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Commercial Arbitration
University of Kansas School of Law
Drahozal, Christopher R.

Commercial Arbitration
I.                    Introduction to Commercial Arbitration
A.     A Theory of Private Dispute Resolution
1.      A form of private dispute resolution.
A matter of contract between the parties: the parties must agree or they will not be bound to arbitrate.
Not only provide administration, but also the rules.
2.      Commercial Arbitration:
–          Private dispute resolution; not including mandatory arbitration by law or labor arbitration; Anything subject to the federal arbitration, only applies to commercial disputes, but the book covers the employment arbitration and  consumer arbitration
–          Private judges instead of public judges
3.      Involvement in arbitration cases — Most credit card, cell phone agreement has arbitration clause. Go find some arbitration clause
a.       Party to arbitration agreement
b.      Legal capacity
c.       Selection of arbitrator: clients pick the arbitrators
B.     What is Arbitration
1.      Competing roles of the private sector and the public sector in resolving disputes
2.      2.2 Problem 1.1: Client is high government official in country considering privatization of court system. To what extent could arbitration replace the country’s court system? What might the government do to promote and foster commercial arbitration?
Prerequisite to suit, filling fee, subsidized by government, but the total cost could be higher.
Rules in civil procedure;
Limited forum selection, fixed location and jurisdiction rules;
Judge/ Jury would be the decision-maker
Facts/ law / contract
Enforce the judgment, government enforced judgment
Fee more expensive (Supp. 124), parties pay the aggregate of all costs to arbitrator, administration and experts, no tax subsidy; may not be more higher than court, less discovery cost…Consumer arbitration can be expensive…
No government set-out rules, use rules that parties agreed
Wherever you agree to have the arbitration, more flexible
The arbitrator/ private judge would be the decision-maker
Facts/ Contracts/ not much about the law as the court
Private and confidential
Not government-involved, private way to enforce it
May or may not have appeal process
3.      Comparison of Judge/Jury and Arbitrator
Judge/ Jury
Rely on precedent doctrine
Legal experts, lawyers
Judge is picked by election or appointment
Paid by public funds or taxed
Life/ Elective term
Can’t pick the judge, jus the court
May follow precedents, authority can be the same, but less degree in reliance on precedent.
Doesn’t have to be a lawyer, but may be an expert in the field
Picked by the parties
Paid by the parties
Only for this case
Can pick the arbitrator
4.      Repeat Player bias—Repeat players are more tend to be favored and win more, probably in court too; Repeat players may be too complicated, may settle the claims that they may lose, settle more often in their weak claim and go to arbitration with their strong claims…No evidence shows the absolute bias.
C.     Why Arbitrate?
1.  Whether it is governmental function?
(1) Whether it is a traditional governmental function is important for several reasons, not the least of which is whether constitutional due process protections apply. One ground on which otherwise private activity can be treated as “state action”- and thus subject to constitutional constraints – is when the “private entity has exercised powers that are 'traditionally the exclusive prerogative of the State.'''
(2) Cremin v. Merrill Lynch: “Courts have consistently held that private arbitration lacks any element of state action; Nor is the court’s confirmation of the arbitrator’s decision. Second, Merrill Lynch is not using the government to deprive Cremin of her constitutional rights: but rather is simply asking this Court to enforce an agreement to determine these rights in a different forum.”
(3) Problem 1.2: Arbitrator award 50,000 in compensatory damages, 1.5 million in punitive damages; losing party opposes confirmation of award on ground that punitive award is excessive under BMW v. Gore.—-NO state actor here is the difference between two cases. The BMW case is a due process claim, only govern the state actor. Jury trial right also doesn’t apply. Contract source and the arbitration rules are to apply. Arbitrator may be easier to compromise.
2. What is Arbitration?—9 U.S.C 2
(1)   AAA Guide to Mediation and Arbitration to business people:
Arbitration: Submission of a dispute to one or more impartial persons for a final and binding decision.
(2)   Problem 1.3: (a) “Impartial mediator” to resolve dispute and abide by decision.— Yes. Impartial third party, binding decision to resolve the dispute. P20 definition, doesn’t say much about neutrality. Arbitration defined: A dispute resolution process in which the parties choose a neutral third party to make a final and binding decision resolving their dispute. (Black 10th) The name doesn’t matter.
(b) Not arbitration, only facilitate resolving the dispute, not a decision-maker. He’s only a mediator.
(c) Judge’s TV court— Yes. Kabia v. Koch case, the court said it is. Treat the arbitrator as judge. The show is paying the award in People’s court. Third party decision maker, both parties agreed.
(d) Not arbitration. Appear before neutral who makes nonbinding ruling. Only one party agrees to, no consent, not both chose the arbitration. No binding decision, not arbitration.
(e) “Impartial mediator” to give advisory opinion—No, no binding decision.
(f) 3 arbitrator, decide the arbitrator before the dispute. If arbitrators are chosen by only one party, it’s still arbitration, because the parties agreed before the dispute arise.
(3)   Even though it’s not legally binding, it’s practically binding. It’s still arbitration.
 AMF case: Whether the agreement to obtain a non-binding advisory opinion in a dispute is enforceable. —The agreement to utilize an alternative dispute resolution mechanism must be enforced.
 Arbitration is a creature of contract, a device of the parties rather than the judicial process. If the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration. The arbitrator’s decision need not be binding in the same sense that a judicial decision needs to be to satisfy the constitutional  requirement of a justiciable case or controversy.
(4)   Cheng –Canindin case: Whether the agreement between the employer and employee to submit the dispute to the Hotel’s Review Committee for a final and binding resolution is enforceable?
NO. Although arbitration can take many procedural forms, a dispute resolution procedure is not an arbitration unless there is a third party decision maker, a final and binding decision, and a mechanism to assure a minimum level of impartiality with respect to the rendering of that decision. The review committee is not an arbitration procedure and the parties did not intend that the review committee procedure constitute binding arbitration.
(5)   Kabia case: Whether a videotaped episode of “The people’s Court” presided by “Judge” Koch is an arbitration ?
It’s arbitration even the third party pay for the award of the judgment and the arbitrator is protected from civil liability.
D.     Why Arbitration
1. The reason people choose arbitration: save time and money, enables the parties to avoid a queue in court, lack of right to appeal…
(1)  C&L case: Whether the Indian tribe waive its immunity by signing the contract with arbitration clause?
The tribe is amenable to a state-court suit to enforce an arbitral award in favor of contractor C&L. Even the tribe has immunity against the suits on contract, it waived its immunity by express contract, when it signed the construction contract with arbitration clause; the choice of law clause makes it plain enough that a court having jurisdiction to enforce the award.
(2) Agreeing to Arbitration clause constitutes a waiver of sovereign immunity in an action to enforce the arbitration award for the foreign states.
2. If contract is silent as to dispute resolution, unless the parties agree other way, they may end up in court.
Problem 1.4—Which kind of contract would be better to contain an arbitration clause?
(a)    One time purchase contractà arbitration is faster, but it could be too expensive
(b)   Oil purchase contract based on regular business  àseries transaction, better to have arbitration clause to keep business relationship
(c)    Oil pipeline contract with a Turkey company à don’t want other country’s court, arbitration better
(d)   Oilfield discover contract with a foreign government àb/c the sovereignty immunity, can’t bind the government in court, but arbitration is OK.
(e)    Credit card contract between the credit card company and customer àcommon, smaller claim, settled by arbitration is good
(f)    Franchise contract between franchisor and franchisee à common, reduce cost
3. Recently enacted Federal Arbitration Statutes(UPDATE)
– 12.USC 1226: Makes unenforceable pre-dispute arbitration clause in motor vehicle franchise contracts
– 10 USC 987(e)(3): Forbids creditor to extend consumer credit to military personel or dependent with respect to which the creditor requires the borrower to submit to arbitration
– 2008 Farm Bill 7 USC 197c(a)
– Franken Amendment-2009 Defense Appropriation Bill—“Any livestock or poultry contract with a pre-dispute arbitration clause to include a provision that allows a producer or grower, prior to entering the contract to decline to be bound by the arbitration provision, and to provide conspicuous notice of the provision.”
– Dodd-Frank  Act: Various provisions precludes residential mortgage agreement from including predispute arbitrati

t question to arbitration, then the court should defer to the arbitrator's arbitrability decision. If not, then the court should decide the question independently. The Kaplans did not agree to arbitrate arbitrability. Courts generally should apply ordinary state-law principles governing contract formation in deciding whether such an agreement exists. However, courts should not assume that the parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]” evidence that they did so.
–          Courts of appeals should apply ordinary standards when reviewing district court decisions upholding arbitration awards, they should not, in those circumstances, apply a special “abuse of discretion” standard.
–          The arbitrator’s decision on arbitrability would have been entitled to deference had the Kaplans clearly agreed to have the arbitrators decide the question of arbitrability.
4.      Buckeye Check Cashing, Inc. v. Cardegna: who should resolve a claim that a contract is illegal and void, the court or arbitrator?
–          Holding: Regardless of whether it is brought in federal or state court, a challenge to the validity of a contract as a whole, and not specifically to the arbitration clause within it, must go to the arbitrator, not the court.
–          First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. 
–          Because this challenges the Agreement, and not specifically its arbitration provisions, the latter are enforceable apart from the remainder of the contract, and the challenge should be considered by an arbitrator, not a court. 
–          Restriction on Buckeye (p11 pc)
§  SCOTUS rejected an attempt to limit Buckeye in Preston: Even if there’s conflict between arbitration clause and the state law administrative proceeding, when the parties agree  to arbitrate all question arising under a contract , the FAA supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.
–          Problem 2.2:
§  Buckeye applies, when it comes to the validity of a contract as a whole, FAA applies and such issue should be submitted to the arbitrator.
§  Except when FAA doesn’t apply—Granite Rock case: W here dispute at issue concerns contract formation, the dispute is generally for courts to decide.
(a)    Court
(b)   Arbitration
(c)    Arbitrator
(d)   Because the parties agreed the arbitrability decided by the arbitrator, so the arbitrator can decide it.
But if there raises a forgery issue, no consent to the arbitrator to decide, it will go to court.
–          Problem 2.3: An employment contract with arbitration clause, P assert a claim for wrongful discharge
§  Employer files suit seeking to enjoin the arbitration proceeding on the ground that the statute of limitations has run. àMerit issue of the contract should go to arbitration.
§  Employer files suit seeking to enjoin the arbitration proceeding on the ground that employee’s demand for arbitration was inadequate under AAA. àProcedure issue of filing arbitration should go to arbitration.
§  Employer files suit seeking to enjoin the arbitration proceeding on the ground that only contractual claims are eligible for arbitration àScope of the issue should go to court, the parties didn’t agree to arbitrate tort claims, substantive arbitrability should be decided by the court
§  Employer files suit seeking to enjoin the arbitration proceeding on the ground that the contract provides that “no claim is eligible for arbitration unless it is brought within one year after it arises.” àTime limit for arbitration should be decided by the arbitrator, it’s a procedure issue, not a scope issue.