The Federal Arbitration Act (FAA)—Title 9, US Code, Section 1-14—was first enacted on February 12, 1925. FAA underwent a few developments through the years. It was codified on July 30, 1947 (61 Stat. 669). It was amended September 3, 1954 (68 Stat. 1233); added Chapter 2 on July 31, 1970 (84 Stat. 692); added two new Sections in October of 1988; renumbered on December 1, 1990 (PLs669 and 702); added Chapter 3 on August 15, 1990 (PL 101-369); and, added Section 10 on November 15, 1990.
The FAA provides the guideline for the enforcement of arbitration agreements and arbitral awards in the US. Originally, it covered mainly commercial transactions and contracts. It ensured that agreements are enforced in maritime and commercial transaction. IT declared that such contracts ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract’.
Parties having disputes over contracts thus do not need to go to court to settle their cases. They will have to refer the matter to an arbitration tribunal. Like a court, the tribunal’s decision is binding and enforceable. Only when there are issues regarding the decision of the tribunal or regarding the tribunal itself, aggrieved parties can seek redress in a legal court.
The FAA requires complaining parties to seek litigation in an arbitration tribunal instead of going to court. They will to get the other party to sit down with the tribunal. If a party has already gone to court, the other party can seek the court to top the litigation and refer the matter to a tribunal. However, the court will have to determine if the matter is something that can indeed be referred to an arbitrational tribunal. Once the case has been referred to the tribunal, the decisions and recommendations of the tribunal shall prevail unless other problems arise.
The FAA through History and Issues
In the early years, FAA was considered a procedural process for courts to implement. It evolved through the years. It is believed that the disputing parties and an arbitration tribunal are in a better position to decide the case. After all, they are closer to the issue and should understand it better than the courts.
The Supreme Court had not always approved of the FAA. It had many issues against the arbitration process:
“Early Supreme Court decisions were highly skeptical that arbitration proceedings could adequately enforce a party's legal rights: ‘Arbitration carries no right to trial by jury arbitrators do not have the benefit of judicial instruction on the law and need not give their reasons for their results; the record of their proceedings is not as complete as it is in a court trial; and judicial review of an award is more limited than judicial review of a trial.’”
Through the years, the Supreme Court shifted its position to favor the FAA. In 1976, Justice Warren Burger called for the reappraisal of the arbitration process. Efficiency is an important consideration. After all, ‘well-developed forms of arbitration’ is not necessarily incompatible with the judicial process.
The FAA was passed precisely to overcome judicial hostility against arbitration. The Supreme Court declared this and upheld the validity of the FAA in 1984. The Court has since then decisions following the FAA as a national policy.
The Supreme Court has clarified that, as a national policy, FAA is a federal law. It applies to both state and federal courts. In addition, all states restricted from passing laws that may contradict the FAA. Should there be existing laws that contradict the FAA, the FAA shall prevail as the Supreme Court considers the FAA to all state laws covering similar issues.
While some legal issues can be raised in the courts, according to the Supreme Court, many issues regarding the validity and scope of an arbitration are matters that should not be decided by courts. These are matters to be decided by arbitrators, precisely why the FAA exists. However, the courts can intervene under certain circumstances: (1) fraud by any of the parties involved’ (2) corruption among the arbitrators; (3) misconduct among members of the arbitration tribunal; and, (4) excessive application of powers.
Under the FAA, arbitrators can ask third-party witnesses and have them provide them with pertinent documents and other evidence. However, as the arbitration body is not a legal court, it may have to ask the courts to compel the witnesses to fulfill those actions. In addition, FAA provides for the procedures on how arbitral awards arising from international transaction should be enforced in the US.
The FAA has also been referred to in labor disputes. It has been used to help in crafting labor laws. It has been used in jurisprudence related to labor litigation.
Context in Society and Environment: The Need for Contracts and Arbitration
The law was a response to developments during the period. The US had just come out of the Industrial Revolution—the so-called Second Industrial Revolution after the civil war—and settling down. The Industrial Revolution brought progress to the US. It also brought with it many problems, especially the exploitation of laborers. The US enjoyed a booming economy. It had a growing middle class and a burgeoning stock market. It was evolving into an affluent—but “unfamiliar”—consumer market. It was also the period of Prohibition. Americans found themselves in a situation that they had never been before. Controls were needed to protect different interests. It was in this environment wherein the FAA was legislated.
It is also important to note that since after the civil war, the US has become a multi-cultural and highly diverse society. Immigration to the US accelerated between 1880 and 1930 because of the Industrial Revolution and the booming economy of the 1920s. Steam-powered ships helped accelerated the process of immigration. The USA thus became more culturally diverse.
The US guarantees people’s rights for freedom of religion. There is no dominant religion in the US. Given the diversity people, the US does not have a single ethical or moral system. It abides by the constitution and other legislated acts. It follows the lines of Joseph Nozick’s concept of social justice based on laissez faire, utilitarian principles . Nozick’s theory is based on the utilitarian ideas of John Stuart Mill and follows the completely, free economics ideas of Milton Freedman.
Contracts thus play a very important role in US society. Since what is right or wrong cannot be defined by a single moral or ethical system, contract practically defines. Parties come to an agreement to what is fair to those involved. They practically define what is right and wrong, what is fair and just within the context of the law and what people of different cultures can agree upon. The FAA seeks to uphold the validity and enforce implementation of such contracts through arbitration should any problems or disputes arise.
The Future of the Federal Arbitration Act and Conclusion
The FAA has been described as moribund since the 1950s. It has been taken over by other laws and jurisprudence. It had enjoyed a revival of sorts as a result of a Supreme Court decision in the 1980s citing the law in the decision. Since then, it had been used by both corporations and labor (and also customers). Because contracts are in effect binding laws, parties—especially labor (and customers)—can seek reprieve through class action. The FAA had also come to cover certain issues related to labor as a result of the Supreme Court invoking the law in a labor case . It has been referred to and used to craft better labor laws or jurisprudence .
However, some corporations and commercial interests are attempting to insert in the contracts a waiver on the part of labor or customers. The waiver stipulates that labor or customers will not take any class action should there be disagreements in the implementation of the contracts. The matter is still up for decision in the US Supreme Court.
The FAA is effective and fair if the parties involved are of equal strength and size. Unfortunately, contracts between corporations and labor or customers are lopsided in favor of the stronger and larger party. The contracts are in effect meant to protect the interests of corporations and give the smaller party a fair deal.
Joseph Stiglitz, a former World Bank economist and Nobel Prize awardee for economics, has pointed out this problem. The elite and corporate interests are controlling legislation and the courts in the US. People in the upper class control policy-making. Inevitably, they will have bias for policies that will protect their interest even if the policies were sincerely intended to improve people’s lives.
Developments related to the FAA seem to be validating Stiglitz’s points. Laws, including the FAA, are evolving to become more and more non-inclusive and highly exclusive to the wealthy. Should the courts allow waivers of class action to become a valid aspect, the FAA would depart from its original intentions and become mainly an instrument protecting the interests of the rich and big corporations.
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