Understanding the Federal Arbitration Act: United States Code Title 9

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Federal Arbitration Act

The Federal Arbitration Act is the foundational law relating to enforcing arbitration agreements within the United States. Those practicing domestic or international commercial arbitration will likely be very familiar with its requirements for enforcement, yet many challenges arise under the Federal Arbitration Act, both in understanding and legal challenges.

For some, the text is difficult to access and understand, and others may be bound by an arbitration agreement enforceable under the Act without knowing it. For much of the general public, the Federal Arbitration Act is something they have never thought about, even though it can impact their lives.

This article will take a look at the Federal Arbitration Act, or the FAA as it is commonly referred to. We will outline the history of the act, highlight some important provisions, and discuss the implications that such provisions may have on the general public and people heavily invested in the international commercial arbitration sector.

Finally, the article will outline important and noteworthy legal challenges to the enforcement of arbitration agreements under the FAA and any outcomes that will impact the application of the FAA.

The goal of this article is to ensure that readers have a broader understanding of the FAA and its implications on their lives.

The History of the FAA

In the early 20th century, the courts in the United States and England had developed a practice of rejecting any agreements that would remove the jurisdiction of the courts over a dispute. This resulted in arbitration agreements that would normally be enforced being rejected by the court stating that they would overrule such provisions in a contract.

Additionally, this led to the United States Congress assessing the need to enforce the terms of such an agreement through positive law. Congress then had large covering provisions codified into the positive law in the United States Code Title 9.

What has become known as the Federal Arbitration Act was codified in 1925. The Act outlines enforcement of such contract provisions and when a person can challenge an arbitration agreement and agreements for existing controversy arising out of contracts to be sent to arbitration. Such grounds were severely limited when the parameters were codified, encouraging the courts to enforce arbitration agreements.

The law has been modified and changed to fit the evolving legal landscape, and such repealed sections are still retained in history to help outline how such former sections affected the law and how the new sections inform the law as it stands. Many of these changes have been made in reaction to the legal challenges and appeals that have encouraged such repeal, which will be discussed in later sections.

One of the more important changes that has taken place is the changes that helped to implement the treaties and conventions outlining the role of international commercial arbitration and the enforcement of foreign arbitral awards within the United States. This has expanded how international commercial disputes are resolved and foreign arbitral decisions are enforced, simplifying the dispute resolution process between the United States and another state or foreign nation.

The Overarching Themes of the Federal Arbitration Act

As mentioned in the history of the Act, the overarching goal of the Federal Arbitration Act is to encourage the use of arbitration and arbitration agreements. It allows for the courts to compel arbitration when an agreement exists. This helps resolve disputes effectively and without needing the courts to be involved. This saves time for the parties and helps remove disputes from the courts.

It applies in both federal and state courts, which helps enforcement and prevents parties from skirting enforcement by bringing a suit in state court. However, any enforcement in state court must relate to foreign commerce.

Related to Foreign or Interstate Commerce

The Act also outlines that it applies to agreements relating to commerce, as it falls under the interstate commerce powers of Congress. Commerce is broadly defined to ensure that most commercial transactions between states, the United States, and other foreign states. It also explicitly includes maritime transactions. This helps ensure that written provisions are enforced.

However, it explicitly does not cover the contracts of seamen, railroad employees, and other workers involved in foreign or interstate commerce. This ensures that companies cannot compel arbitration with their employees simply because they work in interstate commerce.

An Arbitration Agreement Enforceable Under the FAA

Section 2 of the Federal Arbitration Act states that any written provision of a maritime transaction or a contract evidencing a transaction involving commerce that requires a dispute to be resolved through arbitration rather than the courts is valid, irrevocable, and enforceable unless it would be otherwise revocable through contract law. Such agreement can be prospective, meaning that it covers any dispute that arises under the contract, or retrospective, meaning that the parties agreed to submit the dispute to arbitration after the dispute arises.

An arbitration agreement is most frequently prospective and included as a provision in a contract. This means that the courts must compel arbitration when there is an agreement provision in the contract, even if one party does not agree with arbitration any longer. This means that entering into such a relationship with another party should be done with major consideration of the implications and trust on both sides of the agreement.

Enforcement of Such a Contract

Another important section of the positive law surrounding arbitration is the ability of the courts to enforce arbitration agreements and the practicality of how to do this when the agreement is challenged. The FAA allows the courts to compel arbitration when there is an agreement between the parties. This also means that if one of the parties attempts to avoid the arbitration agreement and submits the dispute to court, the courts have the power to suspend proceedings while the state of the arbitration agreement is determined.

If a party refuses to comply with an arbitration agreement, one party can request that the federal court that would have jurisdiction without an arbitration agreement compel such party to arbitrate the issue. Such demand will often result in a stay in any other proceedings and a determination of any challenges to the agreement. Such an application to the court will often ensure that the arbitration agreement is enforced between the parties.

Impacts of Compelling Arbitration

Compelling arbitration does help reduce the number of disputes in front of the court and is often a faster resolution than a trial on a matter. However, compelling a party to arbitrate may raise some issues with the process. It is important to understand these issues and why they may cause issues for the parties moving forward. These are particularly at issue in situations where there may be a power imbalance between the parties such that one party did not have the full ability to agree to the arbitration provision.

Release of Right to Trial

The biggest issue with compelling arbitration is the required waiver of the right to trial on the matter. The right to present your case to a judge or jury is vital in the US Constitution, but when an arbitration agreement is present, some feel that this interferes with this right. Understanding that you cannot have a trial after arbitration is an important step to agreeing to arbitration.

Waiver of Appeal

With a standard trial, the parties will have the ability to appeal the decision and ask another court. to rule on the substance of the dispute if they do not agree with the decision. An arbitration agreement will require a party to waive the right to appeal on a substantive issue.

An arbitral award arising from an agreement may only be appealed for some very specific issues that will be outlined below but are tied to an issue with the process of the arbitration or the neutrality of the arbitrator. A party should also understand the impact of such award and ensure that they are agreeable to waive the appeal.

The Arbitration Process

The FAA also helps outline the arbitration process by providing provisions that address how to handle the process when there is a lack of clarity within the agreement. This involves appointing the arbitrator and compelling the appearance of witnesses.

Appointment of the Arbitrator

The first step in the arbitration process after the agreement to arbitrate is to appoint the arbitrator for the case. The arbitrator will be the person who will hear evidence pertinent to the case and issue an arbitration award. An arbitrator is neutral, meaning that they have no connection to either party or interest in the outcome that will influence the decision they make. They will also need to follow the applicable rules for the arbitration and disclosure of any potential conflicts.

Section 5 of the United States Code outlines the process of appointing the arbitrator when the agreement does not outline a process. The section relies on the agreement between the parties first, then it looks at whether the parties can agree on a method after they begin arbitration. Such method should be followed if agreed upon. If there is no agreement, the United States District Court will appoint an arbitrator to oversee the dispute and hear the evidence.

The Arbitration Hearing

After the arbitrator is appointed, the parties will present their case to the arbitrator. This will often happen first with written arguments, and then a hearing with oral argument if the arbitrator feels that it is needed. At this hearing, the parties can present evidence through witness testimony and documentation. This ensures that the arbitrator has a thorough understanding of the dispute before issuing an award.

Occasionally, the parties may have issues with compelling a witness to attend arbitration and testify. The FAA allows for the arbitrator to issue a summons or subpoena with fees for the hearing in the same way that a court may require such attendance. This ensures that a party does not miss out on presenting vital evidence to the arbitrator that may influence the outcome of the dispute.

Enforcement of the Arbitral Award

Once the arbitrator issues an award, the parties will need to enforce the award legally. When such awards are issued, the party looking to enforce the award will need to take the award to a court to have it confirmed. The court will confirm the award and issue a judgment in an order. Such an order is then able to be enforced as any other court order is. Section 9 of the United States Code Title 9 outlines the process for getting an award confirmed by the court.

It requires the party seeking payment to register the award with the court within one year. The court that can enforce the award will most frequently be outlined in the agreement; otherwise, it will go to the United States district court within which the parties reside or have some other reasonable relation.

Reasons to Challenge an Award

The FAA also outlines the reasons that an arbitral award may be challenged. These issues are limited to the reasons outlined in the FAA and are related more to the process of such arbitration rather than the subject matter submitted to the arbitrators.

This challenge must be brought in the same court that would be responsible for the enforcement of the award through a judgment. It also must be brought by the party that is aggrieved in some way by the outcome of the award. When the court finds that the challenged award was affected in some way, they will rule to vacate the award, which means that the decision is no longer enforceable, but will often need to be arbitrated again.

Corruption, Fraud, or Undue Means

The first reason to challenge an award is that there was corruption, fraud, or undue means used in the process of issuing an award. This is most commonly illustrated by one party bribing the arbitral panel, presenting purely false information, or other fraud within such an action. It can also relate to the enforcement of the arbitration agreement in the first place if it was procured in the same manner.

Impartiality or Corruption with the Arbitrators

Another reason to challenge an award is when there is impartiality or corruption of the arbitrators. This can be the result of an undisclosed conflict with one or more arbitrators that calls their ability to decide without looking out for their interests. Such an issue must impact the outcome of arbitration for it to be the grounds for a challenge, but when it does, it will most likely cause a court to vacate the award.

Misbehavior that Prejudices

When there is no impartiality on the part of the arbitrator but there was other behavior that impacted the outcome for one party, there may be cause for a challenge. Title 9 outlines examples such as the arbitrator refusing to postpone a hearing when there is due cause to do so or refusing to hear evidence that is pertinent and material to the case.

Because the Federal Rules of Evidence do not apply in the same way, it is very unlikely that the arbitrator would have the discretion to exclude evidence that has an impact on the issue. Therefore, if the arbitrator issues rulings on evidence or postponement or other issues that prejudice a party, the awards that they issue may be vacated by a court.

Exceeded or Imperfectly Executed Arbitral Powers

Title 9 also allows an award to be challenged if the parties feel that the arbitrator either exceeded their powers or performed so poorly that the award is not mutual or full. This is commonly illustrated by the failure to consider evidence that was necessary or just poor control over the process. This must impact the way that the award was issued, and it can result in a partial vacation, but a court does not always fully vacate such an award.

Clerical Error

The final reason to challenge is a clerical error that resulted in an unenforceable award. This is most commonly seen in an evident material mistake in calculations or names that results in an award that is unenforceable, most commonly either too much or too little awarded, or the wrong party is named as the person to be paid. The court in this case will usually direct a correction unless there are other issues.

Legal Challenges to the Federal Arbitration Act

As mentioned above, there are critics of the Federal Arbitration Act, and it has faced its fair share of legal challenges in the nearly 100 years it has been a positive law. These challenges have led to changes and the removal of some of the provisions. However, even with the challenges to the basic principles of the law, such provisions have remained in the law and enforceable with the courts.

Today, the courts are more likely to uphold an arbitration agreement or award than they are to deny the parties the opportunity to arbitrate their dispute. There has been a shift away from retaining jurisdiction over a dispute, as courts have become overwhelmed with cases, and to recommending and requiring arbitration or other forms of alternative dispute resolution. This shift has encouraged the courts to continue to support and recommend alternative dispute resolution, yet this does not prevent parties and attorneys from challenging the legal support for the FAA.

Hall Street Associates, L.L.C. v. Mattel, Inc.,552 U.S. 576 (2008)

One of the most common challenges to the FAA is the very narrow grounds for review of an arbitration award. Parties will often argue that they would like the ability to ask for judicial review of the award they received. Yet in Mattel, the Supreme Court found that the parties cannot expand the parameters for judicial review, even when the parties agree in a contract that the options would be expanded. This reinforced that signing an arbitration agreement means waiving the right to appeal the issue on substantive grounds and will be bound by the arbitration award.

Epic Systems Corp. v. Lewis, 584 U.S. ___ (2018)

Another notable legal challenge came before the Supreme Court in Lewis. The issue in this case was whether individual arbitration agreements in employment contracts were enforceable when there were also unions for the employees. The Court upheld the individual arbitration agreements and stated that the FAA and the court’s preference for resolving disputes outside of the court over the right of the parties to collectively arbitrate.

This case was a major distinction in labor law and demonstrates how much the court prefers to enforce arbitration agreements, even when it would likely void another contract that had a similar interference with concerted activity protections. This decision gave additional strength to the FAA.

FAIR Act

Noting that the courts have given additional strength to the FAA over other employment laws, even state laws that have attempted to curtail the effect of the FAA on employees and employment contracts, the United States Congress has introduced legislation to combat the potential unfairness found in arbitration agreements contained in employment contracts. This legislation is known as the Forced Arbitration Injustice Repeal Act or the FAIR Act.

This bill, if passed, would stop forced arbitration between an individual and a company if it is a prospective agreement for arbitration that would require the individual to litigate employment issues, civil rights, and several other types of cases. This law intends to avoid the injustices that are often present when an individual takes on a corporation.

It would make a judge the decisionmaker when it comes to a determination of whether arbitration is appropriate and would invalidate certain arbitration agreements. However, even if the bill. can pass, it is likely to face challenges from strong supporters of the FAA.

Conclusion

The Federal Arbitration Act is a vital piece of legislation for many alternative dispute resolution practitioners, and it outlines the use of arbitration in commercial disputes. However, some shortcomings may need to be addressed to ensure that the arbitration process remains approachable and fair. Understanding the FAA is a vital part of a practitioner’s learning, and we hope that this article has helped you understand the various aspects of the Act.

To learn more about the Federal Arbitration Act, other federal legislation on arbitration and mediation, contact ADR Times today!

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