What is the Federal Arbitration Act and When does it Apply?

Legislation Concept

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The Federal Arbitration Act (a/k/a the “FAA”) is a federal statute codified in Title 9 of the United States Code that establishes federal substantive and procedural law concerning the enforcement of arbitration agreements. It consists of three chapters, Chapters 1 through 3.

Federal Arbitration Act Chapter One

Chapter 1 of the Federal Arbitration Act governs international and domestic arbitration agreements falling within in its scope, and consists of sixteen sections, which are designed to make arbitration agreements as enforceable as other contracts and to authorize federal courts to enforce them by orders compelling arbitration, staying litigation of arbitrable issues, enforcing arbitral subpoenas, appointing arbitrators in certain circumstances, and confirming, vacating, modifying or correcting arbitration awards.

Most of the provisions of Chapter 1 were enacted in 1925 and have not been amended significantly since then. Because Chapter 1 does not address in a comprehensive fashion the myriad of legal issues that have arisen concerning arbitration agreements and awards, there is a very substantial body of judge-made law governing arbitration-related issues, including a fairly extensive line of U.S. Supreme Court cases. This body of federal and state common law is based not only on interpretations of the FAA, but also on the federal common law of labor arbitration, which arises under Section 301 of the Labor Management Relations Act, 29 U.S.C. § 185 (2013), including the famous Steelworkers Trilogy line of cases decided by the Supreme Court over 50 years ago. See  Steelworkers v. American Mfg. Co., 363 U. S. 564, 567, 568 (1960); Steelworkers v. Warrior & Gulf Nav. Co., 363 U. S. 574, 582 (1960); Steelworkers v. Enterprise Wheel & Car Corp., 363 U. S. 593, 597 (1960).

Section 2 of the FAA makes enforceable a written arbitration provision in a “contract evidencing a transaction involving commerce.” 9 U.S.C. § 2 (2013). Section 2 has been interpreted broadly to mean the FAA 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”).

The FAA therefore applies to a broad range of contracts, including ones that may provide for performance only in one state, but which nevertheless affect commerce in some way. For example, two corporate parties domiciled and incorporated in State X might concern a construction project in State X, but if the project is constructed using materials imported from State Y, then the contract will likely be deemed to “affect commerce.” If that contract contains an agreement to arbitrate disputes, then the FAA will likely govern the arbitration agreement. See, generally, Allied-Bruce, 513 U.S. at 282.

The FAA exempts from its otherwise broad scope arbitration agreements in “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The Supreme Court has ruled that “workers engaged in foreign or interstate commerce” was intended to exempt only transportation workers, not all other “workers engaged in foreign or interstate commerce.” Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 119 (2001) (“Section 1 exempts from the FAA only contracts of employment of transportation workers.”).

The FAA’s substantive enforcement command, and the handful of other provisions of the FAA that are substantive in the sense that they implement FAA Section 2’s enforcement command, apply in both state and federal courts. Federal courts, however, do not have subject matter jurisdiction to decide cases simply because they are governed in whole or in part by the FAA. Rather, there must be an independent basis for subject matter jurisdiction, such as the diversity jurisdiction or the underlying dispute would have to fall within the federal question jurisdiction if it were to be decided by a court.  See, e.g., Vaden v. Discover Bank, 556 U.S. 49, 59 (2009) (citations omitted).

Federal Arbitration Act Chapters Two and Three

Chapter 2 of the FAA governs agreements and awards falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”) and consists of Sections 201 through 208 of Title 9. An award may fall under the New York Convention if it is made in the country of a signatory to the New York Convention (and there are many) or if it is made in the U.S. but is the product of an arbitration involving one or more foreign parties who are citizens of signatory states. See, e.g., 9 U.S.C. § 202.

Chapter 2 of the FAA vests in the U.S. federal courts original subject matter jurisdiction over “[a]n action or proceeding falling under the Convention.  .  .  .” irrespective of the amount in controversy or citizenship of the parties. See 9 U.S.C. § 203. It also confers a fairly broad right of removal “[w]here the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the [New York] Convention.  .  .  .” 9 U.S.C. § 205.

Agreements and awards that fall under Chapter 2 may also fall under Chapter 1. See 9 U.S.C. §§ 1, 202. In addition, “Chapter 1 applies to actions and proceedings brought under [Chapter  2] to the extent [Chapter 1] is not in conflict with.  .  . [C]hapter [2] or the  [New  York] Convention as ratified by the United States.” 9 U.S.C. § 208.

Chapter 3 of the FAA governs agreements and awards falling under the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”) and consists of Sections 301-307 of Title 9. See 9 U.S.C. §§ 301-307 (2013). For the most part, Chapter 3 implements the Panama  Convention in essentially the same way that Chapter 2 implements the New York Convention. See 9 U.S.C. §§ 302, 307.


 

challenge

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Want to read about challenging awards under Chapter 1 of the Federal Arbitration Act? Go here.

 

 

 

 

 

Please confirm

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Want to read about confirming awards under Chapter 1 of the Federal Arbitration Act? Go here.

 

         

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