Jason is a writer and attorney who holds a Juris Doctor and a Master of Laws as well as an MFA in Creative Writing
It's all in the fine print
You won the lottery! Literally. You received a scratch off ticket on your birthday from your Uncle Jimmy which had a max payout of $500,000 and you couldn't believe it when you won! You gave ten grand of it to Uncle Jimmy, you used some of it to buy a Maserati, and the rest you invested with a brokerage firm. As part of the brokerage firm agreement, you noticed, but glossed over, this little tidbit of legalese: any dispute arising from this contract for services will be resolved according to the Federal Arbitration Act and will be arbitrated through Financial Industry Regulatory Authority arbitration. A few months later, you're driving down Rodeo Drive and you get a call from your broker. The money's all gone, he tells you. ''What do you mean the money's all gone?'' you yell. ''We invested in Pork Belly Futures and Pork Belly Futures just tanked,'' they say. You get a lawyer. You sue them in Federal Court. Then the brokers pull a fast one. Your lawyer tells you they're enforcing the arbitration provision under the Federal Arbitration Act. ''Arbitration provision,'' you say, ''what does that mean?''
The Federal Arbitration Act
What is Arbitration?
Arbitration is a method of resolving a conflict between two parties without the formal procedures and the long wait times of a civil court case. In arbitration, there is no judge, there is no jury and the rules of evidence are relaxed. Instead of a judge there is an arbitrator, who is picked and agreed upon by each party to the conflict. The arbitrator hears the arguments of both sides, reviews the evidence and makes a ruling for one party or the other. Arbitration is a private process, not public like a civil court case. The decision of the arbitrator is usually final and will be upheld in civil court.
The Federal Arbitration Act (FAA) applies to contracts between parties involved in maritime trade or interstate commerce. The US Supreme Court takes a broad interpretation of what constitutes interstate commerce. For example, the Supreme Court has found that the Federal Arbitration Clause applies to a contract dispute between a homeowner and a pest control business within the same state because the pest control business bought insecticide from out of state.
The Federal Arbitration Act states that an arbitration clause in a contract will be given the same weight and consideration as any other contract. In fact, if there is an arbitration provision in a contract and it is determined that the contract is void, which means it was never agreed upon and is not enforceable, the arbitration provision will still be valid and enforceable.
If there is a provision in a contract for arbitration of any issue and the contract is being disputed in court, the Federal Arbitration Act allows for the court to stay proceedings in order for the issue to be arbitrated upon the request of any of the parties to the dispute. If there is an arbitration provision in a contract, and one of the parties to the contract refuses to participate in arbitration, under the FAA the other party may petition the federal courts to force arbitration. If one of the parties disputes the fact that there was an arbitration agreement, the federal court can hold a trial on whether or not there is an arbitration provision. If the trial determines that the arbitration clause is valid, the judge can direct the parties to go to arbitration.
FAA and International Arbitration Conventions
The FAA provides for the enforcement of arbitral awards arising out of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (CREFAA) and the Inter-American Convention on International Commercial Arbitration (IACICA). The FAA states that the Federal District Courts have the power to resolve an action or proceeding under the CREFAA and the IACICA. Those arbitrations falling under the CREFAA include any arbitration agreement or arbitral award arising out of a legal relationship that is considered commercial and is not between two citizens of the United States unless that legal relationship concerns a reasonable relationship with a foreign state such as a dispute about real estate abroad.
Under the FAA, any action in state court that contains a provision under the CREFAA and the IACICA can be removed from state court to Federal District Court by any party to the action. The District Court has the power to compel arbitration at the request of one of the parties and to confirm and compel the enforcement, within three years of the award, of any arbitral award under the CREFAA and the IACICA. In a case where both conventions apply, the District Courts shall apply the IACICA where a majority of the parties to the arbitration agreement are citizens of states that have ratified the IACICA. All other arbitration agreements will be resolved based on the CREFAA.
The Fine Print Revisited
The fine print can be good you think. You had a choice of arbitrator and you chose well. The process was a lot easier and faster than a court case would have taken. And you won! You got your money back and the brokerage firm had to pay attorney's fees. Now that you know about the process you'll be more aware of arbitration clauses in the contracts you sign.
The Federal Arbitration Act provides both substantive and procedural rules for arbitration in the United States. It places arbitration clauses on equal footing with other contract provisions. In fact, if a contract that contains an arbitration provision is found to be void, the arbitration provision will still be found valid. The FAA applies to any commercial transaction in interstate commerce or admiralty that has an arbitration provision. The FAA also gives power to the District Courts to enforce foreign arbitration clauses under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Inter-American Convention on International Commercial Arbitration.
To unlock this lesson you must be a Study.com Member.
Create your account
Register to view this lesson
Unlock Your Education
See for yourself why 30 million people use Study.com
Become a Study.com member and start learning now.Become a Member
Already a member? Log InBack