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 4 th 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