GLI International Arbitration First Edition - April 2015
Despite its size and complex dual federal and state legal system, the United States is a favourable forum for international arbitration. Its federal and state arbitration statutes and decisional law reflect a strong public policy in favour of arbitration, especially international arbitration. Nowhere is this pro-arbitration policy more clearly set forth than in the Federal Arbitration Act (the "FAA"), which governs international arbitration in the United States, and the jurisprudence interpreting the FAA. Enacted in 1925, the FAA is divided into three chapters. The first chapter governs cases involving interstate or foreign commerce. The second chapter implements the New York Convention, which the United States signed in 1958.1 The third chapter implements the Panama Convention, which the United States signed in 1975.2
The FAA governs the scope of arbitration agreements and requires courts to enforce the agreements according to their terms.3 Taking into account the dual nature of the U.S. legal system, the FAA overrides any state laws that conflict with the federal arbitration law or undermine its policies. The role of state law in the arbitral process is generally to govern substantive issues, such as the interpretation of an arbitration agreement and its terms. In this regard, U.S. courts will ordinarily honour the parties' contractual choice of law, whether that of a U.S. state or another country.
New York, Florida, and Texas are particularly popular venues for international arbitration. The American Arbitration Association ("AAA") and its international division, the International Center for Dispute Resolution ("ICDR"), are both sited in New York but operate nationally and administer all types of domestic and international commercial disputes. The International Chamber of Commerce ("ICC") has a New York office with counsel and staff that administer North American-based ICC arbitrations. A number of other organisations, including JAMS and CPR, also administer international arbitrations in the United States. Some states have created organisations to facilitate the administration of arbitration proceedings. For example, the New York International Arbitration Center was established in 2012 to provide access to information on arbitrating in New York and coordinate the availability of access to hearing locations. In Manhattan, the New York state court system has assigned a senior judge in its Commercial Division, the Hon. Charles E. Ramos, to hear international arbitration-related cases in order to ensure effi cient and consistent adjudication.4 In public remarks, Justice Ramos has emphasised his intent to apply the pro-arbitration policy set out in the FAA and federal case law.
The FAA's primary focus is to legislate the way in which the U.S. courts interact with arbitration proceedings.5 Unlike arbitration laws in some other countries, the FAA does not contain extensive regulations on the necessary components and formalities of arbitration agreements. Instead, arbitration agreements in the United States are viewed in much the same way as other commercial contracts and courts look to generally applicable principles of contract law in interpreting and giving effect to arbitration agreements.6
Nevertheless, both U.S. federal and state courts have developed a body of jurisprudence regarding the scope of arbitration agreements and the division of authority between arbitrators and courts.
In determining whether a particular dispute is arbitrable, U.S. courts analyse the language of the relevant arbitration provision. Often, arbitration clauses will provide for the arbitration of all disputes "aris[ing] out of" or "relat[ing] to" the contract.7 Where an agreement contains this type of language, U.S. courts will construe the arbitration provision "as broadly as possible" to allow for arbitration.8
Although U.S. courts favour arbitration and seek to read arbitration provisions broadly, parties are free to narrow the scope of arbitrable matters through a carefully crafted arbitration agreement. For instance, in World Rentals and Sales, LCC v. Volvo Const. Equip. Rents, Inc., the court found that disputes involving a company's affi liates were not arbitrable because the arbitration agreement expressly excluded affi liates from the agreement to arbitrate.9 Additionally, the courts will honour narrow arbitration agreements where parties have sought to ensure that only certain types of issues are arbitrable, such as by enumerating or specifying the issues that are subject to arbitration under their agreement.10
One area of frequent debate is whether the question of arbitratiblity is to be decided by the courts or the arbitrators. More recently, the U.S. federal courts have held that arbitrability is for the arbitrators to decide if the parties' arbitration agreement is broad enough to grant the arbitrators this power.11 Typically, this question is answered by the arbitration rules referred to in the arbitration clause, because such rules are deemed to be part of the parties' arbitration agreement. For example, both the ICC and the AAA's International Dispute Resolution Procedures ("ICDR Rules") grant the arbitrators jurisdiction to decide arbitrability. In such disputes, the courts are often called on to distinguish between the question of whether a party has agreed to arbitrate anything at all (typically a question for the courts) or whether a party has agreed to arbitrate the particular dispute involved (a question for the arbitrators, assuming the parties have granted the arbitrators this jurisdiction). This distinction can be blurred when a non-party to an arbitration agreement seeks to arbitrate with a party to an arbitration agreement. However, the Federal Court of Appeals for the Second Circuit has held that the arbitrators can be granted jurisdiction to decide this, because the question is whether the signatory has agreed to arbitrate with this particular non-party.
U.S. courts typically decide whether an individual or entity which is not a party to an arbitration agreement may be compelled to participate in arbitration or whether a non-party to an arbitration agreement may compel a party to arbitrate with the non-party. The Supreme Court has held that "traditional principles of state law allow a contract to be enforced by or against non-parties to the contract through assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel."12 Thus, general principles of joinder and the consolidation of third parties apply, and if a non-party to an arbitration agreement demonstrates through its conduct that it is "assuming the obligation to arbitrate", that non-party can be compelled to arbitrate.13 Additionally, if a non-party to a contract with an arbitration clause "knowingly seeks the benefits of the contract containing the arbitration clause", that party can also beestopped from avoiding arbitration.14
The same principles apply where a non-party seeks to compel arbitration with the party to the arbitration agreement. For example, in New York, a signatory to an arbitration agreement was bound to arbitrate with a non-party to that contract because of the "close relationship between the entities."15 However, as noted above, the jurisdiction to decide whether a signatory must arbitrate with a non-signatory has more recently been found to lie with the arbitrators rather than the court, where the signatory agreed to arbitrate under arbitration rules that contain a broad grant of jurisdiction to the arbitrators.
Another instance in which the issue of the joinder of non-parties to an arbitration agreement arises is with respect to corporations that have subsidiary or affiliated entities. In these instances, courts have applied traditional concepts of corporate law and determined that where a company which has entered into an arbitration agreement exercises complete control over a subsidiary and uses that control to commit wrongdoing, the parent corporation may be compelled to arbitrate in a dispute related to its subsidiary.16 Additionally, a corporation which is a non-signatory to an arbitration agreement may be able to compel arbitration where its subsidiary is a signatory to the agreement.17
Courts in the United States have developed a body of law concerning the separability (or severability) of arbitration clauses contained in contractual agreements. According to the doctrine of separability, U.S. courts will typically preserve the parties' agreement to arbitrate even where there is a challenge to the validity of the underlying contract containing the arbitration clause (for example, where a party claims to have been fraudulently induced to sign the contract or argues for other reasons that it was null and void from inception),18 or where there is a clause or obligation within that contract that is not enforceable or invalid by operation of law.19
The FAA does not contain extensive rules concerning arbitration procedure. Accordingly, in the United States, the contracting parties are free to choose the mechanisms and procedures in their arbitration agreement.20
Typically, contracting parties choose how to arbitrate by agreeing to arbitrate under a particular set of arbitration rules administered by a designated arbitration institution, e.g., ICC or AAA. Each arbitration institution has its own unique set of procedures for commencing and carrying out an arbitration.21
In the U.S., the American Arbitration Association administers arbitrations and has different sets of rules that govern various types of disputes, including its International Dispute Resolution Procedures for international cases.22 Additionally, the AAA has rules governing preliminary hearings and scheduling, selection of arbitrators, evidence, designation of the locale where the...
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