Originally from The American Review of International Arbitration

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ABSTRACT

When it was passed in 1925, the Federal Arbitration Act (the “FAA”) enshrined in the United States’ legal system a “liberal federal policy favoring arbitration agreements.” Those words, however, do not appear in the text of the FAA itself. They are judicially created, first enumerated in the circuit courts in the 1960s, acknowledged by the Supreme Court in 1983, and quoted in virtually every opinion addressing the scope and effect of the FAA. In the subsequent decades, practitioners have probed, but few academics have commented on, precisely what this “federal policy favoring arbitration” means. Is this policy-incantation a mere platitude, or does it have a consistent juridical footing that guides its application? This unresolved question has significant ramifications for judges and parties that must interpret and enforce arbitration agreements, and for scholars seeking consistency in this area of the law. This article will trace the evolution of the policy against the backdrop of the post-war global embrace of arbitration; examine its effect on arbitration cases that have reached the Supreme Court; and articulate the utility of a well-defined policy favoring arbitration on the types of matters that require the input of US federal courts.

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I.    THE GLOBAL HISTORICAL BACKDROP: THE DEVELOPMENT OF AN INTERNATIONAL POLICY OF FAVORING ARBITRATION

Private and governmental actors have resorted to private processes to resolve disputes for centuries, but across those eons domestic laws did little to encourage or support it.  Before the dawn of the 20th century, the legal ecosystem of arbitration suffered from inherent weaknesses that rendered the system dependent on morality rather than legal force and thus limited it to the tightly knit communities of organized trade associations and guilds.  Prime among these weaknesses was the fact that agreements to arbitrate were a freely revocable mandate; even without revocation there was no means to judicially enforce an agreement to arbitrate; and arbitral awards were not readily enforced via courts of law.  Judicial imprimatur was eventually given to the arbitral process in the English Common Law Procedure Act of 1854, which coincided with the peak of the Industrial Revolution in England.  For the first time, voluntary arbitration out of court was supervised by the courts to ensure that agreements to arbitrate and final awards were followed and enforced. 

These innovations would coincide with a parallel increase in transnational trade, and hence give rise to the need for global solutions. The Permanent Court of Arbitration (“PCA”), established by the Convention for the Pacific Settlement of International Disputes in 1899, was the first permanent intergovernmental organization to provide a forum for the resolution of international disputes through arbitration.  Article 16 of the 1899 Convention recognized that “[i]n questions of a legal nature,” arbitration is the “most effective, and at the same time the most equitable, means of settling disputes which diplomacy has failed to settle.” 

We see here, for perhaps the first time, the aspirational acknowledgement of States that there exists a policy case for the encouragement of private arbitration. 

In the two decades leading up to the First World War, however, this international policy would generally fail to metastasize at the domestic level. Like a lone tree falling in an uninhabited forest, “[n]o provision was made for cultivating the spirit of arbitration or for educating either governments or their people in the knowledge and use of arbitration.”  Hence, as the old empires of Europe started to crumble, the arbitration of private commercial disputes remained a patchwork quilt of opportunistic processes in an ever-interconnected world.