first eight, assume that a party is seeking to challenge a Federal-Arbitration-Act-governed arbitration award in a federal court having subject matter jurisdiction, personal jurisdiction, and proper venue.
This guide is not legal advice or a substitute for legal advice. An individual or business contemplating a challenge of an award under the Federal Arbitration Act should consult with an attorney or firm that has experience and expertise in arbitration law matters.
What does a person have to prove to convince a Court to grant it vacatur, modification, or correction of an award?
Awards Under the Federal Arbitration Act 2
An arbitration award is presumed valid and an award challenger has a heavy burden of proof to show otherwise. Some courts require clear and convincing evidence of certain grounds, such as evident partiality or corruption in the arbitrators. And even if a challenger can meet its burden, challenging an award under the Federal Arbitration Act must ordinarily be done in a summary proceeding, which is heard and determined in the same manner as a motion.
Generally, the challenger must establish that the only legitimate inference that can be drawn from the law and undisputed facts is that vacatur, modification, or correction of the award is warranted. Even where there are factual disputes, courts ordinarily will not order discovery or evidentiary hearings absent “clear evidence of impropriety.” See, generally, Andros Compania Maritima, S.A. v. Marc Rich & Co., 579 F.2d 691, 701, 702 (2d Cir. 1978).
What proceedings does a Court usually hold to determine applications to vacate, modify, or correct awards under the Federal Arbitration Act?
These applications are summary proceedings that are made and decided like motions. See 9 U.S.C. § 6. If there is not already pending an action between the parties in which a motion may be made, then a challenger can start a proceeding by filing and serving, among other things, a petition or application, a notice of petition or application, supporting affidavits, and a memorandum of law in support. The responding party serves and files a memorandum in opposition, along with any affidavits in support.
Since the matter is a summary proceeding, and since the ordinary pleading rules do not apply, courts generally require the challenger to make all of its arguments at the time its response is due, including arguments that might be made by pre-answer motion in an ordinary law suit, such as lack of subject-matter or personal jurisdiction. The responding party will also typically file a cross-motion to confirm the award, that is, a request that the Court enter judgment upon the award. See 9 U.S.C. § 9. Continue Reading »
If you read Part I you know the arbitration program in PoolRe case was, to put it mildly, inadequate to meet the needs of the multi-party, multi-contract dispute that arose out of the parties’ legal relationships. Perhaps the saving grace is that the both the district court and the Fifth Circuit Court of Appeals vacated the award, which is what Sections 5 and 10 of the Federal Arbitration Act require.
The Fifth Circuit addressed whether the district court erred by: (a) vacating the arbitration award on the ground the arbitrator exceeded his powers; (b) vacating the entire award; and (c) denying the motion to compel arbitration of the Phase II Claims. Finding no error, the Fifth Circuit affirmed the district court’s judgment in its entirety.
The District Court Correctly Concluded that the Arbitrator Exceeded his Powers
The Fifth Circuit held that the arbitrator exceeded his powers because the Arbitrator: (a) was not properly appointed under the terms of the Reinsurance Agreement’s arbitrator selection provisions, which required him to be “selected by the Anguilla, B.W.I. Director of Insurance;” and (b) decided the dispute under the American Arbitration Association’s rules when the Reinsurance Agreement required arbitration under International Chamber of Commerce (“ICC”) Rules.
Arbitrator not Selected as Required by the Reinsurance Agreement’s Arbitrator Selection Provisions
The district court held vacatur was required because the Arbitrator “was not ‘the actual decisionmaker that [PoolRe and the Captives] selected as an integral part of their agreement.'” Slip op. at 9 (quoting district court). The Fifth Circuit held that “the district court properly vacated the arbitrator’s award with regard to the claims against PoolRe[,]” because the Arbitrator “was appointed in the manner provided in the [Engagement Agreement’s] Billing Guidelines — to which PoolRe was not a party — but was appointed in a manner contrary to that provided in the Reinsurance Agreements between PoolRe and the Captives, which required ‘select[ion] by the Anguilla, B.W.I. Director of Insurance.'” Slip op. at 10-11. The Capstone Entities “submitted [their] original arbitration demand to [the Arbitrator][,]” but “PoolRe,” said the Court, “only intervened in that arbitration after [the Anguilla Financial Services Commission] notified Pool Re that no Director of Insurance existed.” Slip op. at 10-11. The Arbitrator thus “had not been ‘selected according to the contract specified method’. . . when he decided the dispute between Pool Re and the Captives.” Slip op. at 11 (quoting Bulko v. Morgan Stanley DW Inc., 450 F.3d 622, 625 ((5th Cir. 2006)).
The Fifth Circuit’s decision is fully consistent with the Federal Arbitration Act, under which “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted). Courts are supposed to enforce arbitration agreements according to their terms, and among the most important terms of an arbitration agreement are those concerning arbitrator selection. See Lefkovitz v. Wagner, 395 F.3d 773, 780 (2005) (Posner, J.) (“Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”); see, e.g., 9 U.S.C. § 5 (“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed. . . .”); Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(1)(d), June 10, 1958, 21 U.S.T. 2519, T.I.A.S. No. 6997 (a/k/a the “New York Convention”) (implemented by 9 U.S.C. §§ 201, et. seq.) (award subject to challenge where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties”); Stolt-Nielsen, 559 U.S. at 668, 670 (one of the FAA’s “rules of fundamental importance” is parties “may choose who will resolve specific disputes”) (emphasis added; citations omitted); Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (vacating award by panel not convened in accordance with parties’ agreement); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994) (same); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986) (same).
Arbitrator Exceeded his Powers by Deciding the Disputes between Pool Re and the Captives under the AAA Rules Rather than under the ICC Rules
The Fifth Circuit also held that the Arbitrator exceeded his powers by deciding the disputes between Pool Re and the Captives under the AAA Rules because the Reinsurance Agreements required “all disputes [to] ‘be submitted for biding, final, and nonappealable arbitration to the [ICC] under and in accordance with its then prevailing ICC Rules of Arbitration.'” Slip op. at 10-11. The Court explained that it “interpret[s] clauses providing for arbitration in accordance with a particular set of rules as forum selection clauses.” Slip op. at 10-11 (quotation and citations omitted). And “[i]f the parties’ agreement specifies that the laws and procedures of a particular forums shall govern any arbitration between them, that forum-selection clause is an important part of the arbitration agreement, and, therefore, the court need not compel arbitration in a substitute forum if the designated forum becomes unavailable.” Slip op. at 11 (quotations and citations omitted). By applying the “the AAA rules [instead of the ICC Rules] to the dispute[,]” the Arbitrator “acted contrary to an express contractual provision,” and therefore exceeded his powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act. Slip op. at 11 (quotation, citation and brackets omitted). Continue Reading »
Arbitration offers rough justice on the merits. Arbitrators have broad discretion not only in deciding the dispute but in fashioning remedies. Skilled, experienced and responsible arbitrators can cut through all sorts of legal and contractual “red tape” to resolve a dispute, applying just enough gloss on the law and the contract to make things work in a businesslike fashion while remaining true to the “essence of the agreement.” Applied just so, that kind of rough justice is sometimes exactly what the parties need to make their agreement work, and in some cases, preserve (or even improve) their commercial relationship going forward. And it is not something that Court adjudication necessarily—or even ordinarily—can achieve.
But rough justice does not govern whether the parties agreed to arbitrate, who’s bound by an arbitration agreement and whether the parties agreed to delegate authority to a particular arbitrator or to follow a particular method of arbitrator selection as set forth in the parties’ agreement. Those questions are governed principally by state contract law and—particularly when multiple agreements and multiple parties are involved, or the question concerns whether an arbitrator was validly appointed—they frequently must be decided by courts, even if some or all of the parties have clearly and unmistakably agreed to submit arbitrability questions to arbitration.
Details, Details. . .
Details always matter, but they are all the more important when a dispute will presumably be decided under state contract law rules and principles by a decision maker whose decisions—unlike those of an arbitrator—are often subject to independent review by an appellate court. Courts generally do not (or at least are not supposed to) substitute rough justice, pragmatism or equity in place of contract law, which is not always so flexible. The casebooks are littered with examples where doing so might arguably have achieved a more desirable outcome but doing so could not be squared with contract rules and principals in a way that befitted higher-court precedent and the circumstances apparently did not warrant departure from precedent.
The U.S. Court of Appeals for the Fifth Circuit’s decision in PoolRe Ins. Corp. v. Organizational Strategies, Inc., No. 14-20433, slip op. (5th Cir. April 7, 2015), is a case where the parties apparently lost sight of some important details in their apparent haste to do a deal that unfortunately went sour. Then, an arbitrator appointed under one of the contracts compounded the problem by making an award that could not even arguably be squared with the clear terms of one of the contracts’ arbitration agreements.
The parties that were probably best positioned to ensure that the arbitration agreements in the various service-provider and reinsurance contracts probably lost the most, and perhaps to some extent at least, there’s some poetic justice to that. They claimed the clients breached their service contracts, the clients said the service providers breached the contracts and independent legal duties and the arbitrator ruled in favor of the service providers. The district court, as we’ll see, properly vacated the award and the Fifth Circuit affirmed. Now the parties are essentially back at square one, albeit much worse for the wear in terms of legal expenses and protracted delay.
The facts and procedural history of the case is somewhat complex, but critically important. Not only do they drive the outcome but they read like a primer on what not to do when attempting to devise a cost-effective arbitration program for disputes that may involve multiple parties and interrelated and interdependent contracts. And they demonstrate pretty starkly some of the consequences that parties can suffer when: (a) they do not properly structure their agreement; and (b) end up with an arbitrator who is not be as savvy as he or she might otherwise be about scope of authority (or simply makes a bad call about it).
We do not mean to suggest that the Arbitrator in this case was in any way incompetent or otherwise blameworthy. To err is human, and even if the arbitrator had made the best permissible decision possible under the circumstances, the parties would still be exposed to the consequences of having not properly structured their arbitration agreements. The arbitrator’s missteps certainly exacerbated the problem, but such things are foreseeable risks that the parties could have managed by, for example, agreeing to an arbitration agreement that was drafted in simple, unambiguous terms governing what is supposed to happen in the event of a multi-contract, multi-party dispute like the one at issue. Such disputes were foreseeable, as they are in any relatively complex transaction involving multiple parties and multiple interrelated contracts.
The mess that is described in the balance of this post could have been avoided had some or all of the parties: (a) understood that their dispute resolution system needed the attention of a skilled and experienced arbitration lawyer; and (b) were willing to invest the modest sum needed to make that possible. Apparently the parties did not appreciate the risks they faced or, if they did, they made a conscious decision to ignore them, perhaps finding it preferable to avoid paying a few extra thousand dollars up front, roll the dice and hope that all would turn out well (and certainly not as it did).
Perhaps one might wonder what the odds were that an underlying dispute like the one at issue would arise. Nobody knows the precise answer, of course, but we’d have to say there was a meaningful risk in view of the nature and structure of the transaction. And given the rather obvious and dramatic disparity between the two arbitration agreements, the risk that Federal Arbitration Act enforcement proceedings would be necessary was likewise meaningful and fairly easy to foresee.
Suppose the risk was 1 in 6—that is, there was approximately a 17% chance that the parties would spend hundreds of thousands of dollars and spend at least an additional year or more embroiled in Federal Arbitration Act enforcement litigation centered on issues collateral to the merits. If we’re talking about a single round roll of a single die, with the idea being to avoid one possible outcome (represented by a whole number ranging from one to six), then that’s about as minimal a risk as could be measured (since there are only six possible outcomes). It also happens to be the same risk one would accept were one to play a round of Russian Roulette with a six-round revolver and a single bullet.
The point is that it is not just a matter of assessing the odds; severity of potential outcomes obviously drives risk assessment and management decisions as well. Most responsible corporate officers and directors aren’t going to take on a Russian-Roulette type risk (i.e., a “bet-the-company” risk) unless they have no choice, and if they must take the risk, they do what they reasonably can to minimize the odds the undesirable outcome will materialize and to mitigate any loss incurred if it does.
Here, the outcome that could have been avoided was very costly—though presumably not a death knell for either party— whereas the cost of substantially decreasing the likelihood of that outcome would probably have been less than a percentage point of the loss.
We’ve posted in the Arbitration Award Practice Blog the first two posts of a series concerning arbitrators exceeding their powers under the Federal Arbitration Act in circumstances where they make awards against persons who are not parties to the pre-dispute arbitration agreement that precipitated the arbitration:
Do Arbitrators Exceed their Powers by Imposing Liability on Corporate Officers who were not Parties to the Arbitration Agreement?
Do Arbitrators Exceed their Powers by Imposing Liability on Corporate Officers who were not Parties to the Arbitration Agreement?—Part II
These posts are designed to illustrate to persons learning about arbitration law basics a point that more experienced practitioners know all-too-well: arbitration law can be counterintutive, and even its relatively straightforward general rules or principles do not apply to all factual scenarios.
For example, under the Federal Arbitration Act the answer to question posed by the articles: “it depends.” If a corporate officer participated in the arbitration solely as a party representative; nobody demanded, requested, argued or suggested that the corporate officer should have been deemed a party; and the corporate officer did not request in his individual capacity relief from the arbitration panel, then the arbitrators would be exceeding their powers were they to make an award against the corporate officer.
But as a general rule, arbitrators do not, on their own motion, award relief to or impose liability on persons who are not parties to the arbitration agreement. But see NCR Corp. v. Sac-Co., Inc., 43 F. 3d 1076, 1080 (6th Cir. 1995) (arbitrator ordered punitive damages to non-parties even though neither party requested such relief). While arbitrators occasionally do render awards granting relief to or against arbitration agreement nonsignatories, usually that occurs only when someone has requested such relief.
That’s what happened, for example, in Stone v. Theatrical Investment Corp., No. 14 Civ. 6494 (PAE), slip op. at 1, 8-9 (S.D.N.Y. Dec. 2, 2014). Stone was a contract dispute between two parties A, a trust, represented by its trustee, and B, a corporation. A demanded arbitration against B under the contract’s pre-dispute arbitration agreement, but also demanded arbitration against B’s CEO, asserting that the arbitrator should pierce the corporate veil and hold the CEO jointly and severally liable for the corporation’s alleged breach of contract. The CEO participated in the arbitration as a party representative for B, but never informed the arbitrator that it objected to her jurisdiction to award relief to him. In addition, the CEO requested the arbitrator to grant him relief in his individual capacity.
Not surprisingly, the general rule did not apply in Stone, a point we discuss briefly in the second of the two Arbitration Award Practice Blog posts. In fact it seems odd that the CEO moved to vacate the award against it on the ground that he did not agree to arbitrate the dispute. It suggests (but certainly does not establish) that perhaps the CEO thought he could make the argument he did despite the arbitration strategy he chose to purse. We do not know whether that is so, however, and there might be other reasons why the CEO opted to pursue that strategy.
Assuming that the CEO did not wish to arbitrate the veil-piercing claim there was much he could have done to ensure a judicial determination of that matter. And that’s something we’ll address in a future post in the Arbitration Award Practice Blog.
InPart II.B.2(A) we identified three key structural aspects of pre-dispute B-2-B arbitration, and discussed the first two in that and a subsequent post. This Part II.B.2(C) wraps up our discussion of arbitration-agreement structure by briefly examining a topic that is at least as important as the scope of the agreement: who the decision makers will be and how they will be selected.
As one renowned jurist put it, “selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”[1] Arbitration allows the parties considerable input into the selection of who the decision makers will be, something that can make it a very attractive alternative to litigation for one or both of the parties. Parties who do not opt out of the court system are left with the luck of draw.
Savvy users of arbitration—and for that matter, most persons with dispute resolution experience in judicial or arbitral forums or both—know that decision makers, whether randomly assigned or selected, are not fungible commodities. Were they fungible, let alone commodities, there would likely be little or no controversy surrounding appointments to the United States Supreme Court.
But differences in judicial philosophy do not have to be based on so-called “liberal,” “moderate” or “conservative” views to be important, and perhaps even outcome-determinative. For example, the composition of a three-judge appellate panel can in many cases significantly influence the outcome of an appeal in many civil cases involving any number of legal and policy issues that are not the subject of discussion, let alone controversy, in the mainstream media.
Presumably many lawyers who argue appeals before three-judge panels (including the author) would scream “halleluiah!” had they the opportunity to select even one member of a three-judge appeals panel—or even if each party got to select one, leaving those two to select a third.
But time and time again, we see situations where parties who could have that opportunity—in the arbitration context, that is— had they negotiated it, or who could have at least participated meaningfully in the selection of one or more arbitrators had they exercised their contract rights with due diligence, end up having little if any meaningful input into the selection process. That type of lost opportunity usually redounds to their detriment, especially when their counterparts not only negotiate arbitrator selection provisions that suit their purposes, but also fully and wisely exercise their arbitrator selection rights. Continue Reading »
We’ve addressed on many occasions the Enterprise WheelStolt-Nielsen/Oxford contract-based outcome review standard, which permits courts to vacate awards when they do not “draw their essence” from the parties’ agreement. Under that standard the “sole question is whether the arbitrators (even arguably) interpreted the parties’ contract, not whether [they] got its meaning right or wrong.” See Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013) (parenthetical in original). (See, e.g., Loree Reins. & Arb. L. F. posts here, here,here, here, here & here.)
While exceedingly deferential, the standard is not toothless. Arbitration awards that disregard or contravene the clear and unmistakable terms of a contract are subject to vacatur under it. See Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 676 (panel had “no occasion to ascertain the parties’ intention in the present case because the parties were in complete agreement regarding their intent.”) (quotation omitted); United Paperworkers v. Misco, Inc., 484 U.S. 29, 38 (1987) (“The arbitrator may not ignore the plain language of the contract. . . .”). That’s because an arbitrator who makes an award that lacks “any contractual basis” has not even arguably interpreted the contract, and therefore has strayed from his or her task. See Oxford, 133 S. Ct. at 2069 (distinguishing Stolt-Nielsen); Stolt-Nielsen, 559 U.S. at 668-69, 672; Misco, 484 U.S. at 38.
An arbitrator whose award contradicts the unambiguous provisions of the parties’ contract may—but will not necessarily—exceed her powers. The answer depends on what the agreement says, what the award says and whether the award is at least arguably grounded in the agreement.
Whether or not a contract or contract term is “ambiguous” depends on whether it is reasonably susceptible to more than one meaning. See, e.g., White v. Continental Cas. Co., 9 N.Y.3d 264, 267 (2007); Greenfield v. Philles Records, 98 N.Y.2d 562, 570-71 (2002). When a contract is unambiguous, a court can interpret it as a matter of law; if it is ambiguous, its meaning is a question of fact for trial.
Can the Interpretation of the Arbitrators be “Unreasonable,” yet still Colorable or Plausible?
The legal standard for lack of ambiguity is that there be only one “reasonable” interpretation of the contract terms, not that there are no other at least barely plausible or barely colorable interpretations of what the contract might mean. In probably the majority of contract interpretation cases concerning alleged contract ambiguity, each litigant supports its position with good-faith, reasonable arguments for why the disputed contract terms are allegedly susceptible to one or more than one meaning. Whenever courts determine that a contract is unambiguous, that conclusion necessarily means that the losing party’s interpretation of the contract is unreasonable as a matter of law. Continue Reading »
One advantage of arbitration is that parties can define and delineate the scope of disputes they agree to submit to arbitration, the basis on which disputes can or must be resolved and the scope of the arbitrator’s remedial powers. If parties impose clear limits on an arbitrator’s authority (usually by expressly excluding certain matters from arbitration or expressly providing that an arbitrator cannot or must grant certain remedies), then courts and arbitrators are supposed to enforce those limitations. See, e.g., Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 559 U.S. 662, 680-81 (2010).
Far too frequently, parties simply agree to a broad arbitration agreement that places no limitations on arbitral power, and when they end up on the wrong-end of an award they didn’t expect, they discover to their dismay that they have no judicial remedy. Whether or not they understood that at the time they agreed to arbitrate is, of course, irrelevant. The only relevant consideration is whether their agreement could be reasonably construed to grant the arbitrator that authority, even if it could also be reasonably construed to withhold it. See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995) (“when a court interprets such provisions in an agreement covered by the FAA, due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration”) (quotation and citation omitted).
But suppose the parties take the time to consider whether they desire to limit arbitral authority, and their arbitration agreement unambiguously expresses an intention to limit arbitral authority to resolve certain disputes or impose certain remedies, or to expressly require that the arbitrators grant certain types of relief, such as fee shifting to a prevailing party. Should a court vacate the award if the arbitrator does not abide by the parties’ unambiguously expressed intentions? Continue Reading »
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