Federal Arbitration Act
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In United States law, the Federal Arbitration Act is a statute establishing procedures for arbitration in cases filed in the United States courts -- both State and federal. It applies where the transaction contemplated by the parties "involves" interstate commerce and is predicated on an exercise of the "Commerce Clause" powers given to Congress in the U.S. Constitution.
The Federal Arbitration Act (found at 9 U.S.C. Section 1 et seq.), first enacted in 1925, provides for contractually-based compulsory and binding arbitration, resulting in an "arbitration award" entered by an arbitrator or arbitration panel as opposed to a "judgment" entered by a court of law. In an arbitration the parties give up the right to an appeal on substantive grounds to a court but are nevertheless entitled to a fundamentally fair proceeding equivalent to that before the courts. Most consumers do not understand fully the impact of arbitration agreements and the potentially severe limitations that these agreements can have on available remedies if a dispute arises. In "form" consumer contracts, the public often has no ability to reject the arbitration clause, and is presented with a transaction only on a "take it or leave basis." Notwithstanding these potential negatives, significant positive benefits are also found when proceeding with an arbitration as opposed to litigation. First, the proceeding is, in effect, a blank slate. The parties, by means of their agreement define the scope of the agreement (what disputes will be addressed) the law to be followed, the rules of procedure which the arbitrator(s) will follow; the form of the award (whether it is a "reasoned" or abbreviated award); and the time within which the arbitration must take place. Notably, unlike a court, the parties also choose who the arbitrator(s) will be. The Federal Arbitration Act requires that where the parties have agreed to arbitrate, they must do so in lieu of going to court, provided that the proceeding is fundamentally fair -- that is, equivalent in fairness to the public courts.
Once an award is entered by an arbitrator or arbitration panel, it must be "confirmed" in a court of law. Once confirmed, the award is then reduced to an enforceable judgment, which may be enforced by the winning party in court, like any other judgment. Under the Federal Arbitration Act awards must be confirmed within one year; while any objection to an award must be challenged by the losing party within three months. The hallmarks of arbitration are privacy, reduced cost, speed and finality as compared to traditional litigation before the courts. An arbitration agreement may be entered "prospectively" --that is, in advance of any actual dispute; or may be entered into by disputing parties once a dispute has arisen.
Arbitration clauses are often combined with forum selection and choice-of-law clauses, both of which are also fully enforceable. The result is that a plaintiff may find himself or herself compelled to arbitrate in a strange private forum thousands of miles from home, and the arbitrators may decide the case on the basis of the law of a state which the plaintiff has never visited.
Additional information pertaining to the legislative history can be found at http://www.mac.doc.gov/nafta/usarb.htm
[edit] Preemption of state law
Section 2 of the Federal Arbitration Act declares that arbitration provisions will be subject to invalidation only for the same grounds applicable to contractual provisions generally. Consequently, any state law that disfavors the enforcement of arbitration agreements will be preempted by the FAA. State laws that govern the procedures of arbitration, but do not affect its enforcement, are outside the Act's preemptive scope.
A number of Supreme Court cases have dealt with the preemption of state laws by the Federal Arbitration Act:
- Southland Corp. v. Keating, 465 U.S. 1 (1984)
- Perry v. Thomas, 482 U.S. 483 (1987)
- Volt Info. Scis. v. Bd. of Trs., 489 U.S. 468 (1989)
- Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995)
- Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681 (1996)
