saving the faa - william w. park the faa.pdf · lexisnexis mealey's international arbitration...

Saving The FAA

byWilliam W. (Rusty) Park

Professor of law Boston UniversityCo-chair of the American Bar Association’s (ABA)International Commercial Dispute Resolution Committee

A commentary articlereprinted from the

Month 2004 issue ofMealey's International

Arbitration Report

MEALEY'S

International ArbitrationReport

LexisNexis MEALEY'S International Arbitration Report Vol. 19, #11 November 2004

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Commentary

Saving The FAA

By

William W. Park

[Editor’s Note: William W. (Rusty) Park is a professor oflaw at Boston University. He serves as the co-chair of theAmerican Bar Association’s (ABA) International Com-mercial Dispute Resolution Committee. This commen-tary is adapted from remarks to the ABA Section on Inter-national Law and Practice in New York last April andwas originally published 4 INTERNATIONAL ARBITRATION

NEWS 10 (ABA, Summer 2004). © William W. Park,2004. Replies to this commentary are welcome.]

Table of Content

I. Time to Be ProactiveA. The Varieties of ArbitrationB. The Ghost of Justice AstburyC. A Separate Framework for Internation-

al TransactionsII. User Friendly Award Vacatur

A. Models of Judicial ReviewB. Manifest Disregard of the LawC. The Sword of Damocles

III. Proposed Chapter 4 for the Federal Arbitra-tion ActA. Statutory TextB. Explanatory Notes

I. Time To Be Proactive

A. The Varieties Of Arbitration

Our first President, George Washington, providedin his will that disputes among his heirs were to bearbitrated by “three impartial and intelligent men”who would declare the testator’s intention “unfet-tered by law or legal constructions.”1 Perhaps thisadmonition against relying on law derived from ex-

posure to a judicial saga similar to Jarndyce v.Jarndyce, the famous Chancery Court dispute fea-tured in Charles Dickens’ novel Bleak House, de-scribed as a case which in course of time became “socomplicated that no man alive knows what itmeans.”2

Doubtless the current Federal Arbitration Act(FAA) would have been sufficient to meet Washing-ton’s needs. The American economy, however, hasgrown ever more complex during the past two hun-dred years. Few would quarrel that increased cross-border trade and investment requires a procedural-ly and politically neutral dispute resolution pro-cess, without which many wealth-creating transac-tions either would not be consummated or wouldbe concluded at higher costs to reflect the greaterinherent risks.

In international arbitration, the United States re-mains a victim of a self-inflicted competitive disad-vantage imposed by its legal framework for arbitra-tion. The spillover of domestic precedents into in-ternational cases will inevitably chill selection ofAmerican cities for international arbitration, withforeign parties understandably anxious to avoid ex-cessive judicial interference. Consequently, Ameri-can businesses will increasingly be forced to acceptforeign arbitral venues with more intelligently de-signed legal frameworks, which of course meansfewer fees to American arbitrators and counsel.

Unlike most of America’s trading partners, ourcourts may vacate awards for an arbitrator’s “man-

Vol. 19, #11 November 2004 LexisNexis MEALEY'S International Arbitration Report

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ifest disregard of the law,” a vague term which (asdiscussed later) has been subject to varying inter-pretations. In addition, the United States (againin contrast to other civilized jurisdictions) pro-vides no statutory scheme of general applicationto protect the interests of ill-informed consumersand employees who may be dispatched by an ar-bitration clause to seek uncertain remedies at in-accessible locations.

The two aberrations are not unconnected. For thepast eighty years, our venerable yet antiquated fed-eral arbitration statute has stubbornly resisted dis-tinctions between business and consumer arbitra-tion, and has pre-empted state law that tried toprotect the little guy. In such an environment, thejudicially created doctrine of award vacatur for“manifest disregard of the law” serves as a safetyvalve.

The root of the problem, of course, is yet anotheraspect of American exceptionalism: the prevalenceof the jury in deciding contract claims. The unique-ness of our civil justice system has given our arbitra-tion law a special evolutionary path, permitting a suigeneris framework for arbitration to develop.

B. The Ghost Of Justice Astbury

Resistance to reform has come largely from arbitra-tion’s institutional establishment, which under-standably perceives itself as providing service to themanufacturers and employers concerned aboutconsumer and employment cases. My good friendJohn Townsend has explained eloquently the estab-lishment’s fear that legislation might open a Pando-ra’s Box of unbridled upheaval, led by an unholyalliance of consumer advocates and plaintiffs’ law-yers who see arbitration as a scam to protect crook-ed finance companies and abusive bosses from ju-ries that could otherwise to protect folks like kindAunt Millie and old Uncle Fred.

The establishment’s opposition to change brings tomind remarks attributed to Sir John Astbury, theEnglish judge who declared the 1926 British Gen-eral Strike of to be illegal. As workers riotedthroughout Britain, some politicians talked of con-ciliation and change. To which Astbury asked rhe-torically, “Reform? Reform? Are things not badenough already?”3

It is beyond cavil that the FAA is under attack. Anddangers lurk in any effort to make things betterwithout mature reflection.

On occasion, however, the health of an individualor an institution can deteriorate from neglect aswell as attention. There are signs that FAA reform isno longer a matter of “if” but of “how” and of“when.” The challenge in preserving a vigorous fed-eral arbitration regime to become proactive in pro-moting intelligent change.

Backlash against abusive arbitration builds on le-gitimate concerns addressed by the American Arbi-tration Association itself,4 making it all the morevital to consider a separate statute for cross-borderarbitration which would permit parallel evolutionin the domestic and international domains.

The so-called “Fairness Act” proposed by SenatorKennedy would completely outlaw employment ar-bitration.5 The Predatory Lending Consumer Protec-tion Act would prohibit mandatory arbitration claus-es in certain mortgages.6 The Motor Vehicle Fran-chise Contract Act already makes pre-dispute arbitra-tion clauses unenforceable in automobile franchises.7

One can only be puzzled by the fear of participa-tory democracy suggested in assertions that intelli-gent reform is impossible. Since my entry into lawschool, no less than six substantive statutory chang-es have been made to the federal law of arbitration.8

None occasioned catastrophe. If the past is anyguide to the future, Congress should be able to rep-licate the feat of common sense change, which haslong been part of our peculiar American genius.

C. A Separate Framework For

International Transactions

The FAA should be amended to provide a separateframework for international arbitration that wouldcontain default rules limiting judicial review ofawards to the narrowest grounds, related to arbitra-tion’s basic procedural integrity, rather than thesubstantive merits of the case.

The conflation of domestic and international arbi-tration is a bad idea as a matter of both sound pol-icy and national self-interest. Rather than a hospi-table climate for international arbitration, the


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present regime leaves the international businesscommunity with little clear guidance to predicthow courts will react to allegations of arbitrator er-ror. Diverse cases call for different levels of judicialreview, with the least interventionist role assumedin arbitration between sophisticated business enti-ties from different countries.

Reform could be accomplished through a numberof ways. One springboard can be found in theUNCITRAL Model Arbitration Law,9 an optionexplored by Professor Coe.10 The Model Law hasalready engendered a rich case law that could serveas a prism to separate and identify many of the in-terrelated themes in cross-border arbitration.11

Wholesale importation of the Model Law, however,is not likely to be satisfactory.12 Any amendment ofthe FAA must take account of home grown arbitra-tion concerns and precedents, which make it best toadapt (rather than adopt) inventions from abroad.

Another possibility would be to tinker with the ex-isting Chapter 2 of the FAA, as suggested by DickHulbert in his admirable reworking of provisionsrelated to jurisdiction, venue and award confirma-tion or vacatur. Clearly Hulbert is right that hisapproach may be more realistic politically: a bitlike sneaking through the back door rather thanmarching up the front steps. One might fear, how-ever, that piecemeal fiddling would not be forcefulenough to prevent the type of misguided judicialinventions that damage the fabric of federal arbitra-tion law.13 Indeed, Hulbert himself has questionedwhether U.S. judges would even pay attention toFAA amendments: “if the law is amended,” heasked (perhaps rhetorically), “would courts give itthe intended effect?”14

Another path, perhaps the most sensible balance ofcompeting goals, would be to add a new chapter tothe FAA that would apply exclusively to interna-tional proceedings conducted in the United States.This approach would address principally the needto limit judicial review of international arbitrationawards, permitting international arbitration law toevolve free from whatever paternalistic measuresmight be appropriate to domestically cultivatedconcerns. To this end, a proposed text for a newFAA Chapter 4 has been added at the end of theseremarks.15

No system is foolproof, of course, given that foolsare so ingenious. The statute would go a long way,however, toward keeping judges from second guess-ing arbitrators on he merits of a dispute, while stillpermitting courts to support arbitration by en-forcement of agreements and awards, as well asthrough interim measures in aid of arbitration.

Arguments also exist for broader gauge change toprotect from excessive review all business arbitra-tion, domestic as well as international. The pro-posal in this paper is intentionally more modest,however, stemming from a concern that widermodifications of the FAA would meet more signif-icant political impediments that would reduceprospects for reform in the international arena,with its special need for neutrality of forum. AsVoltaire observed, the best is often the enemy ofthe good. In this regard, others with the samephilosophy may reasonably draw the line at differ-ent points, as ably demonstrated by Messrs. Coe,Hulbert and Townsend.

II. User Friendly Award Vacatur

A. Models Of Judicial Review

Few moments are more critical in defining thecharacter of an arbitration regime than the instantat which courts review the arbitrator’s decision pur-suant to a motion to confirm or vacate the award.The interaction of judges and arbitrators duringjudicial review will determine whether arbitrationconstitutes an independent dispute resolution pro-cess, or merely a warm-up to later litigation.

The past century has seen experiments with atleast three models of judicial review of awards atthe arbitral situs: (i) scrutiny of the legal meritsof the arbitrator’s decision; (ii) no review at all,even for matters as gross as fraud and bias;; and(iii) examination of the basic procedural integri-ty of the arbitration process, to insure that thearbitrators were honest, each side had an oppor-tunity to present its case, and the limits of arbi-tral jurisdiction were respected.

The third model, review for procedural fairnessonly, would seem best suited for internationaltransactions, and clearly represents the trend forbusiness arbitration, having found its way into theUNCITRAL Model Law and having influenced ar-


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bitration law in key arbitral venues such as En-gland, France and Switzerland. Courts intervene tomonitor violations of basic procedural fairness andexcess of jurisdiction, but not to correct mistakes.While such standards may result in a looser approx-imation of legal rights than in court litigation, theyare likely to comport with commercial expecta-tions.16 Normally, the arbitrator’s award is sup-posed to be the end rather than the beginning ofdispute resolution on the merits.

Not all arbitration, however, calls for laissez-fairereview. If judicial review is to evolve intelligently,different types of disputes require different degreesof judicial scrutiny. Indeed, one might betterspeak of arbitration in the plural than in the singu-lar. Arbitration might be (i) private litigation forbusiness disputes among sophisticated parties withaccess to competent counsel; or (ii) arbitration canbe used as a mechanism to resolve workplace ten-sions; (iii) or arbitration can constitute a processwhereby manufacturers and finance companies tryto shield themselves from having consumer com-plaints heard by civil juries; (iv) in an internationalcontext, arbitration can serve as a way to level theprocedural playing field in deciding business con-troversies among players from different parts of theworld, some of which are occasionally govern-ments. Any of these four horsemen of arbitrationmight be worthy of a legal regime on its own.

B. Manifest Disregard Of The Law

Perhaps the most compelling motive for FAA reformcan be seen by examining the judicially created doc-trine of “manifest disregard of the law.” By statute,courts have been given power to vacate awards fordefects in the basic procedural integrity of the arbi-tration, but not with regard to either vague notionsof public policy or the merits of a dispute.

1. Wilko v. Swan

Fifty years ago, however, this statutory scheme wasamplified by dictum in a U.S. Supreme Court caseprohibiting securities arbitration. In Wilko v.Swan, the Court added “manifest disregard of thelaw” as a basis for award vacatur.17

Some interpretations of this concept take a restrictiveview, building on notions of “excess of authority” tolimit the principle to decisions that ignore the con-

tract or require parties to violate the law.18 Othercourts, however, have taken a more expansive view,effectively including mistakes of law19 and movingwell beyond the consumer and employment contextfor which the doctrine had been conceived.

Yet another approach to “manifest disregard” hasbeen suggested in Williams v. CIGNA FinancialAdvisors Inc.20 and Bridas S.A.P.I.C. v. Governmentof Turkmenistan.21 In these decisions, the Fifth Cir-cuit followed a two-prong inquiry in which it de-termined first whether it was manifest that the ar-bitrators disregarded applicable law. Thereafter, thecourt considered whether the award would resultin “significant injustice” under the circumstancesof the case. Even if there was “manifest disregard,”an award would be upheld as long as no injusticeresulted.

The problem is not necessarily in the “manifest dis-regard” doctrine itself, which properly applied mayhave a salutary effect where a special need exists forgreater judiciary supervision. Rather, the difficultylies in the doctrine’s potential for mischief and mis-use in large international cases, when zealous litiga-tors may be tempted to press “manifest disregard”into service as a proxy for attack on the substantivemerits of an award.

2. Toys ‘R’ Us

In an ideal world, judicial review for “manifest dis-regard” would be limited to domestic transactions.And indeed, a careful reading of the FAA as nowdrafted might yield just this result, as Dick Hul-bert suggests. Surprisingly, however, the SecondCircuit decision in Alghanim v. Toys ‘R’ Us,22 hasheld that domestic judicial review standards ap-plied to awards rendered in international arbitra-tions with a New York situs. An award for $46 mil-lion rendered in New York, in favor of a Kuwaitilicensee of a U.S. toy store, was challenged for thearbitrator’s alleged “manifest disregard of the law.”

“Manifest disregard” is a ground for vacatur underdomestic law, but not under the New York Arbitra-tion Convention. In this connection, it is impor-tant to remember that when adopting the NewYork Arbitration Convention, Congress acceptedits application to so-called “non-domestic awards,”made in the United States, as well as foreign awards


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rendered abroad. The award in Toys ‘R’ Us fell un-der the “non-domestic” category, and thus was sub-ject to the Convention, since two of the three par-ties were non-American, and the underlying agree-ment involved performance in the Middle East.

Convention awards would normally be subject toFAA Chapter 2, which in § 207 provides that acourt “shall confirm the award” unless it finds oneof the defenses to recognition contained in Conven-tion Article V. These defenses essentially supply es-cape hatches related to procedural due process,public policy, and vacatur at the place where anaward is made.

Drawing what seems to be a distinction betweenmotions to confirm and motions to vacate awards,and notwithstanding the language of § 207, theCourt in Toys ‘R’ Us found that a non-domesticaward made in the United States would be subjectto vacatur “in accordance with its domestic arbitra-tion law and its full panoply of express and impliedgrounds for relief including “manifest disregard ofthe law.”23

Not all jurisdictions follow the Toys ‘R’ Us ap-proach. The Eleventh Circuit has held that theNew York Convention’s grounds for refusal to con-firm foreign awards were also the exclusive bases onwhich to review a “non-domestic” award made inthe United States.24 A federal district court in Mi-ami came to the same result with respect to a mo-tion to confirm an award among foreign partiesmade in Florida.25

3. Westerbeke v. Daihatsu

The risks of subjecting international cases to do-mestic grounds for vacatur are illustrated in Wester-beke v. Daihatsu Motor Co., Ltd.,26 involving breachof a distribution agreement by a Japanese manufac-turer. A Japanese manufacturer had given a U.S.company an exclusive right to sell certain contrac-tually defined categories of engines. If the manufac-turer wanted to market a new line of products, thesales agreement gave the distributor a right of firstrefusal during a period of six months.

Ultimately, the deal went sour over a new productline that the manufacturer began offering throughanother North American distributor. The parties

ended up in arbitration pursuant to provisions ofthe 1952 Japan-U.S. Trade Arbitration Agreementreferenced in their contract. The arbitrator award-ed the distributor more than $4 million, havingfound the sales agreement to constitute a bindingcontract with a condition precedent in the form ofa requirement that new lines of engines were sub-ject to a right of first refusal. The manufacturerbrought a motion to vacate the award, arguing thatthe parties had reached only a “preliminary agree-ment to agree.” Without a binding contract, themanufacturer argued, there could be no recoveryfor expectancy damages (purchase of substitutiongoods and lost profits), which was exactly what hadbeen granted in the arbitration.

To complicate matters, the arbitration had been bi-furcated. A liability phase addressed whether thenew product was indeed an engine within the termsof the contract. Then a subsequent stage assessed theclaimant’s damages. Unfortunate language in the In-terlocutory Award on liability (which arguably hadres judicata effect when it came time to draft the finaldecision) gave rise to an argument that the arbitratorhad decided the manufacturer owed no more than aduty to negotiate in good faith.

The district court disagreed and vacated the award,holding that the arbitrator had misapplied the NewYork law on damages. As an additional ground forvacatur, the court held that the theory of liabilityexpressed in the first stage of the proceedings dif-fered from that articulated in the damages stage.

A year later, the Second Circuit reversed, uphold-ing the award of lost profits. In deciding whetherthere had been “manifest disregard,” the Court ofAppeals announced a two-prong test. An objectiveelement required inquiry into whether the relevantlaw was “well defined, explicit and clearly applica-ble.” A subjective component of the test involvedexamination of whether the arbitrator intentionallyignored the law.

Applying this approach, the Court of Appeals lookedfirst at New York law on damages, which it foundconsistent with the arbitrator’s award on the facts ofthe case. The court then proceeded to examine thearbitrator’s intent, and found no evidence of knowingrefusal to apply the governing law. Finally, the court


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addressed the alleged inconsistency between the In-terlocutory and Final Awards. Giving the arbitratorthe benefit of the doubt, the court interpreted ambig-uous language in the Interlocutory Award in light ofwhat the court called a “clarification” in the FinalAward, which had found the sales agreement to con-stitute a contract with conditions precedent ratherthan simply an “agreement to agree.”

C. The Sword Of Damocles

Although the Westerbeke case itself had a happyending for the arbitration’s prevailing party, theprocess involved costly appellate briefing and argu-ment. The Court of Appeals had to examine theNew York law on calculation of damages, as well asthe difference between a “preliminary agreement”on one hand and a binding contract with conditionprecedent on the other. The court also had to ex-plore the very nature of several domestically nur-tured defenses to award enforcement.27 Last butnot least, the nature of “manifest disregard” had tobe investigated, which included examination offacts giving an indication of the arbitrator’s state ofmind when deciding the case.

The very existence of the right to judicial review onthe substantive merits of a dispute hangs over Amer-ican arbitration like a sword of Damocles, to begrasped by litigators whose unhappy clients under-standably seek relief from bothersome and costlyawards. In principle, there would be nothing wrongwith having these questions decided in court. How-ever, when parties by contract agree to have the mer-its of their dispute decided by arbitrators, not judg-es, the prospect of judicial meddling by local courtswill understandably alarm foreign enterprises. Theprocedural and political neutrality of internationaldispute resolution is compromised each time a localjudge reviews the merits of an award.

Such temptations should be placed out of reach,through a new FAA chapter that expressly foreclosesback door judicial interference with internationalcases. The United States will be a more user-friendlyplace to arbitrate if litigants from abroad feel a mea-sure of confidence that they will get the private dis-pute resolution for which they bargained. By mak-ing realistic distinctions between different types ofcases, such an amendment would also make the FAAa healthier and more resistant statute.

III. Proposed Chapter 4 For The Federal

Arbitration Act

A. Statutory Text

Review of International Awards Madein the United States

1. Scope

(a) Except as provided in subsection 1(b), thischapter shall apply to any arbitration with its seatin the United States, in which at least one party isresident or incorporated outside of the UnitedStates at the time the agreement to arbitrate wasconcluded.

(b) Unless the agreement to arbitrate was enteredinto after the dispute arose, this Chapter shall notapply to (i) an employment contract in which theyearly remuneration of the employee is less than[$ XYZ] or (ii) an agreement concluded with re-spect to a consumer transaction.

(c) A consumer transaction includes any agree-ment related to property, services or credit withany individual for purposes outside his trade,business or profession if the amount in dispute isless than [$ ABC].

2. Award Vacatur

In any of the following cases the United Statescourt in the district wherein the award was mademay make an order vacating the award upon theapplication of any party to the arbitration:

(i) a party to the arbitration agreement wasunder some incapacity, or the said agree-ment is not valid under the applicablelaw; or

(ii) the party making the application was notgiven proper notice of the appointmentof an arbitrator or of the arbitral proceed-ings or was otherwise unable to presenthis case; or

(iii) the award deals with a dispute not con-templated by or not falling within theterms of the submission to arbitration, or


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contains decisions on matters beyondthe scope of the submission to arbitra-tion, provided that, if the decisions onmatters submitted to arbitration can beseparated from those not so submitted,only that part of the award which con-tains decisions on matters not submittedto arbitration may be set aside; or thecomposition of the arbitral tribunal orthe arbitral procedure was not in accor-dance with the agreement of the parties;or

(iv) the award was procured by fraud, bias orcorruption;

(v) the award is in conflict with internation-al public policy or the subject matter ofthe dispute is not capable of being sub-mitted to arbitration.

3. Time Limit for Vacatur

An application for setting aside an award coveredby this Chapter must be brought no later thanthree (3) months from the date on which the partymaking that application has received the award.

4. Jurisdiction for Vacatur

An action to vacate an award covered by thisChapter may be brought only in the districtwherein the award was made. In no event may afederal court vacate an award made outside theUnited States.

5. Exclusion of Other Grounds for Vacatur

Unless the parties have explicitly provided for judi-cial review under Chapter 1 of this title, no awardcovered by this Chapter may be vacated on anygrounds other than as provided above.

B. Explanatory Notes

1. Separate FAA Chapter Or

Tinkering With Existing

Provisions?

The proposal set forth above is intended as a stand-alone set of rules to cover vacatur of awards in inter-

national proceedings conducted within the UnitedStates. An alternative approach would be simply tomake slight manipulations to the language ofChapters 2 and 3 that implement the New Yorkand Panama Convention schemes for recognition offoreign and “non-domestic” awards.

Admittedly, such a wide net may complicate theprospects for adoption of the statute. The more ob-vious the change, the more likely that there will beopposition. From a political perspective, less is of-ten more.

Two concerns tip the scales in favor of separateprovisions. First, judicial interpretation of the ex-isting FAA Chapters has often been problematic.One may wish to reduce the prospect of ill-ad-vised judicial creativity by establishing a frame-work which, to the extent possible, will operateindependently of prior case law. Second, a freshstart would permit an approach more user-friend-ly to foreigners, particularly if the text of the legis-lation picks up some of the language and formatused by the Model Law.

2. Fraud, Bias And Corruption

The proposed statutory language goes beyond thetext of the Model Law by suggesting inclusion of“fraud, bias or corruption” as an explicit groundfor vacatur. Some might argue that this is unnec-essary. Admittedly, those defects are subsumedunder “violation of public policy” and “inabilityto present one’s case,” defenses to award enforce-ment that may be pressed into service against biasand corruption under the New York Conven-tion28 as well as national arbitration statutes incountries influenced by the UNCITRAL ModelLaw.29

No good reason argues for leaving these matters tojudicial interpretation. An explicit prohibition onfraud and corruption, added for the avoidance ofdoubt, is unlikely to be seen to imply that fraudand corruption are acceptable in awards subject tothe New York Convention. Moreover, inclusion offraud, bias and corruption as grounds for vacaturcould be expected to make the legislation more po-litically palatable. Otherwise, one can easily imag-ine complaints that the legislative proposal lackedthe most basic protections. Explicit statutory lan-


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guage seems far more likely to convince Congress ofthe proposal’s fairness than reference to learned for-eign treatises that link bias and fraud to public pol-icy violations.

Sensibly, some countries adopting the UNCITRALModel law have filled the lacunae by making clearthat matters such as fraud and corruption mayserve as grounds for award vacatur. Scotland explic-itly allows vacatur if an award “was procured byfraud, bribery or corruption,”30 and the Australianstatute provides “for the avoidance of any doubt”that an award violates public policy if induced by“fraud or corruption” or made in breach of rules of“natural justice,” another way of indicating proce-dural due process.31

3. Definition Of International

Arbitration

The scope of the proposed legislation is narrower thanthat of both FAA Chapter 2 and the UNCITRALModel Law. The former includes even disputes be-tween U.S. citizens as long as they implicate propertyor contract performance abroad. The Model Lawcombines multiple tests, bringing within its scope ar-bitrations in which (i) parties have places of businessin different countries, (ii) the place of contract perfor-mance or the place of arbitration is outside the parties’home country, or (iii) the parties opt to treat the pro-ceedings as international.

A residence-based test seems more sensible.32 Thelinguistic and procedural differences that justify alaissez-faire arbitration regime are likely to arisewhen U.S. residents seek to avoid courts in Paris,Rio or Shanghai, rather than when one U.S. citizensues another in New York over goods and/or servic-es destined for export.

4. Opt-Out Provisions

Some litigants may want the greater protection af-forded by whatever paternalistic interventionmight be afforded under FAA Chapter 1. Somecommentators fear that expansion of judicial re-view would change the character of arbitration.However, freedom of contract would likely havebeneficial effects on balance, reducing the appre-hension of “wild card” awards in high stakes casesaffecting the proverbial family jewels of a litigant.At least as between sophisticated parties to an in-

ternational contract, the right to elect merits re-view would appear to be almost a corollary of theright to elect courts. By contrast, good argumentsexist for denying the right to exclude all courtscrutiny, given that an award takes on a presump-tive validity throughout the world under the NewYork Convention. In other words, the statutoryframework for judicial review of international ar-bitration in the United States would constitute afloor but not a ceiling.

5. Public Policy

In the hope of reducing an overly parochial useof public policy, the statutory proposal adoptsthe French distinction between public policy ap-plicable to domestic cases and public policy ap-plicable to international cases. The latter con-cept, referred to as ordre public international, de-rives from the policy national courts consider rel-evant to cross-border transactions with no directimpact on the forum. Thus, for example, an in-terest rate that would violate public policy in apurely domestic transaction might be acceptablein a cross-border context.

6. Consumers And Employees

The type of laissez-faire judicial review schemeproposed for international contracts between so-phisticated parties is not appropriate for con-sumer transactions and employment contracts,where heightened court scrutiny provides ahealthy measure of paternalistic protection forthe weaker party. One might argue that such re-strictions also belong in other parts of the FAAand perhaps also in the New York Conventionitself. Indeed that would seem eminently sensi-ble, and might well be on the agenda of thoseseeking to improve other parts of arbitration’s le-gal framework.

7. Jurisdiction For Award

Vacatur

By limiting vacatur to the place where the award ismade, the proposed legislation makes clear thatU.S. courts should not be in the business of settingaside decisions in foreign arbitrations. Contrary tothe implication in Cortez Byrd,33 defects in awardsrendered abroad can best be addressed if and whenthey are presented for recognition and/or enforce-ment in the United States.


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Endnotes

1. See W.W. Abbot, ed., THE PAPERS OF GEORGE WASH-INGTON, RETIREMENT SERIES, Vol. 4 (April — Decem-ber 1799), Charlottesville: University Press of Virgin-ia, 1999, at 477-492. The will was dated at MountVernon on 9 July 1979, five months before Washing-ton died of a throat infection, having enjoyed lessthan three years or his well-earned retirement.

2. Dickens’ ninth novel was published in monthlyparts between March 1852 and September 1853.Ultimately, legal costs consumed the entire estate.Despair among the potential legatees caused old TomJarndyce to blow his brains out at a Chancery Lanecoffee house and young Richard Carstone to expirein hopeless dejection.

3. Attributed to Mr. Justice Astbury (1860-1939), whosat on the Chancery Bench from 1913 to 1929, andwas elevated to the Privy Council in 1929.

4. See AMERICAN ARBITRATION ASSOCIATION, CONSUMER

DUE PROCESS PROTOCOL (May 1998) (implementingspecial measures related to matters such as consumeraccess to information, convenient location, moderatecost and speed).

5. “Preservation of Civil Rights Protections Act of2004,” S.2088, found in a statute irresistibly titled“Fairness and Individual Rights Necessary to Ensure aStronger Society: Civil Rights Act of 2004.” The billprovides, “Notwithstanding any other provision oflaw, any clause of any agreement between an employerand an employee that requires arbitration of a disputearising under the Constitution or laws of the UnitedStates shall not be enforceable.” Two exceptions tothis prohibition would allow arbitration agreementsin collective bargaining agreements and agreementsconcluded “knowingly and voluntarily” after a dis-pute arises. See also S. 2435, 107th Cong. § 3 (2002)(introduced by Senators Kennedy and Feingold).Both bills would effectively overrule the U.S. Su-preme Court decision in Circuit City Stores, Inc. v.Adams, 532 U.S. 105 (2001).

6. Lender Consumer Protection Act , S. 2438, 107thCong. (2002) (introduced by Senator Paul Sarbanes,Chair of the Senate Banking Committee). The billwould apply to any mortgage with an APR that ex-

ceeds by six per cent (for first mortgages) or eight percent (for second mortgages) the rate for U.S. Treasurysecurities.

7. Motor Vehicle Franchise Contract Act, § 11028, Pub.L. No. 107-273, 116 Stat. 1758 (enacted as 15 U.S.C.§ 1226), sometimes known as the Bono Bill in recogni-tion of its original sponsor the late Sonny Bono. For arecent cases interpreting the Act, see Daimler ChryslerVans LLC v. Freightliner of New Hampshire, 2004U.s. Dist. Lexis 316 (D.N.H. 2004) and Indian Mo-torcycle Corp. v. Yamin Motorcycle of Houston, 2003U.S. Lexis 25188 (N.D. Cal. 2003).

8. In chronological order, the changes might be listed asfollows: (i) In 1970, Chapter 2 of the FAA adoptedthe New York Convention. (ii) In 1988, Congresseliminated the Act of State doctrine in enforcement ofarbitration agreements and awards. See 9 U.S.C.§ 15. (iii) Also during 1988, Congress clarified theright of interlocutory appeal from arbitration-relatedcourt orders. See 9 U.S.C. §16. (iv) The effect ofsovereign immunity on arbitration was limited in1988, when awards were made enforceable againstany property used in a commercial activity in theUnited States (28 U.S.C. § 1610 (a)(6)) and arbitra-tion clauses were deemed to constitute waivers of sov-ereign immunity from jurisdiction (28 U.S.C.§ 1605 (a)(6)). (v) In 1990, FAA Chapter 3 wasadded to implement the Panama (Inter-American) Ar-bitration Convention. (vi) Finally, effective Novem-ber 2002, the Motor Vehicle Franchise Contract Actmade pre-dispute arbitration clauses unenforceable inautomobile franchises. See § 11028, Pub. L. No.107-273, 116 Stat. 1758, enacted as 15 U.S.C.§ 1226. In addition, minor changes to the FAA weremade in May, 2002, when the so-called “CommaAct” improved the drafting of FAA § 10, which pro-vides for award vacatur. See Pub. L. No. 107-69, 116Stat. 1758.

9. United Nations Commission on International TradeLaw, Model Law on International Commercial Arbi-tration, adopted June 21, 1985. The Model Lawhad been adopted by more than fifty jurisdictions,including four U.S. states (California, Connecticut,Oregon, and Texas) and all of Canada’s provinces.

10. See Jack J. Coe, A Critical Appraisal of the FederalArbitration Act 1925 and of the Suitability of the


10

Model Law as Its Replacement for International Com-mercial Disputes (1999) (unpublished Ph.D. disser-tation, London School of Economics) (on file withauthor). Compare a more cautious alternative, seeWilliam W. Park, The Interaction of Courts and Arbi-trators in England: The 1996 Act as a Model for theUnited States?, 1 Int’l Arb. L. Rev. 54, 67 (1998).For other commentary on the Model Law, see JamesCarter, Federal Arbitration Act Seen as Out of Stepwith Modern Laws, 5 News and Notes From Insti-tute for Transnational Law 1 (1990); Report of theCommittee on State International Arbitration Stat-utes (ABA Subcommittee, Section on InternationalLaw and Practice, March 1990); David Rivkin &Frances Kellner, In Support of the FAA: An ArgumentAgainst U.S. Adoption of the UNCITRAL Model Law,1 Am. Rev. Int’l Arb. 535 (1990); Report of the Wash-ington Foreign Law Society on the UNCITRAL ModelLaw on International Commercial Arbitration, re-printed in 3 Ohio St. J. on Disp. Resol. 303 (1988);Report of the Committee on Arbitration and Alterna-tive Dispute Resolution, Association of the Bar of theCity of New York, reprinted in 1988-89 Arbitrationand the Law 250 (1989).

11. See generally Henri C. Alvarez, Neil Kaplan & DavidRivkin, Model Law Decisions: Cases Applying theUNCITRAL Model Law on International Commer-cial Arbitration (2003).

12. One commentator has described the UNCITRALModel Act as “an ersatz statute divorced from the richand distinctively American federal experience with ar-bitration” and suggested that what is needed is “awork of renovation, the dusting of an antique, not arevolution.” Joseph D. Becker, Fixing the Federal Ar-bitration Act by the Millennium, 8 Am. Rev. Int’lArb. 75, 75 (1997).

13. For example, the U.S. Supreme Court decision inCortez Byrd justified expansive venue for awardvacatur as a way to permit American courts to “va-cate awards rendered in foreign arbitrations notcovered by either convention.” Cortez Byrd Chips,Inc. v. Bill Harbert Const. Co., 529 U.S. 203, 203(2000). It would be hard to imagine anythingmore inimical to good order in international arbi-tration than to see American courts routinely tryingto vacate commercial awards mace in London, Paris,Geneva and Toronto.

14. See, e.g., Richard W. Hulbert, Comment on a Proposednew Statute for International Arbitration, 13 AM. REV.INT’L ARB. 153 (2002). In a case confirming applica-tion of the FAA in state courts, Justice O’Connor ex-pressed similar disenchantment with judicial interpre-tation of federal arbitration law, suggesting that “overthe past decade the Court has abandoned all pretenseof ascertaining congressional intent with respect to theFederal Arbitration Act, building instead, case by case,an edifice of its own creation.” Allied-Bruce Terminixv. Dobson, 513 U.S. 265, 283 (1995), cited in Hul-bert, id. at 154.

15. For a more in-depth analysis of the proposed changes,the reader is immodestly referred to William W. Park,Amending the Federal Arbitration Act, 13 AM. REV.INT’L ARB. 75 (2002).

16. See Am. Almond Prods. v. Consol. Pecan Sales, 144 F.2d 448, 451 (2d. Cir. 1944) (Hand, J.) (confirmingan award for breach of contract in the sale of pecanswhere arbitrators had awarded damages even withoutevidence on market price).

17. Wilko v. Swan, 346 U.S. 427, 436-37 (1953). Seegenerally Noah Rubins, Manifest Disregard of the Lawand Vacatur of Arbitral Awards in the United States, 12AM. REV. INT’L ARB. 363 (2002). Wilko was overruledin Shearson/American Express v. McMahon, 482U.S. 220, 224-25 (1987) (fraud claims under Ex-change Act § 10b and Rule 10b-5) and Rodriguez deQuijas v. Shearson/American Express, 490 U.S. 477,477 (1989) (Securities Act § 12(2) claims). Ironical-ly, when the Wilko Court invented “manifest disre-gard of the law,” it considered the concept as undulyrestrictive of judicial review. The fact that a finding of“manifest disregard” was the only way courts couldaddress a mistake was seen as evidence of the need tonip securities arbitration in the bud by declaring thetopic non-arbitrable.

18. See, e.g., Advest, Inc. v. McCarthy, 914 F.2d 6, 10-11 (1st Cir. 1990) (Selya, J.) (affirming a lowercourt’s refusal to vacate an award in a case whereinan investor alleged that a broker wrongfully liqui-dated his holdings). The Court held that an honestfailure of interpreting the law is not enough to jus-tify vacatur, which requires a decision “contrary tothe plain language” of the agreement or an indica-tion that the arbitrator “recognized the applicable


11

law and then ignored it.” Id. at 8. Cf. Watt v. Tiffa-ny & Co., 248 F.3d 577, 580 (7th Cir. 2001). InWatt, Judge Easterbrook (for better or for worse)aligned the concept with public policy, which in aninternational context might diverge from applica-ble law. For example, an employment agreement tobe performed abroad might discriminate on thebasis of gender or religion in a way acceptable un-der the applicable foreign law. The court stated, “Ifmanifest legal errors justified upsetting an arbitra-tor’s decision, then the relation between judges andarbitrators . . . would break down.” Id. at 579.Judge Easterbrook interpreted the test for vacaturas simply that “an arbitrator may not direct the par-ties’ to violate the law.” Id. at 580.

19. See Halligan v. Piper Jaffray, 148 F.3d 197, 203-04(2d Cir. 1998), cert. denied, 526 U.S. 1034 (1999)(reversing decision that refused to vacate award deny-ing age discrimination claim). See also Westerbeke v.Daihatsu, 304 F.3d 200 (2d Cir. 2002). Only a fewyears ago one of the America’s finest arbitration schol-ars, in referring to elements that a losing party mustprove to demonstrate “manifest disregard,” conclud-ed, “[t]his will never happen in our lifetimes.” AlanScott Rau, The New York Convention in AmericanCourts, 7 AM. REV. INT’L ARB. 214, 238 (1996). Atthat time, of course, neither Halligan nor Westerbekehad been decided.

20. Williams v. CIGNA Financial Advisors Ind., 197 F.3d752, 760-61 (5th Cir. 1999). Williams involved anage discrimination employment case arbitrated underNASD rules. See generally Noah Rubins, “ManifestDisregard of the Law” and Vacatur of Arbitral Awardsin the United States, 12 AM. REV. INT’L ARB. 363(2001).

21. Bridas S.A.P.I.C. v. Government of Turkmenistan,2003 WL 22077651 (5th Cir. 2003). Here, an Ar-gentinean corporation sought to confirm an ICCaward rendered in Houston (the parties having agreedto abandon Stockholm, the contractually stipulatedsitus) under English law against the government ofTurkmenistan and a government-owned oil company.Not only did it refuse to vacate find any “manifestdisregard” of the law, the court also refused to vacatethe award for excess of jurisdiction and held that thegovernment itself could not be forced to arbitrate asthe oil company’s alter ego. Id. at *13-14.

22. Yusuf Ahmed Alghanim & Sons v. Toys ‘R’ Us, Inc.,126 F.3d 15, 23-25 (2d Cir. 1997).

23. For other cases in which federal courts have beenasked to subject international awards to domestic va-catur standards, including “manifest disregard of thelaw,” see Lummus Global Amazonas, S.A. v. AguaytraEnergy de Peru, 2002 WL 31401996 (S.D. Tex.2002) (vacating in part and confirming in part anaward arising from construction of a natural gas pipe-line in Peru; modified to incorporate the parties’ jointstipulation on construction credits), Westinghouse Int’lServ. Co. v. Merilectrica, D. Mass., C.A. No. 00-11832(27 September 2001) (upholding an award in aSouth American power plant construction dispute).See also discussion infra of Westerbeke v. Daihatsu Mo-tor Co., Ltd., 304 F.3d 200, (2d Cir. 2002).

24. Industrial Risk Insurance, 141 F.3d 1434, 1441-42(11th Cir. 1998) (involving a AAA arbitration in Flor-ida between a German corporation and an U.S. insur-er). The dispute arose from malfunction of a “tail gasexpander,” a turbine generating electricity from wastegasses in nitric acid manufacture. Id. Giving a broadscope to the concept of “non-domestic” arbitrationaward, the court held that an award made in the Unit-ed States falls within the purview of the New YorkConvention, and is thus governed exclusively byChapter 2 of the FAA. Id. at 1441.

25. Four Seasons Hotels, 267 F. Supp. 2d 1335, 1335-37(S.D. Fla. 2003) (applying the New York Conventionas the exclusive grounds for considering confirmationof a AAA award rendered in Miami).

26. Westerbeke, 304 F.3d 200 (2d Cir. 2002), rev’g 162F. Supp. 2d 278 (2001). See also Hoeft v. MVLGroup Inc., 242 F.3d 57 (2003), reversing lowercourt decision vacating an award for “manifest disre-gard” in an arbitration arising from a dispute over apurchase price adjustment in the sale of a corporationengaged in market research.

27. For example, the Court had to consider the “essence ofthe agreement” arguments derived from collectivebargaining decisions rendered more than forty yearsearlier in the so-called “Steelworkers Trilogy” cases. SeeUnited Steelworkers v. Enterprise Wheel & CarCorp., 363 U.S. 593, 597 (1960); see also Steelwork-ers v. American Mfg. Co., 363 U.S. 564, 568 (1960);


12

Steelworkers v. Warrior & Gulf Navigation Co., 363U.S. 574, 581-85 (1960). Under this line of casescourts may vacate an award that does not “draw itsessence” from the contract.

28. See, e.g., ALBERT JAN VAN DEN BERG, THE NEW YORK

CONVENTION OF 1958 302, 306, 331, 377-82(1981) (addressing the scope of Articles V(1)(b) (in-ability to present his case) and Article V(2)(b) (viola-tion of public policy)).

29. With respect to public policy under the Swiss LDIP,see generally P. LALIVE, J.F. POUDRET, & C. REYMOND,LE DROIT DE L’ARBITRAGE INTERNE ET INTERNATIONAL EN

SUISSE 430 (1989), insisting that ordre public has aprocedural (as well as substantive) aspect capable ofrectifying abusive arbitrator behavior.

30. See Law Reform (Misc. Provision) (Scotland Act), 1990,c.40, schedule 7, art. 34(2)(a)(v), allowing vacatur if anaward “was procured by fraud, bribery or corruption.”

31. See International Arbitration Act, Act No. 136, 1974(consolidated as in force 31 January 1992), which inSection 19 interprets “public policy” as the term ap-pears in Articles 34 and 36 of the UNCITRAL ModelAct.

32. Corporate entities should probably be consideredresidents if organized under the law of, or possess-ing a principal place of business in, the forumcountry. Thus, for example, a U.S. branch of aforeign corporation would be considered a U.S. res-ident, as would an alien individual present in theUnited States more than 183 days during any cal-endar year.

33. See, e.g., Cortez Byrd Chips, Inc. v. Bill Harbert Const.Co., 529 U.S. 203, 203 (2000) (justifying adoptionof expansive venue requirements as a way to permit an“action under the FAA in courts of the United Statesto . . . vacate awards rendered in foreign arbitrationsnot covered by either convention”). ■

© Copyright 2001 Mealey Publications. All rights reserved. Reproduction strictly prohibited without written permission.

Arbitration And The Fisc:

NAFTA’s ‘Tax Veto’

byWilliam W. (Rusty) Park

Professor of Law at Boston UniversityVice President, London Court of International ArbitrationArbitrator, Claims Resolution Tribunal forDormant Accounts in Switzerland

A case of notereprinted from theMay 2001 issue of

Mealey'sInternational Arbitration Report.

MEALEY'S INTERNATIONAL ARBITRATION REPORTedited by Edie Scott

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