2006/Vol. 5 No.1 - Hamline Law - Hamline University

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6 THE JOURNAL OF AMERICAN ARBITRATION [Vol. 5:1 commercial disputes for hundreds of years. 7 Management and unions have used contractual arbitration to resolve labor disputes for decades. 8 Arbitration gained considerable popularity in the United States in the 1920s when Wall Street pressed Congress to endorse arbitration as an alternative dispute resolution mechanism to resolve equities disputes. 9 During the “Roaring 20s,” there were long delays in trying cases in the court systems of the state of New York. 10 Equities traders and buyers needed quicker dispute resolution. The traders convincingly argued that speed in the resolution of conflict facilitates business. A free market trading system prefers efficiency, economy, speed, and fairness in the resolution of conflict. 11 “The business of business is business,” not lawsuits. 12 and the third by those two—which three men thus chosen shall, unfettered by Law, or legal constructions, declare their sense of the [t]estator’s intention; and such decision is, to all intents and purposes, to be as binding on the [p]arties as if it had been given in the Supreme Court of the United States.” Id. (quoting George Washington’s will). 7. Lee Korland, What an Arbitrator Should Investigate and Disclose: Proposing a New Test for Evident Partiality Under the Federal Arbitration Act, 53 CASE W. RES. L. REV. 815, 817 (2003) (noting that arbitration was used in several of the original U.S. colonies even prior to the American Revolution). 8. Lewis L. Maltby, Private Justice: Employment Arbitration and Civil Rights, 30 COLUM. HUM. RTS. L. REV. 29, 30 (1998) (“For decades, private arbitration has been the vehicle of choice for unions, and it has worked well in this context. Although unions are free to withdraw from arbitration, it is virtually unheard of for a union to do so.”). 9. See Sarah Rudolf Cole, Incentives and Arbitration: The Case Against Enforcement of Executory Arbitration Agreements Between Employers and Employees, 64 UMKC L. REV. 449, 465 (1996) (“Businessmen grew to favor arbitration not only because it offered them autonomy from governmental regulation, but also because it allowed for a faster and more reliable means of dispute resolution.”). 10. See id. During this period, there was an increase in governmental regulation as the nation’s agricultural economy transformed into an urban industrial economy. Id. There was a subsequent increase in litigation because of the regulation, resulting in “extreme congestion and delay [in the court system] accompanied by high costs, inflexible procedures, and obsolete law.” Id. 11. See American Arbitration Ass’n, Executive Summary, Dispute-Wise sm Business Management: Improving Economic and Non-Economic Outcomes in Managing Business Conflicts 5 (2003), available at http://www.adr.org/dw/ES.pdf (last visited Dec. 8, 2005). 12. The quote, “the business of business is business” is usually attributed to Milton Friedman as a result of his seminal article on business ethics. Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y.
2006] ARBITRATION: THE BASICS 7 B. Enactment of the Federal Arbitration Act Despite historical and statutory acceptance, arbitration faced opposition in the courts because it seemingly usurped judicial authority. English courts were loath to accept arbitration agreements, 13 and this reluctance then carried to American courts. 14 Congress, in response to Wall Street’s urging, 15 enacted the Federal Arbitration Act (FAA) 16 in 1925 to combat this judicial hostility. 17 The FAA makes arbitration agreements enforceable like any other contract. 18 Section 2 of the Act provides: A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation TIMES MAG., Sept. 13, 1970, at 32. 13. See Scott v. Avery, 25 L.J. EX. 308, 313 (H.L. 1856) (Campbell, L.J); James P. Buchele & Larry R. Rute, The Changing Face of Arbitration: What Once Was Old Is New Again, 72-AUG J. KAN. B.A. 36, 37 (2003). Judicial hostility towards arbitration dates back to the English common law of the 17th and 18th centuries. Id. Judges, fearing that their salaries would be reduced if arbitration grew widespread, developed the “ouster doctrine” which held that agreements to arbitrate were revocable until an award was issued. Id. 14. See THOMAS E. CARBONNEAU, CASES AND MATERIALS ON THE LAW AND PRACTICE OF ARBITRATION 49 (rev. 3d ed. 2003); see also Buchele & Rute, supra note 13, at 37. The hostility of the English courts toward arbitration was carried into the American colonies, and arbitration agreements were usually unenforceable until the FAA was enacted. Id.; see also Cole, supra note 9, at 462-66. 15. See Cole, supra note 9, at 465-66 (noting passage of New York arbitration statute in 1920 with support from a coalition of lawyers and businessmen, and introduction of the FAA in the U.S. House of Representatives by Congressman Mills of New York). 16. 9 U.S.C. §§ 1-16, §§ 201-208, §§ 301-307 (2000). Chapter one, §§ 1-16, deals with domestic arbitration. Chapters two and three, §§ 201-208 and §§ 301- 307, respectively, cover arbitration proceedings in an international context. 17. See Roger J. Perlstadt, Timing of Institutional Bias Challenges to Arbitration, 69 U. CHI. L. REV. 1983, 1983 (2002) (quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) (“Congress enacted the Federal Arbitration Act (FAA) ‘to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts.’”)). 18. Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 (1974) (stating that the FAA was designed to put arbitration agreements on “the same footing as other contracts”).
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