The Changing Face of Arbitration: What Once Was Old Is New Again

JurisdictionUnited States,Federal
CitationVol. 72 No. 7 Pg. 36-53
Pages36-53
Publication year2003
Kansas Bar Journals
Volume 72.

72 J. Kan. Bar Assn. 7, 36-53 (2003). The Changing Face of Arbitration: What Once Was Old is New Again

Kansas Bar Journal
72 J. Kan. Bar Assn. 7, 36-53 (2003)

The Changing Face of Arbitration: What Once Was Old is New Again

By James P. Buchele and Larry R. Rute*

I. Introduction

Beginning in the mid-1980s, the U.S. Supreme Court consistently upheld a national policy favoring arbitration that was envisioned when the U.S. Arbitration Act (now the Federal Arbitration Act [FAA]) was enacted in 1925.1The core expression of this policy is found in Section 2 of the Act, which provides that a written agreement to arbitrate "shall be valid, irrevocable and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract."2

In the last two decades, the Supreme Court has consistently thwarted challenges to arbitration that were previously entertained and has thereby federalized the law of arbitration. The Kansas appellate courts have followed this lead by holding that the FAA pre-empts Kansas statutes prohibiting arbitration of certain claims.3 The federal policy favoring arbitration has removed impediments that previously existed, thereby encouraging broader use of arbitration. Pre-dispute clauses requiring arbitration are now included at an ever-growing rate in hundreds of thousands of contracts of all kinds.

Lawyers in the future will likely find themselves litigating more frequently in an arbitration forum. Increased use of mediation, coupled with changes in the law of arbitration, has significantly contributed to the decline in the number of trials over the past 30 years. The percentage of civil jury trials in federal courts has dropped from 4.3 percent in 1970 to 1.5 percent in 2001.4 The Administrative Office of the U.S. Courts reports that in 22 of the states reporting data (including Kansas), all but a few are experiencing a similar decline in trial rates.5

In its wide-ranging support of arbitration, the U.S. Supreme Court touted the advantages of arbitration:

The advantages of arbitration are many: it is usually cheaper and faster than litigation; it can have simpler procedural and evidentiary rules; it normally minimizes hostility and is less disruptive of ongoing and future business dealings among the parties; [and] it is often more flexible in regard to scheduling of times and places of hearings and discovery devices.6

In this article, emphasis will be placed on the changes in the law of arbitration over the last 20 years based upon Supreme Court interpretations of the FAA. To understand these dramatic changes, it is important to present a historical perspective and an analysis of the recent cases that have opened new opportunities for dispute resolution. As the use of arbitration expands, the practitioner will need to recognize the issues relative to procedural choice-of-law and judicial review in an arbitration setting, as well as the points to cover in agreements to arbitrate.

II.Arbitration in a Historical Context

The use of arbitration as a means of resolving commercial disputes is not by any means a modern concept. In fact, commentators have noted that throughout much of "the 17th and 18th centuries arbitration remained the primary method of resolving commercial disputes."7 The use of arbitration techniques to resolve commercial disputes is thought to have been developed by the European trading community as a means by which trading partners could avoid the delay inherent in the traditional litigation of disputes. Arbitration was utilized by trading partners to ensure expeditious and uniform enforcement of commonly understood customs and thereby facilitate resolution of disputes without disruption of ongoing business relationships.8

English common law judges, fearing that the use of arbitration had effectively circumvented established court procedures and thereby judicial salaries, developed what came to be known as the "ouster doctrine." Beginning in the 17th century and continuing into the 18th century, a few reported cases began to appear which held that agreements to arbitrate were revocable prior to issuance of an award.9

The English judiciary's hostility toward arbitration carried over to the newly established American court system. American colonial and post-Declaration of Independence courts routinely cited the "ouster doctrine" and public policy arguments to support a refusal to enforce agreements to arbitrate commercial disputes.10 In its 1874 decision in Insurance Co. v. Morse, the Supreme Court gave strong voice to the "ouster doctrine," stating: "Every citizen is entitled to resort to all the courts of the country, and to invoke the protection which all the laws or all those courts may afford him, a man may not barter away his life or his freedom, or his substantial rights."11

While voluntary arbitration continued to be available in a commercial context, its use was limited because American courts would often refuse to enforce the agreement to arbitrate by holding that contracts to arbitrate were revocable. A party could bring suit in court with good prospects that the court would not require the parties to arbitrate.12 Arbitration clauses remained virtually unenforceable through the judicially-created "ouster doctrine," until Congress made arbitration clauses enforceable pursuant to the U.S. Arbitration Act of 1925.13

III.U.S. Arbitration Act of 1925

In the early 1920s the New York Chamber of Commerce lent its resources to the effort to eliminate the courts' hostility toward contractual agreements to arbitrate.14 With the support of the business community, a statute was passed in the state of New

York requiring the courts to enforce "a written contract to settle by arbitration a controversy thereafter arising between the parties to the contract."15

In 1924 the U.S. Supreme Court upheld the New York arbitration statute.16

The American Bar Association and various trade organizations, including the Arbitration Society of America (a predecessor of the American Arbitration Association), supported Congressional consideration of the FAA to ensure that federal courts would honor agreements to arbitrate.17

The key provisions of the FAA are found in Sections 1 and 2:

§ 1 "Commerce" as herein defined, means commerce among the several states or with foreign nations, or in any territory of the United States or in the District of Columbia, or between any such territory and another, or between the District of Columbia and any state or territory or foreign nation, but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.

§ 2 A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.18

Sections 3 and 4 of the FAA serve as procedural provisions to stay litigation or to compel arbitration in "courts of the United States" or "any United States district court" if the court determines that a written arbitration agreement is referable to arbitration.19

The intention of Congress in drafting Sections 1 and 2 has been subject to an ongoing debate. Two core issues quickly arise:

Was it the intention of Congress that the FAA grow out of the Congressional power to control inferior federal courts? Or, did Congress intend to base the FAA upon its power over interstate commerce? In response to the first issue, if the FAA was based on Congress' authority to control federal courts, its authority would be limited to federal but not state courts. Alternatively, if the FAA was primarily derived from the power of Congress over interstate commerce, its impact on arbitration agreements is applicable at both the federal and state levels.20

Section 2 of the FAA explicitly provides that written arbitration agreements "involving commerce" are "valid, irrevocable, and enforceable."21 Because the FAA contained no specific preference as to whether its substantive provisions were binding on the states, this became the core of future commentary and litigation regarding applicability of the FAA to state courts. Indeed, a significant number of commentators have argued that the legislative history surrounding formation of the FAA strongly suggests that the primary purpose of this legislation was to allow merchants to utilize arbitration to settle disputes between themselves. It has been argued that the FAA was not intended to include noncommercial substantive law issues such as statutorily defined contract rights.22 It was not until 1983 that the U.S. Supreme Court determined that state courts are bound by the FAA's provisions.23

IV. Judicial Interpretation and Application of FAA

A. Early Supreme Court decisions

For many years after the enactment of the FAA, there was virtually no significant litigation regarding whether arbitration agreements should be enforceable as a matter of public policy. In 1953 the Supreme Court considered the enforceability of arbitration agreements in Wilko v. Swan.24 In Wilko, the Court determined that a provision to arbitrate a future controversy was void under the Securities Act of 1933 and that arbitration lacked the certainty of a lawsuit to enforce the petitioner's (consumer) rights.25 The Court reasoned:

This case requires subjective findings on the purpose and knowledge of an alleged violator of the [Securities] Act. As their award may be made without explanation of...

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