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Improving Arbitration-Award Making and Enforcement by Faithfully Implementing the Purposes and Objectives of the Federal Arbitration Act

November 12th, 2013 Arbitration Agreements, Arbitration Practice and Procedure, Awards, General, Judicial Review of Arbitration Awards, Small Business B-2-B Arbitration Comments Off on Improving Arbitration-Award Making and Enforcement by Faithfully Implementing the Purposes and Objectives of the Federal Arbitration Act By Philip J. Loree Jr.

Part I:

An Introduction to the Problem and its Solution

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, and craft their agreement accordingly. It can benefit the courts and the general public by shifting to the private sector dispute-resolution costs that the public-sector would otherwise bear.

Arbitration is not a perfect form of dispute resolution (and none is, including court litigation). That is so even when parties carefully draft their arbitration agreements, and the parties, arbitrators, arbitration service providers and courts do their best to ensure the integrity and reliability of the process and otherwise strive to protect the legitimate expectations of the parties. But at least over the last couple of decades or so, arbitration has, in the opinion of many, become a less attractive alternative to court litigation than it was intended to be, could be and once was.

There are no doubt multiple causes for arbitration’s apparent decline and reasonable minds might differ on which are the most significant. It has not been caused solely by the parties, the arbitrators, the arbitration-providers, the courts or the lawyers, but each group has helped facilitate to some degree arbitration’s decline. Paradoxically, well-intentioned efforts to promote arbitration are at least in part to blame.

Like a car, a house, a computer or some other thing we own and rely on heavily on a day-to-day basis, arbitration requires care, feeding, maintenance and occasionally major or minor repairs or refurbishing. If we do not take an ownership interest in it, then its utility will diminish and likely disappear before its time. We cannot delegate all of that responsibility to mechanics, repairpersons, contractors—let alone judges and legislatures.

But who is “we”? Nobody “owns” what might very loosely be termed the “system” or “process” of arbitration, and in any event, that “system” or “process” is not property, personal or real. It is simply a legally recognized and supported way of resolving disputes, the continued existence of which benefits—or at least potentially benefits—in varying degrees the interests of many persons and entities, including state and federal government, and to some extent, the public at large. It is more closely analogous to a market than a good or commodity.

Those who agree to arbitrate and their arbitration service providers—arbitrators, arbitration providers and attorneys—have a direct, economic stake in arbitration in general. Parties are stakeholders in their own arbitration proceeding and not infrequently have a conscious stake in arbitration’s improvement.

While the ability of arbitrators and arbitration-service providers to effect immediate, direct change to arbitration in general is considerably less than that of the courts, they are uniquely positioned to affect the course of whatever arbitration they are involved in, and, over time, can facilitate and implement positive, long-term changes in ways that courts or legislatures cannot or will not. Assuming the parties are satisfied with their administration and disposition of the arbitration, and assuming enough arbitrators and arbitration service providers conduct themselves in a like manner, then over time, their collective actions can have far more influence on arbitration than those of the courts or legislatures. Conversely, their failure to act,or their misplaced actions, may prompt judicial or legislative changes to arbitration law that could reduce arbitration’s utility.

Parties and their counsel can also exert control over the process, sometimes more so than they may realize. They may, for example, craft their arbitration agreements to meet the needs of the problem at hand, take steps to ensure clarity in their submissions, and use the freedom of contract permitted under the FAA to help ensure that their dispute resolution experience adequately meets their needs. If they are not happy with the way arbitration service providers and arbitrators are conducting themselves, they can opt for others in the future, including ones whose actions evidence a commitment to arbitration as a workable and more desirable alternative to litigation as respects many types of disputes.

State and federal courts are another group of stakeholders.  Arbitration can relieve overburdened dockets and, in any event, the coercive enforcement of arbitration agreements and awards falls to them.  Because they are the day-to-day wards of arbitration-law, and because of their coercive powers, the courts have the greatest degree of direct and relatively immediate influence over whether arbitration will likely wilt or flourish.

Meaningful and significant change is most likely to occur if all stakeholders make an effort to change the way they think and deal with arbitration, rather than expecting the legislature or the courts to somehow effect change by themselves. The Federal Arbitration Act (the “FAA”) does not have to be amended and courts do not really need to overhaul and revamp judicially-created arbitration law. Arbitration law is not the problem; the problem lies in what stakeholders do or do not do  to make arbitration a meaningful and attractive alternative to litigation, which is the whole point of arbitration law (or at least that of the FAA).   If enough stakeholders voluntarily make an effort to change at least slightly the way they think about arbitration, then the problem might be solved, or at least diminished in severity.

Arbitration’s problems manifest themselves in various ways, but they are particularly evident in the making and enforcement of awards. Arbitration awards, their enforcement, and the enforcement process itself is, not surprisingly, a source of dissatisfaction among those who have agreed to arbitrate, and a dissatisfied customer is not a repeat one.

Award enforcement is (as it should be) a public, judicial function and those who are contemplating using arbitration are thus privy to the awards that make it to the enforcement stage and to judicial decisions concerning enforcement. If the enforcement process is perceived to be too expensive and time-consuming; if it is implemented in a way that results in judicial enforcement of the award, but not the parties’ agreement; or if it fails to enforce the modest expectations of fundamental fairness the FAA implies into that agreement, then arbitration agreements become less attractive in the eyes of prospective arbitration users, especially those who are wise enough to make informed decisions about the risks and benefits of arbitration.

Arbitration cannot serve as an attractive alternative to litigation unless arbitrators and judges enforce the parties’ arbitration agreement according to its terms and consistent with the parties’ legitimate expectations. When an arbitrator makes an award that contravenes the parties’ legitimate expectations expressed or inherent in their arbitration agreement, then the arbitrator is not enforcing an arbitration agreement according to its terms. Likewise, if a court confirms and enforces that award, then the court is guilty of undermining the purposes and objectives of the FAA.

The making and enforcement of an arbitration agreement cannot be divorced from the parties’ agreement to arbitrate and their submissions. There has to be at least some reasonable connection between the two. But that does not mean that courts must expand the deferential scope of judicial review applicable to awards.

Courts and commentators have long recognized that the FAA’s arbitration-award enforcement scheme must strike a delicate balance among competing considerations, including: (a) preserving arbitration’s ability to serve as an informal, speedy and cost-effective alternative to litigation; (b) keeping judicial involvement in the arbitration process to a minimum for the sake of both the parties and the courts; and (c) ensuring that FAA-sanctioned contractual expectations are adequately met.

Arbitrators, judges, parties and counsel need to act thoughtfully and responsibly if the balance is to be struck. Arbitrators can significantly reduce—or perhaps practically eliminate—the chances that their awards will present a reasonably strong case for vacatur if they err in favor of issuing an award that meaningfully implements the parties’ agreement, including the fundamental fairness requirements the FAA implies into every arbitration agreement. Most or all judges would likely cherish such efforts, because it would not only reduce the number of challenges brought, but would presumably make it even easier to dispose of the challenges that are. Parties who have a real stake in arbitration in general—and who are not so disgruntled by unfavorable results that they can think objectively about whether the unfavorable award was nevertheless at least arguably grounded in their agreement—should welcome that approach as well.

This is more easily said than done. It requires that a significant number of persons interested in arbitration and the award-making and -enforcement process to make some tough choices in close cases, and to consider more carefully and thoughtfully the probable consequences of all their decisions and actions, even ones that do not seem so tough or consequential.

The decisions and actions of those interested in arbitration are not likely to facilitate arbitration’s improvement and foster its continued growth unless they are guided by a relatively simple analytical framework that can be embellished with common sense and good judgment born of  practical experience. Fortunately there is already one in place that has served arbitration well in a number of procedural contexts involving arbitration practice and arbitration-agreement enforcement, but which is not always adhered to as faithfully in the context of award making and enforcement: all involved should strive to enforce arbitration agreements as written and consistent with the modest implied expectation of fundamental fairness the FAA implies into them.

The next segment of this multi-part series outlines that framework and explains how it is not only grounded in the FAA and U.S. Supreme Court decisions construing the FAA, but is the whole point of the FAA. Future installments will explain why some arbitrators, judges, parties and counsel may not, despite their best intentions, always do what is best for arbitration, and will discuss what they might do to better align their actions with their good intentions. When arbitration works the way it was intended to work everybody is a winner in at least some respects, including the loser.


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