The Federal Arbitration Act (FAA)

Instructor: Jason Tauches

Jason is a writer and attorney who holds a Juris Doctor and a Master of Laws as well as an MFA in Creative Writing

In this lesson, you will learn about the Federal Arbitration Act— its provisions, enforcement, and how it interacts with state laws and international conventions.

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.

Main Provisions

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.

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