Arbitration Law FAQ: Chapter 1 of the Federal Arbitration Act
This Arbitration Law FAQ guide briefly explains what the Federal Arbitration Act is, and then provides some general information about Chapter 1 of the FAA for educational purposes only. It is not legal advice, is not a substitute for legal advice, and should not be relied upon as such.
What is the Federal Arbitration Act?The Federal Arbitration Act is a federal statute enacted in 1925 that makes certain (but not all) arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. It was originally, and for many years, known as the “United States Arbitration Act,” but for simplicity’s sake we’ll refer to it as the “Federal Arbitration Act,” the “FAA,” or the “Act.”
It was passed at a time when courts were, for the most part, unwilling to enforce agreements to arbitrate because they thought that such agreements “divested” their “jurisdiction” over disputes that would ordinarily be decided by courts. In other words, many courts thought that it was wrong for courts to lend their assistance to the enforcement of contracts under which parties would agree to submit their disputes to private decision makers.
Even by the time the FAA was passed, arbitration was not new. For example, it can be traced back at least as far as medieval times, when various guilds used it as a way of resolving disputes according to what became known as the “law merchant,” an informal body of rules and principles that merchants believed should be applied to their disputes, but which common law courts did not, at the time, apply. The first arbitration agreement was reportedly included in a reinsurance contract in the late 18th century, and George Washington apparently included an arbitration clause in his will.
The FAA, as originally enacted, consisted of 14 provisions. In 1970 Congress designated those first 14 provisions as “Chapter 1” of the FAA, and added a “Chapter 2,” which consists of various provisions implementing and enabling the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”). In 1988 Congress added two additional provisions to Chapter 1 of the FAA, Sections 15 and 16. In 1990 Congress added to the FAA a Chapter 3, which consists of provisions implementing and enabling the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”).
The remainder of this FAQ guide focuses on Chapter 1 of the FAA.
What does Chapter 1 of the FAA do apart from declaring certain arbitration agreements to be valid?Section 2 of the Federal Arbitration Act is sometimes referred to as the Act’s “enforcement command.” It is the provision that declares certain arbitration agreements to be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.
Under Section 2, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *4 (Jan. 8, 2019) (citation and quotation omitted). Section 2 also “requires courts to place arbitration agreements on an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and citations omitted).
Section 1 of the FAA provides some definitions and exempts from the FAA a fairly limited universe of agreements that would otherwise fall within the scope of the Act. See 9 U.S.C. § 1. The other provisions of Chapter 1 implement the enforcement command by lending judicial support to the enforcement of arbitration agreements and awards. These are briefly summarized below:
Section 3 – Requires courts to stay litigation in favor of arbitration. 9 U.S.C. § 3.
Section 4 – Provides for courts to compel arbitration.
Section 5 – Provides for courts to appoint arbitrators when there has been a default in the arbitrator selection process.
Section 6 – Provides that motion practice rules apply to applications made under the FAA, thereby expediting the judicial disposition of such applications.
Section 7 – Provides for the judicial enforcement of certain arbitration subpoenas.
Section 8 – Provides that where the basis for federal subject matter jurisdiction is admiralty, then “the party claiming to be aggrieved may begin his proceeding [under the FAA]…by libel and seizure of the vessel or other property….” 9 U.S.C. § 8.
Section 9 – Provides for courts to confirm arbitration awards, that is, enter judgment upon them.
Section 10 – Authorizes courts to vacate arbitration awards in certain limited circumstances.
Section 11 – Authorizes courts to modify or correct arbitration awards in certain limited circumstances.
Section 12 – Provides rules concerning the service of a motion to vacate, modify, or correct an award, including a three-month time limit.
Section 13 – Specifies papers that must be filed with the clerk on motions to confirm, vacate, modify, or correct awards and provides that judgment entered on orders on such motions has the same force and effect of any other judgment entered by the court.
Section 14 – Specifies that agreements made as of the FAA’s 1925 effective date are subject to the FAA.
Section 15 – Provides that “Enforcement of arbitral agreements, confirmation of arbitral awards, and execution upon judgments based on orders confirming such awards shall not be refused on the basis of the Act of State doctrine.”
Section 16 – Specifies when appeals may be taken from orders made under the FAA, and authorizing appeals from final decisions with respect to arbitration.
How can I tell if an arbitration agreement or award is governed by Chapter 1 of the FAA?Whether the FAA applies to an award or agreement depends on whether: (a) the arbitration agreement in writing; and (b) it is is part of a “maritime transaction” or of a contract that affects commerce.
Section 2, with bracketed text added, provides:
"[A] A written provision [B] in any maritime transaction or [C] a contract evidencing a transaction involving commerce [D] to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or [E] an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, [F] shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
Section 2’s requirement that an arbitration agreement be “written” (Part [A]) seems simple enough, and, for the most part, it is. But remember, just because a contract is required to be “written” doesn’t mean the arbitration agreement must be signed.
As respects whether a “contract” “evidenc[es] a transaction involving commerce" (Part [C]), the U.S. Supreme Court has interpreted Section 2 broadly to mean the Federal Arbitration Act applies to arbitration agreements in contracts or transactions that affect commerce, that is, to any contract or transaction that Congress could regulate in the full exercise of its Commerce Clause powers. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 268, 281-82 (1995); U.S. Const. Art. I, § 8, Cl. 3 .
Whether a contract “affects” commerce depends on the facts concerning, among other things, the parties, the contract’s subject matter, and the actual or contemplated transactions constituting the contract’s performance or contemplated performance. See Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-57 (2003).
Parts [A] through [D]] of Section 2 make the Federal Arbitration Act applicable to written, pre-dispute arbitration “provision[s]” in “maritime transactions” or in “contract[s] evidencing transactions involving commerce….” These arbitration provisions are “pre-dispute” arbitration agreements because they are “provision[s]” “to settle a controversy thereafter arising out of such contract or transaction, or [out of] the refusal to perform the whole or any part” of such contract or transaction….” 9 U.S.C. § 2 (Part [D])
Parts [A] through [E] of Section 2 make the FAA applicable also to written, post-dispute arbitration agreements, that is, agreements to arbitrate existing disputes arising out of “maritime transactions” or “contract[s] evidencing transactions involving commerce….” To that end Part [E] makes Section 2 applicable to “agreement[s] in writing to submit to arbitration an existing controversy arising out of” “maritime transaction,” (Part [B]) “contract evidencing a transaction involving commerce” (Part [C]), or “refusal to perform the whole or any part” of such a contract or transaction. (Part[D]. 9 U.S.C. § 2 (emphasis added).
Are any arbitration agreements falling under Section 2 exempt from the FAA?Yes. Section 1 of the FAA provides that “nothing [in the FAA] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” According to the United States Supreme Court, this exemption applies “only” to “contracts of employment of transportation workers.” Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 119 (2001). But those “contracts of employment” include not only contracts establishing employer-employee relationships, but also ones establishing independent contractor relationships. New Prime Inc. v. Oliveira, 586 U.S. ___, slip op.at 6, 7, & 15 (Jan. 15, 2019).
Can all FAA Chapter 1 litigation be brought in federal court?No. Chapter 1 of the Federal Arbitration Act does not confer an independent basis for federal court subject matter jurisdiction over applications for the relief authorized by Chapter 1. Put differently making an application under the FAA does not raise a “federal question” over which a federal court could, under 28 U.S.C. § 1331, base subject matter jurisdiction.
But that doesn’t mean that federal courts cannot have subject matter jurisdiction over Chapter 1 Federal Arbitration Act proceedings. If the requirements for diversity jurisdiction are met, including complete diversity of citizenship between the parties, and an amount in controversy that exceeds $75,000.00, excluding interest and costs, then a federal court will have subject matter jurisdiction under the diversity jurisdiction. See 28 U.S.C. § 1332.
Does Chapter 1 of the FAA apply in state court?Yes. State courts are required to enforce arbitration agreements under Section 2 of the FAA. Basically, they must enforce arbitration agreements falling under the FAA, putting them on the same footing as other contracts. See Kindred Nursing Centers, 137 S. Ct. at 1424.
Most or all states have their own arbitration statutes. New York’s arbitration statute, for example, is codified in Article 75 of the New York Civil Practice Law and Rules (“CPLR”).
Depending on applicable state law, state courts may carry out Section 2’s enforcement command using their own arbitration statute’s provisions, even if they are different than those provided by Chapter 1 of the FAA. But if enforcement of the FAA through the provisions of the state’s arbitration code would undermine the purposes and objectives of the FAA, then the offending state arbitration code provisions would be preempted (i.e., superseded) by the FAA to the extent that they conflict with the FAA.