The specificity of international arbitration: the case for FAA reform.

Author:Park, William W.
Position:Federal Arbitration Act

TABLE OF CONTENTS I. INTRODUCTION II. THE ARCHITECTURE OF AMERICAN ARBITRATION LAW A. Scope of the Federal Arbitration Act B. The Need for a New Statute C. Manifest Disregard of the Law 1. The Wilko Dictum 2. Westerbeke v. Daihatsu III. THE SPECIFICITY OF INTERNATIONAL ARBITRATION A. Arbitration's Role in Cross-Border Transactions B. What Makes Arbitration International? IV. JUDICIAL SCRUTINY OF AWARDS A. Statute, Treaty, and Public Policy B. Why, When, and How Courts Review Awards 1. Alternatives 2. Situs Review 3. Efficiency 4. Vitality of National Substantive Law V. THE DEVIL IN THE DETAILS: POSSIBLE CONTOURS OF NEW FAA PROVISIONS A. Optimal Judicial Review for International Arbitration B. Secondary Matters 1. Jurisdictional Determinations 2. The Impact of State Law 3. Arbitral Venue 4. Modification of Court Scrutiny C. Consumer and Employment Contracts Revisited 1. The Current Scope of the FAA 2. Making Distinctions 3. Importing the European Experience D. A Smorgasbord Approach VI. FEAR OF REFORM OVERDOSE A. A Pandora's Box of Special Interests B. Random Change or Reasoned Reform? VII. INVESTOR-HOST STATE ARBITRATIONS A. Blurred Lines: The NAFTA Experience B. Judicial Review and Investment Arbitration C. Political Reaction and Notes of Interpretation VIII. CONCLUSION APPENDIX I. INTRODUCTION

If a pollster asked a random selection of Americans for a one-line verbal portrait of arbitration, common responses might include the following: (i) private litigation arising for construction and business disputes; (ii) a mechanism to resolve workplace tensions between management and labor; (iii) a process by which finance companies and stock brokers shield themselves from customer complaints; (iv) a way to level the playing field in deciding commercial controversies among companies from different parts of the world; (v) the way big corporations use NAFTA to escape regulation. To some extent all would be correct. (1)

Unfortunately, these different varieties of arbitration have all been squeezed into the same antiquated arbitration statute. Enacted 75 years ago as a simple procedural device to enforce arbitration in federal courts, the Federal Arbitration Act (FAA) has now been pressed into service as a body of substantive law that binds state courts as well, requiring that arbitration agreements be enforced on the same footing as other contracts. (2) The Act is as ill-suited to such use as an all-terrain vehicle. As drafted, the FAA ignores critical distinctions in the level of judicial supervision suitable to different types of cases. The laissez-faire court scrutiny appropriate to an international proceeding, between sophisticated business managers with access to competent counsel, may be quite misplaced in a consumer case, where an arbitration clause might require an ill-informed individual to seek uncertain remedies at an inaccessible venue. (3) Moreover, basic arbitration notions are hidden in a maze of inconsistent cases that are anything but user friendly: they disorient and confuse litigants from abroad, adding significant transaction costs to the choice of arbitration in the United States. (4)

The time has come to consider amending the FAA to provide greater clarity for international arbitration. One springboard for reform can be found in the UNCITRAL Model Arbitration Law, (5) which has already engendered a rich case law that could serve as a prism to separate and identify many of the interrelated themes in cross-border arbitration. (6) The Model Law, however, should not be imported wholesale. (7) Any amendment of the Federal Arbitration Act must take account of homegrown arbitration concerns and precedents. (8) Part of the peculiar U.S. genius has been our ability to adapt (rather than adopt) inventions from abroad. (9)

The most critical need is for limitations on judicial review of international arbitration awards, permitting international arbitration law to evolve free from whatever paternalistic measures might be appropriate to domestically cultivated concerns. (l0) Such reform would facilitate efficient and neutral dispute resolution by keeping judges from second-guessing arbitrators on the merits of a dispute, while still permitting courts to support arbitration by enforcement of agreements and awards, as well as through interim measures in aid of arbitration. (11)

It is well known, of course, that certain arbitration service providers and industry groups oppose change. (12) They justify their reform-phobia by reference to the vagaries of the U.S. legislative process. (13) Once Congress goes into motion (so some fear), a Pandora's Box of special interests will open to unleash forces that would eviscerate arbitration's effectiveness. Such skepticism of the democratic process is misplaced. There is no reason to think that Americans today are less capable of intelligent legislation than they were in the past. Moreover, the winds of change are already blowing, and the question is no longer if but how reform will occur. (14)


    1. Scope of the Federal Arbitration Act

      The Federal Arbitration Act subjects most arbitration in the United States to a single standard for judicial review, (15) regardless of whether the dispute is big or small, domestic or international, and notwithstanding state attempts to create a more nuanced framework for arbitration. (16) As a consequence, international arbitration unfolds haunted by the specter of anti-abuse measures intended to protect consumers and employees, (17) relying on the exercise of judicial discretion in an inefficient, case-by-case fashion. (18)

      Understanding the American framework for arbitration requires a brief look at the Second Circuit decision in Alghanim v. Toys 'R' Us, (19) which held that domestic judicial review standards applied to awards rendered in international arbitrations with a U.S. situs. (20) The case, which involved a $46 million award rendered in New York in favor of a Kuwaiti licensee of a U.S. toy store, (21) was challenged for alleged "manifest disregard of the law" by the arbitrator--a ground for vacatur under domestic law but not under the New York Arbitration Convention. (22)

      One must remember that when adopting the 1958 New York Arbitration Convention, the United States accepted its application not only to awards rendered abroad, but also to so-called "non-domestic awards." (23) The award in Toys 'R' Us fell under the latter category ("non-domestic") and thus was subject to the Convention. Two of the three parties were non-American, and the underlying agreement involved performance in the Middle East. (24)

      Convention awards would normally be subject to Section 207 of the FAA, which provides that a court "shall confirm the award" unless it finds one of the defenses to recognition contained in Convention Article V. (25) These defenses essentially supply escape hatches related to procedural due process, public policy, and vacatur at the place where an award is made. (26) Drawing a distinction between motions to confirm and motions to vacate awards, and notwithstanding the language of Section 207, the Court in Toys 'R' Us found that a non-domestic award made in the United States would be subject to vacatur "in accordance with its domestic arbitration law and its full panoply of express and implied grounds for relief" including "manifest disregard of the law." (27)

      Not all jurisdictions follow the Toys 'R' Us approach. The Eleventh Circuit has held that the New York Convention's grounds for refusal to confirm foreign awards were also the exclusive bases on which to review a "non-domestic" award made in the United States. (28) A federal district court in Miami came to the same result with respect to a motion to confirm an award among foreign parties made in Florida. (29)

    2. The Need for a New Statute

      Such conflation of domestic and international arbitration is a bad idea as a matter of both sound policy and national self-interest. Rather than a hospitable climate for international arbitration, the business community is left with little clear guidance to predict how courts will react to allegations of arbitrator error. Diverse cases call for different levels of judicial review, with the least interventionist role assumed in arbitration between sophisticated business entities from different countries.

      The United States remains a victim of a self-inflicted competitive disadvantage imposed by its single legal framework for arbitration. The spillover of domestic precedents into international cases will inevitably chill selection of U.S. cities for arbitration (with fewer fees to arbitrators and counsel) by foreign parties understandably hoping to avoid excessive judicial interference.

      The FAA should be amended to provide a separate framework for international arbitration that would contain default rules limiting judicial review of awards to the narrowest grounds. In addition, parties might be given appropriate options to select greater judicial scrutiny. Such reform would keep courts away from arbitration except to support the process by enforcing agreements and awards and supplying interim measures in aid of arbitration.

      Reform could be accomplished either through tinkering with the existing Chapters 2 and 3 of the FAA or by adding a new chapter which would cover all international proceedings in the United States, regardless of whether they fit within these two treaties. The latter approach, casting a wide net, might be the preferred avenue, since it could help limit misguided judicial inventions to fill either real or perceived gaps in the coverage of international arbitration. (30)

      Some might observe that good arguments also exist for broader gauge change to protect all business arbitration, domestic as well as international, from excessive judicial review on grounds such as "manifest disregard." The proposal in this paper is intentionally more modest, however, stemming from a concern...

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