Knowing the difference will help you obtain a better outcome.
By Joan Stearns Johnsen | October 29, 2021 | Published by American Bar Association
Lawyers primarily familiar with litigation in court, who find themselves in arbitration, may fail to appreciate the distinction between arbitration procedural rules and arbitration law. The arbitration process requires separate rules and law to function. The rules would include the rules of the selected administrator—for example, the rules of the American Arbitration Association. Arbitration law could be the Federal Arbitration Act or state arbitration law. An understanding of the ways in which procedural law and procedural rules independently influence the arbitration process is critical to drafting effective arbitration clauses as well as to procedural choices the parties will make during the pre-hearing phase of their arbitration. It is important to appreciate the availability of the range of choices and the implications of these choices, which can be significant and, in some instances, dispositive.
Arbitration may appear to some to function independently of the courts, and for the most part it does. However, arbitration law plays an important role in arbitration functioning as an alternative to the courts. Arbitrators are often laypeople and rely directly on arbitration law for certain quasi-judicial powers that the parties’ contract cannot give them. Arbitration law gives the arbitrators their powers to issue subpoenas and require the attendance of third parties at hearings. Arbitration law sets forth the legal basis and standards for deciding issues of jurisdiction. Arbitration law sets forth the applicable standards for arbitrator misconduct and for what constitutes a flawed arbitration process necessitating the vacatur of an arbitration award. The choice of arbitration law may even impact the selection of the arbitrator.
As with the arbitration rules, parties have a say in what arbitration law will govern their process. In the international arbitration context, parties have unfettered freedom to select the arbitration law of whatever jurisdiction has the most favorable arbitration law. For domestic matters, parties may choose between the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., or state arbitration law. With some important limitations, parties to a domestic arbitration may even engage in permissible forum shopping.
The choice of a state arbitration act or the Federal Arbitration Act should be made with careful consideration. There are often subtle distinctions between state arbitration laws and the FAA. For example, in Managed Care Advisory Group, LLC v. Cigna Healthcare, Inc., 939 F.3d 1145 (11th Cir. 2019), the Eleventh Circuit joined the Second, Third, Fourth and Ninth Circuits and held that pursuant to the FAA, arbitrators may not issue subpoenas to non-parties for pre-hearing production of documents and depositions. By contrast, the Revised Florida Arbitration Code, Fla. St. 2021 §§ 682.01 to 682.25, is much more liberal and permits the arbitrator to issue third-party subpoenas for discovery. Id., §682.08(4). As another example, if an arbitration is governed by the FAA and lacks a clear delegation clause, the losing party could raise jurisdictional defenses in a motion to vacate filed with a U.S. District Court even after a full hearing and award. However, under New York arbitration law, a party who raises jurisdictional issues, but nevertheless proceeds to defend itself in the arbitration, waives any possible jurisdictional defenses. Fava v. Morgan Stanley Smith Barney, Inc., 2020 N.Y. Slip Op. 33358 (U) (Sup. Ct., N.Y. Cty. Oct. 9, 2020).
In contrast, arbitration procedural rules set forth the process for, inter alia, initiating an arbitration, filing an answer, or selecting arbitrators. The rules set forth a procedure for motion practice or discovery. The selection of a set of rules of an administering organization will determine the procedural framework for the pre-hearing, hearing, and post hearing proceedings. Unlike the Federal Rules of Civil Procedure, these arbitration rules are default procedural rules and may be modified pre-dispute by the parties in their arbitration agreement and post-dispute with the arbitrators’ acquiescence.The distinction between arbitration law and arbitration procedural rules is therefore a subtle yet significant feature of the arbitration process that distinguishes it from litigation in court. As with many of these distinctions, litigators unfamiliar with arbitration may proceed to arbitrate with a litigation mind-set, oblivious to the fact that they are playing a similar but different game, with often completely different rules.