Posted by: yarbel | 4th Jun, 2015

Should There be a Federal Policy on Arbitration? — Aditi Bagchi

Post by Aditi Bagchi

The Federal Arbitration Act can be read merely to protect arbitration clauses from hostile judges.  That is, it may merely require neutrality with respect to arbitration.  Alternatively, it can be understood, together with the slew of federal cases overturning allegedly ‘hostile’ state decisions, as affirmatively friendly to arbitration.

In the recent 7th Circuit decision, Andermann v. Sprint Spectrum L.P, Judge Posner takes the former view.  He observes that it is not clear that arbitration should be preferred, but more importantly, there is no reason to treat arbitration terms differently than other contract terms.  Whatever Posner’s ultimate view about the utility of arbitration, he appears more committed to a strong default of neutral enforcement of contract without reference to public policies that might favor or disfavor particular terms.  As long as parties formally agree on arbitration, arbitration carries the mantle of freedom of contract.

Many scholars doubt how freely parties contract for arbitration, and many are more certain than Posner that pervasive arbitration is (either) good or bad for the public.  But assuming that an arbitration term has been validly adopted in a contract, should it matter to interpretation whether arbitration is good or bad for the public in the absence of a federal law that either prohibits arbitration or requires it?

It should matter, because it is often unclear whether an arbitration term applies to a particular dispute.  The strong policy reasons for deferring to party intent on the essential substance of an agreement become substantially weaker where courts can merely speculate about that intent (e.g., whether parties meant an arbitration term to cover a certain matter), or where the parties’ apparent intentions on the matter were peripheral to their contractual purpose.  Where the application of a valid arbitration term is unclear, whether its application is socially beneficial or deleterious may tip the scales in interpretation, especially where the term is standardized across millions of contracts.

If Posner is right that there is no federal policy on arbitration, that is a problem. Putting aside for the moment what stance federal courts should take (and which Congressional statutes might speak to the question), arbitration is too substantial a public policy issue for courts to approach these terms with ostensible neutrality.  In the absence of an articulated policy, we are likely to end up with courts that are in practice either friendly or hostile but march under the banner of neutrality.

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