In previous segments (here,here, here, and here) we discussed the confirmation of Chapter One Domestic Awards and Chapter Two Domestic Awards. This segment addresses foreign awards.
There are two types of foreign awards that are or may be governed by the Federal Arbitration Act: (a) awards made in the territory of a country that is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or “Convention”), the Inter-American Convention on International Commercial Arbitration (the “Panama Convention”), or both, which we refer to as Chapter Two Foreign Awards; and (b) awards that are made outside the United States in a country that is not a signatory to the New York or Panama Conventions, which we refer to as Chapter One Foreign Awards.
What are Chapter Two Foreign Awards?
Chapter Two Foreign Awards are awards that are made in the territory of a foreign state that is a signatory to the New York or Panama Conventions, and which otherwise falls under one or both of those Conventions.
The last three segments of the Businessperson’s Federal Arbitration Act FAQ Guide discussed the substantive and procedural requirements for confirming a Chapter One Domestic Award, and answered additional FAQs concerning the confirmation of such awards. (See here,here, andhere.) This segment focuses on how confirming Chapter Two Domestic Awards—i.e., domestic awards that fall under the Convention on the Recognition of Foreign Arbitral Awards (the “Convention”)—differs from confirming Chapter One Domestic Awards—i.e., domestic awards that fall under Chapter One of the Federal Arbitration Act only and not under Chapters Two or Three.
This FAQ guide distinguishes between “Chapter One Domestic Awards” and “Chapter Two Domestic Awards.” For our purposes, an award is “domestic” when it is made in the United States, that is, by an arbitrator or panel of arbitrators sitting in the territorial jurisdiction of the United States.
An award made in the United is a “Chapter One Domestic Award” when it falls under Chapter One of the Federal Arbitration Act, but not under Chapters Two or Three, which implement the Convention and the Inter-American Convention on International Commercial Arbitration (the “Panama Convention”).
What is a Chapter Two Domestic Award?
An award is a “Chapter Two Domestic Award” when it is made in the United States, but, for purposes of Section 202 of the Federal Arbitration Act, and Art. I(1) of the Convention, is “not considered” to be a “domestic award.” See Convention, Art. I(1). Such awards ordinarily fall under both the Convention and Section 2 of the Federal Arbitration Award, and thus under Chapters One and Two of the Federal Arbitration Act.
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 Arbitration Law FAQ guide briefly explains what
the Federal Arbitration Act is, and then answers some frequently asked
questions about Chapter 1 of the Act. It is not legal advice, nor a substitute
for legal advice, and should not be relied upon as such.
If you desire or require legal advice or representation in a matter concerning commercial, labor, or any other arbitration-law matter, then do not hesitate to contact a skilled and experienced arbitration-law attorney. This guide provides some general information that may be able to assist you in your search for legal representation, or in simply obtaining a better understanding of some arbitration-law basics.
Arbitration Law FAQS: What is the Federal Arbitration Act?
The Federal Arbitration Act is a federal statute
enacted in 1925 that makes certain (but not all) arbitration agreements “valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2. It was originally, and for many years,
known as the “United States Arbitration Act,” but for simplicity’s sake we’ll
refer to it as the “Federal Arbitration Act,” the “FAA,” or the “Act.”
It was passed at a time when courts were, for the most part, unwilling to enforce agreements to arbitrate because they thought that such agreements “divested” their “jurisdiction” over disputes that would ordinarily be decided by courts. In other words, many courts thought it wrong for courts to lend their assistance to the enforcement of contracts under which parties would agree to submit their disputes to private decision makers.
Even by the time the FAA was passed, arbitration was
not new. For example, it can be traced back at least as far as medieval times,
when various guilds used it as a way of resolving disputes according to what
became known as the “law merchant,” an informal body of rules and principles
that merchants believed should be applied to their disputes, but which common
law courts did not, at the time, apply. The first arbitration agreement was
reportedly included in a reinsurance contract in the late 18th
century, and George Washington apparently included an arbitration clause in his
will.
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 remainder of this FAQ guide focuses on Chapter 1 of
the FAA.
Arbitration Law FAQs: What does Chapter 1 of the FAA do apart from declaring certain arbitration agreements to be valid, irrevocable, and enforceable?
Section 2 of the Federal Arbitration Act is sometimes
referred to as the Act’s “enforcement command.” It is the provision that
declares certain (but not all) arbitration agreements to be “valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2.
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., 586 U.S. ____, slip op. at *4 (Jan. 8, 2019) (citation and quotation omitted). 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 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. 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. 9 U.S.C. §
3.
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.
How can I tell if an arbitration agreement or award is governed by Chapter 1 of the Federal Arbitration Act?
Whether an arbitration agreement falls under the FAA depends on whether: (a) the arbitration agreement is in writing; and (b) is part of a “maritime transaction” or of a contract that affects interstate commerce.
The starting point is, as before, Federal Arbitration
Act Section 2’s enforcement command, which provides, with bracketed text added:
[A] A written provision [B] in any maritime transaction or [C] a contract evidencing a transaction involving commerce [D] 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 [E] an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, [F] shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. § 2.
Section 2’s requirement that an arbitration agreement be “written” (Part [A]) seems simple enough, and, for the most part, it is. But remember, just because a contract is required to be “written” doesn’t mean the arbitration agreement must be signed.
As respects whether a “contract” “evidenc[es] a transaction involving commerce” (Part [C]), 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 Terminix Cos. v. Dobson, 513 U.S. 265, 268, 281-82 (1995); 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 Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-57 (2003). 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.
Parts [A] through [D]] of Section 2 make the Federal
Arbitration Act applicable to written, pre-dispute arbitration “provision[s]”
in “maritime transactions” or in “contract[s] evidencing transactions involving
commerce….” These arbitration provisions are “pre-dispute” arbitration
agreements because they are defined by Part [D] as “provision[s]” “to settle a
controversy thereafter arising out of
such contract or transaction, or [out of] the refusal to perform the whole or
any part” of such contract or transaction….”
9 U.S.C. § 2
(emphasis added). In other words, agreements to submit future disputes to arbitration.
Parts [A] through [E] of Section 2 make the FAA applicable also to written, post-dispute arbitration agreements, that is, agreements to arbitrate existing disputes arising out of “maritime transactions” or “contract[s] evidencing transactions involving commerce….” To that end Part [E] makes Section 2 applicable to “agreement[s] in writing to submit to arbitration an existing controversy arising out of” “maritime transaction,” (Part [B]) “contract evidencing a transaction involving commerce” (Part [C]), or “refusal to perform the whole or any part” of such a contract or transaction. (Part[D]). 9 U.S.C. § 2 (emphasis added).
Arbitration Law FAQs: Are there any Arbitration Agreements Falling Under FAA Section 2 that are Exempt from Chapter 1 of the FAA?
Federal Arbitration Act Section 1
Yes. Section 1 of the FAA 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.” According to the United States Supreme Court, this 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, 586 U.S. ___, slip op.at 6, 7, & 15 (Jan. 15, 2019).
Arbitration Law FAQs: If the Chapter 1 of the Federal Arbitration Act applies, does that mean all FAA litigation falling under Chapter 1 can be brought in federal court?
No. Chapter 1 of the Federal Arbitration Act does not
confer an independent basis for federal court subject matter jurisdiction over
applications for the relief authorized by Chapter 1. Put differently making an
application under the FAA does not raise a “federal question” over which a
federal court could, under 28 U.S.C. §
1331, base subject matter jurisdiction.
But that doesn’t mean that federal courts cannot have subject
matter jurisdiction over Chapter 1 Federal Arbitration Act proceedings. If the
requirements for diversity jurisdiction are met, including complete diversity
of citizenship between the parties, and an amount in controversy that exceeds
$75,000.00, excluding interest and costs, then a federal court will have
subject matter jurisdiction under the diversity jurisdiction. See 28 U.S.C. § 1332.
Does Chapter 1 of the Federal Arbitration Act apply in state court?
Yes. State courts are required to enforce arbitration agreements under Section 2 of the FAA. Basically, they must enforce arbitration agreements falling under the FAA, putting them on the same footing as other contracts. SeeKindred Nursing Centers, 137 S. Ct. at 1424.
Most or all states have their own arbitration statutes. New York’s arbitration statute, for example, is codified in Article 75 of the New York Civil Practice Law and Rules (“CPLR”). Depending on applicable state law, state courts may carry out Section 2’s enforcement command using their own arbitration statute’s provisions, even if they are different than those provided by Chapter 1 of the FAA. But if enforcement of the FAA through the provisions of the state’s arbitration code would undermine the purposes and objectives of the FAA, then the offending state arbitration code provisions would be preempted (i.e., superseded) by the FAA to the extent that they conflict with the FAA.
If you are interested in learning more about the Federal Arbitration Act, see here, here, and here.
Photo Acknowledgments:
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law. L&L added text to the first three photos from the top.
In our last post on Pine Top Receivables, LLC v. Banco De Seguros Del Estado, ___ F.3d ___, Nos. 13-1364/2331, slip op. (7th Cir. Nov. 7, 2014) (per curiam) (here), we offered our take on the case and what it might mean, particularly as respects the Court’s suggestion that state pre-answer security statutes may be procedural under the Erie doctrine, possibly inconsistent with federal procedural law and thus inapplicable in diversity cases. Now let’s take a closer look at what transpired in Pine Top, for even apart from the Court’s allusion to a possible Erie doctrine issue (our Erie ghost of reinsurance future), it involved a number of classic reinsurance issues (our ghosts of reinsurance past), as well as a notable appellate jurisdiction issue and the question whether the assignee of the insolvent ceding company acquired the right to demand arbitration against the reinsurer. Continue Reading »
It did so in the somewhat unusual context of Chapter 3 of the Federal Arbitration Act, which implements the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”). That raised an arcane issue of appellate jurisdiction, which appears to have been caused by Congress failing to amend the appellate jurisdiction provisions of Chapter 1 (codified at 9 U.S.C. § 16 (2013)) to reflect Congress’ enactment of Chapter 3.
Throw in an assignment agreement between the insolvent cedent and a contract interpretation dispute over whether the cedent’s assignee purchased the right to compel arbitration under the reinsurance treaties between the insolvent cedent and the Uruguay-owned reinsurance company, and we have something that might appear to resemble a perfect storm of reinsurance and arbitration-related issues. Continue Reading »
On April 29 — a/k/a “Arbitration Fairness Day” – – Senator Russ Feingold (D-WI) introduced the Senate’s version of the Arbitration Fairness Act of 2009 (S. 931). The Senate’s version tracks the House version in many respects, but there are some important differences between the two.
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. Continue Reading »
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