Originally from American Review of International Arbitration - ARIA

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“Don’t throw the baby out with the bathwater”
–Thomas Murner,  Die Narrenbeschwörung (1512)

Various proposed bills to amend the Federal Arbitration Act are gaining support in Congress.  The bills’ proponents do not intend the bills to interfere with international arbitration, but the amendments do not distinguish between domestic and international disputes.  The bills would have the unintended consequence of severely reducing the efficacy of arbitration as a dispute resolution mechanism for international disputes and inflicting significant damage on U.S. business interests.

I.  INTRODUCTION

  The most prominent of the bills introduced in the U.S. Congress is the Arbitration Fairness Act of 2007 (the “Arbitration Act” or the “Act”), introduced in the 110th Congress in the House and the Senate and reintroduced at the time of this writing in the House of Representatives.  While other bills target specific industry sectors such as long-term care facilities, livestock and poultry growers, and automobile sales, the Arbitration Act focuses on categories of persons whose contracts often contain arbitration clauses. The proposed Act provides that no pre-dispute arbitration agreements shall be valid or enforceable with respect to consumer, employment or franchise disputes.  It further provides that pre-dispute arbitration agreements are void if they concern disputes arising under civil rights statutes and statutes intended to regulate contracts between parties of unequal bargaining power. 

The proposed Act also overrules Supreme Court precedents with respect to the established doctrines of “competence-competence” and “separability,” which concern whether and when the arbitrators themselves or the courts have the authority to make decisions with respect to challenges to the authority of the arbitrators. These principles are fundamental to international arbitration, are incorporated into many international contracts, and are included in the arbitration statutes of major trading nations and the rules of the leading international arbitration institutions.

As drafted, the Arbitration Act would apply equally to domestic and international arbitration. Congressional concerns about the fairness of arbitration to individuals may lead to the abrogation by Congress of contractual terms that reflect international arbitration norms and cause disruption to U.S. business-to-business arrangements. This paper will review the proposed amendments of the Federal Arbitration Act (“FAA”), their impact on international arbitration in the United States and the effect on U.S. companies.  Section II will review the U.S. legislation and Supreme Court decisions which form the basic legal predicate for international arbitration in the United States. Section III will report on why arbitration is the preferred method for dispute resolution in international matters. Section IV will describe the U.S. role in international arbitration.  Section V will outline and discuss the proposed amendments to the FAA as they relate to consumers, employees and franchises, as well as the vaguely defined statutory claims.  Section VI will consider the proposed amendments to the FAA as they relate to competence-competence and separability. Section VII will review the consequences of the Act’s substantive and procedural changes. Section VIII will raise questions as to whether the proposed amendments to the FAA implicate any treaty violations by the United States.  Section IX will consider whether the time has come for the enactment of a separate full-fledged federal international arbitration statute and suggest other legislative solutions to minimize unintended consequences.