At the federal level we have the Federal Arbitration Act (FAA). In addition, most states have passed their own arbitration statute applicable to intrastate arbitration agreements. Most of the state enactments are closely patterned after the Uniform Arbitration Act (UAA). Nevertheless, some elect to exclude certain types of cases such as torts, employment disputes, insurance claims and claims against nursing homes.
The enforcement and vacatur provisions of most state statutes are similar to those found in the FAA. This is particularly true with respect to the grounds upon which an arbitration award may be judicially vacated. As noted in a previous article, in addition to the specific grounds set out in the FAA courts have recognized a limited number of common law grounds for vacatur of arbitral awards. This is also true at the state level with respect to cases decided under state arbitration acts. For example in several states “manifest disregard for the law” and “violation of public policy” have been recognized as common law grounds for vacatur.
State arbitration statutes are often tailored in certain substantive areas. For example, state statutes often:
(1) incorporate mechanisms for appointment of arbitrators in the event the parties fail to agree;
(2) provide a time and method for notice of arbitral hearings;
(3) mandate the right to be heard, present evidence and confront adverse witnesses;
(4) authorize arbitrators to compel attendance of witnesses and production of documentary evidence;
(5) require signed written awards; and
(6) authorize awards to be modified or corrected.
A surprising number of appellate cases have recently arisen addressing the issue of mutuality of obligation — or lack thereof — in arbitral agreements. Arbitral provisions, to be enforceable, have five essential elements: (1) competent parties, (2) subject matter, (3) legal consideration, (4) mutual agreement and, (5) mutual obligation. The principal issue in many recent arbitration cases has been the fifth element, mutuality of obligation. Generally state courts have interpreted mutuality of obligation to require that “an obligation must rest on each party to do or permit to be done something in consideration of the act or promise of the other” and that unless both parties are bound, neither is bound. Courts have fairly consistently found mutuality of obligation to be absent (and the arbitral agreement void) when one party to an arbitration agreement is required to arbitrate while the other retains the right to pursue legal or equitable remedies. One party to arbitration is precluded from limiting the other to arbitration as an exclusive remedy, while reserving unto itself the ability to pursue judicial remedies.
The question of whether the FAA or state arbitration law applies often arises. The Supreme Court has ruled that the “involving commerce” language in section 2 of the FAA is the equivalent of “affecting commerce” and signals congressional intent to use its commerce power as broadly as possible, making that language equivalent to “affecting commerce.” The determining factor is, therefore, whether the transaction in question “affects” interstate commerce.
Conflicts between the FAA and state provisions were addressed by the Supreme Court in Prima Paint Corp. v. Flood & Conklin Mfg. Co. The court ruled that federal courts sitting in diversity are bound by the FAA rather than state law. In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., the court ruled that since the FAA is substantive federal law it governs in both state and federal courts. In Southland Corporation v. Keating, a California state statute was declared void because it conflicted with the FAA. However parties can designate in the arbitration agreement whether the FAA or state law is to apply and the courts are bound to enforce that choice.
Disputes concerning the arbitrability of specific claims arise in cases governed by state law. The outcome usually depends on interpretation of state arbitration statutes by the court and on the construction of the contract language itself. State common law rules of contract construction, including the following, are usually outcome determinitive:
(1) the language is construed to effectuate the intent of the parties is primary;
(2) the language is construed in accordance with its plain meaning;
(3) all doubts and ambiguities regarding arbitrability are resolved in favor of arbitration; and
(4) the language is construed in accordance with its plain meaning.
Given the increasing popularity of arbitration as a method of dispute resolution, it is likely that lawyers and clients alike will be called upon to deal with this ever expanding body of law and procedure. Arbitration can seem like a jurisprudential labyrinth. Its boundaries are statutorily defined at both federal and state levels with a significant overlay of common law–again both federal and state.
The task is to recognize that the seminal question is whether the FAA or state arbitration law applies. Answers to all other questions will likely depend on the answer to that one. This determination hinges on whether the transaction in question falls within the broadened umbrella of “interstate commerce” as defined by the courts or, alternatively, whether the parties have effectively designated in the arbitration agreement itself the law they want to be applied. Once this determination has been made, most of the remaining questions will deal with arbitrability, enforcement and vacatur.
Note: The articles in this series dealing with arbitration were adapted from an article written by Stanley A. Leasure and Wayne L. Anderson entitled Arbitration in Arkansas: A Legal Primer, which appeared in The Arkansas Lawyer, 43 Ark. Law. 14 (2008).