Wait! What Law? What Rules?

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Arbitration is supposed to settle disputes quickly and inexpensively, but a poorly crafted arbitration clause can turn into a costly game of "Whose rules and laws apply?" It might even require an extra, expensive trip to court. 

Let's avoid some of that by focusing on the governing law part of the arbitration clause. The issue, like many in U.S. law, stems from federalism. First, two sets of laws might govern the arbitration: the Federal Arbitration Act (FAA) or a state arbitration act. Second, different substantive bodies of law may apply: the claimant’s state law, the respondent’s, or federal law. 

Paying attention to these possibilities at the start can save a ton of grief if a dispute goes to arbitration. 

The FAA 

Section 2 of the FAA states that a written provision in any contract involving commerce to settle by arbitration a controversy arising out of such contract or transaction shall be "valid, irrevocable, and enforceable," except upon grounds that exist at law or in equity for revoking any contract. Courts read "a transaction involving commerce" broadly to include interstate transactions. 

Since the reach of the FAA is as broad as federal jurisdiction over interstate commerce, the FAA applies without needing to show any specific effect on interstate commerce if, in the aggregate, the economic activity in question would represent a general practice subject to federal control. This covers most commercial contracts. 

There is an exemption for claims by transportation workers, which has been the subject of recent Supreme Court decisions. There's also an exemption for sexual harassment claims under the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. But let's focus on commercial contract disputes here. Just note that these exemptions will apply mostly in employment cases and move on. 

State Arbitration Acts 

Every state has some form of arbitration act. Most states have adopted versions of the Uniform Arbitration Act or the Revised Uniform Arbitration Act. But they're not entirely uniform. 

Let's skip attempts by states to avoid consumer and employee arbitration in state acts. These have largely been unsuccessful because the FAA pre-empts them. There are still procedural differences among state acts and between state acts and the FAA that could impact your arbitration. Differences might include the timing of actions to enforce or vacate arbitration awards, or the arbitrator's power to order discovery. 

For example, under Minnesota’s Revised Uniform Arbitration Act, the arbitrator can issue pre-hearing discovery that isn't authorized under the FAA. This could be crucial in some cases. So, you'll want to dig into the differences between arbitration statutes that could apply to your dispute and how they might affect your case. 

What Rules Will Apply?

If the parties can't agree whether the FAA or state law applies, the arbitrator will decide. In most commercial cases, the FAA will apply since interstate commerce is involved. But it costs money and time to get that determination. It makes more sense to simply specify in the clause whether the FAA or a state arbitration act governs. 

Would a State Arbitration Act Be Better? 

The Supreme Court found that parties can agree that a state act will govern even if the FAA would otherwise govern.  See Volt Information Sciences, Inc. v. Board of Trustees of Stanford University. So, if a state act makes more sense, the parties can put it in their arbitration clause. Note that a general choice-of-law clause may or may not mean a state’s arbitration act will apply. That was said to be an issue of state law in Volt. Be specific! 

General Choice of Law 

Just as a general choice-of-law clause may or may not bring the dispute under a state’s arbitration act, designating a state arbitration act doesn't guarantee the substantive law of that state will govern. And, of course, specifying the FAA doesn't determine which state’s substantive law will govern.

Choice-of-law issues can be complicated and expensive. An arbitrator can figure it out, but why spend time and money on that? It's best to specify it right in the arbitration clause. 

The Easy Way 

At the start of every arbitration, I address what law applies. When parties have thought this through, I can read the arbitration clause, determine their agreement, and fill in a form that reads: 

"Applicable Law: The __________ (State or Federal) arbitration statute/act will apply in the Arbitration and _______ (State) law will be applied substantively to the arbitration."

If I can't tell from the arbitration clause, I'll address it with the parties. If they don't agree, I’ll need counsel to brief the issues so I can decide. It's much better to skip all that and put it in the clause. Failing that, counsel will want to try to agree on what act and law will apply to the arbitration.