The Arbitration Fairness Act: The
International Ramifications
International Institute for
Conflict Prevention and Resolution (CPR)
January 15, 2009
Edna Sussman
www.SussmanADR.com
Overview
• Importance of choice of forum
• The Arbitration Fairness Act of 2007
– Substantive provisions
– Procedural provisions
• Consequences
• Other arbitration bills
• Domestic business to business arbitrations
Choice of Forum for
Dispute Resolution
• Importance in international trade long
recognized in U.S. law
• Bremen v Zapata 1972 – choice of forum an
“indispendable element in international trade”
• Scherk v. Alberto Culver 1974 - “parochial
refusal” to enforce an arbitration agreement
would “imperil the willingness and ability of
businessmen to enter into international
commercial agreements”
Arbitration Fairness Act of 2007
• Purpose – protect the little guy
• Consumer and other scenarios
• Co-sponsored by over 100 members of
the House of Representatives and several
prominent senators including Senators
Kerry, Kennedy, Byrd and Boxer
• Democratic control of Congress
Substantive Provisions of the Act
• “No pre-dispute arbitration agreement shall be
valid or enforceable if it requires arbitration” of :
• Employment disputes
• Consumer disputes
• Franchise disputes
• “Disputes arising under any statute intended to
protect civil rights or to regulate contracts or
transactions between parties of unequal
bargaining power”
• No distinction between international and
domestic arbitration
Statutes provision undefined
• Meaning- “unequal bargaining power”?
• NY County Lawyers Ass. Committee on Federal Courts
found it could cover “securities, antitrust, ERISA, certain
parts of the Uniform Commercial Code, bankruptcy law,
certain parts of admiralty and maritime law,
governmental contracts, intellectual property and a host
of others”
• State statutes that deal with “deceptive acts or practices
in the conduct of any business, trade or commerce or in
the furnishing of any service in this state” like NYS’s
Consumer Protection Act, intended for consumers but
frequently claimed in business to business litigation
• Foreign laws implicated too?
• No international corollary
Franchises
• Business to business
• Many large international franchise
businesses, e.g. Hilton, Intercontinental,
UPS Stores, McDonalds
• Need to maintain brand and quality of
franchise
• Local court problematic: delay, culture,
neutrality
• No international corollary
Procedural Provisions of the Act
• Bill provides: Whether Act applies- federal law.
Validity and enforceability of an agreement to
arbitrate is for the court, “irrespective of whether
the party resisting arbitration challenges the
arbitration agreement specifically or in
conjunction with other terms of the contract
containing such agreement.”
• Reverses decades of precedent on competence
competence and separability
• Impacts ALL arbitrations – not limited to
agreements voided by the Act.
Separability
•
“Agreement to arbitrate” is “separate” or “separable”
from the underlying contract- two agreements. So e.g.
fraud in the inducement of the underlying contract goes
to the arbitrator; fraud as to the arbitration agreement
itself is for the court
• Prima Paint, 1967, necessary to effectuate the parties’
intention and serve the objectives of the FAA that parties
be allowed to proceed in arbitration in accordance with
their agreement in a speedy manner “and not subject to
delay and obstruction by the courts.” See also, First
Options 1995; Buckeye 2006.
Competence-Competence
• How the authority to decide challenges to
arbitral jurisdiction is allocated between the court
and the arbitrator.
– 1. question of timing which dictates who rules first on
the arbitrators’ jurisdiction (i.e. whether the court
determines it on a motion to stay or compel arbitration
or upon review of the award on a petition to vacate or
confirm the award);
– 2. what standard of review is to be given to the
arbitrators’ ruling on challenges to their jurisdiction.
• U.S. – arbitrator decides challenges to own
jurisdiction first, if not based on a challenge to
the agreement to arbitrate itself.
More on How it Works Now
• Simply put- choice between the party seeking to arbitrate
on the basis of an arbitration clause—who would like to
move forward with the arbitration—or the party
challenging the arbitration—who would like to delay it
and be heard in court. In the United States, based on
the court’s recognition of the arbitration agreement (or of
the party’s agreement to have the arbitrator decide if
there was an agreement to arbitrate), the combined
doctrines make a choice in favor of allowing the
arbitration to go forward, with the award to be reviewed
by the court at the conclusion.
• Unless and until a court stays arbitration, arbitrator can
proceed with the arbitration.
Other Countries’ Arbitration Laws
• Competence-competence and separability are
the “cornerstone of international arbitration”
• Precise rule varies somewhat from jurisdiction to
jurisdiction but all accept that a jurisdictional
challenge does not automatically stop the
arbitration.
• Modern arbitration statutes codify this in some
form that at least accepts this basic proposition:
e.g. UNCITRAL Model law ( over 50 countries),
English, Swiss, French. FAA over 80 years old.
Institutional rules
•
•
•
•
Institutional rules expressly provide for competence-competence and
separability, e.g.: AAA, ICC, LCIA, Singapore, Dubai, Hong Kong, WIPO,
American Arbitration Association “1. The tribunal shall have the power to
rule on its own jurisdiction, including any objections with respect to the
existence, scope or validity of the arbitration agreement.
2. The tribunal shall have the power to determine the existence or validity of
a contract of which an arbitration clause forms a part. Such an arbitration
clause shall be treated as an agreement independent of the other terms of
the contract. A decision by the tribunal that the contract is null and void shall
not for that reason alone render invalid the arbitration clause.”
ICC Article 6 Section 4 “Unless otherwise agreed, the Arbitral Tribunal shall
not cease to have jurisdiction by reason of any claim that the contract is null
and void or allegation that it is non-existent, provided that the Arbitral
Tribunal upholds the validity of the arbitration agreement. The Arbitral
Tribunal shall continue to have jurisdiction to determine the respective rights
of the parties and to adjudicate their claims and pleas even though the
contract itself may be non-existent or null and void.”
Significance of the
Act’s Provisions
• Act has retroactive effect “shall apply with respect to any
dispute or claim that arises on or after” the effective date.
• Overrides contractual business to business agreements
to arbitrate
• Overrides provisions of arbitral rules chosen to govern
• Any challenge to jurisdiction on any basis - arbitrator
must stop!!!! No authority to continue. Must await court
ruling
• Changes economics of the deal, Bremen, Carnival Lines
• Invitation for delay and may entail trial in court of the
central issues in the case
• Prospective application would be equally problematic
Flooding the Courts
• Virtually every case could find its way to a
lengthy court proceeding
• Claims of invalidity of the contract for a
host of reasons are commonplace
• Delay is the game of the
defendant/respondent
• Already crowded courts
Consequences for
International Trade
• US not an arbitration friendly forum – won’t be
4th most popular seat for long
• U.S companies:
– Won’t elect U.S. law as governing the contract,
minimize contacts with U.S.
– Charge more to compensate
• Foreign companies
– Won’t do business with U.S. companies – fear of U.S.
litigation process, difficulty in collection
– Require U.S. companies to hold assets overseas to
satisfy possible disputes
• Global economy – unintended consequences
Other arbitration bills
• Fairness in Nursing Home Arbitration Act approved by judiciary committee of both houses
• Fair Arbitration Act of 2007 – Sen. Sessions bill
• Poultry growers - Farm Bill 2008 - opt out in
new contracts enacted
• Automobile Fairness Act of 2008
• American Homebuyers Protection Act
• Alcohol Franchise Contract Arbitration Fairness
Impact on All
Business to Business Arbitration
• Same problems presented with domestic
business to business arbitration